01 August 2024
P&I Club Results Review 2024
Ten of the 12 P&I Clubs have now issued their audited financial statements for the 2023-24 cycle, the exceptions being NorthStandard and the Japan Club at the time of writing. However, we do have some information on these clubs’ performance, which has been included in this review.
More detailed information will be utilised in our subsequent review in the coming months.
Overall, the clubs made a collective surplus during the reporting cycle, as follows:
*Gard owners general discount plus Skuld members credits
Free Reserves have increased by USD812.5 million to USD5.7 billion – a new all-time high level, surpassing the USD5.56 billion level seen at the end of the 2020-21 reporting cycle.
*Britannia and Steamship capital returns; **Adjustment to Britannia opening free reserves determined in current cycle
Whilst there is insufficient detail for all clubs as regards the split of this result between underwriting and investing activities, we would estimate the split as approximately USD150-160 million contribution from underwriting and approximately USD700 million contribution from investments, after exchange gains/losses and tax.
Underwriting
The latest underwriting results indicate that the fundamentals of P&I remain unchanged, reinforcing the notion that "the more things change, the more they stay the same." The underwriting result, at around +USD150-160 million for 2024 is broadly similar to 2023’s +USD153.2 million. The financial year combined ratios, adjusted to reflect excess call revenues, for both years is around 97.5% across the market.
However, when we look at the two years previous to 2023, we can see a clear sustained improvement – the calls adjusted financial year combined ratio, for the market, in 2021 was 121% and in 2022 was 113%. The significant levels of general increase, together with additional charges for the cost of the international group reinsurance programme, combining with a more benign claims environment, to create this turnaround.
The 2024 outcome was not dependent on any revenue from excess calls and therefore is more sustainable. Clearly, there are winners and losers within these market-wide statistics – 7 of the 12 clubs report combined ratios under 100% with 5 being above 100%. In the prior year, the split was 6 and 6. The range of outcomes varies between 83% (London Club) and 110% (American Club, Gallagher estimate, not disclosed in club accounts) with the larger clubs more closely clustered around the market average.
The smaller clubs appeared more vulnerable to variations in claims experience – particularly large claims experience - with the London Club seeing incurred claims falling by almost USD50 million year on year underpinning the improvement in its combined ratio from over 130% to 83%.
Premium income looks to be around USD5.2 billion, up 10% from the USD4.7 billion in the previous year but an element of this increase will be reflected in increased reinsurance costs. Incurred claims also appear to be up almost 10% from USD2.85 billion to some USD3.1 billion.
Pool claims for policy year 2023-24 are at relatively modest levels, although not as low as in the prior policy year. Two good years in a row on the face of it, and we understand that the significant adverse claims development in earlier years seen in 2023 has not been repeated at the same level in 2024. This tends to suggest that member claims are still rising no doubt still influenced by general and social inflation.
Financial year basis combined ratios
Investments
The numbers very much speak for themselves here, as investment earnings recovered strongly from the USD520 million of negative income in the previous year. Across the two years, the clubs earned USD180 million in positive returns – still below par given the assets available for investment, but there are, no doubt, still unrealised losses remaining in the investment portfolios with interest rates still at relatively elevated levels compared to the past 8-10 years.
These comparatively elevated interest rates have generated better levels of income on cash or variable-rate bonds, but until these rates fall again (they were broadly stable in the period) the unrealised losses will continue to sit on the balance sheet. There is no particular evidence to suggest that clubs have been forced to crystallise any of these losses during the year, with positive cashflows ensuring “current premium cashflows pay for older years claims cashflow.
Investment yields are variously quoted as being in the 6 to 8% range, but as ever the timing of individual year ends will influence this return.
Investment returns
*Estimate The above figures exclude foreign exchange and tax
Free reserves
In aggregate, free reserves have risen to a new historic high level of USD5.7 billion. The table below sets out free reserves at the individual club level:
In addition to the above capital distributions, two Scandinavian clubs – Gard and Skuld – have effectively returned funds to members via premium discounts or credits amounting to USD35.4 million. These have mitigated the possible increase in Free Reserves for those Clubs and, when added to the capital distributions, mean that members have “received a benefit” of almost USD70 million.
2024 P&I Results Summary
P&I Club Reported Financials (USD Million)
Early summer outlook
So, what do these results mean for the state of the market? What do we anticipate as regards the general increases to be sought in the late autumn?
With underwriting returns having been stabilised and investment returns having offset the losses of the prior year and more, the figures tend to suggest that some clubs could be looking for a zero to 5% general increase or target increase. At this stage in 2024, we would expect to see the market look for an average of 4-5% in 2025. The majority of P&I Clubs will feel that premium increases can still be justified, and some of the markets seem to be talking of closer to 5% to 7.5% at the time of writing. The half-year figures for 2024-25 will very much inform the ultimate decisions and there appears to be pressure coming from the reinsurance markets over rates.
The impact of pool claims will be hard to predict for the coming year with 2024 being a busy year for the pool, with around 8-10 pool claims albeit not yet reported as a pool loss, but have serious potential. The “MV Dali” casualty is dividing opinion and potentially creating pricing issues for the reinsurance programme. What is clear at this early stage is that the “MV Dali” incident will not influence the P&I renewal in 2025, however, we may see reinsurers push for increases in GXL rates in 2025. We will understand the market sentiment better in the autumn.
Individual clubs will, of course, still have individual needs, and not everyone is in a stronger financial position now as compared to 12 months ago. There will consequently be outliers, but these results are positive for the market generally and could give considerable price flexibility to the financially stronger clubs. We would expect to see a continuation of both capital returns and revenue returns in the forthcoming six months. This will provide some budgetary stability or reductions for Owners in 2025.
Gard has, of course, already maintained its owner’s general discount policy, increasing its 2024–25 level to 10%. Steamship Mutual has given renewing members a 7.5% credit against the 2024–25 premium.
The sentiment in the market, as we see it, suggests that other clubs will follow the patterns of last year: we have seen Skuld’s board sign off 5% in returns and would expect club boards to sign off returns in one form or another at Gard (for 2025–26), Steamship(perhaps moderated by the pre-existing premium credit), and Britannia, given that these clubs are in a better position to do so at this stage.
Rationally, it is better to return funds to members in the way Gard does, or as capital, rather than reduce rate increases or even cut them at this stage - since we are only a year out of the hard market cycle. Such techniques are by their nature one-offs, they do not have the longer-term implications of reducing ETC going forward and, as a consequence, increasing rate volatility. Remember the trailing 7 year combined ratio average is closer to 118%, 2023 is only seen to be a lucky claims year in reality.
Finally, what of Standard & Poors? In recent years, they have reduced ratings and/or outlooks based on high combined ratios and weakening financial strength. Will they be so eager to improve ratings and/or outlooks as a result of consecutive years of positive underwriting and a record high collective level of free reserve? We have our doubts.
We will update our thoughts and analysis of the market position in the coming months as trends become more clear and further data is available. However, at this early stage, looking at the half-year, we look forward with cautious optimism for members.
Summer has just arrived in London, we wish you all an enjoyable summer period and look forward to seeing you in September.
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