MARINE P&I PRE-RENEWAL REVIEW OCTOBER 2015

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1 MARINE P&I PRE-RENEWAL REVIEW OCTOBER 2015

2 FOUNDED BY ARTHUR GALLAGHER IN CHICAGO IN 1927, ARTHUR J. GALLAGHER & CO HAS GROWN TO BE ONE OF THE LARGEST, MOST SUCCESSFUL INSURANCE BROKERAGE AND RISK MANAGEMENT COMPANIES IN THE WORLD. WITH EXTRAORDINARY REACH AND DEPTH ACROSS INTERNATIONAL BORDERS, OUR PARENT GROUP EMPLOYS OVER 20,000 PEOPLE AND ITS GLOBAL NETWORK PROVIDES SERVICE IN MORE THAN 140 COUNTRIES. Outside the US, we use the brand name Arthur J. Gallagher. Wherever and whenever there is an issue of risk we re there for our clients from individuals to small businesses to international conglomerates. Our people, our depth of technical expertise and our global reach is critical in delivering unrivalled coverage, risk management and placement expertise. We work seamlessly across countries and international territories. Where we do encounter difficulties and complexities we meet them head on. We dismantle barriers never letting them get in the way. We work tirelessly to provide solutions that drive value and competitive advantage for the benefit of all our clients and we liberate our people to do what they do best: promoting and protecting our clients interests. We just do not give up; whether it s sourcing cover for the thatched cottage in England; cyber risks across European borders; complex coverage for the international supermarket chain; marine cargo in Australia; political risk coverage in developing economies; energy cover in extreme environments; or helping our banking partners with their comprehensive homeowner offer. Family values have been core to our culture since our company was founded and this drives the way in which we, Arthur J. Gallagher, look after our clients. Since 1927 we have built our business for today. For tomorrow, we continue to invest in our business. A BUSINESS WITHOUT BARRIERS

3 CONTENTS EXECUTIVE SUMMARY The World of P&I According To AJG...04 Welcome to our 2015 Review...06 Timeline International Group Clubs Aggregate Financial Year Results...09 Financial Commentary...11 CLUB PAGES Summary Of Clubs Financial Position At February 20, American Steamship Owners Mutual P&I Association Inc...24 The Britannia Steam Ship Insurance Association Ltd...26 Assuranceforeningen Gard Gjensidig...28 Japan Ship Owners Mutual P&I Association...30 London Steam-Ship Owners Mutual Insurance Association Ltd...32 North Of England Protecting & Indemnity Association Ltd...34 Shipowners Mutual P&I Insurance (Luxembourg)...36 Assuranceforeningen Skuld Gjensidig...38 The Standard Club...40 Steamship Mutual Underwriting Association (Bermuda) Ltd...42 Sveriges Angfartygs Assurance Forening...44 The United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Ltd...46 West Of England Ship Owners Mutual Insurance Association INDUSTRY STATISTICS 7 Year Combined Ratio...53 Premium & Claims Per GT...54 $ Per GT Of Tonnage...55 Free Reserves...56 Tonnage...58 Growth Factors...60 Market Share...61 General Increases Effective Etc Basis...62 Average Expense Ratio Year Investment Income Summary...66 P&I Call History Statistics...68 P&I Release Call Statistics...69 Lay Up Returns...70 Ratings Agencies...71 International Group Reinsurance Programme Structure & Rates...72 Losses To Pooling...74 Hydra Insurance Company Limited...75 MAJOR LIMITING CONVENTIONS AND STATUTES AFFECTING P&I RISKS Developments in the past 12 months...78 CONTACTS Marine Our One Stop Shop...92 London Marine P&I...94 London Marine Division Senior Management...94 London Marine Division Directors...94 London Marine Division Broker / Account Executive / Technician

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5 01 MARINE P&I PRE-RENEWAL REVIEW 2015

6 MARINE P&I PRE-RENEWAL REVIEW 2015 THE WORLD OF P&I ACCORDING TO AJG NORWAY, ARENDAL Gard AS UK, NEWCASTLE North of England USA, NEW YORK Eagle Ocean Marine UK, LONDON British Marine (QBE Group) Carina Lodestar Ltd Navigators P&I Osprey Underwriting Agency Charterers P&I Club USA, NEW YORK American Club UK, LONDON Britannia P&I Club London P&I Club Shipowners P&I Club Standard Club Steamship Mutual P&I The UK Club West of England GREECE, ATHENS Aigaion Insurance Co. SA 4

