November 21, 2008
American P&I Club raises premiums
The American P&I Club says it is taking action to strengthen its balance sheet under turbulent economic conditions. The club's premium requirements reflect a desire to maintain strong underwriting results.
The directors of the American P&I Club, have taken what they call "some difficult but important decisions" to safeguard the club's capital adequacy and to improve surplus levels over the prior year to secure the future.
These decisions affected the closing of the 2005 policy year, the development and further funding of open policy years, and setting premium levels for 2009.
The 2005 year is to be closed without any further supplementary call.
The 2006 year is intended for closure in the second quarter of 2009 without further call in the absence of unforeseen developments; the release call margin is 10%.
The 2007 and 2008 years are each subject to a further call of 25%; the release call margin is 25% over and above this.
The 2009 renewal will see a 7.5% general increase on advance call for mutual entries, plus additional reinsurance costs, subject to a 20% estimated supplementary call in due course; release call, 45% and a 27.5% general increase on fixed premium entries plus additional reinsurance costs.
In a circular issued to club members today, Joe Hughes, chairman and chief executive of managers Shipowners Claims Bureau Inc., says that despite the current hostile environment surrounding the shipping industry, there are several positive factors which characterize the American Club's present financial condition.
Despite the severe downturn in most financial market indices since the beginning of 2008, the year-to-date value of the club's invested assets had only declined by some 10% as of October 31. Since the great majority of the club's portfolio is held in fixed income securities and cash, amounting at present to some 75% of the total fund, the fall in equity prices has been offset by a rise in the value of its fixed income holdings where, in particular, the club's investments in tax-free municipal bonds have recently outperformed.
The recent strengthening of the U.S .dollar also benefits the club. It reduces its overseas costs in U.S. dollar terms and, since the club's investment exposure in non-U.S. dollar denominated assets is very small, the club's susceptibility to currency exchange losses is probably less than that of the market in general.
Also, and as a matter of central importance to the club's long-term operational strength, its underwriting results in recent years continue "to place it among the very best performers within the International Group" of P&I clubs.
A recent independent analysis of the club's underwriting performance for the years 2003 to 2007 inclusive placed it second out of 10 major group clubs relating to both pure loss ratio and to net combined ratio results. In the former case, the club's figures were 20% better than the weighted market average, while in the latter case the club outperformed the market by some 10%.
Mr. Hughes notes that since the American Club has been much less reliant than others on investment income to subsidize underwriting losses, it is comparatively less vulnerable to downturns in investment earnings.
Contributing to the better-than-market underwriting performance, a comprehensive review and subsequent consolidation of the club's risk portfolio that started in mid-2006, continues to exert a favorable influence on current year trends.
Mr. Hughes goes on to note encouraging signs on the claims front. He says: "The incidence and severity of attritional claims--i.e., those with an incurred value of up to $250,000 per incident--continue to show improvement into 2008 consistent with the trend that began to develop in 2007."
The club's incident count has been declining steadilyt. From a high point of 3,437 in 2005, the number fell to 2,723 in 2006, 2,102 in 2007, and stands at 1,202 so far in 2008, inclusive of files opened in respect of survey costs only.
"These figures are grounds for cautious optimism that this positive trend will continue," says Mr. Hughes.
On capital adequacy and surplus funding, Mr. Hughes says that in recent years the club has been building its invested funds at an unprecedented rate, enhancing the potential contribution of investment earnings to operating results, but the sharp downturn in financial markets has inevitably placed unforeseen pressure on its free reserves.
Arnold Witte, of Donjon Marine Co., Inc. and chairman of the board of the American Club, speaking in New York today, commented: "The directors' actions are designed to generate statutory and GAAP surpluses in the order of $40 million by year-end which, in the case of the former, is comfortably above the basic requirements of the regulator while providing sufficient margin to withstand any further deterioration in investment markets."
Mr. Witte said that the club's board had looked at raising statutory surplus through the issue of subordinated debt in the form of surplus notes. However, having reviewed the matter in depth, the board concluded that, for the time being, given current market conditions, it was better to raise capital directly for purposes of surplus enhancement than to encumber the club with debt.
Mr. Witte also reassured members that the directors had been under no illusions about the undesirability of price increases in any form at present. However, "they have been prepared to take the tough decisions necessary to sustain the club's continuing financial strength in the ongoing challenging business climate."
The American Club currently insures a fleet representing 16 million tons gross, the majority of vessels being bulk carriers followed by tankers. Some 75% of the membership emanates from Europe, but Asian membership is growing strongly.