Solid investment return
All clubs in the IG reported a positive investment return in 2017/18. The range of individual clubs’ return was between 2.5% and 8.4%, with a healthy 5.5% average return across the market.
This variance in individual club investment results, largely follows the divergence in their investment strategies. The discrepancy in allocation of assets held by each of the clubs as at 20 February 2018 is shown in the chart below.
The average equity holding across the IG market as at 20 February 2018 was 16% of total investments (very similar to the 2016/17 financial year). In 2007/08, before the 2008 equity market crash, the average equity holding across the market was 22.5%. At the low point (after the 2008 crash) the average equity holding in 2008/09 had reduced to 12.4% across the IG market.
This percentage progressively increased until 20 February 2014 when the average equity holding across the market was 17.2%, though this has abated slightly and stabilised around 16% in the most recent four financial years. The highest percentage equity holding by any individual club in 2017/18 was the American club with 28% and four other clubs have equity holdings of 20% or greater.
Five clubs have equity holdings of 20% or greater.
Variance in individual club investment results largely follows the divergence in their investment strategies.The graph below shows the percentage return on investment achieved by each club in the 2017/18 financial year.
The final graph outlines the percentage increase or decrease in each club’s free reserves as at 20 February 2018. This summarises the combined effect of each club’s underwriting and investment results for the financial year, when compared to their own free reserves.
Claims trends
Since 2003, Willis Towers Watson’s P&I reviews have routinely highlighted trends towards greater volatility in overall claims levels.
The market has seen inflationary increases on small and medium sized claims averaging about 3% per year over the last 17 years. Around this relatively low level inflationary background however, the number and size of very large claims has varied enormously. This unpredictability of very large claims, combined with increased club and IG retentions, has created enormous volatility in total claims levels in the market.
This is exemplified in recent years where an absence of a significant number of high value claims has been the primary driver in the very positive results.
A sharp reduction, or a temporary lack of activity, in total claims levels is very much a part of the overall picture of volatility as the years with double digit increases in claims levels. In these ‘unlucky’ years (2003/04, 2004/05, 2006/07, 2009/10 and 2011/12) the material increases in the number of high value claims were key drivers in the overall negative underwriting results in those years.
The background to this has been discussed at length in our previous reviews and will be developed further in the IG Reinsurance section of this review.
The number and size of very large claims has varied enormously.