Annual Report and Accounts 2012

Transcription

1 Annual Report and Accounts 2012

2 The Steamship Mutual Underwriting Association (Bermuda) Limited Contents 02 Notice of Meeting 03 Directors 04 Report of the Directors 10 Appendix I Policy Year Statement All Classes 12 Appendix II Policy Year Statement P&I Class 14 Consolidated Income and Expenditure Account 15 Consolidated Balance Sheet 16 Consolidated Cash Flow Statement 17 Notes on the Accounts 26 Report of the Independent Auditor

3 The Steamship Mutual Underwriting Association (Bermuda) Limited The Steamship Mutual Underwriting Association (Bermuda) Limited (Incorporated under the laws of Bermuda) and its subsidiary companies Managers Steamship Mutual Management (Bermuda) Limited Washington Mall 1, P.O. Box HM 447 Hamilton HM BX, Bermuda Telephone: (1441) Telefax: (1441) Managers representatives Steamship Insurance Management Services Limited Aquatical House, 39 Bell Lane, London E1 7LU Telephone: / Steamship Mutual Management (Hong Kong) Limited Room , Jubilee Centre 18 Fenwick Street, Wanchai, Hong Kong Telephone: (852) /(852) Telefax: (852) /(852) Representative office in Brazil Avenida Rio Branco, 151/ , Centro Rio de Janeiro, R.J. CEP Brazil Telephone: (55 21) /(55 21) Telefax: (55 21)

4 The Steamship Mutual Underwriting Association (Bermuda) Limited Notice of Meeting Notice is hereby given that the Thirty Eighth Annual General Meeting of the Members of the Association will be held at the Hotel de Rome, Berlin, Germany, on Tuesday, 24th July 2012 at 09:05 hours for the following purposes: 1 The Secretary to confirm that Notice of the Meeting has been given. 2 To approve the Minutes of the last Meeting of the Members. 3 To receive the Directors Report and Accounts for the year ended 20th February To fix the number of Directors for the ensuing year. 5 To elect Directors retiring in rotation. Under the Bye-laws of the Company, one-third of the Directors are required to retire annually by rotation. The Directors retiring by rotation are Mr M. Bayley, Ms I. Grimaldi, Mr H. M. Juniel, Mr J. M. Macdonald, Mr A. L. Marchisotto, Mr C. K. Ong, Mr R. Otoni Andrade and Mr M. Verde. Being eligible all Directors offer themselves for re-election. 6 To appoint Auditors and to authorise the Directors to agree their remuneration. 7 Confirmation of acts. 8 To transact any other ordinary business of the Company. By Order of the Board S. Davis Secretary 8th May 2012 N.B. A Member who is entitled to attend and vote at the above Meeting is entitled to appoint a proxy to attend, speak and vote in his place. The instrument appointing a proxy may be in the form enclosed and must be deposited with the Secretary at Clarendon House, Church Street West, P.O. Box HM 666, Hamilton HM CX, Bermuda, not less than 48 hours before the time specified for the holding of the Meeting. 02

5 The Steamship Mutual Underwriting Association (Bermuda) Limited Directors Directors H. L. F. Schoeller, Columbia Shipmanagement Ltd. (Chairman) A. Abraha, Ethiopian Shipping Lines K. H. Ahn, Korea Line Corp. (resigned 14th November 2011) C. J. Ahrenkiel, Ahrenkiel Consulting Services M. W. Bayley, Royal Caribbean International S-M. Edye, Sloman Neptun Schiffahrts AG. O. H. Fritzner (retired 26th July 2011) I. Grimaldi, Grimaldi Holdings SpA. S. Hajara, The Shipping Corporation of India Ltd. D. M. Ho, Magsaysay Maritime Corp. H. M. Juniel, Reederei F. Laeisz GmbH. J. R. Lean (retired 26th July 2011) J. M. Macdonald, Conyers, Dill & Pearman C. J. Madinabeitia, Tradewind Tankers SA A. L. Marchisotto, Moran Holdings, Inc. B. B. A. McAllister, McAllister Towing S. A. Meenai, Pakistan National Shipping Corp. (appointed 10th May 2011) S. Mehta, Essar Global J. W. Murray, Hapag-Lloyd (resigned 8th May 2012) C. K. Ong, U-Ming Marine Transport Corp. R. Otoni Andrade, Log-In Logistica Intermodal SA A. Pohan, New York Waterway K. Sheehan, Norwegian Cruise Line (appointed 10th May 2011) B. K. Sheth, The Great Eastern Shipping Co. Ltd. R. Siddiqi (retired 10th May 2011) A. Tung, Island Navigation Corp. International Ltd. M. Verde, Augustea Ship Management SrL. Wang, Y-G., China Shipowners Mutual Assurance Association Wei, J-F., China Ocean Shipping (Group) Co. (retired 26th July 2011) A. Zacchello, Seaarland Shipping Management BV. Secretary S. Davis, Conyers, Dill & Pearman Managers Steamship Mutual Management (Bermuda) Ltd. Registered office Clarendon House 2 Church Street Hamilton HM 11 Bermuda Administrative office Washington Mall 1 P.O. Box HM 447 Hamilton HM BX Bermuda Telephone: (1441) Telefax: (1441)

6 The Steamship Mutual Underwriting Association (Bermuda) Limited Report of the Directors The Directors have pleasure in presenting their Report and the Accounts of the Association for the year ended 20th February Principal activities The principal activities of the Association were the insurance and reinsurance of Protection and Indemnity (P&I) risks, and of Freight, Demurrage and Defence (FD&D) risks on behalf of Members. The total entered tonnage as at 20th February 2012 stood at approximately 92.6 million GT. The Association is a member of the International Group of Protection and Indemnity Clubs ( the Group ). Directors The Directors of the Association are as shown on page 3. In accordance with the Act of Incorporation, as amended on 18th April 1984, and the Bye-laws, the under mentioned Directors of the Association hold office until the Annual General Meeting to be held in Berlin, on 24th July 2012, when they retire: Mr M. Bayley, Ms I. Grimaldi, Mr H. M. Juniel, Mr J. M. Macdonald, Mr A. L. Marchisotto, Mr C. K. Ong, Mr R. Otoni Andrade and Mr M. Verde. Being eligible all Directors offer themselves for re-election. Audit Committee The Committee acts on behalf of the Board in considering the Association s financial statements and its external and internal audit activities. In so doing the Committee liaises with the Managers and external auditor in monitoring the quality of all reporting which contains material financial information, assessing the Association s internal control systems, and advising the Board on the effectiveness and objectivity of the internal and external auditor. In discharging its responsibilities the Committee receives regular financial and management reports from the Managers including a quarterly report from the Compliance Manager and the internal auditor. The Committee establishes the scope of the reporting, both to itself and the Board, and continually assesses the quality and adequacy of this information. The Committee monitors the effectiveness of the Managers activities with respect to their regulatory, audit and control responsibilities with a specific focus on any issues of enhanced strategic importance or which present a significant risk to the Association. Within the past year the Committee s work has included the following matters: reviewing a range of operational and risk management policies; discussing with the Managers, the underlying causes of the deterioration in prior year claims experienced in the first two quarters; receiving training in relation to the introduction of Solvency II; in conjunction with the Managers, reviewing the company s procedures as regards Know your Client (KYC) checks and commissioning the implementation of a proprietary system to strengthen screening controls; reviewing internal audit reports on investment controls; underwriting and pricing controls; and controls over claims estimating, payment and reinsurance recoveries; reviewing Eurozone sovereign debt exposure; reviewing the implementation of actions arising from the FSA Risk Mitigation Programme; and monitoring changes in the wider regulatory and compliance environment including licensing and taxation issues. The Committee meets four times a year, prior to each meeting of the full Board and is currently attended by the following Directors: Mr H. M. Juniel (Chairman), Mr C. J. Ahrenkiel, Mr M. W. Bayley, Mr C. J. Madinabeitia, Mr A. Pohan, Mr H. L. F. Schoeller, Mr K. Sheehan and Mr M. Verde. 04

7 The Steamship Mutual Underwriting Association (Bermuda) Limited Free reserves The balance on the Technical Account showed a surplus of US$ 1.2 million for the financial year. The overall surplus for the financial year of US$ 4.8 million reflects the above technical surplus together with a US$ 4.1 million surplus on the revaluation of freehold property offset by net investment losses of US$ 0.5 million. Free reserves increased from US$ 99.5 million to US$ million. Underwriting During the year mutual and additional premium was levied as follows: for the year 2011/12 (Class 1 P&I) 100% mutual premium; for the year 2011/12 (Class 2 FD&D) 100% mutual premium; The 2008/09 year was closed in May Gross premium written totalled US$ million compared to US$ million last year. The Directors have set the release call for both Class 1 (P&I) and Class 2 (FD&D) at 20% of mutual premium for the 2011/12 policy year; 15% of mutual premium for the 2010/11 policy year and 5% of mutual premium for the 2009/10 policy year. Free reserves As at 20th February 2012, the combined free reserves of the Association and The Steamship Mutual Trust stood at US$ million. Discounted at a rate of 2.5% over ten years to take account of run-off, the combined free reserve figure is US$ million compared with US$ million discounted at 2.5% last year. For the year under review, the Directors did not order a general increase in Class 1 premium. Tonnage The level of owned entered tonnage grew by 6.9 million GT during the year. The 2012 renewal saw both a number of new entries and cancellations, resulting in a net decrease in owned entered tonnage of 2.2 million GT. However taking the year on year increase into account for both owned and chartered entries, the overall total entered tonnage rose to 92.6 million GT. The Association s policy is to achieve diversity of vessel types and trades within its underwriting portfolio. Similarly, the Association seeks to keep a worldwide spread of owners. This policy of avoiding an over concentration in any one area minimises the adverse effects of market differences or economic difficulties in particular trades or regions. Analysis of gross tonnage by geographical area will be included within the Management Highlights to be published in June Pooling and reinsurance The Association s reinsurance programme for the 2011/12 policy year was arranged in conjunction with other members of the Group. The policy provided an ultimate limit of US$ 3,052 million in excess of US$ 8 million, except in relation to oil pollution claims, which were subject to an overall limit of US$ 1,000 million. Pooling For 2012/13, the individual Club retention, before Pooling with other members of the Group, will remain at US$ 8 million, and the upper limit of the Pool will remain at US$ 60 million each event. However this year, a Club bringing a claim to the Pool will bear a 10% retention within the layer of US$ 45 million to US$ 60 million, with the balance being divided amongst all Clubs in the usual way. At the 2012 renewal the general increase was set at 5%. 05

