THANKS TO THE DILIGENT EFFORTS OF OUR CLIENTS and their client service teams, 2015 was one of our best years on record. We achieved our financial objectives and accomplished our business goals. We streamlined our business processes to be more efficient, and made significant progress in improving our products and services. Despite an extremely competitive marketplace, we maintained a strong client base and exceeded our new business sales targets. On top of this very positive outcome, we issued our eighth membership credit to our policyholders. All in all, it was a tremendously successful year.
Our combined ratio of 85.3 percent was exemplary for the third consecutive year, and the combination of strong underwriting performance and investment results increased our surplus by 3.8 percent to US$11 billion.
These outstanding financial results substantiate the enduring strength of our mutual business model, our balance sheet and the trusted partnerships we have formed with our clients, brokers, reinsurers and WorldReach® partners. This intricate relationship network is further cemented by a deep bench strength of highly engaged, knowledgeable employees solely focused on delivering the highest quality insurance products and services available—fulfilling our promise to help keep our clients resilient.
Review of 2015
In April 2015, our board of directors approved a membership credit of US$465 million to eligible policyholders renewing between June 30, 2015 and June 29, 2016. This marks our third consecutive membership credit and our eighth overall. By the end of June 2016, we will have provided nearly US$3 billion in total membership credit to our mutual owners since the program began in 2001. The membership credit process embodies the core value of our mutual structure. Our clients’ dedication and focus on increasing the resilience of their business reduces the frequency and severity of losses, making it possible for us to share the benefits of our positive financial results. Despite the inherent volatility of the business, we have consistently issued a membership credit whenever conditions make it possible.
A shared commitment to business resilience underpins the risk management partnerships we have with our clients. In 2015, clients made excellent progress in improving physical and human element risk, gaining significant ground in reducing critical risk exposures. Internally, we continued to optimize our processes and technologies to bring greater efficiencies, expand capabilities and innovate products and services—further differentiating our product in a highly competitive marketplace. Among these efforts, we continued to focus on solutions to mitigate principal risk exposures (fire, flood, boiler and machinery) and emerging risks.
Flood continues to be a worldwide concern, and it remains one of the world’s most costly natural hazards. Our global flood-mapping footprint is nearly complete, and our ongoing research and product testing allows us to devise new ways to combat this growing global business threat. As our clients break ground in new markets, many of which are vulnerable to flood, we’ve forged influential relationships to increase the availability of FM Approved loss prevention products worldwide.
We’ve been developing our unique understanding of risk for nearly two centuries, and are using this foundation to unlock the value of data analytics to help our clients through predictive modeling. Predictive analytics, coupled with our research and field engineering data, will provide a more definitive understanding of which client locations are more likely to incur a loss, and where to take action to improve the risk.
The FM Global Resilience Index is the first data-driven tool to rank the supply chain resilience of 130 countries and territories around the world. First launched in 2014, the index aggregates nine drivers of resilience into three factors—economic, risk quality and the supply chain itself. Executives are able to prioritize their supply chain risk management and investment efforts and generate powerful insights about risk and opportunities in the supply chain to help guide their strategy. In 2015, the FM Global Resilience Index was recognized by Business Insurance magazine with an innovation award.
We continue to lead the market in contract certainty, particularly as it relates to timeliness of policy delivery. In 2015, 88 percent of master policies were delivered on or before the effective date of the contract, and 96 percent were delivered within 30 days.
2015 Premium Trends
For the third successive year, the lack of insured natural disasters, combined with new and abundant forms of alternative reinsurance capacity and strong balance sheets, created a highly competitive marketplace. Even with these challenging market conditions, we retained 95 percent of our clients and exceeded our new business goals, which reinforces the value placed in our mutual business model and focus on loss prevention. Despite this strong performance, due to the continued strengthening of the U.S. dollar, our overall gross in-force premium decreased by 2.5 percent.
Affiliated FM, which was rebranded in 2015 to AFM, also experienced a decline in premium, reflecting the ongoing competitive nature of middle-market business.
On a consolidated basis, FM Global (large commercial property) and AFM (middle-market property) represent 95.8 percent of our overall in-force premium, with Mutual Boiler Re and FM Global Cargo representing the balance. Consolidated net premium earned decreased by 1.1 percent to US$4 billion, excluding the impact of 12 months of the membership credit.
Our consolidated loss ratio for 2015 was 55.5 percent, which includes an increase of US$125 million to our discontinued lines loss reserves—legacy company contracts representing third-party liability insurance and reinsurance business placed prior to 1984. With this increase, we continue to be very conservatively reserved.
Our loss ratio, excluding membership credit and discontinued reserve increase, was 46.4 percent. There has been a general decline in natural disasters worldwide over recent years, and claims activity from natural disasters remains historically low. That said, our 14.7 percent loss ratio from natural disasters was slightly higher than in 2014, but still well below our five-year average of 22.3 percent.
