2016 was another positive year for the Club which concluded in a successful renewal with overwhelming support from our Members and a modest financial surplus.
During the year we took the positive decision to return 5% of mutual premium to Members for the 2016 policy year in recognition of the continuing difficult trading conditions facing many areas of the shipping industry. Our pension scheme deficit suffered a further impairment following a fall in UK corporate bond yields triggered by post-Brexit uncertainty in the UK. The cumulative impact of this and the return of premium reduced the financial year surplus by over US$44 million.
Notwithstanding this, the combined ratio for the financial year was 96%, an excellent result, particularly after returning 5% of 2016 premiums to Members. This result should ensure that our long term combined ratio remains in the upper quartile of International Group (IG) clubs and is testament to the Club’s rigorous underwriting approach and proactive claims and risk management ethos.
The renewal at 20 February 2017 was extremely positive for North. Net growth at renewal was approaching 5 million GT and year-on-year growth overall was nearly 10 million GT, taking total owned tonnage to 140 million GT (190 million GT including chartered). It is particularly pleasing to see that the overwhelming majority of this growth came from the existing membership, demonstrating real confidence in the financial strength and service delivery of the Club. As a result of membership renewal negotiations and further reductions in reinsurance costs over the year, premiums have reduced slightly, a credible result in the current market conditions.
The 2016 claims experience remained at a relatively stable level, although due to a number of larger claims in the second half of the year, not as positive as the previous policy year. At 20 February 2017 there were 34 claims recorded with incurred values in excess of US$1 million compared with 19 the previous year. The number and value of Pool claims in 2016 was at a low point. The recent period of relatively benign claims is of course very welcome but we must not be complacent as there may be early indications of claims increasing.
Free reserves have remained stable over the course of the year. The Club’s capital strength, as assessed by Standard & Poor’s, increased from “AA” to “AAA” and we maintained an ‘A’ (stable) rating for the 13th consecutive year. Our available capital is now within a tolerance range approved by the Directors, which is reflective of the Club’s risk appetite and exposures.
Positive contributions to the financial year result were an investment return of 2.8%, producing US$25 million and an underwriting surplus resulting in a combined ratio of 96%. Following the 5% mutual premium return (approximately US$14 million), a small surplus of US$2.4 million was achieved and free reserves increased to approximately US$431 million.
A negative factor has been an increase in the defined benefit pension scheme deficits. Members may recall an improvement of US$18 million in 2015, but due to the volatility in UK corporate bond yields, the position has deteriorated by approximately US$30 million, increasing the combined deficit to US$57 million for the North Group. The deficit is closely monitored and it is hoped it will unwind in the medium term if the interest rate environment improves. Any benefit from this will accrue to the Club’s membership in the future. In the meantime, capital strength remains very strong and there is no tactical benefit in crystallising the deficit at this stage.
Service excellence has been the foundation of North’s successful development into one of the largest and leading IG Clubs. This remains the case and the Club will be conducting another survey of Members and Brokers later in the year to further understand Members’ requirements and to refine and enhance the services provided. The Club’s service offering last year was supplemented by the opening of a subsidiary office in Shanghai in November, working in tandem with the Hong Kong office to support not only the Asian based membership but also the international membership trading in the region. Throughout the course of the year, the operational and service delivery teams based at North’s headquarters in Newcastle and across regional offices have been further strengthened.
North is committed to a strategy of continued diversification, with the objective of delivering meaningful benefits for the mutual membership. This strategy is achieved through the careful development of fixed premium business within the group which currently stands at approximately 30% of total group income. As well as a growing fixed premium chartered portfolio, the largest proportion of this diversification results from the merger with Sunderland Marine (SMI) in February 2014.
SMI has undergone a period of significant transformation as we deliver against the strategy established by the Board following the merger. A financial loss during the year of US$9.9 million resulted from a movement in the defined benefit pension scheme of US$4.7 million and an operational loss of US$5.2 million. Included within the operational result are costs relating to the restructuring of the SMI organisation and from the run-off of discontinued areas of business. SMI is now focused on underwriting in core areas which continue to produce a profitable contribution for the group. This strategy is nearing completion and more recently in the US and Canada where business is now being underwritten by a partner in Lloyd’s of London through SMI’s MGA in Canada, Harlock Murray Underwriting (HMU).
