2017 was a positive year for the Club delivering further strategic progress and culminating in a successful renewal with an increased membership, underpinned by a strong financial performance.
During the course of the year, a number of the long-standing economic challenges facing the global shipping market abated to some extent and freight rates showed some signs of improvement across a number of areas. Combined with oil price stabilisation, and further economic strengthening in China and the United States, these changes provided a welcome economic boost for a number of shipping sectors. Nevertheless, we are yet to see conclusive evidence that this improvement is permanent, or that it will lead to a shipping market that can provide a stable foundation for sustainable growth and profitability.
In these uncertain trading conditions for global shipping, it is more important than ever that our Members can confidently rely on our support. This was clearly demonstrated in our renewal strategy announcement in November 2017, when, for the second consecutive year, we decided to charge no general increase.
We remain determined to support our Members by providing value for money in everything we do, and recognise that decisions such as the general increase have a material impact upon our Members’ commercial operations. We recently refined the Club’s purpose statement to re-emphasise our ongoing commitment to supporting our Members.
The outcomes that are reported at each 20 February are a direct result of the commitment of our people. I would like to thank everyone for their dedication and commitment to delivering outstanding service to our Members throughout the year. This commitment to service excellence was clearly recognised in the triennial Member & Broker Survey conducted in September 2017, which returned a series of exceptional results.
2017/18 has been another successful year for North and we should all take pride in our contributions, as we continue, “to enable our Members to trade with confidence”.
The combined ratio for the financial year was 104%, a satisfactory result given the prevailing market conditions. The Club’s continuing robust approach to underwriting and risk management should see the long term combined ratio remain in the upper quartile of the International Group of P&I Clubs (IG).
The Club’s free reserves have continued to strengthen and our Standard & Poor’s “AAA” capital strength assessment remained constant and our ‘A’ (stable) rating was maintained for the 14th consecutive year. Our available capital is also slightly above the upper end of the target range approved by the Directors last year, which is reflective of the Club’s risk appetite and exposures.
The investment return for 2017/18 was 2.87%, producing US$28.6 million which together with a combined ratio of 104% delivered an overall surplus of US$20 million, resulting in free reserves increasing to approximately US$451 million.
The Club’s defined benefit pension schemes closed to future accrual on 31 January 2018. The future obligations of the schemes will no longer increase and over time, as the interest rate environment normalises, we expect to be able to minimise the schemes’ deficit which will accrue to the benefit of the Club’s membership.
Over the coming years the prevailing operating environment facing all clubs within the IG will be one of intensifying cost pressure combined with the impact of premium dilution following successive renewals at which no general increase was declared.
Rising cost pressures stem from increasing claims as well as changes in the operating and regulatory environment such as Solvency II and Brexit. Such changes are likely to increase the reliance on investment returns to deliver a positive return for clubs at a time when markets are highly unpredictable.
The Club again received tremendous support and loyalty from the membership resulting in a very encouraging February 2018 renewal. The overwhelming majority of Members renewed their entries along with a significant number supplementing their current entries with us. In addition, a number of new Members were welcomed to the Club.
The strategy of controlled growth saw total entered tonnage rise to 195 million GT, comprising 142 million GT of owned tonnage and 53 million GT of chartered tonnage. This represents a net growth of 5 million GT in 2017/18, with the majority of this growth originating from existing Members, demonstrating their enduring confidence in the Club’s financial strength and service excellence.
Our plan to further develop our market leading FD&D class has already proven to be very successful, leading to an increase in tonnage of approximately 8 million GT. This brings the Club’s total FD&D entry for owned and chartered Members to over 140 million GT, reflecting the confidence Members have in our ability to support their trading activities.
Similar to last year, membership renewal negotiations and reductions in the IG’s reinsurance costs have driven a modest reduction in the Club’s premium income. This is a very credible outcome given the prevailing market conditions.
The value of the Club’s claims for 2017 saw an improvement on 2016, despite a small increase in the overall number of claims. The number of smaller attritional claims, valued below US$1 million, remain very much in line with earlier years.
However, the eventual underwriting outcome for the Club is typically determined by the larger and less predictable claims. During 2017, the volume of claims in excess of US$1 million was slightly below that of the previous year, despite a rise in ship numbers and tonnage over the same period.
Average premium rating for clubs has however, been falling in the meantime, driven by the “soft” market conditions and the increase in ship scrapping.
Delivering excellent service to our Members underpins everything we do at North. During Autumn 2017, we commissioned our second triennial independent Member and Broker Survey to measure the service expectations of our Members and their brokers.
The aim of this survey was twofold. Firstly, through listening to our Members and their brokers, we can identify potential improvements to the service we deliver. This is part of our commitment to finding new and innovative ways of enhancing our products and service. Secondly, we were keen to evaluate our performance against the benchmark results established in the 2014 survey. The 2017 survey returned outstanding and improved results across all the key measures and confirmed the very high service standards achieved by the Club.
During 2017, we continued with the implementation of our diversification strategy to deliver meaningful financial benefits for our mutual membership.
In response to the projected higher cost and reduced premium income scenario, our five-year strategic plan was revised to ensure that as well as effectively managing our costs, we generate additional income through other business areas.
The Club is working towards its target to increase the proportion of fixed P&I, Hull and Aquaculture business written by both North and in particular the reshaped Sunderland Marine. There has been strong progress in the development of our already significant chartered portfolio, and the growth of our FD&D income utilising the strong service reputation of our in-house team.
With the Sunderland Marine business continuing to advance, and further strengthened with the recent sale of the Knighthood Corporate Assurance brokerage, we remain confident that the diversification strategy is delivering wider benefits for the Club’s membership.