Our 2015 risk loss ratio of 28.9 percent was below our 2014 ratio of 31.6 percent, and our five-year average of 30.9 percent. Risk losses stem predominantly from fire and explosion, hazards that typically occur at locations without automatic ceiling sprinkler protection.
Our 2015 expense ratio was 29.8 percent, reflecting the impact of the membership credit, coupled with the decrease in net premium earned. As a mutual company, we are committed to delivering high-quality services worldwide, balanced by careful expense management. To maintain this delicate balance, a designated business process improvement team continues to identify and implement solutions that bring about efficiencies. We are ramping up our efforts to better leverage technology, including developing mobile solutions that streamline the way we deliver our products and services. Our latest advance in client technology solutions is the MyRisk® mobile app, which provides fast and easy access to account-specific data from various portable devices.
Against a backdrop of very strong client retention and recent growth in new client acquisition, our workforce has remained relatively flat over the past three years. As our clients continue to expand across the globe, our goal is to effectively support localized needs while striking the right balance of staffing resources to achieve maximum efficiency.
FM Global prides itself on maintaining a stable, well-educated workforce. Due to the essential nature of engineering in our service delivery, in 2015, our field engineers spent nearly 536,000 hours visiting more than 68,000 client locations. To enhance their skills and expertise, they also dedicated nearly 35,000 hours to basic, intermediate and advanced classroom training.
Average employee tenure is 12.5 years, and employee turnover rate averages about 6 percent each year. In 2015, we made some significant changes in executive leadership, and this created a domino effect in leadership changes across the company. These changes have had a positive effect on our organizational structure, tapping into our succession planning and opening up new opportunities for internal advancement.
Investments and Surplus
Our investment portfolio produced a 1.53 percent return. Discussion and quantified breakdown of the results is provided in the Investment Report section beginning on page 24. In summary, bond and stock returns remained low, reflecting persistent low interest rates and numerous global economic challenges—moderate U.S. GDP growth; deceleration and structural change in China’s economy; and volatility in commodities and currency exchange rates. Even in a volatile investment market, FM Global’s approach puts a greater emphasis on longer-term, multiyear results. While 2015 returns were below previous trend-line returns from both stocks and bonds, the intrinsic value from investing in quality credits and equities should accrue to quality-oriented portfolios in the future.
Leadership and Governance
Our board of directors, eight advisory boards and five risk management executive councils form the structural backbone of our mutual governance. In this important consultative role, they ensure our clients will always be front and center in determining FM Global’s long-term strategy. We are grateful for their support and oversight. In 2015, we welcomed Daniel L. Knotts, chief operating officer at RR Donnelley to our board of directors. Three of our board members announced their retirement. We extend our thanks to Walter Galvin, John Paloian and Alfred Verrecchia for all their contributions.
The quality and value of our products and services continue to be recognized by independent, third-party industry ratings agencies, analysts and media channels worldwide. In 2015, A.M. Best and Fitch reaffirmed our ratings at A+ and AA, respectively, and we have an A+ interactive rating from Standard & Poor’s, with a Stable outlook. An independent study conducted by Advisen among risk managers ranked FM Global “highest” in property claims management. Similarly, we were the number one choice by corporate insurance buyers according to a survey conducted by StrategicRISK. We were also pleased to be acknowledged by Global Finance magazine as the “world’s best supply chain insurance provider.”
2016 Forecast and Landscape
The low interest rate environment over the last several years has encouraged the entry of new sources of capital into the insurance market, and the relatively benign period of catastrophe loss has resulted in significant strengthening of industry balance sheets. This combination produced a very competitive marketplace in 2015 and is likely to continue into 2016. Although competitors attempt to replicate our successful business model, our mutuality and strong specialty focus are unique to FM Global, and these core strengths are what differentiate us in our market. Our mutual status allows us to gain inimitable insight into our client needs—driving us ever forward as a market leader, and establishing new inroads for tomorrow’s industry standards.
As we look to 2016, our course remains steady, but we will aggressively pursue our strategic goals, with a focus on building an agile, innovative and diverse workforce, combined with flawless execution of our business model. We believe data analytics will open new doors to helping our clients drive down their cost of risk and remain resilient. Internally, we’ll continue to focus on process improvement to keep internal operating costs to a minimum, while achieving optimal results. Given our strong surplus, we’ll continue to explore new ways to invest our capital into products and services that most benefit our clients, and will be introducing an enhanced version of the world-leading FM Global Advantage® policy that will include more than a dozen enhancements.
Finally, our strong client retention rate and superior financial results are positive indicators of a healthy, thriving organization. Behind those results, of course, are the individuals who make it happen. Our success would not be possible without a knowledgeable, dedicated workforce solely focused on meeting the needs of our clients. They are the best of the best, and in order to retain them, we are committed to providing them with the skills and resources they need to flourish. It’s our employees who make FM Global unique and special, and it’s both a pleasure and a privilege to lead such an experienced and talented organization.
Thomas A. Lawson
President and Chief Executive Officer
Shivan S. Subramaniam
Chairman of the Board