8 The Steamship Mutual Underwriting Association (Bermuda) Limited Report of the Directors continued Pooling and reinsurance - continued Hydra Insurance Company Limited ( Hydra ) With effect from 20th February 2012, the liabilities of the Association under the Group Pooling Agreement for the top layer of the Pool (from US$ 30 million to US$ 60 million each event) and for the Group s retention of 25% of the first US$ 500 million layer of the General Excess Loss contract will continue to be reinsured into Hydra. Hydra is a cell captive set up by the Group in Bermuda under the Segregated Account Companies Act Excess Loss cover The Group s Excess of Loss programme was renewed with the same structure as for the expiring year. The Group, via Hydra, continues to retain a 25% co-insurance of the first layer of the contract, from US$ 60 million to US$ 560 million each event. The limit of the supplementary pooled cover for a restricted range of risks covered by the Bio-Chem exclusions in War Risk policies remains at US$ 30 million, any one event each vessel, for the 2012/13 policy year. US oil pollution The Group continues to levy special surcharges for vessels carrying persistent oil as cargo to the USA. The rates of surcharge for such voyages will reduce by 30% in 2012/13. Charterers cover The Association provides cover for P&I and other risks for charterers, reinsured outside the Pool. Limits up to US$ 500 million are provided for P&I and a variety of limits for other risks. Non-Poolable covers The Club continues to provide cover for a range of risks which are ancillary to Members core operations, reinsured outside the Pool with limits up to US$ 500 million. The Steamship Mutual Trust At the beginning of the financial year, the Association arranged, through its wholly-owned subsidiary, The Steamship Mutual Underwriting Association (Reinsurance) Limited, to extend the existing reinsurance contract with The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited as Corporate Trustee of The Steamship Mutual Trust ( the Trust ), a duly authorised insurer under the Insurance Act 1978 of Bermuda, to cover all its retained liabilities in respect of the 2011/12 policy year, on existing terms and conditions. The Chairman of the Association is an ex-officio Director of the Corporate Trustee which administers the Trust. The beneficiaries under the Trust are the Members of the Association. These arrangements performed entirely satisfactorily during the year. Claims Gross claims and related expenses, including Pool claims, paid during the financial year, increased by 35.0% to US$ million in respect of all policy years, as compared to US$ million during the previous financial year, 2010/11. After recoveries from the Group Pool and Excess of Loss contract, claims paid for all years during the financial year amounted to US$ million, an increase of US$ 19.4 million (10.8%) over the previous year. Claims paid by the Association, net of reinsurance recoveries but including claims handling costs, remained unchanged at US$ 24.1 million during the year to 20th February Net claims paid during the financial year, on a combined basis including both Associations and Trust, amounted to US$ million, an increase of 10.6% from the figure (US$ million) for the 2010/11 financial year. Net outstanding claims rose by US$ 81.6 million to US$ million, an increase of 15.3% from the net outstanding claims as at 20th February

9 The Steamship Mutual Underwriting Association (Bermuda) Limited Gross claims arising in respect of the policy year 2011/12, including IBNR, are projected to be US$ million, an increase of 88.5% over 2010/11 (US$ million). Claims net of reinsurance recoveries in respect of the policy year amounted to US$ million on a combined basis, an increase of 12.6% to the comparable figure for 2010/11 (US$ million). During the policy year, through the Association s membership of the International Group, the Managers have monitored developments concerning the proposal to amend the limits of liability provided for in the 1996 Protocol to the Convention on Limitation of Liability for Maritime Claims (LLMC 1996) and the discussions regarding loading and carriage provisions contained in the International Maritime Solid Bulk Cargoes (IMSBC) Code following a series of vessel losses as a result of cargo liquefaction. The development and implementation of the new pollution prevention regulations in China have continued to be monitored as have the discussions at the IOPC Fund regarding interim funding and the handling of large claims volumes. The Managers have also been closely involved in issues in the United States in relation to the use of dispersants in oil clean-up operations under OPA and proposed changes to pollution legislation in Alaska, California and Massachusetts. Sanctions that have been developed in the USA, the EU and the UK in relation to Iran, Libya and Syria have continued to be an issue. The Somali piracy problem continues to be of great concern, and the loss prevention DVD commissioned by the Managers on the subject of piracy Piracy : the Menace at Sea has been welcomed by the maritime industry and has been shortlisted for the 2012 Seatrade Awards in the Safety at Sea category. The 18th and 19th issues of Sea Venture were published in September 2011 and March 2012 respectively, and throughout the year the Managers also published various circulars, Risk Alerts, articles and news bulletins on the issues described above and other matters of topical interest on the Association s website. The 2012/13 edition of the Association s DVD guide to casualty investigation and claims handling, A Team Effort will shortly be distributed to Members and correspondents incorporating Spanish, Chinese, Korean, Russian and Brazilian Portuguese versions. The Managers have continued to work with Videotel Marine International in the production of training programmes on Leadership and Team Working Skills, Dangerous and Difficult Bulk Cargoes, and Lifeboat Accidents. Further details of the Association s loss prevention activities will be included in the Management Highlights. Policy year statements The figures in Appendices I and II to this Report are prepared under the accounting policies and in the format used within the financial statements providing a summary and breakdown by both class of business and underwriting year. No allowance has been made for the allocation of any future investment income. Investments The total level of cash and investments held by the Association increased by 12.4% to US$ million. The total gain on financial investments was US$ 4.2 million. The Association only experienced one Pool claim during the policy year; the grounding of the Costa Concordia in Italy on 13th January This vessel was entered with the Club on a 50/50 quota share basis with the Standard P&I Club. 07

10 The Steamship Mutual Underwriting Association (Bermuda) Limited Report of the Directors continued Rules With the support of advice from the Association s lawyers, the Directors have approved Rule changes effective from 20th February 2012, to clarify and in some cases broaden the scope of existing cover, and to take account of legislative changes. Class 1 Protection and Indemnity Rule No. 24 i Imprudent or Unlawful Trading This amendment provides for the possibility of recovery, subject to the Managers discretion, for liabilities arising where, for example, unlawful or contraband cargo is carried without knowledge and intent on the Member s part. Rule No. 24 ii Bribes and other Corrupt Activity Whilst bribery has never been condoned by the Club, following the coming into force in the UK in July 2011 of the Bribery Act 2010, this new provision introduces an express exclusion of recovery from the Club in respect of any sums which are determined by the Directors to have been paid by way of a bribe or other corrupt or illicit activity. Rule No. 42 Subrogation This amendment clarifies that the Club s rights of subrogation apply not just where it reimburses the Member directly, but also where it makes payment under a guarantee or other security issued on behalf of a Member. Rule No. 45 Amendments to Rules An amendment to permit a change to the Club Rules to enable the scope of cover to respond as a result of the coming into force of any legislation, regulation or international convention during a policy year. Class 2 Freight, Demurrage and Defence Rule No. 5 x An amendment to broaden the availability of Class 2 cover for disputes relating to salvage, towage and pilotage services rendered by or to an entered ship. The cover will be available for tug and salvage vessels provided they are declared as such and properly rated. Rules 8 and 9 An express provision clarifies that the discretionary nature of Class 2 cover also includes the right to impose a pay-first requirement in respect of costs covered under Class 2 prior to seeking reimbursement from the Club. In addition the language in Rule 9 is amended to reflect the day-to-day superintendence of Class 2 claims by the Managers and to include a more generic provision referring to the appointment of lawyers and other experts rather than a sole reference to the solicitors of the Club. Rule No. 43 Provision of Bail This amendment makes clear that the Club may have the benefit of the Member s rights of recourse against third parties, which are assigned to the Club, in circumstances where the Club makes a payment pursuant to a guarantee or other security issued on behalf of a Member. 08

11 The Steamship Mutual Underwriting Association (Bermuda) Limited The Steamship Mutual Underwriting Association Limited ( SMUA ) Under an agreement made on 20th February 2003, the Association entered into a reinsurance contract with SMUA under which the Association indemnified SMUA in respect of 95% of the first US$ 30 million of its net underlying liabilities in respect of each policy year and 100% of any such liabilities which exceed US$ 30 million in respect of each policy year. From 20th February 2006, the indemnity was reduced to 90% of the first US$ 30 million of SMUA s net underlying liabilities. From 20th February 2009, the indemnity is in respect of 90% of the first US$ 50 million of SMUA s net underlying liabilities and 100% of any excess over US$ 50 million. All Members of SMUA are automatically Members of the Association and thus beneficiaries of the Trust. Management Highlights The Management Highlights will be published in June Statement of Directors responsibilities The Directors have prepared financial statements for each financial year in accordance with European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and United Kingdom accounting principles applicable to insurers. In preparing those financial statements the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Association will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Association. They are also responsible for the system of internal control, for safeguarding the assets of the Association and hence for taking reasonable steps to prevent and detect fraud and other irregularities. H. L. F. Schoeller Chairman Barcelona, Spain 8th May

12 The Steamship Mutual Underwriting Association (Bermuda) Limited Appendix I Policy Year Statement All Classes Open Policy Years - All Classes 2011/12) 2010/11) 2009/10) Total) US$ 000) US$ 000) US$ 000) US$ 000) Gross premium 285,934) 289,116) 297,580) 872,630) Less: Group Excess Loss reinsurance premium (20,748) (21,558) (20,285) (62,591) Other reinsurance premium (1,381) (1,553) (1,479) (4,413) The Trust reinsurance premium (206,818) (203,787) (206,493) (617,098) Net premium 56,987) 62,218) 69,323) 188,528) Gross claims paid Own claims paid (26,016) (79,533) (83,327) (188,876) Group Pool claims (3,561) (7,342) (6,105) (17,008) Claims administration expenses (17,268) (17,597) (20,252) (55,117) (46,845) (104,472) (109,684) (261,001) Less: Group Excess Loss reinsurance recoveries ) ) ) ) Group Pool reinsurance recoveries ) 1,048) 537) 1,585) The Trust reinsurance recoveries 29,579) 83,631) 88,313) 201,523) Net claims paid (17,266) (19,793) (20,834) (57,893) Own claims outstanding including IBNR (384,428) (97,345) (80,106) (561,879) Group Pool claims outstanding including IBNR (34,335) (18,183) (15,213) (67,731) Future claims administration expenses (10,120) (2,290) (975) (13,385) Less: Group Excess Loss reinsurance recoveries 106,875) ) ) 106,875) Group Pool reinsurance recoveries 98,408) 7,829) 3,454) 109,691) The Trust recoveries 198,400) 101,831) 86,129) 386,360) Net provision for claims outstanding (25,200) (8,158) (6,711) (40,069) Brokerage (7,350) (12,322) (17,090) (36,762) Underwriting administration expenses (1,647) (5,312) (6,366) (13,325) Other expenses (6,544) (7,366) (6,532) (20,442) Balance on the technical account (1,020) 9,267) 11,790) 20,037) Net investment income (including realised 4,219) 1,577) 7,108) 12,904) and unrealised) Non-technical account administration expenses (594) (722) (853) (2,169) Other income 30) 100) 12) 142) Taxation (6) ) (1) (7) Open policy years funds available 2,629) 10,222) 18,056) 30,907) 10

13 The Steamship Mutual Underwriting Association (Bermuda) Limited Closed Policy Years - All Classes Total) US$ 000) Available balance as at 20th February ,593) Add: Balance of 2008/09 year as at 20th February ) Movements during financial year: Net premium (2,150) Net claims paid (3,877) Expenses (2,083) Other income ) Available balance as at 20th February ,703) Own claims outstanding including IBNR (251,658) Group Pool claims outstanding including IBNR (38,782) Future claims administration expenses (2,617) Less: Group Excess Loss reinsurance recoveries 6,716) Group Pool reinsurance recoveries 50,734) The Trust recoveries 230,536) Net provision for claims outstanding (5,071) Closed policy years funds available 72,632) Summary Open and closed years funds available 103,539) Reinsurance balance and statutory reserve 803) Total projected funds available 104,342) 11

