Report and Accounts For the year ended 20 February 2003

Transcription

1 Report and Accounts For the year ended 20 February 2003

2 00 01 Contents Contents 02 Chairman s Statement 05 Directors, Managers and Auditors 06 Managers Review 30 Report of the Directors 33 Report of the Auditors 34 Consolidated Balance Sheet 36 Consolidated Income and Expenditure Account 38 Notes to the Financial Statements 48 Class 1 Consolidated Policy Year Statement and Statement of Reserves 50 Class 2 Consolidated Policy Year Statement 52 Notice of Meeting

3 Our mutual system has extraordinary commercial value. We can best preserve this by maintaining at reasonable cost the diversity of the International Group s shipowner membership.

4 02 03 Chairman s Statement Chairman s Statement Stephen Van Dyck The tough operating environment that the Club and our industry have faced for the last two years has continued through Nevertheless, I am pleased to say that since I last reported to you the Club s strong financial standing has been maintained. Despite the fact that investment conditions were volatile throughout the year, an overall investment return of over 3% was achieved and claims costs have been generally stable. Premium levels have also increased by more than 25% - the first increase for some years. This indicates that the persistent market softness of recent years may at last have been halted. This is particularly good news for the health of our business even if it means that our reinsurance costs will also increase. The overall financial result for the Club is therefore very satisfactory. Net assets including future calls at 20 February declined slightly from $512 million to $496 million with free reserves decreasing by a little less from $138 million to $125 million. The Club s overall standing in the market is reflected in a steady increase in membership through 2002 from existing and new Members to more than 45 million GT for owned vessels. Looking ahead it is plain that many of the challenges that our industry has had to face will continue. Investment conditions show few signs of sustained improvement as uncertainties in global economies persist. The recent war in Iraq and on-going conflict in Israel also create further uncertainty at a time when the events of September remain in sharp focus. Indeed your Board is most concerned that the risk of terrorism directed indiscriminately at world shipping has if anything intensified. Not only did one West of England member face the consequences of a terrorist attack on the VLCC LIMBURG in September last year, but the imposition by virtually all commercial underwriters of policy exclusions for the more extreme terrorist outrages through the use of chemical or biological weapons presents even more of a problem for all shipowners. The reality is that insurance protection for substantial losses may be very limited if it is available at all. Although our Managers have been able with great difficulty to buy back some limited protection this year for events of this kind, the coverage is only for $60 million in the aggregate for all our Members and it may not be possible to renew it. If terrorist events of any severity or frequency occur this fund will not go very far especially if there is significant loss of life and injury or if oil and other environmental pollution is caused. Furthermore, the longstanding assumption that shipowners will in

5 The Club s strong financial standing has been maintained throughout the tough operating environment of the last two years. Financial Highlights at 20 February 2003 ($ million) *excluding additional calls Net Assets* Additional Calls Outstanding Claims (374.7) (371.2) Free Reserves practice not be held responsible for terrorist events must be open to question. The legal burdens now imposed on them by new maritime security legislation, enacted in both the US and elsewhere, are likely to make avoidance of blame more difficult. Of equal concern is that despite strenuous efforts in the United States by shipowners and the Clubs, it has still not been possible to ensure that the shipowning community as a whole will be protected by the US Government s Terrorism Risk and Insurance Act (TRIA) enacted in November last year even on the temporary and limited basis that that legislation may permit. This leaves shipowners with inadequate commercial war risk and terrorism cover at comparatively low limits of protection in excess of hull value. If national governments remain unwilling to share some of these extreme burdens, and if commercial underwriters themselves remain so risk averse, P&I Clubs themselves will have to consider more actively whether or not they should Pool these risks along with more traditional P&I liabilities. The mutual Club system has stood the test of time by responding in the past to Member needs when commercial and government solutions have not been forthcoming. That sort of response is called for now in the face of these difficulties. Other developments that have taken place during the year will in due course also have an adverse effect on our business. Changes to the Athens Convention agreed at IMO in October will result in strict liability and in substantially higher per capita limits for loss of life or injury to passengers. Insurance for passenger vessel operators will also be compulsory to a substantial monetary limit and there will be a right of direct action against insurers. Quite how our industry should or will respond to these impositions remains to be decided, although their implementation may be some years away. But your Board does not believe that the International Group s reaction should be too negative and that it should not impose excessive restrictions on such a significant part of the shipowning community. As I said a year ago, some limitations may be appropriate, but they must be tempered so that passenger vessel operators are not forced to look elsewhere for their P&I requirements. Our mutual system needs to preserve its extraordinary commercial value by maintaining, on a sensible basis, and at reasonable cost the great diversity within the International Group s membership. The loss of the tanker PRESTIGE off Spain last November will cause further difficulties for our business in the years to come. The more extreme measures

