Emergence of two-tier market prompts underwriter concern on credit risk and claims
ROMAN Abramovich has got one — well, four at the last count — and his fellow billionaires are busy building new, bigger varieties to keep ahead of what has become the ultimate status symbol race.
The superyacht sector is thriving on extreme wealth as the need grows for the mega-rich to find suitable objects to spend their gains.
Ordinary yacht owners, perhaps law firm partners or investment bankers, in contrast are feeling the distinctly icy breeze from the global credit crisis, with the likes of loss adjusters Charles Taylor reporting a sharp rise in dodgy insurance claims in the US.
But for the premier league rich, if their activity in the superyacht market is anything to go by, their billions look largely untouched by the US sub-prime crisis.
All eyes in the world of yachts and yachting may be on the Solent and Cowes this week, but it is the superyacht sector that is generating the business and talk in pleasure boat circles.
The number of premier league wealthy individuals with investable assets of at least $1m held $37.2trn at the start of 2007, according to Reuters.
The luxury superyacht market is booming, with orders up 18% on 2007 and four times the level a decade ago. The super-yacht charter market in 2007 was worth $370m, according to Markel International, the London-based underwriting arm of the US insurance giant.
Nearly 1,000 superyachts, which are over 80 ft (24 m) long, are on order, with reports that the yards building these vessels are booked through to 2011 and beyond, it says.
Taiwanese and Chinese yacht-builders are also catching up with predominantly Italian, US, Dutch and French builders on the multi-billion dollar market, offering prices that are between a third to half the price tag than in the west.
However, in the smaller yacht market the troubles in the global financial markets is having a devastating effect, with US yacht builders cutting jobs and others temporarily halting production.
Yacht brokers are also feeling the cold wind of economic woes, with profits falling by up to 65%.
Small yards, meanwhile, are facing bankruptcy as the sector struggles with the rising cost of fuel as well as the scarcity and expense of spare parts.
Nick Smith, a director at loss adjuster Charles Taylor, says there is a growing gulf between the boats of the rich and the super rich, the standard and the super-yacht markets.
The value of smaller vessels is dropping by the day, as owners are forced to cut back expenditure amid straitened economic conditions. The value of super yachts, however, is mounting, as owners that are unaffected by the credit crisis queue up to book shinier and larger vessels.
Many smaller boat owners bought their vessels with borrowed money, often secured on residential property that is losing its value, leaving them with loans in excess of these assets. But the likes of Mr Abramovich are unhindered by the need to service debt.
In the smaller vessels segment, general maintenance is among the first things to be cut; while in the superyacht segment expense does not seem to hold back owners keeping their vessels pristine and immaculate.
“The quality of boats is deteriorating and underwriters should place greater emphasis and importance on pre-risk surveys,” says Mr Smith.
By contrast, marine insurers are increasing business in the superyacht sector, which offers low claims and a wide range of underwriting opportunities.
In the smaller vessels segment, fraudulent claims are on the rise as owners struggle with increasing credit costs and decreasing asset values, says Charles Taylor, with false theft and fraudulent personal injury claims on the increase.
Superyachts, in contrast, are now huge business for boat builders to brokers, maritime suppliers to crew managers looking for a slice of the new wealth.
Marine insurers have not been left on the esplanade either, with many underwriters no longer looking at superyacht insurance as a sideshow but as a major aspect of their portfolio.
Perhaps this is not surprising, with the market buzzing with reports back in March of a ‘secret’ yacht order at Fincantieri in Genoa for £140m ($274m), placed by an undisclosed fellow countryman of Mr Abramovich.
‘Hull 6154’ is 438 ft long and will boast 15 rooms, and what is likely to become the essential trappings of a helipad, submarine hangar, speedboats, jetskis, marble and gold bathrooms and mandatory jacuzzis.
The 60-crew vessel will no doubt be the source of envy and renewed building activity for the likes of the Abramovich’s, with their 377 ft long and £72m Pelorus, or Microsoft billionaire Paul Allen with his Octopus at 413 ft, worth some $126m.
Some marine insurers are now only half-jokingly talking about a new category of luxury superyachts that should really be classed as frigates.
Wherever the market and its paymasters go, these developments certainly relegate Harrods owner Mohammed al-Fayed’s 1990-built Sokar, a mere 208 ft long with a double-digit millions secondhand value, into the league of the has-beens and non-runners.
The insurable superyacht fleet is expanding both in terms of size and numbers, with brokers Aon estimating that the world fleet of these super yachts is up to 7,000 vessels over 30 m in length, compared with 4,000 in 2004.
Insurers writing business in London, Europe and the US are finding they have to keep pace with the sector.
Rates have come under some pressure as more marine insurers pile into what was, until recently, a small business area, but so far this year demand for insurance has hardly slackened.
London underwriters are trading stories of tidy earnings from Russia’s new wealthy and others desperate to keep up with the Abramoviches and willing to pay handsome premiums to cover the slightest scratch on these ultimate boys’ toys.
Obsessive pride among owners is also requiring underwriters to be ever more inventive, offering cover in many ways for a super-rich lifestyle as much as an ocean-going vessel.
That means that beyond the conventional hull policy, protection will also include crew welfare, personal accident and medical cover, employers’ liability and pollution.
Other lines of cover include overside risks, such as the submarines, helicopters jet skis and speed boats packed on to the latest generation superyachts.
The insurance market is also reporting very few claims, with rising sales and values posing an increased potential for risk aggregation.
Events like the 2004 Athens Olympics and the Americas Cup in Valencia in 2007 attract concentrations of yachts, raising awareness among insurers of the potential for a single incident and the need to find ways to mitigate this risk.
Marine insurers offering cover for superyachts were calling annual increases of around 10%-15% a year up to 2006-2007, although rates started to soften through 2007 on newly-built vessels.
Aon says that there are close to 480 newbuildings lined up to take the water in 2008, with few of the existing boats of this size being decommissioned.
Price tags are now escalating to anything between €350m-€500m for this latest generation of superyachts placing rising capacity demand on insurers that, until recently, were looking at arranging cover for vessels up to €100m.
Demand for newbuildings is pushing delivery times into 2011-2013, with the more impatient end of the market reported by brokers to be prepared to pay premiums to jump the queue.
“This has prompted several new owners to sell their yachts and make a 20% plus return on their initial investment within a few weeks of delivery,” says Aon.
Boat builders, like the merchant yards of Korea and China, have are also faced procurement problems in a rising commodities market and have looked to eastern Europe, Turkey and Australia for hull construction.
Billionaire owners of these superyachts have not escaped the crewing crisis that is afflicting the world merchant fleet, as well as the related concerns among insurers over navigational skills and the availability of quality crews.
However, if yacht owners face the same staffing shortage of those in gas or dry bulk shipping, the predominantly non-business nature of these vessels has freed them to throw money to secure crew.
Marine insurers highlight that yacht owners have faced difficulties finding masters, engineers and other crew members, but they are well aware that top rates and luxury can lure the cream from the merchant fleet.
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This article appeared in Lloyd's List on Thursday 7 August 2008. For more information visit www.lloydslist.com