14 The Steamship Mutual Underwriting Association (Bermuda) Limited Appendix II Policy Year Statement P&I Class Open Policy Years - P&I Class 2011/12) 2010/11) 2009/10) Total) US$ 000) US$ 000) US$ 000) US$ 000) Gross premium 249,497) 250,475) 260,318) 760,290) Less: Group Excess Loss reinsurance premium (20,748) (21,558) (20,285) (62,591) Other reinsurance premium (1,381) (1,553) (1,479) (4,413) The Trust reinsurance premium (176,313) (173,210) (177,099) (526,622) Net premium 51,055) 54,154) 61,455) 166,664) Gross claims paid Own claims paid (21,884) (64,546) (66,566) (152,996) Group Pool claims (3,561) (7,342) (6,105) (17,008) Claims administration expenses (14,355) (13,679) (16,254) (44,288) (39,800) (85,567) (88,925) (214,292) Less: Group Excess Loss reinsurance recoveries ) ) ) ) Group Pool reinsurance recoveries ) 1,048) 537) 1,585) The Trust reinsurance recoveries 25,447) 68,644) 71, ,642) Net claims paid (14,353) (15,875) (16,837) (47,065) Own claims outstanding including IBNR (358,740) (85,250) (71,721) (515,711) Group Pool claims outstanding including IBNR (34,335) (18,183) (15,213) (67,731) Future claims administration expenses (8,849) (2,042) (850) (11,741) Less: Group Excess Loss reinsurance recoveries 106,875) ) ) 106,875) Group Pool reinsurance recoveries 98,408) 7,829) 3,454) 109,691) The Trust recoveries 172,712) 89,736) 77,744) 340,192) Net provision for claims outstanding (23,929) (7,910) (6,586) (38,425) Brokerage (6,493) (10,149) (14,940) (31,582) Underwriting administration expenses (1,416) (4,332) (5,415) (11,163) Other expenses (5,808) (6,134) (5,650) (17,592) Balance on the technical account (944) 9,754) 12,027) 20,837) Net investment income (including realised 3,760) 1,323) 6,188) 11,271) and unrealised) Non-technical account administration expenses (522) (590) (723) (1,835) Other income 30) 100) 12) 142) Taxation (6) ) (1) (7) Open policy years funds available 2,318) 10,587) 17,503) 30,408) 12

15 The Steamship Mutual Underwriting Association (Bermuda) Limited Closed Policy Years - P&I Class Total) US$ 000) Available balance as at 20th February ,408) Add: Balance of 2008/09 year as at 20th February ,546) Movements during financial year: Net premium (2,155) Net claims paid (3,875) Expenses (2,073) Other income ) Available balance as at 20th February ,851) Own claims outstanding including IBNR (234,774) Group Pool claims outstanding including IBNR (38,782) Future claims administration expenses (2,472) Less: Group Excess Loss reinsurance recoveries 6,716) Group Pool reinsurance recoveries 50,734) The Trust recoveries 213,653) Net provision for claims outstanding (4,925) Closed policy years funds available 67,926) Summary All Classes FD&D Others P&I Open and closed years funds available 103,539 (2,076) 7,281 98,334 Reinsurance balance and statutory reserve 803 Total projected funds available 104,342 13

16 The Steamship Mutual Underwriting Association (Bermuda) Limited Consolidated Income and Expenditure Account for the year ended 20th February 2012 Technical Account Note US$ 000) US$ 000) Earned premium, net of reinsurance Gross premium 2 286,217) 295,111) Outward reinsurance premium Group Excess Loss (21,910) (22,755) The Trust 3 (208,080) (209,013) Earned premium, net of reinsurance 56,227) 63,343) Claims incurred, net of reinsurance Claims paid Gross amount 4 278,589) 206,371) Reinsurers share: Group Pool and Excess Loss 4 (78,634) (25,849) The Trust 4 (175,866) (156,425) Net claims paid 24,089) 24,097) Change in the provision for claims Gross amount 5 230,537) (9,606) Reinsurers share: Group Pool and Excess Loss 5 (148,547) 32,696) The Trust 5 (69,442) (21,308) Change in the net provision for claims 12,548) 1,782) Claims incurred, net of reinsurance 36,637) 25,879) Net operating expenses 6 18,428) 26,415) Balance on the technical account for general business 1,162) 11,049) Non-Technical Account Balance on the general business technical account 1,162) 11,049) Investment income 7 49) 3,690) Unrealised gains/(losses) on investments 8 83) (2,112) Investment management expenses (609) (718) Other income 9 4,117) 230) Other charges ) ) Taxation 10 (6) ) Surplus for the financial year 4,796) 12,139) The results for both years are in respect of continuing operations. There are no recognised gains or losses in either year other than the transactions reported in the above income and expenditure account. The accompanying notes to these accounts form an integral part of this income and expenditure account. 14

17 The Steamship Mutual Underwriting Association (Bermuda) Limited Consolidated Balance Sheet as at 20th February 2012 Assets Note US$ 000 US$ 000 Investments Land and buildings 11 10,997 6,910 Other financial investments 12 93,948 85,855 Reinsurers share of technical provisions Claims outstanding 5 890, ,922 Debtors Debtors arising out of direct insurance operations 11,459 19,674 Debtors arising out of reinsurance operations 13 29,974 21,374 Other debtors 14 7,988 4,469 Other assets Cash at bank and in hand 8,121 7,855 Prepayments and accrued income Deferred acquisition costs Other prepayments and accrued income Total assets 1,054, ,226 Liabilities Capital and reserves Free reserves ,342 99,546 Technical provisions Provision for unearned premium Claims outstanding 5 936, ,515 Provisions for other risks and charges Provision for taxation 10 3 ) Creditors Creditors arising out of direct insurance operations 5,177 3,697 Creditors arising out of reinsurance operations 16 4,454 5,744 Other creditors 3,529 4,119 Total liabilities 1,054, ,226 The accompanying notes to these accounts form an integral part of this balance sheet. These financial statements were approved by the Board of Directors on 8th May H. L. F. Schoeller H. M. Juniel Managers: Chairman Director Steamship Mutual Management (Bermuda) Limited 15

18 The Steamship Mutual Underwriting Association (Bermuda) Limited Consolidated Cash Flow Statement for the year ended 20th February 2012 Surplus on ordinary activities before tax US$ 000) US$ 000) Operating surplus before taxation after interest 4,802) 12,139) Increase in general insurance technical provisions 12,528) 1,581) Unrealised (gains)/losses on investments (83) 2,112) Unrealised gain on revaluation of property (4,087) ) (Increase)/decrease in debtors (4,481) 24,942) Decrease in creditors (399) (42,775) 3,478) (14,140) Net cash inflow/(outflow)from operating activities 8,280) (2,001) Cash flow statement Net cash inflow/(outflow) from operating activities 8,280) (2,001) Taxation paid (4) ) 8,276) (2,001) Cash flows were invested as follows: Increase in cash holdings 266) 19) Net portfolio investment Purchase/(sale) of bonds and loans 6,300) (39,297) (Sale)/purchase of money market instruments (29,141) 32,334) Increase in cash on short term deposit 30,851) 4,943) 8,010) (2,020) Net investment of cash flows 8,276) (2,001) Movement in opening and closing portfolio investments net of financing Net cash inflow for the period ) Portfolio investments 8,010 (2,020) Movement arising from cash flows 8,276 (2,001) Changes in market values and exchange rate effects 83 (2,112) Total movement in portfolio investments net of financing 8,359 (4,113) Portfolio investments net of financing at 20th February ,710 97,823) Portfolio investments net of financing at 20th February ,069 93,710) 16

19 The Steamship Mutual Underwriting Association (Bermuda) Limited Notes on the Accounts 1. Accounting policies (a) Accounting convention The consolidated accounts have been prepared in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applicable to insurers. The Association has adopted all material recommendations of the Statement of Recommended Practice on Accounting for Insurance Business issued in December 2005 and amended in December 2006 by the Association of British Insurers ( ABI SORP ). After making enquiries, the Directors have a reasonable expectation that the Association has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. (b) Basis of consolidation The Group accounts consolidate the accounts of The Steamship Mutual Underwriting Association (Bermuda) Limited and its subsidiary undertakings The Steamship Mutual Underwriting Association (Reinsurance) Limited, Steamship Mutual Property Holdings Limited and its share of Hydra Insurance Company Limited at 20th February (c) Calls and premiums written Calls and premiums, less returns, comprise the total premiums receivable for the whole period of cover provided by contracts incepting during the financial year. All premiums are shown gross of commission payable to intermediaries. (d) Unearned premiums The proportion of the premiums written relating to periods of cover after the year end is carried forward as a provision for unearned premiums. (e) Deferred acquisition costs Acquisition costs, comprising commission and other costs related to the acquisition of new business are deferred to the extent that they are attributable to premiums unearned at the balance sheet date. (f) Claims and related expenses Claims and related expenses are charged to the income and expenditure account when they have been settled. A provision is made on a claim by claim basis for the estimated cost of claims notified but not settled by the balance sheet date. A provision for claims incurred but not reported is established on a statistical basis having regard to past experience as to the number and magnitude of claims reported after previous balance sheet dates. (g) Reinsurance premiums and recoveries Payments made to and recoveries from other Associations under the Group Pooling arrangements are brought into the income and expenditure account when debited or credited. Other reinsurance premiums are brought into the income and expenditure account on an accruals basis. (h) Land and buildings Land and buildings are revalued every three years and are held at the revalued amount. Any losses or reversal of losses arising upon revaluation are recognised in the income and expenditure account. (i) Other financial investments Quoted investments have been valued at their bid value as at the balance sheet date. Unquoted investments are held at cost less any provision for impairment in value. The unrealised gains and losses on the movement during the year in the market value of investments compared to their cost are included in the non-technical account. 17

20 The Steamship Mutual Underwriting Association (Bermuda) Limited Notes on the Accounts continued 1. Accounting policies continued (j) Debtors Receivables arising from insurance and reinsurance operations are reviewed for impairment throughout the financial year and as at the balance sheet date. (k) Foreign currencies Monetary assets and liabilities, other than unquoted investments, are converted to US dollars at the rate of exchange ruling at the balance sheet date. Unquoted investments are included at their original dollar cost. Income and expenditure items are translated to US dollars at the rate of exchange ruling at the relevant month end. All exchange differences are included in the income and expenditure account. Land and buildings have been translated at the historic rate of exchange prevailing on the date of revaluation. The rates of exchange ruling on the balance sheet date and used for the purpose of preparing the accounts were as follows: Canadian dollars C$ Euro UK sterling (l) Allocation to policy years and classes Mutual premium, additional premium, fixed premium, reinsurance premium payable, claims and reinsurance recoveries are allocated to the policy years and classes to which they relate. Administration expenses, investment income and exchange gains or losses are allocated to the current policy year in line with total premium income. 2. Gross premium US$ 000) US$ 000) Mutual and fixed premiums written 285,275) 293,722) Deferred premium and releases 1,024) 1,577) Additional premium (102) (389) Movement in unearned premiums 20) 201) 286,217) 295,111) Gross premium by destination Europe 99,849) 106,464) North America 77,170) 65,703) Far East 60,038) 61,194) Africa and Middle East 12,300) 22,987) Latin America 24,356) 24,532) Indian Sub-Continent 12,504) 14,231) 286,217) 295,111) Gross premium relates predominantly to one class of business: Protection and Indemnity. 18

