Report MANAGEMENT 216
CONTENTS Financial Summary 1 Chairman s Statement 2 Operational Review 4 www.nepia.com
FINANCIAL SUMMARY Five Year Combined Summary Income Statement US$ millions 215/16 214/15 213/14 212/13 211/12 Gross premium income 489.8 394.9 383.5 365.3 346.3 Underwriting result 87.4 (29.2) 13.2 (1.3) (7.5) Investment result and foreign exchange (12.8) 25.9 13.1 8.5 15. Pension Scheme deficit 18.2 (19.1) (26.3) Revaluation of land and buildings (2.5) 6.9 (5.9) SMI free reserve at 2 February 215 41.4 Increase / (decrease) in free reserve 9.3 25.9 (1.8) 1.6 Balance Sheet US$ millions Feb-16 Feb-15 Feb-14 Feb-13 Feb-12 Net assets 1,5.9 1,41.3 935.9 917.6 896.2 Net outstanding claims (622.5) (73.2) (623.7) (65.4) (582.2) Free reserves 428.4 338.1 312.2 312.2 314. Combined ratio 73.3% 18.6% 9.1% 14.2% 11.8% MANAGEMENT REPORT / FINANCIAL SUMMARY www.nepia.com 1
CHAIRMAN S STATEMENT During what has been another dif ficult year for the shipping industry, North has continued to provide its Members with high levels of service whilst ensuring it remains a financially solid Club that is well positioned to meet future challenges. North s strategic goals are to deliver service excellence and to enhance financial strength and membership quality, I am pleased to report that these goals were achieved. When we announced our renewal strategy and General Increase back in November 215, we highlighted the fact that the relatively low increase of 2.5% for both the P&I and FD&D Classes reflected the improvement in the Club s financial position, the favourable claims development during 215/16 and our claims projections going forward, and recognised the depression in the global freight markets and volatility in investment markets. The relatively benign claims environment and difficult freight markets coupled with the relative financial strength of all International Group (IG) clubs resulted in most of our IG peers announcing low general increases. It therefore gives me great pleasure to report that we achieved an excellent set of results for the financial year to 2 February 216. The combination of the benign claims environment, significant improvements on past Policy Year and Pool claims and a successful strategy to improve our underwriting performance have led to an exceptionally strong financial performance for the North Group overall. Free reserves increased by US$9 million to US$428.4 million and delivered a combined ratio of 73.3%. This brings the combined ratio average of the past five years down to 95.7%, amongst the best in the IG. This result was achieved in spite of an overall loss of almost US$13 million on investments which was countered by a reduction of just over US$18 million in the Group s Pension Scheme deficit. Volatility in investment markets however still persists and the UK s recent decision to leave the European Union will fuel this further and for some time yet, presenting continuing challenges. We are nevertheless determined to ensure financial security for our Members and continue our proud record of not having made unbudgeted calls for 25 years. We remain a well-capitalised Club that has more than met the Solvency II requirements, maintained our Standard & Poor s A rating, and vitally, we are capable of providing the industry leading levels of service to our Members that they have come to expect from us. Owned entered tonnage reached 131 million GT at the conclusion of the 216 renewal, representing a growth of almost 4% year on year, which is broadly in line with world fleet growth. Chartered tonnage has reached a record level of 54 million GT. Pratap Shirke Chairman MANAGEMENT REPORT / CHAIRMAN S STATEMENT www.nepia.com 2
CHAIRMAN S STATEMENT CONTINUED Our strategy to refine the membership in order to improve the overall performance has been successful and our financial results have demonstrated this over the past year. Our acquisition and ongoing successful integration of Sunderland Marine is further testament to the success of our overall strategy by delivering a platform for further diversification benefits for the mutual membership. Although Sunderland Marine made a small loss this year, it represents a significant improvement on the previous year as we continue to simplify the business, reduce costs and improve profitability. Doing things the North way is at the heart of what we do and we will continue to focus our attention on ensuring that our Members receive the service they deserve, for example providing industry leading in-house legal solutions, advice on ship s technical and operational issues and encouraging early intervention in disputes, which is an initiative I am keen to promote. I truly believe that North provides the benchmark for service in the industry. Looking