2017 was certainly a challenging year. It was a year of unprecedented natural disasters, which had a significant impact on our industry, our company, our clients and our employees. In addition to hurricanes, earthquakes, wildfires and other natural events, we also experienced an untypical increased frequency in risk losses. We ended 2017 with a combined ratio of 129.9 percent, which included following through on our 10th membership credit (an approximate benefit of US$3.8 billion to our clients since 2001).
"As a mutual company, we know that our resilience reflects your resilience."Thomas A. Lawson, Chairman and Chief Executive Officer
Despite our combined ratio, consolidated net income for 2017 was US$254 million versus US$797 million in 2016, and FM Global’s surplus increased by more than US$1 billion to US$13 billion. Our capital base is stronger than ever—a testament to the strength and stability of a business model built for volatility.
This past year, we helped our clients deal with potentially devastating disasters. With FM Global’s engineering advice, many clients managed to weather the events with minimal disruption, and of course our team members were there quickly to support clients who did experience an impact to their facilities following the significant natural catastrophes.
Other high notes of 2017 included the opening of a new insurance company in Luxembourg, and the opening of the new state-of-the-art FM Global Learning Center in Norwood, Mass., USA. Construction also continued on the FM Global Centre in Asia, a 125,000-square-foot (11,610-square-meter) loss prevention training and operations complex, located in Singapore. The facility, the first of its kind in Asia, will open in early 2019.
Through the FM Global Centre and our U.S.-based research and testing facilities, we are more focused than ever on turning science into solutions. In this report, you will read how this uncommon knowledge helps our clients better understand their risks and mitigate them.
As a mutual company, we know that our resilience reflects your resilience.
We are proud of the work we do—and the work our clients do—to protect the value created by their businesses.
2017 Premium Trends
Despite a highly competitive marketplace, we retained approximately 97 percent of our clients. While we fell shy of our expectations for new business, the strong retention rate combined with a significant addition of new clients resulted in an overall increase in gross premium for the organization.
On a consolidated basis, FM Global (large commercial property) and AFM (middle-market property) are the sources of 95.4 percent of our overall premium in force, with Mutual Boiler Re and FM Global Cargo representing the balance. All lines showed top-line premium growth, generating a positive outcome. Consolidated net premium earned showed a slight increase at US$4.1 billion, excluding the impact of 12 months of membership credit.
Our consolidated loss ratio for 2017 was 100.8 percent. The natural disaster loss ratio of 50.0 percent, due in large part to hurricanes Harvey, Irma and Maria, and the September earthquake in Central Mexico, far surpassed projections and raised our five-year average from 18.0 percent to 22.4 percent. The unprecedented U.S. hurricanes reinforced our belief that the majority of loss is preventable when proactively managed. We found that clients who had implemented our risk improvement recommendations fared significantly better post-Harvey/Irma/Maria compared with those clients with incomplete recommendations. Overall, our aggregate loss results continue to outperform catastrophe model predictions, due to our engineering differential.
Our 2017 risk loss ratio, a measure of losses predominantly from fire and explosion, increased from the prior-year ratio of 30.0 percent to 45.1 percent, due to the untypical severity of risk losses, including a very large fire at an unsprinklered facility. Fire remains the most significant risk exposure to our policyholders, and we thank them for their commitment in addressing this hazard. As an indicator of this commitment, they installed 97.4 million square feet (9 million square meters) of ceiling sprinklers worldwide in 2017.
Our 2017 expense ratio was 29.1 percent. This metric is a priority and contributing factor in our ability to provide the most value to our clients. To increase efficiency, we are continuing our successful focus on business process improvement. We are also committed to providing faster, more innovative product development and flawless product delivery by leveraging the efforts of our agile technology transformation.
Our investment portfolio produced a 12.8 percent return on total assets, a very positive result that outperformed market benchmarks. Discussion and detailed breakdown of the results are provided in the Investment Report section beginning on page 21. In summary, strong returns from stocks during 2017, with FM Global’s combined equity portfolio return of 22.5 percent, benefited our results. Performance was also enhanced by taxable bond returns above benchmark and beneficial allocation to municipal and high-yield fixed income securities. Our strong balance sheet and longer-term investment orientation continue to allow us to participate in the returns of higher opportunity/volatility asset classes.
Our employee retention rate remained comparatively high at 94 percent, with average employee tenure at 12.5 years. Employee diversity remains a top priority. In 2017, we created more opportunities for groups within our employee population that have been underrepresented in leadership positions. This is an ongoing objective. Our progress was evident in the class of new field engineers—more than 40 percent of whom were women. Our other major focus is on leadership development and succession planning. Training is a major aspect of this objective. To provide our people with the best resources, we introduced a new internal learning management system.
Leadership and Governance
At the end of the year, Shivan Subramaniam stepped down as chairman of the board. I thank him for the leadership he demonstrated as FM Global’s first president and CEO, and later, as its chairman. His direction was pivotal in the growth of FM Global and our emergence as a world-class company in our industry. He will be greatly missed.
In 2017, we welcomed Glenn Landau, senior vice president and chief financial officer of International Paper, to our board of directors. Jonathan Mariner, retired chief investment officer for Major League Baseball, retired from our board. I want to thank him for his many contributions throughout the past eight years.
I would also like to thank our board of directors, eight advisory boards and five risk management executive councils for their oversight and support in providing the best property risk management products and services to our policyholder-owners.
"We will continue to invest in research and technology that will speed the transfer of knowledge into loss prevention solutions."Thomas A. Lawson, Chairman and Chief Executive Officer
2018 Forecast and Landscape
The natural hazard losses of 2017 have altered the global insurance market landscape, creating new pressures in both the reinsurance and primary insurance markets. The industry remains well capitalized; however, sustained low interest rates have led to a renewed focus on disciplined underwriting. As always, we look at the merits and quality of risk along with prevailing market conditions to determine pricing and terms and conditions. We have the vision, strategy, innovative culture and resources to succeed in this environment and will continue to leverage emerging trends and technologies to deliver the best products and services based on the changing needs of the marketplace.
We will continue to invest in research and technology that will speed the transfer of knowledge into loss prevention solutions. We are in the midst of a business technology transformation, using agile principles to accelerate our time to market. We also know that innovation which originates outside our industry will be essential to future growth and success. In 2018, we will launch an innovation lab dedicated to exploring these emerging technologies and how we can leverage them for the benefit of our clients. These will all be focal points for us in 2018.
The fact that we are a knowledge-based company with a global presence is a distinct advantage for us and our clients. While research and learning facilities are vital to acquiring knowledge, they only create value through the application of that knowledge by those who train there: our employees and our clients. It is our people, and their ability to apply what they learn through client interaction, that make FM Global unique. Thanks to them, and to our clients’ commitment to loss prevention, we will continue to manage volatility, protect our clients from loss, and develop solutions that meet their evolving property protection needs.
Thomas A. Lawson
Chairman and Chief Executive Officer