Directors' Report & Financial Statements for the year ended 20th February 2016
2015 has proved to be another good year for the Club culminating with a very positive renewal.On the financial side, we ended the year with a small surplus despite a loss from our investment portfolio.This positive result in a poor year for the investment markets can be attributed to our disciplined approach to underwriting.
The combined ratio for the financial year was 92%; a very creditable result in the prevailing soft market conditions. This year's result means that the Club will have delivered an underwriting result at or close to our target breakeven 100% combined ratio for the past six years.
Consistent underwriting results have helped to build our capital reserves and I was delighted that once again we were able to reflect our continuing strong financial performance by reducing our premium requirement last year. In October, we reduced the final premium instalment of the 2014 year by 10%, an overall reduction of 2.5% on that year's premium. As I said in my statement two years ago, if the circumstances allow - particularly in the event of another strong underwriting year, I would hope that it would be possible to make further returns in the future.
The cost of claims in 2015 was one of the lowest for a decade and the claims profile was very similar to that of 2011, which was one of the best claims years on record. Two key features have contributed to this result: a lower number of expensive casualty claims and the reduced number of claims overall. Our continuing good fortune in avoiding the larger casualty claims also means that our overall credit balance on the Pool is now just under $140 million. This is good news for our Members as it means that we will pay reduced contributions to our share of Pool claims. At the same time, we cannot be complacent: the average cost of each additional claim is inflating at over 4% a year and a small increase in the number of claims together with a handful of large casualty claims could result in a poor claims year.
The Club's free reserves and capital are largely unchanged from one year ago. The question of how much capital a P&I mutual needs has been much debated in recent years, particularly in the context of the Solvency 2 Directive. I and my fellow Directors are acutely aware of the need to explain the Club's approach to its capital requirements, particularly in these distressed markets for many shipowners. We have therefore returned to this topic once again in the Review of the Year.
The last renewal was particularly positive for the UK Club and it capped a very good year for growth in the Club's tonnage. Net growth in owned tonnage at the renewal was just over 4 million gt, one of the best on record, and the year-on-year growth was 8.5 million gt. This took the Club to 135 million gt of owned tonnage, an increase of 6.8% over the year. Premium, after taking into account the effect of the reduction in the cost of reinsurance was down around 1%, This was in line with our expectations and a satisfactory result in the current market. The charterers' book was largely unchanged from the previous year.
Last year the Club carried out a survey of the Members and brokers, and the findings of that exercise affirmed the now widespread perception of the Club's position of leadership in the industry. We remain at the forefront of excellent case handling and provision of value-add services to the Members, and this is attributed to our commitment to a real understanding of our Members' operations and requirements. The survey also confirmed the market view of leading financial strength and stability, so that Members should feel assured in their decision to entrust their P&I risks with the UK Club. As we move forward through continuing difficult times for shipowners the membership should be confident that the UK Club has positioned itself to offer the right people, in the right places at the right time to manage the impact on their operations of P&I risks.
The Club continues to make a strong contribution to many aspects of the affairs of the International Group, through widespread participation of our Managers in IG subcommittees, often in leadership roles - including that of the current Chairman
of the IG Managers. Industry issues and developments in liability law are addressed and policy is developed for recommendation to Club boards. A huge range of subjects is tackled, amongst which one of the most prominent in 2015 was the partial lifting of Iran sanctions late in the year. This offered trading opportunities, but brought challenges for reinsurance programmes due to continuing primary sanctions in the USA. Two of the other subjects that remained in focus were the Maritime Labour Convention, where preparations are ongoing to provide the financial security that shipowners will need from January 2017, and piracy, which presents a significant threat to trade in certain areas, particularly in the Gulf of Guinea region.
After years of planning and a number of delays, the Solvency 2 regime finally came into force on 1st January 2016. The Club has prepared for Solvency 2 in a number of ways. We have restructured the Club to bring its underwriting subsidiary in line with the requirements of the Directive, rearranged our governance at Board level better to reflect the demands of the new regime and, perhaps most significantly, we have adopted a market standard approach to risk assessment and the setting of our capital requirement. As part of that process the Club sought, and on 17th February 2016, obtained approval from the Prudential Regulatory Authority of the use of the Club's internal model to calculate the Solvency Capital Requirement. This was a most significant milestone for our Club and places us in a small group of firms in the London market with approved models. In addition to reducing our solvency capital requirement, we use the model to help us in all our key financial decisions, from setting the premium requirement at the start of the policy year to designing our reinsurance programme.
2015 was another busy year for the Board and for some, particularly those involved in the internal model approval process, it involved a considerable sacrifice of their time. I would therefore like to thank all my fellow Directors and particularly my Deputy Chairmen for their support during the year. We are also very fortunate to have the services of a number of specialist Directors and I would like to thank Nigel Smith for his Chairing of the Audit Committee and Roger Gillett for his work on all aspects of our risk awareness and the purchase of our reinsurance programme.
This year we said farewell to Giuseppe Bottiglieri. Giuseppe made a great contribution to our affairs and I would like to thank him on behalf of the Board for his many years of service. During the year three new Directors, Markos Nomikos, Jan Valkier and Yee Yang Chien joined the Board. I welcome them and look forward to their contribution to our affairs.
I would also like to take this opportunity to thank the Managers for their contribution to the significant progress the Club has made over the last few years and, in particular, for their work on the recently approved Internal Model. Looking forward
At the time of writing this statement, we are a few months into our merger discussions with the Britannia Club. The Boards of both Clubs are now engaged in a process to determine whether a merger is possible and whether it will deliver value to the Members of both clubs. I believe this initiative provides us with an opportunity to create a world beating shipowner controlled P&I club which puts service first, and uses benefits of scale to deliver additional value to all the Members. There is still a lot of work to do on both sides to establish whether the merger will be possible. Ultimately, if the Boards decide to proceed, the final decision will rest with the Members of both Clubs.
Our financial results and the progress we have made in risk management, marked by the internal model approval, and in our governance structures, have placed us in an excellent position to meet the challenges of the coming years. There is a new confidence about the Club, which was evidenced by the success of this year's renewal.
I look forward to building on that confidence in 2016.
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