6 04 05 Chairman s Statement continued which some European Union states have talked about imposing on a unilateral basis may have been forestalled for now as amendments to CLC and the Fund Convention are set to take effect with higher limits of liability for shipowners and the addition of a new third tier of compensation. However, it remains to be seen whether or not some maritime nations will continue to demand more stringent civil and criminal sanctions against shipowners for events of this kind, and whether or not rapid phase-out proposals for single hull tankers will be forced through too hastily at potentially great cost to shipowners and the wider community. Since my last report Messrs J A Loutsis and N G Kairis have retired from the Board. As Vice-Chairmen of the Club, they have both served with great dedication and distinction for many years. We shall be sorry to lose their good humour, wisdom and sound advice, but we are fortunate that Nico Kairis has agreed to continue to serve as a Director and Chairman of ISRe where his investment skills and knowledge will continue to be of great benefit to the Club. Messrs Z F Al-Dughaither, A Djoun and V Restis have also left the Board over the past year. I would like to thank them for their advice and commitment over the years. I would also like to extend a very warm welcome to Ms T Petalas and Messrs A R C B Cooke, L B Cooler, G L Guenov, T Izmailov, A Teigen and G Woodford all of whom have joined the Board since my last report. Their experience, knowledge, and fresh insights will, I am sure, be of great value to the Club as we meet some of the challenges that our industry faces. May I end by thanking my colleagues for their wise counsel and support through the year. The Club continues to be in robust financial shape in testing times. This is in no small way due to our Managers who I would like to thank on behalf of the Board for their continued dedication and professionalism in ensuring that the Club will remain in good shape in the years to come. Stephen Van Dyck Chairman

7 Directors, Managers and Auditors Directors S A Van Dyck Chairman Tampa G S Coumantaros Vice-Chairman New York L Criel Vice-Chairman Antwerp M T Los Vice-Chairman London and Athens S I Al Bassam Kuwait M S O Aldhaheri Abu Dhabi Z F Al-Dughaither Riyadh H V Boyd Antwerp A R C B Cooke London L B Cooler Miami J M de Mello Franco Lisbon J A Drakos Stamford, Connecticut M B Ergin Istanbul Gao Weijie Beijing G L Guenov Varna T Izmailov Novorossiysk Huang Shao Jie Hong Kong E Kromann Copenhagen Li Shao De Shanghai P G Livanos Monaco P R L Lorenz-Meyer Hamburg R R Miles London A S Papadimitriou Athens T Petalas Monaco B S Sire Paris S K Sood Mumbai A Teigen Bangkok Wang Haiming Beijing G Woodford London Managers The West of England Ship Owners Insurance Services Limited Tower Bridge Court Tower Bridge Road London SE1 2UP United Kingdom Telephone: +(44) (0) Facsimile: +(44) (0) mail@westpandi.com Secretary and Principal Office P A Aspden 33 Boulevard Prince Henri L-1724 Luxembourg Telephone: +(352) Registered Number RCB 8963 Auditors PricewaterhouseCoopers S.à r.l. Réviseur d entreprises 400 route d Esch L-1014 Luxembourg Telephone: +(352)

8 06 07 Managers Review Manager s Review Peter Spendlove Managing Director Overview In retrospect 2002 may be seen to be at or near the bottom of the downward trend which the Club and the P&I industry have experienced for the last few years. Although net assets, including forecast additional calls, have declined slightly from $512 million to $496 million, and free reserves from $138 million to $125 million, the signs are that the trend may now be on the upswing. This welcome development is not due to any sustained improvement in the outlook for investments. The modest returns experienced since 2000 are not likely to increase to the levels that were once commonplace. However, persistently falling premium has now been halted. For the 2002 policy year premium income overall is up by 25%, and technical underwriting results show a significant improvement on previous years. For the 2003 policy year premium income is up again by a similar percentage. Provided claims remain stable, there will be less need to realise the levels of investment return earned during the 1990 s. The overall level of surplus on closed years, which now includes 1999, is little changed. For the open years, from 2000 (closed in May 2003), claims have continued to develop within expectations. Volatility is nevertheless a feature of our business. A higher than usual frequency of substantial claims can significantly affect an individual policy year. Sharing claims in excess of $5 million through the International Group s Pool provides crucial protection for the Club in such circumstances. In addition the Club s own reinsurance protection for risks within the Club s retention remains a fundamental part of its long-term strategy to limit volatility from year to year. Underwriting For several years technical underwriting results for the P&I industry and the wider marine and reinsurance markets have been increasingly unsatisfactory. Recognition that such a state of affairs cannot continue is now universal. Since 2001, all International Group Clubs have applied general premium increases averaging more than 20%. This has no doubt been unwelcome to shipowners. However the absence of substantial investment income, and rising costs (particularly reinsurance), make such increases essential for the health both of individual Clubs and of the International Group system. At the same time the competitive pressure from commercial market imitators has continued for the moment to recede. The result for the West of England is that the technical underwriting deficit is down from nearly 40% in 2001 to