21 The Steamship Mutual Underwriting Association (Bermuda) Limited 3. Reinsurance contracts (a) Under contracts dated 11th March 1983, the Association, through its subsidiary company, The Steamship Mutual Underwriting Association (Reinsurance) Limited (note 19), reinsured with The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited all of its Protection and Indemnity risks and Freight, Demurrage and Defence risks for the period up to 20th February 1983 and subsequently further contracts for each of the policy years ended, respectively, 20th February 1984 through to 20th February (b) Under an agreement made on the 20th February 2003, the Association agreed to indemnify SMUA in respect of 95% of the first US$ 30 million of SMUA s net underlying liabilities and 100% of any such liabilities which exceed US$ 30 million for all policy years through to 2005/06; in respect of 90% of the first US$ 30 million of SMUA s net underlying liabilities and 100% of any such liabilities which exceed US$ 30 million for all policy years from 2006/07 through to 2008/09 and in respect of 90% of the first US$ 50 million of SMUA s net underlying liabilities and 100% of any such liabilities which exceed US$ 50 million for all subsequent policy years. 4. Claims paid gross amount US$ 000) US$ 000) Claims and related expenses 238, ,119) Group Pool claims 19,663 10,489) Claims administration expenses 20,651 20,763) 278, ,371) Less reinsurers share Group Pool 43,016 13,089) Group Excess Loss 35,618 12,760) The Trust 175, ,425) 254, ,274) Net claims paid 24,089 24,097) 19

22 The Steamship Mutual Underwriting Association (Bermuda) Limited Notes on the Accounts continued 5. Change in net provision for claims US$ 000) US$ 000) Gross outstanding claims Provision brought forward (705,515) (715,121) Provision carried forward 936,052) 705,515) 230,537) (9,606) Group Pool and Excess Loss reinsurers share of outstanding claims Provision brought forward 125,469) 158,165) Provision carried forward (274,016) (125,469) (148,547) 32,696) The Trust s share of outstanding claims Provision brought forward 547,453) 526,145) Provision carried forward (616,895) (547,453) (69,442) (21,308) Change in net provision for claims 12,548) 1,782) The estimates for known outstanding claims are based on the best estimates and judgement of the Managers of the final cost of individual cases based on current information. The individual estimates are reviewed regularly and include this Association s share of other Associations Pool claims. Full provision is also made for claims incurred but not reported by the balance sheet date using detailed statistical analysis having regard to past experience as to the number and magnitude of claims reported after previous balance sheet dates. 20

23 The Steamship Mutual Underwriting Association (Bermuda) Limited 6. Net operating expenses US$ 000) US$ 000) Acquisition costs Brokerage 7,948) 11,633) Underwriting administration expenses 2,715) 6,250) 10,663) 17,883) Administrative expenses Other administration expenses 7,180) 7,919) Directors remuneration 454) 426) Auditor s remuneration audit fees 131) 187) 7,765) 8,532) 18,428) 26,415) Transactions with related parties Steamship Mutual Management (Bermuda) Limited ( SMM(B) ) provides management and administrative services to the Association. Under the terms of its management contract SMM(B) receives as remuneration for its services, a fee which is based in part on premiums payable by Members in each accounting year together with reimbursement of its office and administration expenses and those of its worldwide Representatives. For the financial year to 20th February 2012 these fees and expenses amounted to US$ 28.4million (2011: US$ 32.8 million) with US$ 5.4 million prepaid at the year end (2011: US$ 1.9 million). Since 21st February 2000 the Association has provided SMM(B) with an unsecured, indefinite long term loan amounting to US$ 2,031,185. There were no other related parties transactions requiring disclosure under FRS Investment income US$ 000) US$ 000) Dividends and interest 137) 611) Realised (losses)/gains Investments ) 2,922 Exchange (88) 157 (88) 3, ,690 21

24 The Steamship Mutual Underwriting Association (Bermuda) Limited Notes on the Accounts continued 8. Unrealised gains/(losses) on investments US$ 000) US$ 000) Investments 88) (2,113) Exchange (5) 1) 83) (2,112) 9. Other income US$ 000) US$ 000) Surplus on revaluation of property (see note 11) 4,087) ) Profit commission earned from the Origin joint venture with AEGIS ) 131) Bail commission 30) 99) 4,117) 230) 10. Taxation The charge for the year consists of an estimated liability for the accounting year to 20th February 2012 of US$ 2,573 and an underprovision of US$ 3,697 in respect of the previous financial year (2011: US$ nil) based upon negotiations with the United Kingdom HM Revenue & Customs and assessed on the investment income of the Association and SMUA for the year. At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda. Accordingly no provision for such taxes has been recorded by the Association. In the event that such taxes are levied, the Association has received an undertaking from the Bermuda government exempting it from all such taxes until 31st March Land and buildings The freehold property consists of office premises in London E1. It is occupied under licence, free of rent, by the London Representatives of SMM(B). The property was valued by CB Richard Ellis Limited at 6,950,000 (US$ 10,996,835) reflecting the market value at 20th February This resulted in a revaluation surplus of US$ 4,086,964 since the last valuation at 20th February The original costs incurred when the property was purchased in 1987 amounted to US$ 16,952,

25 The Steamship Mutual Underwriting Association (Bermuda) Limited 12. Other financial investments US$ 000) US$ 000) Market value Bonds and loans 7,629) 1,240) Equities 146) 152) Money market instruments 47,484) 76,625) Deposits with credit institutions 38,689) 7,837) Cash accounts ) 1) 93,948) 85,855) Cost Bonds and loans 7,466) 1,167) Equities 485) 485) Money market instruments 47,484) 76,625) Deposits with credit institutions 38,689) 7,837) Cash accounts ) 1) 94,124) 86,115) Unquoted investments of US$ 146,307 (2011: US$ 151,637) are carried in the accounts at their original euro cost less a provision for a permanent diminution in value. 13. Other financial investments US$ 000) US$ 000) Group Clubs 589) 1,978) The Trust 22,726) 17,602) SMUA 4,865) ) Other reinsurance debtors 1,794) 1,794) 29,974) 21,374) 14. Other debtors US$ 000) US$ 000) Balances with agents 519) 539) Other debtors 7,469) 3,930) 7,988) 4,469) 23

26 The Steamship Mutual Underwriting Association (Bermuda) Limited Notes on the Accounts continued 15. Free reserves US$ 000) US$ 000) Statutory reserve 240) 240) Accumulated fund brought forward 99,306) 87,167) Surplus for year 4,796) 12,139) 104,342) 99,546) The balance carried forward, of US$ 104,342,228 together with any additional premium to be ordered by the Board of Directors and recoveries under the reinsurance contracts, will be available to meet liabilities not yet passed or ascertained. The Members of the Association are liable for their rateable proportion of any deficiency arising from an excess of liabilities over premium. The Directors and Managers are of the opinion that the Association has adequate assets and contractual arrangements to meet known and anticipated liabilities. 16. Creditors arising out of reinsurance operations US$ 000) US$ 000) Group Clubs and Excess Loss 4,454) 4,488) SMUA ) 1,256) 4,454) 5,744) 24

27 The Steamship Mutual Underwriting Association (Bermuda) Limited 17. Wholly-owned subsidiary companies The Steamship Mutual Underwriting Association (Reinsurance) Limited is a wholly-owned subsidiary company which in turn holds 100% of the share capital of Steamship Mutual Property Holdings Limited. 18. Hydra Insurance Company Limited ( Hydra ) Hydra is a reinsurance captive created by the Members of the Group. Each Member has its own cell which is legally separate from the liabilities of the other cells. Under the provisions of FRS 5 this cell has been classified as a quasi-subsidiary and has been consolidated. 19. Security During the course of the year to 20th February 1997, the Directors authorised the setting up of a trust to secure the payment of recoveries to US resident Members of the Association in accordance with the standard terms of the US National Association of Insurance Commissioners. As at the balance sheet date assets with a total value of US$ 5.4 million (2011: US$ 7.8 million) had been allocated to the trust. For many years the Association has deposited funds with the Wells Fargo Bank, NA as trustee of the Trust Agreement dated 7th April 1966, between various members of the Group and the US Federal Maritime Commission in connection with the provision of evidence of financial responsibility under Sections 2 and 3 of US Public Law As at the balance sheet date the funds deposited had a total value of US$ 1.4 million (2011: US$ 1.2 million). 25

28 The Steamship Mutual Underwriting Association (Bermuda) Limited Report of the Independent Auditor To the Members of The Steamship Mutual Underwriting Association (Bermuda) Limited We have audited the financial statements of The Steamship Mutual Underwriting Association (Bermuda) Limited for the year ended 20th February 2012, which comprise the consolidated income and expenditure account, the consolidated balance sheet, the consolidated cash flow statement and the related notes 1 to 19. These financial statements have been prepared under the accounting policies set out therein. These financial statements have been prepared for the purpose of Member and policy holder information. This report is made solely to the Company s Members in accordance with Section 90 of the Bermuda Companies Act Our audit work has been undertaken so that we might state to the Company s Members those matters we are required to state to them in an independent auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s Members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As described in the statement of Directors responsibilities, the Company s Directors are responsible for the preparation of the financial statements in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applicable to insurers. Our responsibility is to audit the financial statements in accordance with International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the relevant financial reporting framework and whether the financial statements have been properly prepared in accordance with the Bermuda Companies Act We also report to you whether in our opinion the information given in the Directors Report is consistent with the financial statements. 26

29 The Steamship Mutual Underwriting Association (Bermuda) Limited Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the Company s affairs as at 20th February 2012 and of its surplus for the year then ended; have been properly prepared in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through S396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applied to insurers; and have been properly prepared in accordance with the Bermuda Companies Act Opinion on other matter In our opinion the information given in the Directors Report is consistent with the financial statements. Deloitte LLP Chartered Accountants and Registered Auditor London 8th May

30 The Steamship Mutual Underwriting Association Limited Contents 02 Notice of Meeting 03 Directors 04 Report of the Directors 08 Appendix I Policy Year Statement All Classes 10 Appendix II Policy Year Statement P&I Class 12 Income and Expenditure Account 13 Balance Sheet 14 Cash Flow Statement 15 Notes on the Accounts 20 Report of the Independent Auditor

31 The Steamship Mutual Underwriting Association Limited The Steamship Mutual Underwriting Association Limited Managers Steamship Insurance Management Aquatical House, 39 Bell Lane London E1 7LU Telephone: /

32 The Steamship Mutual Underwriting Association Limited Notice of Meeting Notice is hereby given that the One Hundred and Third Annual General Meeting of the Members of the Company will be held at the Hotel de Rome, Berlin, Germany, on Tuesday, 24th July 2012 at 09:10 hours for the following purposes: 1 To receive and if thought fit, to adopt the balance sheet and accounts for the year ended 20th February 2012, they having been recommended for adoption by the Board. 2 To elect Members of the Board. The Member of the Board retiring by rotation and in accordance with Article 11.2 of the Association is Mr H. M. Juniel. Being eligible, he offers himself for re-election. 3 To authorise the Managers to fix the remuneration of the Auditors. A Resolution proposing the appointment of Auditors to the Company will be put to the Meeting. 4 To transact any other ordinary business of the Company. By Order of the Board S. A. Ward Secretary 8th May 2012 N.B. A Member who is entitled to attend and vote at the above Meeting is entitled to appoint a proxy to attend, speak and vote in his place. The instrument appointing a proxy may be in the form enclosed and must be deposited with the Secretary at Aquatical House, 39 Bell Lane, London E1 7LU, United Kingdom, not less than 48 hours before the time specified for the holding of the Meeting. 02