7 MARINE P&I PRE-RENEWAL REVIEW 2015 NORWAY, BERGEN Norwegian Hull Club NORWAY, OSLO Hydor AS NORWAY, OSLO Skuld P&I SWEDEN, GOTHENBURG Swedish Club RUSSIA, MOSCOW Ingosstrakh Rosgosstrakh Ltd JAPAN, TOKYO Japan P&I Club GERMANY, HAMBURG Hanseatic Underwriters KOREA, SEOUL Korea P&I Club NETHERLANDS, ROTTERDAM RaetsMarine BV Charterama BV CHINA, BEIJING China P&I Club COMMERCIAL P&I MARKET INTERNATIONAL GROUP P&I CLUB NON-IG MUTUAL P&I CLUB 5

8 MARINE P&I PRE-RENEWAL REVIEW 2015 WELCOME TO OUR 2015 REVIEW Malcolm Godfrey, Executive Director All of which leads me to think the time is right for a zero premium increase at the next renewal, if not a premium reduction! The Clubs may feel differently and, in the current underwriting environment, potentially see a minimal increase to be justified, as I will now explore below. Welcome to the 2015 annual P&I review, one which reflects upon a most unusual year for the marine insurance industry in general. On the P&I front, we discuss in this report a P&I underwriting profit for the mutual market; at the same time IUMI have just reported that 2014 is a profitable year for the hull market: the first one since Since produced an overall loss for the P&I mutual market, I wonder how long it has been since both facets of the market were aligned in this way? Speaking of the lessons of history, I had occasion to look at our 2005 P&I review recently, which is curiously apposite. In that year we noted that Collectively, Free Reserves have exceeded $2 billion for the first time. and wondered how long will the Club members be willing to see ever growing piles of money sitting in their Club? There has to be a time when they decide enough is enough. At the date of this report, just 10 years on, those Free Reserves are in excess of $ 4.6 billion and little has been done to figure out whether enough is enough. In the past 10 years the Clubs have generated more surplus than they did in the previous 150 years, since Lord Campbell s Act of 1846 prompted the formation of the first Protection Association in Another statistic on the same theme stands out since the shipping industry became mired in the slump of late 2008, the Clubs have doubled their Free Reserves from $ 2.3 billion to $ 4.6 billion. In contrast, in February 2015 the Baltic Dry Index had hit a 30 year low at about 5% of its peak immediately pre crash. Well known shipping companies had sunk without a trace, an oversupply of bulkers continued to bedevil performance in that sector, and now we see the Chinese economy slowing again. Not all of the shipping market is as badly off as the bulker operators, for instance tanker rates, in February 2015, were at their highest since 2008 with a contangoed crude price encouraging traders to charter vessels simply to store oil to sell later for a higher price. Nonetheless most owners would give their right arm to have doubled their net worth between 2008 and Results the market has seen an overall underwriting profit: 8 Clubs made underwriting profits and all except for one made an overall profit. This was after dealing with significant one off costs associated with pensions. Three Clubs have reported their half year results and two showed an underwriting surplus for the period. Claims claims have continued to fall on a per GT basis and the pool experienced one of its best years in the last decade in The claims climate continues to be characterised as benign and pool claims for continue the trend with only 7 reported incidents so far. However, as larger claims are becoming more and more influential in the total claims cost, a bad year may be just around the corner for the market as a whole, or at any given Club. Reinsurance reinsurance rates are softening in the market, as the cost of recent large casualties begin to fade into history. This should mean that the Clubs retention reinsurance cost should fall (although increased individual Clubs retentions will offset this somewhat) as well as the cost of the International Group programme where savings should again be passed on to members. Business newbuildings continue to be underwritten at ultra competitive (some might say suicidal) rates which is contributing towards maintaining a significant churn rate. There are however signs that this may be less influential in the future as orders for new bulkers, in particular, dry up again, after the false dawn in In effect renewing vessel rates subsidise the low rates new buildings command, so with less new business, the extra cost loaded into the general increase will not be so onerous. Investment income without being in any way spectacular, the Clubs have earned $ 1 billion from their investments in the past 3 years. Volatility here is the key word 6 month results in the 3 Clubs to have reported so far this year all show negative income for the period: but in 2014 all the Clubs were showing the same trend, only to see yields recover in the second half year. Now, therefore, more than any time in recent history there is an opportunity for the Clubs to demonstrate solidarity with their membership. A general increase in the 0 to 2.5% range and a premium refund via the 6