Having delivered significant change during the year, the Club is confident that SMI will make an ongoing and positive contribution for Members. Over the next two years, we will be working to bring the SMI business directly into North through a Part VII transfer process, which is the final stage of full integration of the businesses.
The unique nature of the SMI transaction to acquire the company and free assets means that we now have a diversified fixed premium platform with an annual income in excess of US$90 million, without incurring the expensive set up costs sometimes involved with transactions of this scale. I am confident that the fixed premium diversification strategy is well positioned to produce financial benefits for the mutual membership, whilst delivering competitively priced service to fixed premium policyholders.
North’s fundamental business aims include operation as a mutual insurance organisation and key membership and participation in the International Group, which I strongly believe provides significant benefits for Members and the global shipping industry. North plays a key role in the affairs of the International Group with the management team holding a number of leadership roles, including on the topical Sanctions Committee, Claims Cooperation Committee, and current Chairman of the key Reinsurance Sub-Committee, (which has successfully delivered reinsurance premium savings of circa US$100 million over the last three years). I believe it is important that the benefits of the International Group are clearly explained to Members and stakeholders and I encourage all International Group clubs to engage in this process and to ensure that the International Group finds increasingly innovative ways to cooperate and assist Members’ requirements. North has actively supported and promoted a specific industry wide initiative of early intervention to resolve disputes on a collaborative basis, which is showing positive benefits in terms of both time and cost.
North has been at the forefront of best practice corporate governance within the P&I arena. This has enabled the Club to transition smoothly into the Solvency II regime, largely within the existing governance structure. I am particularly grateful to my fellow Directors and the Club’s managers for their diligent efforts in this area as they continue to refine and enhance the governance arrangements, which is an ongoing process within North.
A further significant challenge has arisen following the UK’s referendum decision in June 2016 to leave the European Union and the UK Government’s triggering of the two year Article 50 process on 29 March 2017.
In the event that a satisfactory trading arrangement which secures financial passporting rights is not negotiated by March 2019, then it will be necessary for the Club to make alternative arrangements, probably by way of the establishment of a European based and regulated company. The Club’s managers are currently reviewing various options and will ensure that suitable arrangements are in place over the coming months to allow a smooth transition in the event that Brexit negotiations do not preserve free trading and access to Europe.
In November 2016, Atul Agarwal retired from his positions as Non-executive Member Director and Members Board representative, and I would like to thank him for his valuable contribution. I am pleased to welcome James Tyrrell (Non-executive Member Director) and Phil Moorhouse (Independent Non-executive Director) to the Board of Directors following their appointments during the year.
The Members Board continues to expand and I am pleased to welcome a number of new representatives: Atle Sebjornsen (NCC), Dimitris Marinos (Seastar), Coco Vroon (Vroon BV), Capt. Anoop Sharma (Shipping Corporation of India) and Philipp Reith (Orion Bulkers).
Philipp Reith has joined in succession to his father Stephan, after nearly 30 years of combined service on the Board of Directors and Members Board, including as Chairman of the Board of Directors from 1996 to 1999. I would like to thank Stephan for his service to the Club. It is particularly pleasing to note that the appointments of Philipp, James and Dimitris represent a continuation of long standing Member relationships as their responsibilities pass to the next generation.
After a period of relative consolidation, North has agreed modest growth targets for the next few years. Controlled growth is a healthy operating strategy for business, but for North this will always be subject to meeting our financial and service targets.
Overall, this has been another productive and positive year for the Club and we have again made significant progress towards our strategic aims and objectives, along with further improvements against agreed key performance indicators. Delivery of financial stability and the highest level of service are fundamental to North. I am confident that we are achieving this and I believe the overwhelming support from all Members during the year and at renewal is testament to this. I am sure this will continue to be the case throughout 2017 and beyond.