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10 08 09 Managers Review continued Entered Tonnage by Area of Management (Class 1 Owner Entry) at 20 February 2003 Europe inc. Russia 50.9% Asia, Far East & Australasia 28.6% Americas 12.9% Middle East / Africa 7.6% Entered Tonnage by Vessel Type (Class 1 Owner Entry) at 20 February 2003 Tankers & OBOs (inc. LPG / LNGs) 29.9% Dry Cargo / Container Vessels 29.5% Bulk Carriers 29.4% Passenger Liners & Ferries 8.5% Specialist Vessels & Misc. 2.7% about half that figure for Assuming that claims costs are similar for 2003, the technical underwriting result should broadly balance, so that premium increases on the scale of the last two years should not be necessary in future. Despite low premium levels since 1999, the Club s policy year results, after taking account of investment income, have developed satisfactorily over the last year. This enabled the Board to reconfirm, in May 2003, that forecast calls and releases for all policy years will remain unchanged. For Class 1 risks, the 1999 policy year has been closed with a modest surplus. The 2000 policy year has improved and, with a further allocation from investment income, is also in surplus. In the absence of significant investment income since 2000, the 2001 and 2002 policy years continue to be in deficit. This will in due course be covered from reserves if future investment income remains low. However, claims for 2001 and 2002 are now lower than originally anticipated, confirming that claims costs for these years remain stable. For Class 2 risks a surplus is projected for all policy years. For the closed policy years up to 1997 the overall surplus is nearly $12 million similar to the figure a year ago. At the same time all open policy years are currently forecast to be in surplus of between $0.7 million and $1.1 million. Detailed policy year information for Classes 1 and 2 appears on pages 48, 49 and 50. On 20 February 2003 entered tonnage for mutual entries was a little over 46 million GT, some 10% higher than the previous year. Chartered entries also increased to about 17.5 million GT. Most chartered tonnage is covered by the Club s Comprehensive Charterer s facility which continues to be reinsured by Lloyd s and Swiss Re. The growth in the Club s entered tonnage is largely the result of acquisitions and new buildings entered by existing Members, but a number of new Members from Europe, South East Asia and the US joined the Club at the recent renewal The Club s entered tonnage remains diverse, reflecting the overall profile of the world fleet. Reinsurance As with all Group Clubs, claims sharing through the International Group s Pool, and the Pool s excess of loss reinsurance programme, remain the crucial elements enabling the Club to provide the most cost effective and extensive P&I cover in the marine liability market.

11 Claims sharing and reinsurance through the International Group s Pool are crucial elements enabling the Club to provide the most cost effective and extensive P&I cover in the marine liability market. In 1999 the Group elected to buy excess of loss reinsurance for two years with a third year option. The multi-year programme proved to be advantageous. The exercise of the third year option for 2002 was particularly advantageous. The Group was able to control rises in reinsurance costs in the aftermath of September 11 more effectively than would have been possible had the contract been renewable from scratch. However, for 2003, the Group has had to replace the contract altogether for the first time since During that time the market hardened significantly, and capacity of suitable quality has been concentrated with fewer, more risk-averse reinsurers. The result is that for 2003 the premium for the whole programme has increased from a little over $175 million to $246 million with limits and retentions remaining unchanged. The premium figures do not, however, tell the whole story. Consistent with the Group s longer term strategic objectives, more risk is now retained within the working layers of the contract. This consists of increased co-insurance in the first layer for losses from $30 million up to $500 million. The retained share is now 25%, up from 10% in The increased co-insurance in part replaces the alternative element in the programme now discontinued for 15% of claims in excess of $100 million placed since 1998 by Benfield Greig. Benfield however are retained as the Group s second broker with responsibility for protecting the 25% co-insurance for losses exceeding $250 million in aggregate. In due course it may be that co-insurance will play an increasingly important part in the first layers of the programme. One important aspect of the Group s strategic review, which began in 2002, is that for the first time the Group has the use of a modelling process to help forecast the probability and frequency of severe losses in future policy years. This makes decisions about retaining risk within the Pool more analytical than has been possible in the past. It also makes it possible to judge more accurately whether or not the Group s reinsurers are charging a premium that fairly represents the risk. The decision this year to change the leading underwriter on the contract s first layer was in no small part due to the Group s ability to determine that the proposed renewal price significantly exceeded the premium parameters derived from the model. For 2003 the voyage surcharge system for tankers carrying persistent oils to the United States has remained in place. The record has been satisfactory but, because Group reinsurance costs have

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13 The International Group can now model with reasonable accuracy the probability and frequency of severe losses. This provides a stronger analytical basis for decisions about retaining risk within the Pool.

14 12 13 Managers Review continued Group Excess Loss Reinsurance Programme 2003/ Pool 5 Club Retention Pool, Co-insurance & Overspill First General Excess & Oil Pollution Second General Excess & Oil Pollution Third General Excess Fourth General Excess 2.5% limitation 25% co-insurance (subject to separate protection) not to scale risen, the element in the surcharge to cover reinsurance has been increased by 40%.Vessels with segregated ballast tanks therefore pay $0.126 per GT per voyage, and vessels without segregated ballast tanks $ per GT. Special provisions apply to vessels trading to LOOP and for parcel tankers. Participation in the Pool, and the Group s excess of loss reinsurance contract, remain the most important elements in the Club s reinsurance arrangements. Established policy, however, is to supplement the Group programme with a number of long-term market reinsurances specifically designed to reduce the volatility of retained losses for individual policy years. They also ensure as far as possible that the level of free reserves and forecast additional calls can be maintained. The most significant of these is the multi-year stop loss risk transfer contract placed with Munich Re. The policy, started in 2000, is scheduled to run until February 2010, with the first five years at a pre-set fixed premium. In its first three years it has already proved its worth by capping, at a clearly identifiable level for each policy year, the total net cost of claims for the entire Membership including the Club s share of other Clubs Pool claims. Other important reinsurances that applied for 2002 have been renewed on favourable terms for Two, covering individual large claims within the $5 million Club retention, have been placed with Munich Re and Swiss Re for many years. These have been extended without significant change to premium or terms and conditions, notwithstanding the general hardening in reinsurance markets. Another, also renewed on essentially unchanged terms and conditions, is the Swiss Re contract for FD&D claims in excess of $1 million. However, for the first time in many years, and in common with most Group Clubs, a decision was taken not to buy some limited overspill protection for The Board and Managers felt that a further proposed increase in the premium, which had risen by 300% in 2002, could not be justified. War Risk P&I and Terrorism One clear sign that commercial reinsurers are more risk averse is the widespread decision by war risk and terrorism underwriters to exclude from their policies for 2003 all losses that are directly or indirectly caused by any chemical, bio-chemical or electromagnetic weapons. This exclusion, alongside the long-standing nuclear risks exclusion,