9 EXECUTIVE SUMMARY collective reinsurance scheme is in order. If the Clubs premium income falls a little, so be it, they have more than enough reserves to accommodate it, despite growing risk exposure arising from the volatilities of high severity claims and unpredictable investment yields. If the Clubs are not going to use their treasure chests to help the owners, what else are they going to do with it, and how much will those actions help the members? Risk retention the reinsurance renewal saw Hydra assume a greater share of the first excess layer and it has already been announced that the individual Club retention for has been increased to $ 10 million. At the same time increasing deductibles and fee / combined deductibles continue to change the shape of the retained risk, reinforcing the exposure to severe rather that frequent losses. It is perhaps the Clubs themselves who are changing the appearance of their claims profile, not the market. Not all Clubs can be happy with this, particularly the smaller ones or those concerned with loss of claims control. Diversification despite its doubters, notably Nigel Palmer in Britannia s report this year, this continues apace. The new generation of Club CEO continues to try to change the face of the industry: Standard have started a new Lloyd s syndicate and Skuld have opened themselves up to non marine business via their syndicate. These endeavours have yet to result in tangible benefit for the members, with the notable exception of Gard, but Palmer s point on subsidisation of the P&I premium is well made. Where these other revenue streams reduce the members P&I premium this will distort pooling contributions, and the formula for apportioning this cost may well need to be revisited should significant future subsidies (implicit or explicit) arise. The bigger question is, of course, will these subsidies even arise? Both the hull market and the fixed premium P&I market are suffering from chronic over capacity, so where is the logic of investing in the sector? Until interest rates rise and commercial capital is attracted elsewhere, this overcapacity is unlikely to resolve itself so why the attraction for the Clubs? Skuld do not appear to be making any money from their Lloyd s syndicate, and Standard have launched their syndicate in a very soft market and hence have needed extremely competitive initial pricing. Maybe the prevailing logic is use it or lose it if the Clubs do not diversify, and so justify keeping the capital, they might feel even more pressure to return some of the accumulated funds. Hugo Wynn-Williams, chairman designate of the International Group, may experience a bumpy three year tenure as these factors play out. Both risk retention and diversification are controversial issues that elicit widely differing views from the individual Clubs. This will naturally create tensions within the union, as each Club devises differing development strategies, and this could factionalise the group. The biggest threat to the International Group Agreement comes from within, but we certainly have not reached a point of no return: continued change is inevitable and generally positive, but the Clubs should beware of becoming something that they were not designed to be. In their hearts they should remain members Clubs and not commercial underwriters. Of course these tensions could all be avoided by using the surplus funds to reduce members premiums rather than for expansion! In this volatile environment it is more important than ever to secure the services of a well-respected and experienced broker. A broker that understands the changes that are happening in the market and what impact those changes may have. A broker who can devise the best solutions for the shipowner s commercial risks. After four years of relatively hard markets, where owners premiums have risen significantly, now is the time to take stock and review options. At Gallagher we have a team of professionals with over 150 years experience in the P&I market: don t wait any longer, give us a call. Malcolm Godfrey Executive Director Marine Division Specialty Risks EDITORIAL COMMENT On 1st October 2015, the day of our print deadline, the Japan Club released corrected financial statements which significantly changed policy year claims incurred data. On their Club page, and in section 3 where specific analysis of the Club is noted, we have updated figures. However production deadlines have made it impractical to amend all market wide statistics herein. Any limitations so imposed are not considered likely to impact readers comprehension of the trends identified herein. 7

10 MARINE P&I PRE-RENEWAL REVIEW 2015 TIMELINE OCTOBER Britannia becomes the penultimate Club to receive a Standard & Poor s interactive rating, being afforded an A stable rating; NOVEMBER General Increase season ends with an average P&I increase of around 3.0% and varying between 0% and 6.2%. FD&D increase is somewhat lower at 2.75% with a range of 0% and 10%; Britannia reduces the deferred call on the policy year from 45% to 40% DECEMBER The London Club becomes the final Club to receive a Standard & Poor s interactive rating, being afforded a BBB stable rating; Standard & Poor s increase their rating of West of England form BBB to BBB+ stable; The Japan Club establish a new Gaiko fixed premium class aimed at short haul operators in Asia, the Middle East and Australia; The 1971 IOPC Fund is formally wound up, despite opposition from the International Group; 2015 JANUARY FEBRUARY Group excess reinsurance programme renews with reductions being seen across all vessel categories except passenger vessels, where a renewal as is is seen. Hydra increases its participation on the first excess layer slightly; The London Club restructures, resulting in the Bermuda Club becoming a subsidiary of the Association. This is designed to optimise capital efficiency in anticipation of Solvency II implementation in 2016; Stale Hansen takes over as President and CEO of Skuld in a move predicated earlier in 2014; Standard Club Asia launches the Singapore War Risks Mutual; MARCH APRIL MAY JUNE JULY Simon Swallow succeeds Charles Hume as Chief Executive of the Shipowners Club; The 2007 Nairobi International Convention on the Removal or Wrecks comes into force; Lloyd s Syndicate 1884 launches. The syndicate was established by the Standard Club to develop new marine and energy covers. The Club and some of its members participate in the syndicate; Once again, Gard forego $ 37.0 million of call income by reducing the deferred call on the policy year from 25% to 15%; The compensation limits under the 1996 protocol to the 1976 LLMC increase by 51% for both personal injury/loss of life claims and property claims; Geoff Parkinson retires as CEO of North of England s Sunderland Marine subsidiary. Tom Rutter is appointed interim CEO pending a permanent appointment; Dorothea Ioannu is appointed Global Business development Director for both the American Club and the Eagle Ocean Marine fixed premium facility; North of England take first legal steps necessary to transfer the run off business of MSMI into NEPIA by way of a Part VII transfer; Shipowners Club announces its intention to change its financial year end to 31 December with effect from 31 December 2015; SEPTEMBER The Swedish Club announce six monthly figures to 30 June 2015: a deficit of $ 6.2 million has arisen, reducing Free Reserves to around $ 180 million; Skuld are to start underwriting non marine business via Lloyd s Syndicate 1897 with effect from 1 January Capacity is expected to be around $ 75 million; Skuld announce half year results to 20 August 2015: a surplus of $ 9 million has arisen but recognition of additional pension fund liabilities mean that Free Reserves have fallen $ 4.9 million to $ million. 8