forward, North will continue to support the International Group s initiatives, devoting significant management resources to the important work of the various sub-committees and working groups. We will also monitor developments following the UK s recent decision to leave the European Union, managing the risks and engaging with regulators where necessary. A commitment to mutuality is part and parcel of the North way, but this commitment does not mean that the Club should not diversify and provide new and innovative solutions in other areas to support our Members. We will work with our Members as we strive to achieve our vision of being a world leading marine insurance group, providing the highest quality of cost-effective service I would like to take this opportunity to thank North s Directors and Board members for their dedication to North s affairs and I look forward to working with them over the coming year. I would also like to thank all of the Club s Members for their ongoing support and commitment to the Club and to North s staff for their passion and drive towards achieving North s strategic vision and objectives. Pratap Shirke Chairman August 216 MANAGEMENT REPORT / CHAIRMAN S STATEMENT www.nepia.com 3
OPERATIONAL REVIEW Strategy During the year North has continued to achieve the key strategic objectives that were reaffirmed by the Board last September, namely, of enhancing financial stability and membership quality, and delivering service excellence. In line with these strategic objectives, the Club has: Ensured that the criteria for Member selection has continued to be refined. Ensured that there continues to be appropriate diversification in terms of vessel type, Member type and geographical spread. Ensured that there continues to be appropriate diversification into fixed income streams that will generate long term benefit for the mutual membership. Ensured that the investment strategy continues to focus on capital preservation. Ensured that the ongoing emphasis on delivering personal and flexible solutions to Members problems remains at the forefront of the service ethos of all staff. Ensured that in the light of the ongoing malaise in shipping freight markets that the service offering continues to deliver mutual cost efficiencies. Membership Overview Total owned tonnage entered in the Club increased year on year by approximately 4%, in line with the average growth of world tonnage. The ongoing Member Review Programme undertaken by the Club s Underwriting, Claims and Loss Prevention departments, has continued to make significant progress in enhancing the quality of the membership. TONNAGE DEVELOPMENT AT 2 FEBRUARY 2 18 The type of ships entered in the Club continues to be in line with the world fleet. Geographically, 36% of entered tonnage is from the Asia Pacific region, 19% from southern Europe and 17% from northern Europe. ENTERED GT (OWNED & CHARTERED) GEOGRAPHICAL REGION AT 2 FEBRUARY 216 2% 12% Asia Pacific Southern Europe Northern Europe Middle East 7% 17% 7% North America Scandinavia Other ENTERED GT (OWNED & CHARTERED) SHIP TYPE AT 2 FEBRUARY 216 2% 2% 19% 1% 36% 16 14 39 43 49 43 54 * 6% 5% 12 1 39% 8 6 123 127 131 127 131 19% 4 2 212 213 214 215 216 26% * Estimated Bulk Carriers Tankers Container Ships Car Carriers LNG Other General Cargo Passenger MANAGEMENT REPORT / OPERATIONAL REVIEW www.nepia.com 4
OPERATIONAL REVIEW (CONTINUED) The average age of ships entered in the Club has generally fallen whilst the size of ships entered continues to increase. AVERAGE SHIP AGE AT 2 FEBRUARY This large claims experience in 215/16 also compares favourably with the recent experience of the last five years. LARGE CLAIMS EXPERIENCE AT THE 12 MONTH DEVELOPMENT POINT FROM INCEPTION 25 25 2 5 49 6 5 2 15 1 5 15 1 5 4 32 222.6 157.8 19 143.2 116.4 71 211/12 212/13 213/14 214/15 215/16 4 3 2 1 29 21 211 212 213 214 215 216 Policy Year Retained Value No. of Claims * Projected by Clarksons ** Excludes ships below 1,GT Owned Tonnage Only Average World Tonnage AVERAGE SHIP SIZE (P&I OWNED TONNAGE ONLY) AT 2 FEBRUARY 4, 35, In addition, attritional claims (less than US$1 million in value) have also been significantly fewer in number, with 1, fewer claims reported compared to the previous year. Again, the attritional claims experience in 215/16 compares favourably with the recent experience of the last five years. ATTRITIONAL CLAIMS EXPERIENCE AT THE 12 MONTH DEVELOPMENT POINT FROM INCEPTION 3, 25, 2, 25, 16 14 12 1 7,522 7,263 6,58 6,545 5,541 8, 7, 6, 5, 1, 5, 29 21 211 212 213 214 215 216 8 6 4 2 145.8 151.7 126.3 132.3 16.3 4, 3, 2, 1, * Excludes ships below 1,GT Claims Overview Owned Tonnage Only The claims experience in 215/16 was particularly benign, with P&I claims reported being both low in number and in value. There were only 19 large claims (in excess of US$1 million in value) reported, compared to 5 such claims reported the previous year. The technical underwriting result is particularly sensitive to this relatively small segment of high value large claims. 211/12 212/13 213/14 214/15 215/16 Retained Value Policy Year No. of Claims Finally, 45 the financial year result also benefited because of the favourable development of claims in the 214 and prior policy years. Claims development in respect of Pool claims was also better than expected, resulting in releases from Hydra claims reserves. MANAGEMENT REPORT / OPERATIONAL REVIEW www.nepia.com 5