During the year, we have seen considerable M&A activity and consolidation within shipping. This has affected a number of our Members, and has had both positive and negative impacts on entries with the Club and is reflected in some of the changes in our entered tonnage.
Throughout 2017, sanctions continued to be used by the United States and the European Union, as well as by other bodies and countries, as a tool to accomplish foreign and economic policy goals and to act as a visible sign of disapproval of another country’s conduct. The current political climate suggests that there will be no change to this approach.
2017 also saw major developments in environmental regulation, capped by the global entry into force of the IMO Ballast Water Management Convention in September 2017. Owners of existing vessels have until 1 September 2018 to install new systems under the Convention. This marks a crucial step forward on the path towards stopping the spread of invasive aquatic species. However, compliance with the law will represent another major cost for shipowners.
Similarly, there are growing concerns around the impact of the global low-sulphur fuel cap in January 2020. Unless ships have emissions abatement systems installed, they will be forced to burn distillates or distillate-based fuels to comply with the new 0.5% sulphur limit in fuel. Some are already calling this development the biggest change in ships’ power since the transition from coal to oil. With MGO (Marine Gas Oil) currently trading at a near 50% premium to IFO (Intermediate Fuel Oil) 380 and only about 1,500 scrubber installations to date, there will be cost increases along the global shipping supply chain.
North’s loss prevention efforts remain focused on shipboard operational effectiveness and claims prevention, in order to support safety at sea and minimise vessel downtime. Analysis of the root causes underpinning large claims has identified two critical considerations. Firstly, the prevailing safety culture operating within individual shipping companies. Secondly, the operational competence and professionalism of ship board crews.
During 2017, North’s loss prevention team promoted and supported best practice through our innovative crew training webinars, publications and Member seminars such as our Right Crew briefings.
The need to remain relevant and to focus on the future needs of shipowners has never been more important and we passionately believe that the current mutual ethos and supporting arrangements of the IG provides significant financial and operational benefits for Members and the global shipping industry. It is important that the full benefits of the IG are clearly communicated and we encourage all clubs to engage in this process. We fully support
the ongoing review of the way the IG operates. However, we must ensure that we do not prejudice the fundamentals of trust and cooperation, which are so important in supporting the IG mutual system. The smooth operation of this mutual system is vital to the trading requirements of the overwhelming majority of the world’s shipowners and in providing a reliable and sustainable global marine liability platform.
As we move further into 2018, planning for a post-Brexit business environment continues to be a key priority for the Club. In November 2017, we announced contingency plans to establish a subsidiary insurance company in Ireland to underwrite the Group’s EEA insurance business after Brexit. Preparations to establish the Irish subsidiary are progressing well, with the new business expected to be operational by the end of 2018. Further announcements will be made during the course of the year as we progress through the authorisation process with Irish regulators, the Central Bank of Ireland. We will continue to keep our contingency plans under review in the light of any developments in negotiations between the UK government and the European Union with regard to transitional and future trading arrangements.
In other EU related developments, the General Data Protection Regulation (GDPR) will update and enhance current data protection legislation and establish a harmonised framework for the protection of personal data from 25 May 2018. Businesses that deal with EU citizens need to be transparent about how they use their personal data and to comply with key legislative principles when processing this data. The costs of non-compliance are potentially very high, as the new legislation provides regulators with the power to fine businesses up to 4% of their worldwide turnover if they do not comply with the GDPR requirements. The Club has made appropriate arrangements to ensure compliance with the requirements of GDPR.
Throughout 2017/18 I was pleased to announce a number of Non-executive Director appointments to the Board: Philipp Reith (Orion Bulkers), Ioanna Procopiou (Prominence Maritime SA and Sea Traders SA) and Nick Taylor (Independent Non-executive Director). Also James Tyrrell (Arklow Shipping) was appointed as a member of the Group Risk Committee following his appointment to the Board of Directors early in 2017.
Joining our Members Board during the year to represent the interests of our mutual membership alongside the Board’s existing member representatives were Philip Shapiro (Liberty Maritime Corporation), George Moundreas (NGM Energy SA), Edo Taslaman (Atlantska Plovidba) and Martin Badsted (D/S Norden A/S).
Following Capt. Sliwa Michael’s retirement as a Non-executive Director and from the Members Board, Samuel Gontha succeeded him on the Members Board, as a representative of Zodiac Maritime Limited. Waleed Al Dawood (UASC) retired from the Members Board following completion of the acquisition of UASC by Hapag Lloyd. Phil Moorhouse, Newcastle Building Society chairman, stood down as an Independent Non-executive Director and Atle Sebjornsen (National Chemical Carriers Limited) resigned from the Board in March 2018. I would like to thank Sliwa, Waleed, Phil and Atle for their service to the Club.
We have also been planning for a significant change in our senior management team. After 37 years with North, Alan Wilson stood down as Joint Managing Director on 1 May 2018. I would like to thank Alan for his immense contribution to North over the last four decades. Alan has been at the core of North’s values and an architect of the strong and prudent financial and risk management that North is so widely recognised for. Alan will continue to work with North on a part time basis as an Executive Director, supporting Paul Jennings (who has become Chief Executive Officer) and his Executive Team.
Looking forward it is clear that we are in a period of innovation on many fronts. From artificial intelligence and ship automation, to digitalisation there is a range of technologies that are likely to impact shipping in the near future. The emergence of what has been described as the fourth industrial revolution and an aging global consumer base makes it more challenging to predict the shape and size of shipping markets.
In combination with the long-standing structural and economic challenges facing shipowners, we are likely to see trade dynamics and trade patterns continue to evolve. In these changing and challenging times, the delivery of financial stability and the highest levels of service to our Members is fundamental to the success of North, enabling ‘our Members to trade with confidence’ in 2018 and beyond.