15 The industry has long assumed that shipowners will not in practice be held responsible for terrorist events. This is now open to question.

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17 If national governments remain unwilling to share these extreme burdens, and if commercial underwriters remain so risk averse, P&I Clubs will have to consider pooling war and terrorism risks along with more traditional P&I liabilities. Class 1 Tonnage by Policy Year at 20 February * 46.0 Owned Chartered *Estimated creates significant additional gaps in a shipowner s insurance arrangements. There is no comprehensive way in which they can be filled. Some cover has been bought back for the West of England s Members for the 2003 policy year. It extends to a limit of $60 million in aggregate for all Members for losses that would otherwise be excluded by the chemical and bio-chemical exclusion. For a more detailed explanation Members should refer to the Club s Notices to Members issued since February For 2002 the excess war risk P&I cover which for some years has been available to Members for losses in excess of proper hull value was renewed with a limit of recovery of $200 million. For many Members this seemed adequate as an excess war risk P&I protection, particularly if a shipowner was unlikely to be held responsible for a war or terrorist act. However, during 2002 new maritime security legislation enacted in the US and elsewhere imposes new and more stringent burdens of care on shipowners to ensure that acts of terrorism are not carried out on their vessels. The likelihood of avoiding liability for war or terrorist acts has therefore been significantly reduced, and the adequacy of only $200 million of excess protection has become questionable especially in the United States and the European Union. For 2003 the limit on the cover has therefore been increased to $400 million but if, as noted already, a terrorist chooses to use a biological, chemical or nuclear device the excess cover will not apply at all. In these circumstances International Group Clubs need to consider how they should respond to their Members clear and significant need. Should they conclude that, in the absence of fully comprehensive cover from the commercial market, the mutual system should itself provide some of the cover? Substantial technical problems arise if they elect to do so, not least of which is the absence within International Group Clubs of funds for war risk or terrorist claims. On the other hand, over the years Group Clubs have traditionally provided the liability product of choice to shipowners, because they alone have had the flexibility and adaptability to meet Members needs when commercial markets have been unable to respond. If shipowners do want a mutual response, their demand needs to be clear and broadly based. At present too few seem concerned about the liabilities they face or the inadequacies of their cover. National governments seem unconcerned as well. Some have recognised the need for the state provision of terrorist cover for land-based commercial property. None has so far effectively included

18 16 17 Managers Review continued Investments* by Currency at 20 February 2003 US $ 84.0% Euro 8.2% Japan 2.0% Sterling 1.4% Rest of the World 4.4% *Investments excluding property the commercial vessels that still carry most of the world s international trade. Expectations that the Terrorism Insurance Act (TRIA), which came into effect in the United States in November 2002, would at least temporarily provide shipowners with substantial additional cover for incidents occurring in the United States now look very uncertain. Instead of applying to all vessels regardless of flag, it now seems that TRIA will apply only to a small number of US flag vessels. This will make it of little practical value to the shipowning community as a whole. To date, however, TRIA remains the only national initiative that may be of use to shipowners. Investments The Club s overall return was 3.2%, a good result in difficult investment conditions. It was made possible by the Board s decision some time ago to increase allocation to the absolute return portfolio and reduce allocation to equities. In contrast to the previous year, when all asset classes outperformed their benchmarks, this year the performance of the Club s individual portfolios was more mixed, with some managers outperforming, and others failing to reach, their benchmarks. Fixed income returns were again the mainstay of investor portfolios in 2002, as the worst bear market in equities since the Great Depression marked its third year of double digit losses despite the Federal Reserve s aggressively accommodative monetary stance. At the time of writing, the most important investment issue is whether the rally in equities that commenced on 11 March, 2003, marks the end of this protracted bear market or is merely yet another bear market rally. Since the US stock market peaked early in 2000 there have been five periods, including the current one, when the S&P 500 index rose more than 20%. The previous four periods ended badly for bullish investors, and perhaps this rally will prove to be the same. However, there are some grounds for greater optimism on this occasion. The uncertainty about a war in Iraq, which was a major impediment to a strong recovery in the US economy, is over. The Federal Reserve by focusing on the risk of deflation has decoupled interest rate expectations from growth prospects, and clearly signalled its willingness to keep Dollar interest rates low over a long period, which is likely to extend well into an economic recovery. Furthermore, the US has adopted a stimulative fiscal policy. Taken together, these factors would seem to be positive for financial assets in general and riskier ones such as equities and corporate bonds in