33 The Steamship Mutual Underwriting Association Limited Directors Directors A. L. Marchisotto, Moran Holdings, Inc. C. J. Ahrenkiel, Ahrenkiel Consulting Services I. Grimaldi, Grimaldi Holdings SpA. H. M. Juniel, Reederei F. Laeisz GmbH. J. W. Murray, Hapag-Lloyd (resigned 8th May 2012) Secretary S. A. Ward, Steamship Insurance Management Managers Steamship Insurance Management Registered office Aquatical House 39 Bell Lane London E1 7LU Telephone: / Registered number

34 The Steamship Mutual Underwriting Association Limited Report of the Directors Company registration number The Directors have pleasure in presenting their Report and the Accounts of the Association for the year ended 20th February Principal activities The Association is a company limited by guarantee incorporated in the United Kingdom. The principal activities of the Association were the insurance and reinsurance of Protection and Indemnity risks (P&I), and of Freight, Demurrage and Defence (FD&D) risks on behalf of Members. The Association is a member of the International Group of Protection and Indemnity Clubs ( the Group ). Directors The Directors of the Association are as shown on page 3. In accordance with Article 11.2 of the Articles of Association, one-third of the Directors retire from office at each Annual General Meeting. The Director retiring by rotation is Mr H. M. Juniel. Being eligible, he offers himself for re-election. Free reserves The balance on the technical account for general business showed a surplus of US$ 7.61 million for the financial year. The overall surplus for the financial year of US$ 7.39 million reflects the above technical surplus together with investment losses of US$ 0.22 million. Free reserves increased from US$ million to US$ million. The Association s exposure to liquidity or cash flow risk is minimal given that it holds all investments in cash and money market instruments. The Association does not engage in hedging or any other type of derivative activity. Underwriting During the year mutual premium was levied as follows: Gross premium written totalled US$ million compared to US$ million last year, a 62.2% increase, caused by the transfer of a large number of European based members from SSM Bermuda on 20th February The combined ratio, a key financial performance indicator, fell from 102.3% to 83.4%. The Directors have set the release call for both Class 1 (P&I) and Class 2 (FD&D) at 20% of mutual premium for the 2011/12 policy year; 15% of mutual premium for the 2010/11 policy year and 5% of mutual premium for the 2009/10 policy year. For the year under review, the Directors did not order a general increase in Class 1 premium. At the 2012 renewal the Directors ordered a general increase of 5%. Tonnage The level of entered tonnage fell during the year from 51.4 million to approximately 46.0 million gross tons. Pooling and reinsurance The Association s reinsurance programme for the 2011/12 policy year was arranged in conjunction with other members of the Group. The policy provided an ultimate limit of US$ 3,052 million in excess of US$ 8 million, except in relation to oil pollution claims, which were subject to an overall limit of US$ 1,000 million. Pooling For 2012/13, the individual Club retention, before Pooling with other members of the Group, will remain at US$ 8 million and the upper limit of the Pool will remain at US$ 60 million each event. However this year, a Club bringing a claim to the Pool will bear a 10% retention within the layer of US$ 45 million to US$ 60 million, with the balance being divided amongst all Clubs in the usual way. for the year 2011/12 (Class 1 P&I) 100% mutual premium; for the year 2011/12 (Class 2 FD&D) 100% mutual premium; The 2008/09 year was closed in May

35 The Steamship Mutual Underwriting Association Limited Pooling and reinsurance continued Hydra Insurance Company Limited ( Hydra ) With effect from 20th February 2012, the liabilities of the Association under the Group Pooling Agreement for the top layer of the Pool (from US$ 30 million to US$ 60 million each event) and for the Group s retention of 25% of the first US$ 500 million layer of the General Excess Loss contract will continue to be reinsured into Hydra. Hydra is a cell captive set up by the Group in Bermuda under the Segregated Account Companies Act Excess Loss cover The Group s Excess of Loss programme was renewed with the same structure as for the expiring year. The Group, via Hydra, continues to retain a 25% co-insurance of the first layer of the contract, from US$ 60 million to US$ 560 million each event. The limit of the supplementary pooled cover for a restricted range of risks covered by the Bio-Chem exclusions in War Risk policies remains at US$ 30 million, any one event each vessel, for the 2012/13 policy year. The Steamship Mutual Underwriting Association (Bermuda) Limited ( SSM Bermuda ) Under an agreement made on 20th February 2003, the Association entered into a reinsurance contract with SSM Bermuda under which SSM Bermuda indemnified the Association in respect of 95% of the first US$ 30 million of its net underlying liabilities in respect of each policy year and 100% of any such liabilities which exceed US$ 30 million in respect of each policy year. From 20th February 2006 the indemnity was reduced to 90% of the first US$ 30 million of the Association s net underlying liabilities and 100% of any excess over US$ 30 million. From 20th February 2009 the indemnity is in respect of 90% of the first US$ 50 million of the Association s net underlying liabilities and 100% of any excess over US$ 50 million. All Members of the Association are automatically Members of SSM Bermuda and thus beneficiaries of The Steamship Mutual Trust. US oil pollution The Group continues to levy special surcharges for vessels carrying persistent oil as cargo to the USA. The rates of surcharge for such voyages will reduce by 30% in 2012/13. Charterers cover The Association provides cover for P&I and other risks for charterers, reinsured outside the Pool. Limits up to US$ 500 million are provided for P&I and a variety of limits for other risks. Non-Poolable covers The Club continues to provide cover for a range of risks which are ancillary to Members core operations, reinsured outside the Pool with limits up to US$ 500 million. 05

36 The Steamship Mutual Underwriting Association Limited Report of the Directors continued Policy year statements The figures in Appendices I and II to this Report are prepared under the accounting policies and in the format used within the financial statements providing a summary and breakdown by both class of business and underwriting year. No allowance has been made for the allocation of any future investment income. Rules With the support of advice from the Association s lawyers, the Directors have approved Rule changes effective from 20th February 2012, to clarify and in some cases broaden the scope of existing cover, and to take account of legislative changes. Class 1 Protection and Indemnity Rule No. 24 i Imprudent or Unlawful Trading This amendment provides for the possibility of recovery, subject to the Managers discretion, for liabilities arising where, for example, unlawful or contraband cargo is carried without knowledge and intent on the Member s part. Rule No. 24 ii Bribes and other Corrupt Activity Whilst bribery has never been condoned by the Club, following the coming into force in the UK in July 2011 of the Bribery Act 2010, this new provision introduces an express exclusion of recovery from the Club in respect of any sums which are determined by the Directors to have been paid by way of a bribe or other corrupt or illicit activity. Rule No. 43 Provision of Bail This amendment makes clear that the Club may have the benefit of the Member s rights of recourse against third parties, which are assigned to the Club, in circumstances where the Club makes a payment pursuant to a guarantee or other security issued on behalf of a Member. Rule No. 45 Amendments to Rules An amendment to permit a change to the Club Rules to enable the scope of cover to respond as a result of the coming into force of any legislation, regulation or international convention during a policy year. Class 2 Freight, Demurrage and Defence Rule No. 5 x An amendment to broaden the availability of Class 2 cover for disputes relating to salvage, towage and pilotage services rendered by or to an entered ship. The cover will be available for tug and salvage vessels provided they are declared as such and properly rated. Rules 8 and 9 An express provision clarifies that the discretionary nature of Class 2 cover also includes the right to impose a pay-first requirement in respect of costs covered under Class 2 prior to seeking reimbursement from the Club. In addition the language in Rule 9 is amended to reflect the day-to-day superintendence of Class 2 claims by the Managers and to include a more generic provision referring to the appointment of lawyers and other experts rather than a sole reference to the solicitors of the Club. Rule No. 42 Subrogation This amendment clarifies that the Club s rights of subrogation apply not just where it reimburses the Member directly, but also where it makes payment under a guarantee or other security issued on behalf of a Member. 06

37 The Steamship Mutual Underwriting Association Limited Statement of Directors responsibilities United Kingdom company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Association as at the end of the financial year and of the surplus or deficit of the Association, for that period. In preparing those financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Association will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Association and to enable them to ensure that the financial statements comply with the Companies Act They are also responsible for the system of internal control, for safeguarding the assets of the Association and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Association s Directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. Disclosure of information to the auditor Each of the persons who is a Director at the date of approval of this report confirms that: so far as the Director is aware, there is no relevant audit information of which the Association s auditors is unaware; and the Director has taken all steps that they ought to have taken as a Director in order to make themself aware of any relevant audit information and to establish that the Association s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act A. L. Marchisotto Chairman Managers Steamship Insurance Management Barcelona, Spain 8th May

38 The Steamship Mutual Underwriting Association Limited Appendix I Policy Year Statement All Classes Open Policy Years All Classes 2011/12) 2010/11) 2009/10) Total) US$ 000) US$ 000) US$ 000) US$ 000) Gross premium 221,180) 136,499) 98,248) 455,927) Less: SSM Bermuda reinsurance premium (177,800) (115,336) (86,720) (379,856) Net premium 43,380) 21,163) 11,528) 76,071) Gross claims paid Own claims paid (17,460) (42,011) (25,774) (85,245) Claims administration expenses (4,376) (2,362) (1,756) (8,494) (21,836) (44,373) (27,530) (93,739) Less: SSM Bermuda reinsurance recoveries 15,714) 37,810) 23,196) 76,720) Net claims paid (6,122) (6,563) (4,334) (17,019) Claims outstanding including IBNR (292,500) (47,154) (29,144) (368,798) Less: SSM Bermuda reinsurance recoveries 289,223) 46,344) 26,708) 362,275) Net provision for claims outstanding (3,277) (810) (2,436) (6,523) Brokerage (16,499) (10,810) (3,652) (30,961) Underwriting administration expenses (5,420) (1,490) (1,048) (7,958) Other expenses (4,442) (1,815) (572) (6,829) Balance on the technical account 7,620) (325) (514) 6,781) Investment income (including realised and unrealised) (247) (327) 65) (509) Other income 25) ) 75) 100) Taxation ) ) (2) (2) Open policy years funds available 7,398) (652) (376) 6,370) 08

39 The Steamship Mutual Underwriting Association Limited Closed Policy Years - All Classes Total) US$ 000) Available balance as at 20th February ,472) Add: Balance of 2008/09 year as at 20th February ,819) Movements during financial year: Net premium (85) Net claims paid (844) Expenses 22) Available balance as at 20th February ,384) Claims outstanding (51,161) Less: Group Pool recoveries ) SSM Bermuda reinsurance recoveries 49,516) Net provision for claims outstanding (1,645) Closed policy years funds available 18,739) Summary Open and closed years funds available 25,109) Reinsurance balance 231) Total projected funds available 25,340) 09