OPERATIONAL REVIEW (CONTINUED) In line with the Club s experience on retained claims, the 215 year Pool claims experience was also relatively benign, with only 15 Pool claims notified to date. North reported one claim to the Pool, the sinking of a small general cargo ship, the EASTERN AMBER off South Korea, albeit this Pool claim is relatively low in value. Whilst the 215/16 year resulted in a benign experience in terms of P&I claims, the Club has nevertheless continued with its efforts at reinvigorating claims handling management. The skilful and discerning management of large claims, notably major admiralty incidents such as collisions, pollutions and wreck removals, has benefited the Club s balance sheet as well as the IG Pool and General Excess of Loss (GXL) Reinsurance partners. This was particularly evident from the challenging, but ultimately successful removal and partial burial of the wreck of the SMART, which was completed in September 215. It was an example of how a proactive, innovative and open approach to a major wreck removal, could lead to a successful outcome for all parties. The complex US$19 million, two year operation was concluded on time and on budget thanks to a high level of collaboration between the South African Maritime Safety Authority, the salvors (Titan) and the Club. Investments Conversely however, higher yields on UK "AA" rated corporate bonds resulted in a reduction in the liabilities of the Group's Defined Benefit Pension Schemes, reducing the deficit by US$18.2 million. This is in contrast to the deteriorations reported in the previous two years. As previously reported, the pension scheme was closed to new members in 26 and members ongoing benefits were restricted in 214. Free Reserves Influenced by the improving claims experience, the Free Reserve at 2 February 216 increased by approximately US$9 million to US$428.4 million. The combined ratio was 73.3%, producing the best technical underwriting result for the Club in recent times. This contrasts with the 214/15 combined ratio of 18.6% and is vindication of the Club s efforts at enhancing membership quality. The five year average combined ratio of 95.7% is amongst the best in the IG, maintaining the Club s long term aim of producing financial stability. FREE RESERVES 45 4 Although North's investment policy continues to be conservatively positioned, the challenging conditions experienced during the year resulted in a loss including foreign exchange movements of US$12.8 million. In a volatile 12 months, investments in equities and corporate bonds lost 7.7% and 4.9% respectively, whilst government bonds, the main investment class, produced a positive return of 1.73%. 35 3 25 2 15 1 314 312 312 338 * 428 P&I CLASS ASSET ALLOCATION AT 2 FEBRUARY 216 12.9% 5 211/12 212/13 213/14 214/15 215/16 Policy Year *Inclusion of SMI following acquisition on 28 February 214 9.% 32.8% 19.% 26.3% Government Bonds Non-Government Bonds Cash & Cash Equivalents Equities Short Dated Treasuries MANAGEMENT REPORT / OPERATIONAL REVIEW www.nepia.com 6
OPERATIONAL REVIEW (CONTINUED) Capital The Solvency II regulatory regime came into force on 1 January 216. North's Own Risk and Solvency Assessment (ORSA) dictates its capital needs and its business decision making requirements, ranging from renewal pricing and reinsurance purchasing, to investment strategy. Encapsulated within this is the need to ensure that North has adequate capital to: reflect its business risks; comply with regulatory requirements; provide a sufficient buffer so as to negate the need for unbudgeted additional calls in any ordinary underwriting cycle; and to maintain the Group s current A (stable) rating from Standard & Poor s (S&P) even during periods of volatility. North complies with the requirements of Solvency II and comfortably meets Solvency II capital requirements. S&P also reaffirmed the Club s A (stable) credit rating for the twelfth consecutive year in January 216. The rating reflects North s strong competitive position, strong capital and earnings, robust risk management and conservative reserving practices. The