19 Investment conditions show few signs of sustained improvement while uncertainty in global economies persists. Investments* by Asset Type at 20 February 2003 Fixed Income 54.0% Equities 16.0% Absolute Return 17.2% Cash 12.8% *Investments excluding property particular. That said, with yields on Government Bonds now at their lowest for about 50 years, the allocation to absolute return funds will be maintained, not only because of their higher anticipated returns currently, but also because of the protection they should provide when interest rates do eventually rise. International Conventions The past year has seen changes to International Conventions that will significantly affect shipowners liabilities. In October 2002, an IMO conference met in London to agree a Protocol to the 1974 Athens Convention on passenger liabilities. Revisions to the Convention have been under discussion for many years, and the principal concern of governments has been to increase the compensation available to each passenger in the event of a maritime casualty. But there was also a broadly held view that the new Protocol should make provision for compulsory insurance and direct action against insurers. The agreed text of the new Protocol provides for strict liability, direct action and compulsory insurance up to approximately $330,000 per passenger, with an overall limit of liability, including negligence claims, of around $530,000 per passenger. Under the 1974 Convention, liability is fault based and subject to a per capita limit of around $60,000, although a number of states have unilaterally imposed higher figures. A compromise proposal, approved by the Boards of all Group Clubs, was rejected by the Conference. It remains to be seen whether Clubs will be prepared to provide the levels of cover and certification required by the Protocol, which may come into force within the next two to four years. The successful international regime for tanker oil pollution liabilities (the Civil Liability and Fund Conventions) has also been under intense scrutiny following the ERIKA and PRESTIGE losses. Again, the main preoccupation of governments has been to increase the total compensation available to claimants. Under the 1992 CLC and Fund Conventions the overall compensation available is approximately $180 million. This figure will increase to $270 million in November In May 2003 a Protocol to the 1992 Fund Convention was adopted at a Diplomatic Conference. This will enable any state that is a party to the 1992 Fund Convention to have access to an overall amount of compensation slightly in excess of $1 billion. This will be funded by receivers of oil in participating

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21 The past year has seen changes to International Conventions that will significantly affect shipowners liabilities.

22 20 21 Managers Review continued states. Club statistics for a ten year period show that the cost of pollution compensation paid under the international system has been evenly divided between ship owners and oil receivers. Mindful of the need to maintain an equitable balance, Club Boards have agreed in principle to the introduction of a voluntary scheme. This would substantially increase the minimum limit of liability applicable to smaller tankers under CLC, provided that no substantial changes are made to the liability provisions of CLC, which has served claimants well since its introduction. The Supplementary Fund Protocol could come into force in the next two or three years. Work continues on the IMO draft Wreck Removal Convention, which is likely to be agreed by 2005, although it will not come into force until several years later. In its current form, the draft Convention would entitle states to order the removal of wrecks within their EEZ or 200 mile limit, if the wreck or its cargo posed a hazard to navigation, a threat to the environment or a threat to a wide range of other activities including conservation, health, fishing and tourism. Liability for the shipowner will be strict, and there are provisions for compulsory insurance and direct action. A potential problem is the fact that the draft does not currently provide for limitation rights. Draft EU directives on environmental liability and criminal sanctions for pollution give concern for the future. While the environmental directive, in its original form, does not apply to maritime pollution covered by international conventions, this exemption has been questioned. As the directive contains far reaching proposals for imposing environmental liabilities along the lines of OPA 90, it is to be hoped that the European Parliament will not adopt it in its current form, not least because of the European Union s stated commitment to the international convention system. The directive on criminal sanctions for pollution is equally draconian. It seeks to impose severe punishment, including imprisonment, on any individual responsible for an intentional or grossly negligent discharge. Courts would have the power to impose substantial fines, which could not be insured, and to impose judicial winding up or bans on commercial activity for corporations. It remains to be seen whether or not member states will support such radical changes.

23 Club statistics for a ten year period show that the cost of pollution compensation paid under international conventions has been evenly divided between shipowners and oil receivers.