40 The Steamship Mutual Underwriting Association Limited Appendix II Policy Year Statement P&I Class Open Policy Years P&I Class 2011/12) 2010/11) 2009/10) Total ) US$ 000) US$ 000) US$ 000) US$ 000) Gross premium 191,213) 125,275) 88,898) 405,386) Less: SSM Bermuda reinsurance premium (153,743) (105,608) (78,544) (337,895) Net premium 37,470) 19,667) 10,354) 67,491) Gross claims paid Own claims paid (14,121) (36,684) (21,667) (72,472) Claims administration expenses (3,578) (2,070) (1,487) (7,135) (17,699) (38,754) (23,154) (79,607) Less: SSM Bermuda reinsurance recoveries 12,709) 33,016) 19,501) 65,226) Net claims paid (4,990) (5,738) (3,653) (14,381) Claims outstanding including IBNR (280,043) (43,007) (27,801) (350,851) Less: SSM Bermuda reinsurance recoveries 278,011) 42,611) 25,499) 346,121) Net provision for claims outstanding (2,032) (396) (2,302) (4,730) Brokerage (14,576) (10,306) (3,339) (28,221) Underwriting administration expenses (4,579) (1,306) (886) (6,771) Other expenses (3,787) (1,647) (503) (5,937) Balance on the technical account 7,506) 274) (329) 7,451) ) Investment income (including realised and unrealised) (214) (301) 59) (456) Other income 25) ) 75) 100) Taxation ) ) (2) (2) Open policy years funds available 7,317) (27) (197) 7,093) 10

41 The Steamship Mutual Underwriting Association Limited Closed Policy Years - P&I Class Total) US$ 000) Available balance as at 20th February ,138) Add: Balance of 2008/09 year as at 20th February ,433) Movements during financial year: Net premium (60) Net claims paid (800) Expenses 11) Available balance as at 20th February ,722) Claims outstanding including IBNR (49,072) Less: Group Pool recoveries ) SSM Bermuda reinsurance recoveries 47,579) Net provision for claims outstanding (1,493) Closed policy years funds available 18,229) Summary All Classes FD&D Others P&I Open and closed years funds available 25, (626) 25,322 Reinsurance balance 231 Total projected funds available 25,340 11

42 The Steamship Mutual Underwriting Association Limited Income and Expenditure Account for the year ended 20th February 2012 Technical Account Note US$ 000) US$ 000) Earned premium, net of reinsurance Gross premium 2 220,498) 135,982) Outward reinsurance premium 3 (177,069) (115,039) Earned premium, net of reinsurance 43,429) 20,943) Claims incurred, net of reinsurance Claims paid Gross amount 4 71,791) 43,893) Reinsurers share (61,129) (38,276) Net claims paid 10,662) 5,617) Change in the provision for claims Gross amount 252,500) 25,735) Reinsurers share (253,776) (23,855) Change in the net provision for claims (1,276) 1,880) Claims incurred, net of reinsurance 9,386) 7,497) Net operating expenses 5 26,435) 13,919) Balance on the technical account for general business 7,608) (473) Non-Technical Account Balance on the general business technical account 7,608) (473) Investment income (247) (327) Other income 25) ) Surplus/(deficit) on ordinary activities before taxation 7,386) (800) Taxation 6 ) ) Surplus/(deficit) for the financial year 7,386) (800) Free reserves brought forward 17,954) 18,754) Free reserves 25,340) 17,954) The results for both years are in respect of continuing operations. There are no recognised gains or losses in either year other than the transactions reported in the above income and expenditure account. The accompanying notes to these accounts form an integral part of this income and expenditure account. 12

43 The Steamship Mutual Underwriting Association Limited Balance Sheet as at 20th February 2012 Assets Note US$ 000) US$ 000) Investments Other financial investments 7 30,055) 17,805) Reinsurers share of technical provisions Claims outstanding 411,791) 158,015) Debtors Debtors arising out of direct insurance operations 12,543) 5,745) Debtors arising out of reinsurance operations ) 1,312) Other debtors 587) 24) Other assets Cash at bank and in hand 4,615) 7,124) Prepayments and accrued income Deferred acquisition costs 460) 141) Other prepayments and accrued income ) ) Total assets 460,051) 190,166) Liabilities Capital and reserves Free reserves 8 25,340) 17,954) Technical provisions Provision for unearned premium 3,382) 990) Claims outstanding 419,961) 167,461) Provisions for other risks and charges Provision for taxation ) ) Creditors Creditors arising out of direct insurance operations 1,367) 1,628) Creditors arising out of reinsurance operations 4,865) ) Other creditors including taxation and social security 5,136) 2,133) Total liabilities 460,051) 190,166) The accompanying notes to these accounts form an integral part of this balance sheet. These financial statements were approved by the Board of Directors on 8th May A.L. Marchisotto H. M. Juniel Managers: Chairman Director Steamship Insurance Management 13

44 The Steamship Mutual Underwriting Association Limited Cash Flow Statement for the year ended 20th February 2012 Surplus/(deficit) on ordinary activities before tax US$ 000) US$ 000) Operating surplus/(deficit) before taxation after interest 7,386) (800) Increase in general insurance technical provisions 1,116) 2,279) (Increase)/decrease in debtors (6,368) 14,578) Increase/(decrease) in creditors 7,607) (16,032) 2,355) 825) Net cash inflow from operating activities 9,741) 25) Cash flow statement Net cash inflow from operating activities 9,741) 25) Taxation paid ) (2) 9,741) 23) Cash flows were invested as follows: (Decrease)/increase in cash holdings (2,509) 2,522) Net portfolio investment Purchase/(sale) of money market instruments 12,250) (2,499) Net investment of cash flows 9,741) 23) Movement in opening and closing portfolio investments net of financing Net cash (outflow)/inflow for the period (2,509) 2,522) Portfolio investments 12,250) (2,499) Total movement in portfolio investments net of financing 9,741) 23) Portfolio investments net of financing at 20th February ,929) 24,906) Portfolio investments net of financing at 20th February ,670) 24,929) 14

45 The Steamship Mutual Underwriting Association Limited Notes on the Accounts 1. Accounting policies (a) Accounting convention The accounts have been prepared in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom per Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, and applicable United Kingdom accounting standards. The Association has adopted all material recommendations of the Statement of Recommended Practice on Accounting for Insurance Business issued in December 2005, and amended in December 2006 by the Association of British Insurers ( ABI SORP ). After making enquiries, the Directors have a reasonable expectation that the Association has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. (b) Premium written Premium, less returns, comprise the total premium receivable for the whole period of cover provided by contracts incepting during the financial year. All premium is shown gross of commission payable to intermediaries. (c) Unearned premium The proportion of the premium written relating to periods of cover after the year end is carried forward as a provision for unearned premium. (d) Deferred acquisition costs Acquisition costs, comprising commission and other costs related to the acquisition of new business, are deferred to the extent that they are attributable to premium unearned at the balance sheet date. (e) Claims and related expenses Claims and related expenses are charged to the income and expenditure account when they have been settled. A provision is made on a claim by claim basis for the estimated cost of claims notified but not settled by the balance sheet date. A provision for claims incurred but not reported is established on a statistical basis having regard to past experience as to the number and magnitude of claims reported after previous balance sheet dates. (f) Reinsurance premium and recoveries Reinsurance premium and recoveries are brought into the income and expenditure account on an accruals basis. (g) Investments Quoted investments have been valued at their bid-value as at the balance sheet date. Bond income is accounted for on an accruals basis. The unrealised gains and losses on the movement during the year in the market value of investments, compared to their cost are included in the non-technical account. (h) Allocation to policy years and classes Mutual premium, fixed premium, additional premium, reinsurance premium payable, claims and reinsurance recoveries are allocated to the policy years and classes to which they relate. Administration expenses, investment income and exchange gains or losses are allocated to the current policy year in line with total calls and premium income. 15

46 The Steamship Mutual Underwriting Association Limited Notes on the Accounts continued 1. Accounting policies continued (i) Foreign currencies The functional currency is US dollars. Monetary assets and liabilities are converted at the rate of exchange ruling at the balance sheet date. Income and expenditure items are translated at the rate of exchange ruling at the relevant month end. All exchange differences are included in the income and expenditure account. The rates of exchange ruling on the balance sheet date and used for the purpose of preparing the accounts were as follows: Euro 0.760) 0.733) UK sterling 0.632) 0.617) 2. Gross premium US$ 000) US$ 000) Mutual and fixed premium written 222,446) 136,314) Deferred premium and releases 567) 33) Additional premium (123) 34) Movement in unearned premium (2,392) (399) 220,498) 135,982) Gross premium by class of business Protection and Indemnity 191,514) 124,172) Freight, Demurrage and Defence 6,520) 3,761) Other 22,464) 8,049) 220,498) 135,982) Gross premium by destination United States of America 90,750) 72,367) Germany 25,475) 23,335) Cyprus 22,593) 11) Netherlands 19,956) 14,866) France 12,266) 784) Brazil 10,961) 10,960) United Kingdom 9,620) 485) Italy 8,333) 7,497) Greece 3,794) 14) Spain 2,269) 172) Mexico 2,253) 1,897) Indonesia 1,742) 1,358) Other countries 10,486) 2,236) 220,498) 135,982) The Association s activities relate predominantly to one class of business: Protection and Indemnity. 16

47 The Steamship Mutual Underwriting Association Limited 3. Reinsurance contracts The Association has the following reinsurance arrangement: Under an agreement made on the 20th February 2003, SSM Bermuda agreed to indemnify the Association in respect of 95% of the first US$ 30 million of the Association s net underlying liabilities and 100% of any such liabilities which exceed US$ 30 million in respect of all policy years through to 2005/06; in respect of 90% of the first US$ 30 million of the Association s net underlying liabilities and 100% of any such liabilities which exceed US$ 30 million for all policy years from 2006/07 through to 2008/09, and in respect of 90% of the first US$ 50 million of the Association s net underlying liabilities and 100% of any such liabilities which exceed US$ 50 million for all subsequent policy years. 4. Claims paid - gross amount US$ 000) US$ 000) Claims and related expenses 67,545) 41,517) Claims administration expenses 4,246) 2,376) 71,791) 43,893) 5. Net operating expenses US$ 000) US$ 000) Acquisition costs Brokerage 16,684) 10,603) Underwriting administration expenses 5,347) 1,496) 22,031) 12,099) Administrative expenses Other administration expenses 4,233 1,657 Regulatory fees Directors remuneration 3 4 Auditor s remuneration - audit fees ,404 1,820 26,435 13,919 The Association had no employees in either financial year. Transactions with related parties Steamship Insurance Management ( SIM ) provides management and administrative services to the Association. Under the terms of its management contract SIM receives, as remuneration for its services, a fee which is based in part on premiums payable by Members in each accounting year together with reimbursement of its office and administration expenses. For the financial year to 20th February 2012, these fees amounted to US$ million (2011: US$ million). US$ million was prepaid at the year end (2011: US$ million owed to SIM). 17

