This has been a good year for the Club. The free reserves increased by $20 million, which has taken the Club’s capital (free reserves and hybrid capital) to $548 million. This result has been achieved through a combination of disciplined underwriting and a solid investment return of 5%.

The financial year combined ratio was 104%, a little higher than our target ratio of 100%, but satisfactory in the current soft market conditions and within our accepted tolerances in the short term. This year’s result means that we will have achieved an average combined ratio over the last five years of 101% which is a very creditable result and amongst the very best in our market. The result is all the more impressive as we are still dealing with the aftermath of the 2013 policy year, which was one of the most expensive in the Club’s history. This demonstrates clearly the underlying strength of the Club. It is also worth noting that, because of the way we account under International Financial Reporting Standards (IFRS), the headline combined ratio excludes the impact of any exchange rate variances; this is shown separately in our financial statements. If the benefit of the stronger US Dollar during the year had been fully reflected in the claims statistics, the combined ratio would have been 97%.

Claims
After last year’s results, which were dominated by the impact of the 2013 policy year, it was a relief to return to a degree of normality in 2014. The number of claims in 2014 after 12 months was down 8% on those in 2013 and is some 40% lower than they were a decade ago. This is encouraging and while it is almost certainly driven by macroeconomic factors such as the condition of the shipping markets, it must also reflect, in part,  the Club’s approach to the quality of its Membership. We must be careful, however, not to become  complacent. Although the frequency of claims is down, the average cost of claims is increasing. The average cost per claim is now 20% higher than it was five years ago and people claims (injuries and illnesses) cost on average almost double what they did ten years ago. We must take care, therefore, not to let premium slip too far behind the level of claims inflation, which we know from our own experience and our experience of Group Pool claims is running well ahead of the mainstream inflation indices. This means that we must keep  premiums moving forward, while being mindful at all times of the difficulties faced by many of our Members in the current shipping market conditions.


Capital
In this year’s Review of the Year we return once more to the subject of capital and provide an explanation of our approach to our capital requirements. The Club’s capital position, which is made up of a combination of free reserves and hybrid capital, is undoubtedly strong and enables us to meet all our capital requirements, including those arising under the Solvency 2 Directive. It also supports the Club’s S&P rating. In our capital planning we include a buffer above the strict regulatory requirements in order to protect the Club from extreme events, such as the collapse of the investment markets combined with a sudden deterioration in the claims reserves such as we experienced in 2007/2008. However, the Board remains very aware that we must continue to balance the capital needs of the Club against the needs of the shipowners at a time of stress in the shipping markets. Consideration of that balance and the avoidance of holding excessive levels of capital is debated regularly at our Board meetings.

Service
Last year, in welcoming our upgrade to the full A (Stable) S&P rating, I referred to the effort that we would now need to put into maintaining our reputation for ‘best in class’  service. During the past year we have undertaken, together with our Managers, a review of our resourcing needs and have begun a programme of recruitment around the world.  This will take some time to bed down but we are conscious of the need to ensure that we are providing the highest standards of service. To this end, we are once again conducting a survey of the Membership and I hope all Members and their brokers will have taken this opportunity to provide their comments and feedback to us. My fellow directors and I place great importance on listening to our Members’ views.

Renewal
Immediately after the 20th February we reported another strong renewal result with a net increase of 1.2 million gross tons (gt) of mutual business, taking our mutual owned tonnage to 127 million gt. The combined mutual owned and chartered tonnage now stands at over 225 million gt, an increase of over 3% over the past year. More importantly, we achieved a premium increase of 3.5% before the impact of terms on our renewing business. While a little below our expected level of increase, given the Club’s general increase announced at this renewal, it was a good result in the prevailing shipping market conditions and has enabled us to keep the premium moving forward.

Regulation

By the end of the year we had completed the process of restructuring our group of clubs with the transfers of business to our new branches of the UK (Europe) Club in Hong Kong, Japan, and Singapore. Meanwhile we have continued to put a considerable amount of work into our compliance with the Solvency 2 regime. During 2015 we will submit our Internal Model for regulatory approval. This model is used by the Board in making its key decisions on risk appetite, reinsurance purchases and our capital requirements. It has been specifically tailored to the needs of the Club and, if approved by the PRA, will enable the Club to hold less capital than would be required under the Solvency 2 Standard Formula for our industry.

Risk Management and Reinsurance
In recent years we have put in place a comprehensive programme for the Club’s specific reinsurances. This has played a vital role in managing the claims volatility and has cushioned the impact of claims on the 2012 and 2013 years in particular.

I am pleased to be able to report that towards the end of last year we were able to renew all the Club’s own reinsurances on very favourable terms; this will place us in a strong position should there be another surge in claims similar to that which we experienced in 2013.

Industry matters
Our Managers continue to play a leading role in the work of the International Group,  chairing a number of influential IG subcommittees and serving on many others, through  which industry issues and developments in liability law are addressed. We are strongly  committed to the benefits of the mutual system, in which ship owners share their risks, own their insurance vehicles, and benefit from the highest levels of cover provided at
cost. With our fellow members of the IG, the UK Club will work to ensure that the mutual product remains attractive, effective, and the product of choice for the vast majority of owners with blue water tonnage.

Governance
The work of the Boards of the Club and of the supporting committee structure has  increased significantly over the last few years. For some directors, particularly those involved in our key committees, this means a considerable sacrifice of their time and their companies’ time for the benefit of the Club. I would therefore like to thank in particular my Deputy Chairmen, Eric André, Ottmar Gast, Nicholas Inglessis and Masamichi Morooka for their support during last year. Sadly this will be the last time that I thank Eric as he stood down from the Board in October last year. On behalf of the Board and the Club, I would like to thank Eric for 21 years of service to the Club. We will miss his support. I would also like to thank Nigel Smith for the chairing of the Audit and Risk Committee. Over the year we have said goodbye to two other directors in addition to Eric André; Jason Liberty and Pavel Vasilchenko. I am very grateful to both Jason and Pavel for the important contributions they have made to our deliberations.

During the year four new directors, Peter Bagh, Randy Chen, Antje Gibson and Nilson Nunes joined the Bermuda Board and I am very much looking forward to their contributions over the coming years.

In conclusion
The results of 2014 have provided us with an excellent platform to take the Club forward. We have successfully weathered the impact of the high claims year of 2013, restored the Club’s S&P rating and strengthened our balance sheet. I and my fellow  directors are very much looking forward to building on the progress we have made recently and to cementing our position as the leading shipowner controlled P&I Club.

Pre 2016 Financial Statements

Past editions of the Club's financial reports are here.


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