24 22 23 Managers Review continued Number of Mutual Members Claims per Policy Year over $2 million (Excludes Other Clubs Pool Claims) All these changes provide unwelcome news for shipowners as the liabilities they face continue to escalate. Claims and Management The number of claims for individual policy years has remained reasonably consistent from year to year, although the number of precautionary surveys has risen steadily in recent years. At 20 February 2003 the numbers of reported claims were: for ,265; for ,089; and for ,634. The average value of a claim for these years, capping at the Pool limit but before allowing for other reinsurance recoveries, was about $13,900, $12,000 and $11,200 respectively. The results imply stability rather than a downward trend, because 2002 is a relatively undeveloped year, and because a comparatively small number of claims, whose occurrence is generally random, represent a large proportion of the overall cost. For example, claims over $100,000 represented over 60% of the total cost for 2000 and 2001 but less than 2% of the total number of claims. The West of England s annual expense ratio for the 5 years to 20 February 2003 was 12.39%. This figure, which is a mandatory disclosure for members of the International Group of P&I Clubs, is calculated in accordance with Group guidelines and is derived from the audited figures included in the financial statements for the relevant years. The calculation measures management costs against premium and investment return. Classes 2,3 & 4 FD & D Class 2 The overall surplus for this Class remained almost unchanged during the year under review. The forecast balance stands at $23.5 million, including unallocated investment income. All policy years, open and closed, continue to develop in line with forecast. The aggregate surplus for closed policy years up to and including 1997/98 remained at about $12 million as claims costs have remained stable. The 1998/99 policy year was closed at the May 2003 Meeting without further call. All open years are in surplus. The limit per case of $5 million, introduced two years ago, protects the Balance Sheet of this Class. Excess loss reinsurance placed with the West of England (Hamilton) and, at higher levels, in the market, provides considerable protection in respect of large claims below this cap and for older years.

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27 Claims per policy year have remained stable, although the number of precautionary surveys has risen steadily in recent years. Net Paid and Estimated P&I Claims by Type of Claim Policy Year 2002/03 Cargo 28.0% Injury 26.0% Collision, etc 21.0% Pollution 12.0% Fines 2.0% Other 11.0% Strikes - Classes 3 and 4 Classes 3 and 4 continued to provide cover for crew and port strikes respectively during the year ended 20 February No claims were made in respect of either Class. Although these Classes have remained in surplus, they have faced increasing reinsurance costs and declining demand for this type of cover. Recent years have therefore shown a deficit, and on 20 February 2003, a significant rating review resulted in the non-renewal of the major business written in these Classes in preceding years. West of England Hamilton The West of England s wholly owned reinsurance subsidiary in Bermuda has provided valuable reinsurance protection since It participates in the Club s P&I retention reinsurances, as well as a programme of stop loss and excess loss covers. It also provides FD&D stop loss and excess of loss covers, and participates in reinsurance cover for Classes 3 and 4. From 2002/03, on a multi-year basis, it will also protect Class 1 within certain bands from an investment income shortfall. Loss Prevention Maritime security issues have dominated the headlines this year, particularly the latest changes to SOLAS and the introduction of the International Ship and Port Facility Security (ISPS) Code. The requirements were outlined in a recent Notice to Members. The same notice also referred to a new loss prevention initiative taken in association with Videotel Marine International. With assistance from the Club, Videotel has produced a distance learning package designed to train Ship Security Officers in compliance with the ISPS Code. The package consists of a video and written material (or an interactive CD Rom if preferred) and includes an optional facility for assessment and certification. A working group drawn from many sectors of the industry was formed to oversee the development of the course. This included several prominent Members, and representatives from IMO, ICS, Bimco, Intertanko and the US Coast Guard. Members have been sent a complimentary copy of the video and are entitled to a substantial discount on the price of the full package. The projected surplus of Hamilton at 20 February 2003 was a little over $72 million. Members will also be provided with a CD Rom of the full version of PC Maritime's award-winning Officer of

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29 We maintain a comprehensive loss prevention programme for our members, using distance learning aids, like video and CD Rom, as well as full-scale loss prevention seminars. the Watch programme, a training aid to familiarise users with the Collision Regulations. Both experienced deck officers and cadets have found Officer of the Watch of the greatest benefit. The programme contains many question and answer sessions, and features relative-motion radar exercises, plus a number of bridge simulation scenarios. Although unable to rival a full mission simulator, the programme is sufficiently advanced to permit the use of the engines, helm (manual and automatic), binoculars, bearing repeaters, whistle, radar (incorporating a reflector plotter) and charts. The watchkeeper may view ahead, astern, to port and starboard, and events may be played back for review and analysis. Moreover, other vessels will react to decisions made by the watchkeeper according to the Collision Regulations, unless programmed to behave as a rogue. A copy of the CD Rom will be sent to Members shortly. We continue to hold regular loss prevention seminars for Members, maritime security being the most frequently requested topic at present. In addition, courses in Bridge Resource Management and Engine Room Resource Management remain in high demand and are now in their sixth year.

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31 The mutual Club system has stood the test of time by responding to its members needs.

32 30 31 Report of the Directors Report of the Directors The Directors have pleasure in presenting their report together with the audited financial statements of the Association for the year ended 20 February Activities The principal activity of the Association continues to be the insurance and reinsurance of Members protection and indemnity risks (Class 1), freight, demurrage and defence risks (Class 2), strikes risks of ships officers and/or crew (Class 3) and strikes risks in port areas (Class 4). During the year, the Association reinsured, through its wholly-owned subsidiary International Shipowners Reinsurance Company SA, 90% of its Class 1, 2, 3 and 4 risks, and the reinsurance of The West of England Ship Owners Mutual Insurance Association (London) Limited, for past and current years. Also, The West of England Reinsurance (Hamilton) Limited, a 100% subsidiary of the Association, reinsured various specific areas of the Association s business on both a stop loss and excess loss basis. The West of England Ship Owners Insurance Services Limited, which is wholly owned by the Association, continued to provide insurance and claims handling services for this and the other Associations in the West of England group. It also acted as landlord to its tenant companies at its premises in London. Future Developments and Events Since the Balance Sheet Date The Association will continue to maintain and develop its activities as above. No changes are envisaged to these. There have been no significant events after the balance sheet date. Financial Statements These financial statements conform to the Luxembourg law of 8 December 1994 in all respects except for the fact that investments are stated at market value and land and buildings at valuation. Luxembourg legislation requires that investments, including land and buildings, are stated at the lower of cost or market value. The treatment adopted is consistent with the basis of accounting generally accepted by the other members of the International Group of P&I Associations. The financial statements are set out on pages 34 to 47 with the principal accounting policies summarised on pages 38 and 39. Financial statements conforming fully to the Luxembourg legislation are filed with the Luxembourg authorities: copies are available on request from our Principal Office.