48 The Steamship Mutual Underwriting Association Limited Notes on the Accounts continued 6. Taxation The charge represents the estimated liability for the accounting year to 20th February 2012, of US$ 91 (2011: US$ 294) based upon negotiations with the United Kingdom tax authorities, assessed on the investment income of the Association for the relevant years. US$ 000) US$ 000) Analysis of tax charge on ordinary activities United Kingdom corporation tax at 20% (2011: 21%) based on the surplus/(deficit) for the financial year ) ) Adjustment in respect of prior years ) ) ) ) Factors affecting tax charge for the current period The tax assessed for the financial year is higher than that resulting from applying the standard rate of corporation tax in the United Kingdom. The differences are explained below. Surplus/(deficit) on ordinary activities before tax 7,386) (800) Tax at 20% (2011: 21%) thereon 1,477) (168) Effect of income not subject to corporation tax (1,477) 168) Prior period adjustments ) ) Current tax charge for period ) ) 7. Other financial investments US$ 000) US$ 000) Market value Money market instruments 30,055) 17,805) Cost Money market instruments 30,055) 17,805) All investments are listed. 18

49 The Steamship Mutual Underwriting Association Limited 8. Free reserves US$ 000) US$ 000) Free reserves brought forward 17,954) 18,754) Surplus/(deficit) for year 7,386) (800) 25,340) 17,954) The balance carried forward of US$ 25,339,929 together with any further additional premium to be ordered by the Board of Directors and recoveries under the reinsurance contracts, will be available to meet liabilities not yet passed or ascertained. The Members of the Association are liable for their rateable proportion of any deficiency arising from an excess of liabilities over premium. The Directors and Managers are of the opinion that the Association has adequate assets and contractual arrangements to meet known and anticipated liabilities. 19

50 The Steamship Mutual Underwriting Association Limited Report of the Independent Auditor Independent Auditor s Report to the Members of The Steamship Mutual Underwriting Association Limited We have audited the financial statements of The Steamship Mutual Underwriting Association Limited for the year ended 20th February 2012, which comprise the income and expenditure account, the balance sheet, the cash flow statement and the related notes 1 to 8. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company s Members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company s Members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s Members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As explained more fully in the Directors Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s (APB s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements, sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 20

51 The Steamship Mutual Underwriting Association Limited Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the Company s affairs as at 20th February 2012 and of its surplus for the year then ended; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; the financial statements are not in agreement with the accounting records and returns; or certain disclosures of Directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Colin Rawlings FCA (Senior Statutory Auditor) For and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London 8th May

52 The Steamship Mutual Trust Contents 01 Directors of the Corporate Trustee 02 Report of the Corporate Trustee 04 Appendix I Policy Year Statement All Classes 06 Appendix II Policy Year Statement P&I Class 08 Income and Expenditure Account 09 Balance Sheet 10 Cash Flow Statement 11 Notes on the Accounts 16 Report of the Independent Auditor

53 The Steamship Mutual Trust The Steamship Mutual Trust Directors of the Corporate Trustee The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited H. S. Frank, Carnival Corporation (Chairman) S. von Appen, Sociedad Naviera Ultragas Ltda. J. G. Conyers, First Bermuda Securities Ltd. A. E. Exel, ISIS (Asia Pacific) Pty. Ltd. H. L. F. Schoeller, Columbia Shipmanagement Ltd. C. C. Tung, Orient Overseas (International) Ltd. Secretary of the Corporate Trustee A. R. Anderson, Conyers, Dill & Pearman Manager of the Corporate Trustee Hamilton Investment Management Ltd. Registered office of the Corporate Trustee Clarendon House 2 Church Street Hamilton HM 11 Bermuda Administrative offices of the Corporate Trustee Washington Mall 1 P.O. Box HM 447 Hamilton HM BX Bermuda Telephone: (1441) Telefax: (1441)

54 The Steamship Mutual Trust Report of the Corporate Trustee The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited has pleasure in presenting its Report and the Accounts of The Steamship Mutual Trust ( the Trust ) for the year ended 20th February Principal activities The Trust s principal activity during the year was the reinsurance of Protection and Indemnity (P&I) and Freight, Demurrage and Defence (FD&D) risks. At the beginning of the accounting period, the Corporate Trustee extended its current year contract, entered into on behalf of the Trust, with The Steamship Mutual Underwriting Association (Reinsurance) Limited, to cover the period from 20th February 2011 to 20th February 2012 on existing terms and conditions. The total premium receivable by the Trust in respect of all its reinsurance contracts during the accounting period amounted to US$ million. Accounts The surplus of funds available to meet outstanding claims as at 20th February 2012 decreased by US$ 19.7 million to US$ million before taking into account anticipated future investment income. No transfers to the capital reserve of the Trust were made during the year. The total assets of the Trust at the balance sheet date amounted to US$ million, an increase of US$ 51.8 million on the previous year. Policy year statements The figures in Appendices I and II to this Report are prepared under the accounting policies and in the format used within the financial statements, providing a summary and breakdown by both class of business and underwriting year. No allowance has been made for the allocation of any future investment income. Markets 2011 was a disappointing year for most investments except for those government bonds which benefited from investors flight to safety during the year. It was a year in which major financial markets, especially bonds, moved from reflecting a normal economic recovery to pricing in an extended period of relatively weak growth and low inflation in developed market debtor countries, supported by low interest rates. Throughout the period under review market sentiment fluctuated between fears that the European sovereign debt crisis might cause another banking collapse and global recession, and hopes that credible support measures could be implemented by European authorities and that the US economy could exceed growth expectations. The S&P 500 index returned only1.4% for the Trust s financial year but was nevertheless one of the best performing equity markets. Most markets, including those in developing countries, performed poorly despite global economic growth of 3.8% in Markets have rallied in recent months due to a combination of better than expected short-term economic growth, a lower immediate risk of financial contagion from Europe and a substantial amount of liquidity support being provided by central banks. There are still significant headwinds to economic growth and investment returns in 2012, including debt reduction, budget tightening, underlying inflation risks in emerging economies, and regulatory and political uncertainty. Investment performance The Trust s overall investment return of 4.6% was made up of a 5.0% return on fixed income investments, a 2.2% return on hedge funds of funds and a 5.6% return on equities. This overall return was again higher than expected, boosted by unrealised gains in the matching portfolio of government bonds.this portfolio continues to be invested in the lowest risk government bonds with a duration and currency profile matching that of the Club s claims liabilities such that risk, and regulatory capital, in that part of the portfolio is minimised. All active managers in the remaining surplus portfolio recorded positive returns with only the hedge fund of fund managers lagging their benchmark. 02

55 The Steamship Mutual Trust Risk management and asset allocation During the year the Corporate Trustee has kept under close review the impact of sovereign debt credit rating downgrades and the European debt problems on its fixed income portfolios. The matching portfolio of government bonds has no exposure to those European countries experiencing financing strain and the corporate bond portfolios have very little exposure to issuers in those countries. After the research undertaken in 2010 a US$ 30 million allocation to emerging market investments was made in the fourth quarter of This comprises three diversified funds with two managers investing in equities, government and corporate bonds, including some local currency exposure. Despite this new allocation overall portfolio risk has been maintained below target throughout the year. The Corporate Trustee has continued to consult regularly with the Board of the Bermuda Association, which is the ultimate reinsured and whose members are the beneficiaries of the Trust. That Board receives regular presentations on the utilisation of the agreed risk budget, investment performance and asset allocation. Claims Net claims and related expenses paid increased by 9.3% year on year to US$ million. The Corporate Trustee is satisfied that the reassured is taking appropriate steps to ensure that a prudent underwriting policy is maintained. Statement of Corporate Trustee s responsibilities The Corporate Trustee has prepared financial statements for each financial year in accordance with European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and United Kingdom accounting principles applicable to insurers. In preparing those financial statements the Corporate Trustee is required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Trust will continue in business. The Corporate Trustee is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Trust. It is responsible for the system of internal control, for safeguarding the assets of the Trust and hence for taking reasonable steps to prevent and detect fraud and other irregularities. H. S. Frank Chairman The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited Barcelona, Spain 7th May

56 The Steamship Mutual Trust Appendix I Policy Year Statement All Classes Open Policy Years All Classes 2011/12) 2010/11) 2009/10) Total) US$ 000) US$ 000) US$ 000) US$ 000) Gross premium 206,819) 203,788) 206,489) 617,096) Less: Reinsurance premium (29,447) (26,508) (22,975) (78,930) Net premium 177,372) 177,280) 183,514) 538,166) Gross claims paid Own claims and related expenses (29,579) (83,631) (88,312) (201,522) Less: Reinsurance recoveries 56) 3,736) 3,014) 6,806) Net claims paid (29,523) (79,895) (85,298) (194,716) Claims outstanding including IBNR (198,400) (101,831) (86,129) (386,360) Less: Other reinsurance recoveries 15,842) 2,217) 10,726) 28,785) Net provision for claims outstanding (182,558) (99,614) (75,403) (357,575) Administration expenses (58) (84) (80) (222) Balance on the technical account (34,767) (2,313) 22,733) (14,347) Allocated net investment income 37,837) 7,484) 525) 45,846) Non-technical account administration expenses (1,993) (1,762) (1,686) (5,441) Open policy years funds available 1,077) 3,409) 21,572) 26,058) 04

57 The Steamship Mutual Trust Closed Policy Years - All Classes Total) US$ 000) Available balance as at 20th February ,137) Add: Balance of 2008/09 year as at 20th February ,045) Movements during financial year: Other net premium 1,880) Net claims paid (54,789) Movement in allocated Trust investment income (27,948) Available balance as at 20th February ,325) Claims outstanding including IBNR (230,536) Less: Other reinsurance recoveries 25,276) ) Net provision for claims outstanding (205,260) Closed policy years funds available 3,065) Summary Open and closed years funds available 29,123) Investment income available for allocation 136,746) Reinsurance balance 287) Total projected funds available 166,156) 05

58 The Steamship Mutual Trust Appendix II Policy Year Statement P&I Class Open Policy Years P&I Class 2011/12) 2010/11) 2009/10) Total) US$ 000) US$ 000) US$ 000) US$ 000) Gross premium 176,314) 173,210) 177,099) 526,623) Less: Reinsurance premium (20,192) (18,300) (17,341) (55,833) Net premium 156,122) 154,910) 159,758) 470,790) Gross claims paid Own claims paid and related expenses (25,447) (68,644) (71,551) (165,642) Less: Reinsurance recoveries ) ) 89) 89) Net claims paid (25,447) (68,644) (71,462) (165,553) Claims outstanding including IBNR (172,712) (89,736) (77,744) (340,192) Less: Other reinsurance recoveries 14,140) 1,227) 9,255) 24,622) Net provision for claims outstanding (158,572) (88,509) (68,489) (315,570) Administration expenses (51) (73) (71) (195) Balance on the technical account ) (27,948) (2,316) 19,736) (10,528) Allocated net investment income 29,692) 3,859) ) 33,551) Non technical account administration expenses (1,744) (1,543) (1,492) (4,779) Open policy years funds available ) ) 18,244) 18,244) 06

59 The Steamship Mutual Trust Closed Policy Years - P&I Class Total) US$ 000) Available balance as at 20th February ,072) Add: Balance of 2008/09 year as at 20th February ,700) Movements during financial year: Other net premium 1,912) Net claims paid (52,116) Movement in allocated Trust investment income (32,576) Available balance as at 20th February ,992) Claims outstanding including IBNR (213,653) Less: Other reinsurance recoveries 25,661) Net provision for claims outstanding (187,992) Closed policy years funds available ) Summary All Classes FD&D Others P&I Open and closed years funds available 29,123 7,814 3,065 18,244) Investment income available for allocation 136,746 Reinsurance balance 287 Total projected funds available 166,156 07

