Thanks to the superb efforts of our clients and their client service teams, 2016 was another very successful year for FM Global. Despite a very competitive marketplace, we once again achieved our financial goals and accomplished our business objectives, while maintaining a strong client base and exceeding our new business targets.
Our combined ratio of 83.2 percent was market-leading for the fourth consecutive year, and the combination of strong underwriting performance and investment results strengthened our surplus by 8 percent to US$11.9 billion at year-end. In addition, we issued our ninth membership credit since the program began in 2001. By the end of 2017, we will have provided more than US$3.3 billion in total membership credit to our mutual owners. This process of giving back underscores our mutual structure and supports our clients' loss prevention focus.
These outstanding results validate the strength of our business model and enable us to focus on our working relationships with clients, brokers, reinsurers and WorldReach® partners. This network is supported by the fully engaged, knowledgeable workforce here at FM Global, whose sole focus is on delivering the highest quality insurance experience to our clients. We are committed to providing our employees with the training, development and resources they need to flourish. This global team helps to create the advantages our clients expect from us.
2016 Premium Trends
Against extremely competitive market conditions, we not only retained most of our clients but also exceeded our expectations for new business. As a result of this strong performance, our overall gross premium in force increased for both our FM Global and AFM lines.
On a consolidated basis, FM Global (large commercial property) and AFM (middle-market property) are the source of 95.8 percent of our overall premium in force, with Mutual Boiler Re and FM Global Cargo representing the balance. Consolidated net premium remained flat at US$4 billion, excluding the impact of 12 months of the membership credit.
The fact that we are a knowledge-based company with a global presence is a distinct advantage for us and our clients.
Our consolidated loss ratio for 2016 was 52.9 percent. The natural disaster loss ratio of 19.8 percent was slightly higher than both prior year and our five-year average of 18 percent.
Our 2016 risk loss ratio of 30 percent was a marked improvement from the prior-year ratio of 32.3 percent and helped to lower our five-year average to 31.3 percent. Risk losses stem predominantly from fire and explosion. This ratio continues to improve as our clients prioritize risk improvement and reduce their losses. As an indicator of their commitment, our policyholders installed 94.4 million square feet (8.8 million square meters) of ceiling sprinklers worldwide in 2016.
Our 2016 expense ratio was 30.3 percent. Acting on our commitment to deliver high-quality services at low cost, we improved operating efficiency by implementing our new global policy delivery system. By one significant measure, 89 percent of policies were delivered on or before the effective date. We also appointed an innovation leader to accelerate our leverage of technology and improve time-to-market delivery of new products.
Investments and Surplus
Our investment portfolio produced a 6.65 percent return. Discussion and detailed breakdown of the results are provided in the Investment Report section beginning on page 21. In summary, healthy returns from stocks during 2016, with the S&P 500 index return of 12 percent, benefited our portfolio. Our strong balance sheet and longer-term investment orientation allows us to participate in the returns of higher opportunity/volatility asset classes.
Our employee retention rate remained comparatively high at 94 percent, average employee tenure stood at 12.6 years, and we made progress on two top priorities. The first is to become a more diverse workforce. While we have not yet reached our goal, progress was evident in the class of new field engineers— more than 50 percent of whom were women. The other key priority is to sharpen our focus on leadership development and succession planning. Training is a major aspect of this objective. To provide our people with the best resources, we made substantial progress toward developing a new learning management system.
Leadership and Governance
In 2016, we welcomed Michel Giannuzzi, chief executive officer, Tarkett, and Israel Ruiz, executive vice president and treasurer, Massachusetts Institute of Technology, to our board of directors. Two of our board members announced their retirement. We extend our thanks to David Pulman and James Thyen for all their contributions. We are grateful for the support and oversight provided by our board of directors, eight advisory boards and five risk management executive councils.
Industry and Public Recognition
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 2016, A.M. Best, Fitch and S&P Global affirmed our ratings at A+, AA and A+, respectively.
FM Global was named best carrier for property, business interruption, and boiler and machinery insurance by National Underwriter, and we received an Innovation Award from Business Insurance for MyRisk®, our client extranet. Outside our industry, we were honored that the White House Office of Management and Budget recognized FM Global for our on-site risk assessments and loss prevention recommendations for schools, hospitals and transportation facilities.
By the end of 2017, we will have provided more than US$3.3 billion in total membership credit to our mutual owners.
2017 Forecast and Landscape
We are in the midst of a complicated industry landscape. A combination of low interest rates and a benign state of natural catastrophes over the last several years continues to support significant capital in the insurance market and has strengthened balance sheets. This resulted in a competitive marketplace
In 2016, which we expect to continue in 2017. While some competitors continue to try to replicate our business model, our mutuality and strong specialty focus remain unique to FM Global and differentiate us in the market.
The vote by the United Kingdom to exit the European Union (EU) will affect a number of insurance companies, including FM Global. We implemented our contingency plan and are in the process of forming a new company, FM Insurance Europe S. A., in Luxembourg, which will allow us to continue to deliver seamless coverage throughout the EU.
The fact that we are a knowledge-based company with a global presence is a distinct advantage for us and our clients. To ensure we are well-positioned in the future, we began construction on a new loss prevention training and operations center in Singapore and began the expansion of our SimZone hands-on training facility in Norwood, Mass., USA. The latter project will be completed midyear, 2017.
FM Global is acknowledged globally as the leading provider of property loss prevention engineering services and insurance capacity to large corporations. In recent years, AFM has also achieved a leadership position in North America, with significant opportunity for profitable expansion in other global markets. With the progress we continue to make in all our market segments, the future success of our business model, with its emphasis on keeping our clients resilient, appears to be very secure.
In this Annual Report, you will see how FM Global continues to build on who we are, while remaining true to our promise to protect the value our clients' businesses create. We feel strongly that an alliance with FM Global helps build its own unique set of competitive advantages in any industry. It was a productive year—in which we enhanced our FM Global Advantage® policy, introduced our global flood map, and redoubled our commitment to cyber risk reduction, all driven by what we heard from our clients. As we move into 2017 and beyond, we're certain our clients will indeed enjoy those benefits and take major strides right along with us.
Thomas A. Lawson
President and Chief Executive Officer
Shivan S. Subramaniam
Chairman of the Board