ratings also apply to North s fishing and aquaculture subsidiary, Sunderland Marine (SMI). It equally reflects the strong record that North has not had to resort to unbudgeted additional calls for 25 consecutive years. The Board is nevertheless currently working with actuarial and investment consultants to both identify the most appropriate investment approach for North as well as to agree the basis for establishing the optimum level of capital required to meet the various risks identified in the Risk Register. The results will be reported later in the year. Reinsurance Comprehensive reinsurance programmes underpin the cover that the Club provides. The IG secured favourable terms in the renewal of the General Excess of Loss (GXL) reinsurance contract at 2 February 216, resulting in significant rate reductions across all vessel categories. The overall premium reduction amounted to approximately 7.5%. The individual Club retention has increased to US$1 million for the 216/17 year, but the attachment point on the GXL contract remains unchanged at US$8 million. The IG Pool now also only has two layers: a Lower Pool from US$1 million to US$45 million, and; a single Upper Pool from US$45 million to US$8 million. There has also been a slight alteration to the structure of the first two layers of the GXL, with a further 5% multi-year US$1 billion (excess of US$1 million) private placement having been effected. INTERNATIONAL GROUP OF P&I CLUBS GENERAL EXCESS OF LOSS REINSURANCE CONTRACT STRUCTURE 2 FEBRUARY 216 3.8bn 2.8bn 1.8bn 58m 12m 1m 8m 45m 3m 1m P&I Collective Overspill Excess of Underlying Third Layer Excess of Underlying Second Layer Market Share First Layer Market Share Hydra 214 216 Multi-Year Private Placement 215 217 Multi-Year Private Placement 216 218 Multi-Year Private Placement Reinsured by Hydra Private Placement Private Placement Private Placement Lower Pool 3.1bn 2.1bn 1.1bn Second Layer Market Share First Layer Market Share Upper Pool Reinsured by Hydra Lower Pool Reinsured by Hydra Individual Club Retention (ICR) Single per-vessel retention OWNED ENTRIES OIL POLLUTION Hydra Private Placement Private Placement Private Placement 1.bn 12m 1m North has renewed its various existing retention reinsurance programmes, whilst also introducing new additional reinsurance partners to the current panel. In the light of the depression in the shipping freight markets, it has been an imperative for the Club to continue to focus on achieving efficiencies in its reinsurance purchasing strategy. 7.5% ICR 8m 45m 3m 1m MANAGEMENT REPORT / OPERATIONAL REVIEW www.nepia.com 7
OPERATIONAL REVIEW (CONTINUED) Release Calls North undertakes an annual actuarial assessment to establish the appropriate level of Release Calls for each Policy Year and the current P&I Class and FD&D Class Release Calls have been set as follows, as at 2 May 216: SMI Policy Year P&I Class FD&D Class 214/15 5% 5% 215/16 5% 5% 216/17 15% 15% The overall result for SMI was a minor loss for the year of US$.8 million. This represents a significant improvement on the US$12.2 million loss experienced in the previous year, vindicating the efforts made during the integration process aimed at simplifying the SMI business, reducing costs and improving profitability. The 215/16 year loss was also influenced by a number of non-operational factors, including a foreign exchange loss of US$2.7 million, a revaluation loss of SMI s former headquarters in Durham of US$2.4 million and one-off costs associated with the integration of the business (including redundancy costs) of US$2.3 million. These losses were also offset by a gain of US$4.6 million following the revaluation of the pension scheme liabilities. FD&D Class Given the continuing difficult economic environment, pursuing and defending claims for uninsured losses and protecting their assets as far as possible has never been so important to our Members. North is well placed to provide the highest levels of legal support through a large team of over 3 qualified lawyers. Working from the Club s offices in Newcastle, Piraeus and Singapore, the team handles the majority of legal work in-house. This year, a large number of our Members were affected by the fallout from the demise of the OW Bunker Group and our FD&D team has been actively involved in protecting Members interests in the numerous actions that have been brought against them. The team works actively within external legal and industry forums to help deal with the varying legal issues affecting shipping, therefore providing wider protection for Members. Loss Prevention The Loss Prevention team have for a number of years engaged in an ongoing analysis of large claims which have identified two frequent root causes seafarer standards and the