Gard group result and reduction in last instalment
The financial year ending 20 February 2021 produced a total comprehensive profit on an Estimated Total Call (ETC) basis of USD 68 million.
The last instalment of the agreed ETC for 2020 policy year was 20 per cent or USD 76 million. This was reduced to 10 per cent, meaning USD 38 million have been included in the accounts. This marks the final time that the last instalment - and any corresponding reduction in premium, is deferred till several months after the end of the policy year. For the 2021 policy year, an Owners’ General Discount has been introduced on the ETC so that, if the capital position of the group allows, the discount is given at the beginning of the policy year.
Due to the high volatility and uncertainty in the global financial markets, because of the Covid-19 pandemic, the Board of Directors resolved at their meeting in May 2020 to defer the decision regarding the last premium instalment for the 2019 policy year until the November 2020. Based on the Gard group’s financial position then the Board decided to levy a 15 per cent last instalment amounting to USD 54 million that has been included in the accounts for the year to 20 February 2021. The last instalment for the 2019 policy year was originally 20 percent of the ETC, or USD 72 million.
The total comprehensive profit including changes to last instalments was USD 84 million for the 2021 accounting year ending 20 February 2021.
The consolidated equity, which provides security and stability for the membership, was USD 1,263 million as at 20 February 2021, compared to USD 1,179 million the previous year. The financial position of the group at the time of reporting remains strong, with a low probability of levying any unbudgeted supplementary call.
Gard group on Estimated Total Call basis (ETC basis)
Gross written premium on ETC basis was USD 922 million, an increase of USD 48 million or 5.5 per cent from last year. The strong result is driven by both hardening rates in most classes of business and growth in new business volume.
As a result of increase in volumes achieved during the year, the Gard group has increased its overall market share.
The panel of reinsurers on the Gard group reinsurance programmes remain stable. There is an upward market pressure on the cost of reinsurance. The impact on Gard has been acceptable as a result of strong, long-term relationships with reinsurers, satisfactory claims records relative to the overall market and continuing changes to our risk profile.
Claims incurred for own account totalled USD 632 million, an increase of USD 46 million from last year. There has been a higher-than-expected level of own P&I mutual claims and Pool claims from the International Group clubs, which includes an adverse development on claims from prior years. The Pool claims development continued the trend from the financial years 2018 and 2019.
When considering the exceptional circumstances, the year demonstrated an acceptable technical performance, even after a claims intensive financial year. The technical result was a loss of USD 26 million and a combined ratio net on an ETC basis of 104 per cent. Last year there was a loss of USD 10 million and a combined ratio net on an ETC basis of 102 per cent.
The non-technical result was a strong USD 113 million with gains across all major asset classes.
Protection & Indemnity on ETC basis
Gross written premium for P&I on ETC basis was USD 505 million, a decrease of USD 14 million from last year. The volume increase for P&I mutual did not offset the effect of reduced premiums due to lay up rates and churn. For fixed price P&I the decline in the offshore market resulted in reduced premium. The P&I market has been soft for several years due to a benign claims’ development. This is gradually turning as pricing needs to reflect the cost of major claims seen in 2018, 2019 and 2020. The market is competitive but we saw the year as a turning point.
P&I claims incurred for own account totalled USD 413 million, an increase of USD 7 million from last year. Our Pool loss record has improved in recent years and consequently our percentage contribution to Pool claims is now lower than our IG market share measured in GT.
The Covid-19 pandemic impacted claims in the following areas:
- The number of crew illness claims has increased by about 50 per cent compared to previous years.
- There have been several compensation claims concerning ship quarantine and disinfection costs. In particular February/April 2020 saw several outbreaks on cruise ships causing illness and death of passengers and crew. Since that time, most cruise and other passenger ships paused trading reducing risks overall for that segment.
- Covid-19 has caused an increase in Defense enquiries, contract reviews and disputes.
Marine & Energy
For Marine & Energy, gross written premium was USD 417 million, an increase of USD 62 million or 18 per cent from last year. The increase is due to growth in volume for Marine business and hardening of rates for Marine and Energy. The technical result for Marine & Energy was a profit of USD 20 million against a profit of USD 17 million last year. The combined ratio was 93 per cent, the same as last year.