33 These statements show a deficit for the year of $14.0 million (2002 $17.4 million) before transfer to Reserve Deposit Fund of $400,000 (2002 $150,000) and transfer to Revaluation Reserve of nil (2002 $6.8 million). Total reserves at 20 February 2003 were $125.0 million (2002 $137.8 million). Directors The present Directors of the Association, who are listed on page 5, held office throughout the year under review with the exception of Mr A R C B Cooke who joined the Board with effect from 7 August 2002, Mr G L Guenov who joined the Board with effect from 9 September 2002, Mr A Teigen who joined the Board with effect from 18 November 2002, Mr L B Cooler who joined the Board with effect from 20 January 2003, Mr T Izmailov and Ms T Petalas who both joined the Board with effect from 4 February 2003 and Mr G Woodford who joined the Board with effect from 5 March Mr V Restis retired from the Board with effect from 7 May They are all sincerely thanked for their services to the Association. In accordance with the Constitution of the Association, all of the Directors will retire at the forthcoming Annual General Meeting but, being eligible, offer themselves for re-election. Directors and Officers Liability Insurance During the year, the Association maintained insurance cover for Directors and Officers against legal liabilities relating to the Association s activities. Auditors At the forthcoming Annual General Meeting on 24 September 2003, the Directors will propose a resolution for the appointment of PricewaterhouseCoopers S.à r.l. as Auditors for the period commencing 20 February By order of the Board In addition, Mr D B Cobb retired from the Board with effect from 25 April 2002, Mr A B Djoun retired from the Board with effect from 8 May 2002, Mr J A Loutsis retired from the Board with effect from 4 December 2002, Mr N G Kairis retired from the Board with effect from 5 February 2003 and P A Aspden Secretary 7 May 2003

34 32 33 Report of the Auditors

35 The West of England Ship Owners Mutual Insurance Association (Luxembourg) Report of the Auditors To the Members of The West of England Ship Owners Mutual Insurance Association (Luxembourg) We have audited the consolidated financial statements of The West of England Ship Owners Mutual Insurance Association (Luxembourg) for the year ended 20 February 2003 set out on pages 34 to 47 and have read the related Report of the Directors. These consolidated financial statements and the Report of the Directors are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to check the consistency of the Report of the Directors with them. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements give, on the basis of the Accounting Policies adopted by the Association as presented in Note 1, a true and fair view of the financial position of The West of England Ship Owners Mutual Insurance Association (Luxembourg) as of 20 February 2003 and of its operations for the year then ended. In order for these consolidated financial statements to be prepared on a basis consistent with accounting policies adopted by other members of the International Group of P&I Associations, investments are stated at market value and, as described in Notes 1 and 2 and for the reasons stated therein, land and buildings are stated at estimated market value. At 20 February 2002, and previously, land and buildings were revalued, the revaluation surplus taken to the Consolidated Income and Expenditure Account and then transferred to a revaluation reserve. Luxembourg law requires investments and land and buildings to be stated at the lower of cost and market value and buildings to be depreciated over their estimated useful lives. Statutory consolidated financial statements in conformity with Luxembourg law which differ from these consolidated financial statements only in these respects are filed with the Commissariat Aux Assurances and the Registre de Commerce in Luxembourg and our audit opinion thereon is unqualified. The Report of the Directors is in accordance with the consolidated financial statements. We have also examined the Consolidated Class 1 and Class 2 Policy Year Statements on pages 48 to 50. In our opinion, these Statements have been properly prepared in accordance with the notes to them, the accounting policies and consolidated financial statements on pages 34 to 47 and the assumptions made in calculating the forecast additional calls and releases. PricewaterhouseCoopers S.à r.l. Réviseur d entreprises represented by Mervyn R Martins 7 May 2003

36 34 35 Consolidated Balance Sheet at 20 February Note $ 000 $ 000 Assets Investments Land and buildings 2 36,562 32,924 Other financial investments 2 403, ,799 Reinsurers share of technical provisions 440, ,723 Claims outstanding 114,074 77,947 Debtors Member debtors 9,081 7,863 Reinsurance debtors 11,002 9,346 Additional calls not yet charged 18,730 30,100 Other debtors 3 28,933 91,832 Other assets 67, ,141 Tangible assets Cash at bank and in hand 37,477 60,559 Prepayments and accrued income 37,872 60,872 Accrued interest 1,777 2,039 Other prepayments and accrued income ,371 2,415 Total Assets 662, ,098