safety culture on board ships (the lack of which is often evidenced by poor operational practices). Both these issues have been concerns for the industry for some time and with the shortage of Officers forecast to be more acute in the future, the recruitment and retention of good quality Officers may become increasingly problematic for shipowners. The Club is therefore focusing its loss prevention effort towards the human element in shipping, reflected across the various publications, advice and general support for Members in this area. This has also fed into the inter-departmental collaboration within the Club on the Member Review programme, which has delivered tangible benefits in terms of the improving quality of the membership. The Club has also been actively involved with a number of industry initiatives during the past year, aimed at reducing claims and enhancing vessel safety, for example: The ongoing initiative within the IG and with the Cargo Incident Notification System (CINS), to produce guidelines for the carriage of calcium hypochlorite and aimed at reducing the risk of fires posed by this cargo, as well as those associated with other dangerous containerised cargoes. The collaboration with Company Security Officer Alliance (CSOA) to assist Members CSOs in protecting their seafarers and vessels from piracy, stowaways and fraud. Close monitoring of developments in the implementation of the Verified Gross Mass (VGM) requirement for containers shipped by sea. MANAGEMENT REPORT / OPERATIONAL REVIEW www.nepia.com 8
OPERATIONAL REVIEW (CONTINUED) Sanctions Iran The partial lifting of sanctions against Iran following the conclusion last year of the Joint Comprehensive Plan of Action (JCPOA), finally took effect on Implementation Day, 16 January 216. As a result, the EU lifted its prohibition on shipowners and their insurers engaging in most Iranian trades. The US also lifted secondary sanctions which had similarly prevented non-us companies from conducting business with Iran, but US primary sanctions prohibiting US domiciled shipowners and financial institutions from engaging in business with Iran have continued unabated. The Club has been fully supportive of the efforts made by the IG to facilitate the full resumption of lawful trades to Iran, including the purchase of fallback insurance by the IG to cover in part the risk of reinsurance recovery shortfalls arising from the inability of US primary reinsurers to contribute towards Iran nexus claims, as well as agreeing to the mutualisation of shortfalls in excess of the cover provided by the fallback insurance. North also supports the IG s efforts to secure a long term solution to the problems presented by the continuation of US primary sanctions against Iran. The ideal solution would be for the US authorities to provide a licence to US domiciled reinsurers, which would legitimise their contribution to Iranian nexus claims under the IG s GXL reinsurance programme. Maritime Labour Convention The Club fully supports the IG s efforts to provide shipowners with a practical solution to their insurance and certification requirements under the Maritime Labour Convention (MLC). Although the MLC actually entered into force in 213, the subsequent amendments which will take effect on 18 January 217, will require relevant ships to display certificates confirming that insurance or financial security is in place for the costs of crew repatriation as well as for the payment of wages in arrears for four months following abandonment. Although these credit risk liabilities do not naturally fall within the range of third party liabilities traditionally covered by the Clubs, the IG was nevertheless quick to recognise that without a Club based solution shipowners would risk facing additional and costly insurance requirements from the commercial market instead. As a consequence, the IG clubs have agreed to absorb (but not to pool) such liabilities and efforts are now underway with those states which have ratified the MLC in order to agree the form of certification required as evidence of cover. EU Referendum The recent UK referendum on membership of the EU resulted in a majority vote in favour of the UK leaving the EU. This will lead to a period of considerable uncertainty regarding the mechanism and duration of the future exit negotiations and the form of the UK s relationship with the EU subsequent to exit. The Club is monitoring the situation in order to manage the risks and opportunities that arise and will engage with regulators when and where necessary. North will ensure that appropriate contingency measures are put in place to deal with the regulatory and legal consequences of the referendum outcome. MANAGEMENT REPORT / OPERATIONAL REVIEW www.nepia.com 9