Claims incurred for own account totalled USD 219 million, an increase of USD 39 million from last year. This was mainly driven by increase in volume from Marine hull. In Energy, actuarial reserves have been increased for windfarms, which are a new product area, and Builders’ Risk (after a very good performance last year) also rose.
The energy market has seen some rate increases, although premium levels are still considered too low in a market segment prone to large claims. With only one large claim in energy this year, it made a strong contribution to the overall result.
For the financial year to 20 February 2021 Gard achieved a return on its investments of 5 per cent versus 5.7 per cent for the strategic benchmark. For the comparable period last year, Gard’s investment portfolio returned 5.8 per cent. The size of the group’s investment portfolio as at 20 February 2021 was USD 2,295 million, an increase of USD 193 million the previous year.
The year was marked by the impact of the global pandemic which caused a significant sell-off in global financial markets at the beginning of the period, though most global markets recovered strongly by the end of the financial year, with several markets ending the period at all-time highs. This recovery was the result of unprecedented fiscal and monetary stimulus across the globe, led by the US which dropped interest rates to zero and where the CARES act was signed into law at the end of March 2020 and provided a USD 2.2 trillion stimulus injection into the US economy. Whilst the EU and other governments followed suit with similar packages, it was not until July that the EU agreed a significant degree of spending. The combination of fiscal stimulus and zero US interest rates proved to be a strong accelerant to financial markets, sparking an historic recovery in equity and credit markets. This was particularly true in the US where technology sectors experienced an expansion of their multiples amid a speculative fever not seen since the late 1990s. Unexpectedly rapid vaccine developments combined with the election of Joe Biden and the expected enactment of further stimulus, meant that this optimism continued. US equity markets ended at all-time highs and corporate spreads at comparable levels to the period prior to the pandemic, when US 10-year treasury yields hit 0.53 per cent. However, from there, they started to rise gradually as the US yield curve steepened significantly as 10-year rates rose whilst five-year rates remained low. Further strong sell-offs in December and January caused more increases in rates below five years following a resurgence of inflation worries from the expectations of further stimulus and a weakening dollar. As Gard’s fixed income investments have relatively low aggregate duration, the impact on the portfolio of rising rates has been limited.
The credit portfolio experienced significant losses at the beginning of the year. As markets recovered Gard’s portfolio followed and the portfolio was a significant contributor to the return with an estimated return of 6.6 per cent. The managers in the portfolio took advantage of volatile markets at the beginning of the year and the return was achieved with no significant changes to overall spread duration and a slight improvement to average credit rating.
In emerging market sovereign debt, Gard’s managers delivered an estimated return of 8 per cent and delivered strong relative performance through country selection throughout the year, with returns also boosted due currency gains.
The equity portfolio returned an estimated 16 per cent for the fiscal year. Whilst being underweight to US large cap technology saw the portfolio underperform in the first half of the year, the second half saw significant gains, especially across emerging economies, helped by stronger expectations for global growth, ongoing interest in renewable technology firms and a falling dollar.
The alternatives portfolio was mixed for the year, with a loss in our hedge fund exposure of -10 per cent partially offset by a strong period for our primary real estate exposure, in which low rates and a strong market for industrial and logistics property drove a return more than 7 per cent.
Gard is and aims to remain a responsible investor. We fully support the UN Principles of Responsible Investment and encourage fund managers to sign up to them. These principles recognise that long-term sustainable returns are dependent on stable, properly functioning and well-governed social, environmental and economic systems.
Capital and Risk Management
Over the twelve months to 20 February 2021, the Gard group continued to be strongly capitalised, despite a year highly affected by Covid-19, fluctuations in the financial markets and significant losses from the International Group’s pooling system.
Gard has an effective system of risk governance, which provides sound and prudent risk management. Risk governance is based on the three lines of defence model, with clearly defined roles and responsibilities. Risk taking is carried out in the business functions (1st line), risk oversight is carried out by the Risk Management function, Compliance function and the Actuarial function (2nd line). Independent assurance is provided by Internal Audit (3rd line).