37 The West of England Ship Owners Mutual Insurance Association (Luxembourg) Consolidated Balance Sheet at 20 February Note $ 000 $ 000 Liabilities Capital and reserves Reserve Deposit Fund brought forward 15,650 15,500 Transfer from income and expenditure account Reserve Deposit Fund carried forward 1 16,050 15,650 Revaluation Reserve brought forward 8,488 1,712 Exchange movement 1,234 (18) Revaluation surplus 6,794 Revaluation Reserve carried forward 2, 14 9,722 8,488 Income and expenditure account brought forward 113, ,021 Deficit for the financial year (13,971) (17,433) Transfer to Revaluation Reserve (6,794) Transfer to Reserve Deposit Fund (400) (150) Income and expenditure account carried forward 13 99, ,644 Technical provisions 125, ,782 Claims outstanding 485, ,683 Creditors Member creditors 8,804 6,681 Reinsurance creditors 1, Other creditors 5 41, ,961 51, ,633 Total Liabilities 662, ,098 Chairman Director 7 May 2003

38 36 37 Consolidated Income and Expenditure Account for the year ended 20 February Note $ 000 $ 000 $ 000 $ 000 Technical Account Earned premiums, net of reinsurance Gross premiums written 165, ,999 Outward reinsurance premiums (24,681) (17,716) Earned premiums, net of reinsurance 6 141, ,283 Allocated investment return transferred from the non-technical account 15,764 11,754 Claims incurred, net of reinsurance Claims paid Gross amount (189,868) (166,559) Reinsurers share 43,739 29,732 Net claims paid 7 (146,129) (136,827) Change in the provision for claims Gross amount (32,662) 33,484 Reinsurers share 36,127 (21,959) Change in the net provision for claims 8 3,465 11,525 Claims incurred, net of reinsurance (142,664) (125,302) Operating expenses 9 (26,506) (18,835) Balance on the technical account (12,385) (16,100)

39 The West of England Ship Owners Mutual Insurance Association (Luxembourg) Consolidated Income and Expenditure Account for the year ended 20 February Note $ 000 $ 000 Non Technical Account Balance on the technical account (12,385) (16,100) Investment income 11 60,297 72,119 Investment charges 11 (44,533) (60,365) Allocated investment return transferred to the technical account (15,764) (11,754) Deficit on ordinary activities before tax (12,385) (16,100) Tax on ordinary activities 12 (1,586) (1,333) Deficit on ordinary activities after tax (13,971) (17,433)

40 38 39 Notes to the Financial Statements for the year ended 20 February Accounting Policies General The West of England Ship Owners Mutual Insurance Association (Luxembourg) is established in the Grand Duchy of Luxembourg as a mutual insurance association. As a mutual association under Luxembourg law, the Association has no share capital or subscribed capital. In 1995, to comply with European Union and Luxembourg minimum insurance solvency margin requirements, a reserve fund, the Reserve Deposit Fund, was established, to which allocations are made periodically to meet the minimum solvency levels required. Presentation of financial statements These financial statements have been prepared in conformity with the law of 8 December 1994 on financial statements with respect to insurance and reinsurance undertakings except for the fact that investments (including land and buildings) are not stated at cost but at valuation, and with the significant accounting policies generally adopted by the members of the International Group of P&I Associations. A summary of the more important accounting policies is set out below. The West of England Ship Owners Mutual Insurance Association (London) Limited The financial statements have been drawn up to incorporate the terms of an agreement dated 18 October 1985 whereby the Association has reinsured the totality of the risks insured by The West of England Ship Owners Mutual Insurance Association (London) Limited up to 20 February 1986 for Class 2 and 20 February 1987 for Classes 3 and 4. In accordance with the agreement, the assets of The West of England Ship Owners Mutual Insurance Association (London) Limited have been held by that Association in trust for The West of England Ship Owners Mutual Insurance Association (Luxembourg) throughout the financial year. Basis of consolidation The consolidated financial statements have been prepared in US Dollars and incorporate the assets and liabilities of the Association and its subsidiaries at 20 February 2003 and the results of the year ended on that date. Classes and policy years Members are insured in accordance with the Rules of the Association. Separate records are maintained for all Classes of insurance. Mutual policy balance accounts are maintained, individual accounts being held for all open policy years for each Class. The accumulated balance for all policy years is available, if required, for any exceptional future charges. Calls and reinsurance premiums are credited or charged to the policy year to which cover relates except in the case of the reinsurance transactions with The West of England Ship Owners Mutual Insurance Association (London) Limited which are maintained separately. Claims are included in policy years by reference to the date of the incident and reinsurance recoveries are matched accordingly. General and management expenditure is allocated to Classes on the basis of calls and premium income and is charged to the policy year in which it is incurred; investment income is allocated to policy years as determined by the Directors. Premiums Gross premiums consist of calls, premiums and releases invoiced in respect of policies incepting prior to the balance sheet date together with movements in additional calls not yet charged which have been notified to Members. Reinsurance premiums are charged to the consolidated income and expenditure account on an accruals basis. Debtors Full provision is made for amounts owing which are more than one year in arrears and in respect of other balances considered to be doubtful.