60 The Steamship Mutual Trust Income and Expenditure Account for the year ended 20th February 2012 Technical Account Note US$ 000) US$ 000) Earned premium, net of reinsurance Gross premium written 3 208,080) 209,013) Outward reinsurance premium (29,560) (25,788) 178,520) 183,225) Claims incurred, net of reinsurance Claims paid Gross amount 4 175,866) 156,425) Reinsurers share (18,010) (11,942) Net claims paid 157,856) 144,483) Change in the provision for claims Gross amount 69,442) 21,308) Reinsurers share 874) 6,815) Change in the net provision for claims 5 70,316) 28,123) Claims incurred, net of reinsurance 228,172) 172,606) Net operating expenses 6 58) 84) Balance on the technical account for general business (49,710) 10,535) Non-Technical Account Balance on the technical account for general business (49,710) 10,535) Investment income 7 18,651) 25,670) Unrealised gains on investments 8 13,401) 5,962) Investment management expenses (1,993) (1,761) (Deficit)/surplus for the financial year (19,651) 40,406) The results for both years are in respect of continuing operations. There are no recognised gains or losses in either year other than the transactions reported in the above income and expenditure account. The accompanying notes to these accounts form an integral part of this income and expenditure account. 08

61 The Steamship Mutual Trust Balance Sheet as at 20th February 2012 Assets Note US$ 000) US$ 000) Investments Other financial investments 9 750,606) 698,617) Reinsurers share of technical provisions Claims outstanding 5 54,061) 54,935) Debtors Debtors arising out of reinsurance operations 11 9,271) 8,910) Prepayments and accrued income Accrued interest 4,768) 4,417) Total assets 818,706) 766,879) Liabilities Capital and reserves Free reserves ,156) 185,807) Technical provisions Claims outstanding 5 616,895) 547,453) Creditors Creditors arising out of reinsurance operations 13 35,132) 29,434) Other creditors ) 4,185) Total liabilities 818,706) 766,879) The accompanying notes to these accounts form an integral part of this balance sheet. These financial statements were approved by the Corporate Trustee on 7th May The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited 09

62 The Steamship Mutual Trust Cash Flow Statement for the year ended 20th February 2012 (Deficit)/surplus on ordinary activities before tax US$ 000) US$ 000) Operating (deficit)/surplus before taxation after interest (19,651) 40,406) Increase in general insurance technical provisions 70,316) 28,123) Unrealised gains on investments (13,401) (5,962) (Increase)/decrease in debtors (712) 36,550) Increase in creditors 2,036) 2,196) 58,239) 60,907) Net cash inflow from operating activities 38,588) 101,313) Cash flow statement Net cash inflow from operating activities 38,588) 101,313) Cash flows were invested as follows: Movement in cash holdings ) ) Net portfolio investment Net purchase of bonds and loans 110,934) 21,055) Net purchase of equities 10,050) 13,147) Net (sale)/purchase of alternative investments (2,750) 14,316) (Decrease)/increase in money market instruments (79,646) 52,795) 38,588) 101,313) Net investment of cash flows 38,588) 101,313) Movement in opening and closing portfolio investments net of financing Net cash inflow for the period ) ) Portfolio investments 38,588) 101,313 Movement arising from cash flows 38,588) 101,313 Changes in market values and exchange rate effects 13,401) 5,962 Total movement in portfolio investments net of financing 51,989) 107,275 Portfolio investments net of financing at 20th February ,617) 591,342 Portfolio investments net of financing at 20th February ,606) 698,617 10

63 The Steamship Mutual Trust Notes on the Accounts 1. Constitution The Trust was created by a settlement under Bermudian law. The Corporate Trustee is The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited, a company incorporated under the laws of Bermuda and registered as an insurer under the Bermuda Insurance Act 1978, so enabling the Trust to undertake reinsurance business. 2. Accounting policies (a) Accounting convention The accounts have been prepared in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applicable to insurers. The Trust has adopted all material recommendations of the Statement of Recommended Practice on Accounting for Insurance Business issued in December 2005, and amended in December 2006 by the Association of British Insurers ( ABI SORP ). After making enquiries, the Trustees have a reasonable expectation that the Trust has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. (b) Premium written Premium comprises the total premium receivable for the whole period of cover provided by contracts incepting during the financial year. All business is ceded from The Steamship Mutual Underwriting Association (Reinsurance) Limited, a company incorporated in Bermuda. (c) Claims and related expenses Full provision is made on a claim by claim basis for the estimated cost of claims notified but not settled by the balance sheet date. A provision for claims incurred but not reported is established on a statistical basis having regard to past experience as to the number and magnitude of claims reported after previous balance sheet dates. (d) Reinsurance premium and recoveries Reinsurance premium and recoveries are brought into the income and expenditure account on an accruals basis. (e) Foreign currencies Assets and liabilities including investments and bank balances have been converted to US dollars at the rate of exchange ruling at the balance sheet date. Income and expenditure items including foreign exchange transactions are converted to US dollars at the rate of exchange ruling at the date of the transaction. All exchange differences are included in the income and expenditure account. (f) Other financial investments Investments and cash balances have been valued at their bid value as at the balance sheet date. Bond income is accounted for on an accruals basis. Equity income is accounted for on an ex-dividend basis. Forward exchange contracts are valued at the exchange rate prevailing at the year end. The unrealised gains and losses on the movement during the year in the market value of investments compared to their cost are included within the non-technical account. 11

64 The Steamship Mutual Trust Notes on the Accounts continued 3. Gross premium written US$ 000) US$ 000) Premium receivable under reinsurance contracts 208,080) 209,013) Under contracts dated 11th March 1983, as amended, the Corporate Trustee, on behalf of the Trust, accepted reinsurance business in respect of all the Protection and Indemnity risks and Freight, Demurrage and Defence risks of The Steamship Mutual Underwriting Association (Reinsurance) Limited for the period up to 20th February 1983 and subsequently further contracts for each of the policy years ended, respectively, 20th February 1984 through to 20th February ) 4. Claims paid - gross amount US$ 000) US$ 000) Claims paid 175,864) 156,422) Claims handling charge 2) 3) 175,866) 156,425) 5. Change in the net provision for claims US$ 000) US$ 000) Gross outstanding claims Provision brought forward (547,453) (526,145) Provision carried forward 616,895) 547,453) 69,442) 21,308) Reinsurers share Provision brought forward 54,935) 61,750) Provision carried forward (54,061) (54,935) 874) 6,815) Change in the net provision for claims 70,316) 28,123) An adverse net run-off deviation of US$ 13.2 million was experienced during the year (2011: US$ 18.3 million positive net run-off deviation). The estimates for known outstanding claims are based on the best estimates and judgement of the Managers of The Steamship Mutual Underwriting Association (Reinsurance) Limited of the final cost of individual cases based on current information. Full provision is also made for claims incurred but not reported by the balance sheet date using detailed statistical analysis having regard to past experience as to the number and magnitude of claims reported after previous balance sheet dates. 12

65 The Steamship Mutual Trust 6. Net operating expenses US$ 000) US$ 000) Administrative expenses Non-investment management expenses payable to Corporate Trustee 13) 32) Auditor s remuneration audit fees 45) 52) 58) 84) 7. Investment income US$ 000) US$ 000) Dividends and interest 17,535) 15,219) Realised gains/(losses) Investments 1,183) 12,162) Exchange (67) (1,711) 1,116) 10,451) 18,651) 25,670) 8. Unrealised gains on investments US$ 000) US$ 000) Investments 16,244) 1,587) Exchange (2,843) 4,375) 13,401) 5,962) 13

66 The Steamship Mutual Trust Notes on the Accounts continued 9. Other financial investments US$ 000) US$ 000) Market value Equities 30,286) 18,993) Alternative investments 65,416) 63,984) Bonds and loans 638,042) 519,155) Money market instruments 9,838) 86,085) Cash accounts 7,442) 10,809) Open forward exchange contracts (418) (409) 750,606) 698,617) Cost Equities 25,050) 15,000) Alternative investments 62,821) 65,571) Bonds and loans 631,962) 521,028) Money market instruments 9,838) 86,085) Cash accounts 7,412) 10,811) 737,083) 698,495) 10. Rates of exchange The rates of exchange ruling at the accounting dates were as follows: UK sterling 0.632) 0.617) Euro 0.760) 0.733) 11. Debtors arising out of reinsurance operations US$ 000) US$ 000) The Steamship Mutual Underwriting Association (Reinsurance) Limited ) ) Other reinsurance debtors 9,271) 8,910) 9,271) 8,910) 14

67 The Steamship Mutual Trust 12. Free reserves US$ 000) US$ 000) Capital reserve 33,827) 33,827) Accumulated fund brought forward 151,980) 111,574) (Deficit)/surplus for year (19,651) 40,406) 166,156) 185,807) 13. Creditors arising out of reinsurance operations US$ 000) US$ 000) The Steamship Mutual Underwriting Association (Reinsurance) Limited 22,726) 17,602) Other reinsurance creditors 12,406) 11,832) 35,132) 29,434) 14. Other creditors US$ 000) US$ 000) Unsettled investment transactions 37) 3,550) Other creditors 486) 635) 523) 4,185) 15. Taxation At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda. Accordingly no provision for such taxes has been recorded by the Trust. In the event that such taxes are levied the Trust has received an undertaking from the Bermuda government exempting it from all such taxes until 31st March Transactions with related parties The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited is the Corporate Trustee of the Trust. It receives a fee for investment management costs and related expenses. For the financial year to 20th February 2012 this fee amounted to US$ 2.1 million (2011: US$ 2.0 million) of which US$ 0.4 million (2011: US$ 0.6 million) was outstanding at the balance sheet date. 15

68 The Steamship Mutual Trust Report of the Independent Auditor To the Corporate Trustee of The Steamship Mutual Trust We have audited the financial statements of The Steamship Mutual Trust for the year ended 20th February 2012, which comprise the income and expenditure account, the balance sheet, the cash flow statement and the related notes 1 to16. These financial statements have been prepared under the accounting policies set out therein. These financial statements have been prepared for the purpose of Member and policy holder information. This report is made solely to the Corporate Trustee in accordance with Section 90 of the Bermuda Companies Act Our audit work has been undertaken so that we might state to the Corporate Trustee those matters we are required to state to them in an independent auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trust and the Corporate Trustee as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Trustees and Auditors As stated in the Statement of Trustee s Responsibilities, the Corporate Trustee is responsible for the preparation of the financial statements in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applicable to insurers. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law in Bermuda and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the relevant financial reporting framework and whether the financial statements have been properly prepared in accordance with the Bermuda Companies Act We also report to you whether, in our opinion, the information given in the Report of the Corporate Trustee is consistent with the financial statements. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the Trust s affairs as at 20th February 2012 and of its deficit for the year then ended; have been properly prepared in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applicable to insurers; and have been properly prepared in accordance with the Bermuda Companies Act Opinion on other matter In our opinion the information given in the Report of the Corporate Trustee is consistent with the financial statements. Deloitte LLP Chartered Accountants and Registered Auditor London 7th May

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