Gard’s Risk Management function is mandated to ensure that the group has the necessary expertise, frameworks and infrastructure to support good risk-taking. In addition, it performs reporting activities. The independence of the Risk Management function is maintained by a direct reporting line from the Chief Risk Officer to the Chief Executive Officer, and regular reporting to the Risk Committee.
Gard’s internal risk capital model provides a quantification of the risks to which Gard group and its legal entities are exposed and is an important tool for the group. The model is used to determine the risk and capital requirements for internal purposes. The internal model and its parameters are reviewed regularly to reflect Gard’s experiences, changes in the risk environment and best practice. The insurance risk and market risk modules from the internal risk capital model have been approved by the Norwegian FSA to be used for calculating Solvency II capital requirements for Gard group, Assuranceforeningen Gard – gjensidig - and Gard Marine & Energy Insurance (Europe) AS. The Standard Formula is used for counterparty risk and operational risk.
Risk appetite and strategy
Gard’s risk appetite is to hold sufficient capital and liquidity as well as to constrain its risk taking to ensure that the group can continue to operate following an extreme loss event with the same risk tolerance for insurance risk. The risk-taking must be aligned to Gard’s risk-carrying capacity.
Gard aims to fulfil the following key objectives:
- Have a high probability of meeting its insurance liabilities and providing its services;
- Preserve the continuity of its offering after an extreme loss event; and
- Have the flexibility and competence to help Members and clients manage new risks and pursue attractive business opportunities as and when they arise.
Eligible own funds – partial internal model
|20 February 2021
|20 February 2020
|Tier 1 Basic own funds
|Tier 2 Ancillary own funds
|Tier 3 Other own funds
|Eligible own funds
Gard has a simple capital structure consisting of Tier 1 capital through equity, which is earned and available, high quality Tier 2 capital in the form of unbudgeted supplementary calls, and tax assets included as Tier 3 capital. The probability that Gard would have to raise additional capital from its mutual Members by way of unbudgeted supplementary calls should be low.
The Gard group aims to manage its capital such that all its regulated entities always meet local regulatory capital requirements.
In context of its business operations Gard enters into a broad variety of risks, where the main risks are insurance risk and market risk. Gard is also exposed to counterparty default risk, operational risk, liquidity risk, business risk, compliance risk and reputational risk.
Gard has an extensive reinsurance programme. The mutual business is pooled between International Group (IG) clubs. For the 2020 policy year the IG clubs pool claims above the club retention of USD 10 million and up to USD 30 million. Between USD 30 million and up to USD 100 million the IG clubs are reinsuring each other. Above USD 100 million the group purchases a reinsurance programme with USD 2 billion cover per vessel per event with an annual aggregate deductible of USD 100 million which is shared between the IG clubs. In addition, an overspill protection cover of a further USD 1 billion is purchased. For P&I Fixed and the Marine and Energy businesses there are high capacity reinsurance programmes in place. The structure of the reinsurance programmess has been stable during the last years.
Liquidity risk is the risk that Gard group, a legal entity and/or branch either does not have available sufficient financial resources to meet its obligations as they fall due or can secure such resources only at an excessive cost. The sources of inflows are stable in Gard, where liquidity is generated primarily through premium income. Although payments are fairly stable over time, the nature of the insurance business means that Gard must be prepared to make sudden and large payments.
The amount of liquidity held is largely determined by internal liquidity stress tests. Based on these stress tests, we estimate short-term and long-term liquidity needs. To mitigate liquidity risk, Gard has established several mechanisms including cash pool arrangements within the group and holding highly liquid assets.
In October 2020 Standard & Poor’s affirmed the A+ financial strength of the Gard group and its direct writing subsidiaries (Gard P. & I. (Bermuda) Ltd., Assuranceforeningen Gard – gjensidig -, Gard Marine & Energy Limited and Gard Marine & Energy Insurance (Europe) AS). The outlook was revised from stable to negative, reflecting the group’s recent weaker technical performance largely due to significant losses from the IG pool claims.