11 MARINE P&I PRE-RENEWAL REVIEW 2015 INTERNATIONAL GROUP CLUBS AGGREGATE FINANCIAL YEAR RESULTS The following table shows the composite results of the International Group Clubs for the last 3 years. Figures include the pledged assets of Boudicca Insurance Co Ltd, with year-on-year movements in this amount treated as incurred losses. Figures for those Clubs who do not report as at 20 February are included on the basis of their results for the nearest year-end to 20 February of any given year. No adjustment is made to eliminate inter-club transactions, in particular pooling transactions Call Income 4,350,060 4,109,703 3,832,325 Acquisition Costs 412, , ,533 Reinsurance 892, , ,944 Claims Incurred 2,708,747 2,732,847 2,826,979 Administrative Expenses 240, , ,757 4,253,693 4,170,647 4,129,213 Underwriting Result 96,367 (60,944) (296,888) Investment Income 288, , ,004 Exchange Gains / (Losses) etc (79,762) (25,483) (1,670) Taxation (23,152) (22,951) (18,260) 185, , ,076 Overall Result 282, , ,188 Cash and Investments 11,213,369 10,804,092 10,404,362 Other Net Assets 178, , ,335 11,391,730 11,004,346 10,595,697 Net Outstanding Claims 6,770,579 6,714,204 6,531,946 Free Reserves 4,522,454 4,191,804 3,963,976 Debt Capital 98,697 98,338 99,775 For all years, figures above include Gard on a consolidated basis, ie including the activity, assets and liabilities of Gard Marine & Energy. In North of England acquired Sunderland Marine which added $ 48.5 million to Free Reserves. Figures reflect prior year application of changed accounting policies. 9

12 MARINE P&I PRE-RENEWAL REVIEW 2015 INTERNATIONAL GROUP CLUBS AGGREGATE POLICY YEAR RESULTS Development of key figures at the end of 12, 24 and 36 months respectively on the open policy years at 20 February 2015 are as follows. 1. CALL INCOME IN 000S OF US DOLLARS at 12 months at 24 months at 36 months ,490, ,392,786 3,481, ,137,020 3,225,740 3,205, (closed) 3,159,933 3,218,603 3,204, (closed) 3,115,037 3,195,058 3,163, CLAIMS INCURRED IN 000S OF US DOLLARS at 12 months at 24 months at 36 months ,529, ,609,200 2,550, ,653,824 2,597,481 2,560, (closed) 2,535,437 2,421,466 2,350, (closed) 2,312,692 2,292,447 2,221, UNDERWRITING RESULT IN 000S OF US DOLLARS at 12 months at 24 months at 36 months (267,218) (406,097) (238,794) (583,623) (437,951) (419,749) (closed) (369,065) (186,748) (130,722) (closed) (222,746) ( 66,324) (12,199) 4. OVERALL RESULT IN 000S OF US DOLLARS at 12 months at 24 months at 36 months (170,342) (223,873) (65,488) (357,097) (215,690) (186,214) (closed) (207,504) (31,624) 28, (closed) (14,362) 141, ,959 10

13 MARINE P&I PRE-RENEWAL REVIEW 2015 FINANCIAL COMMENTARY saw a continuation of improved underwriting results, as a financial year underwriting profit of $ 96.4 million arose. This contrasts favourable to the previous year s adjusted loss of $ 60.9 million and is a far cry from the $ million underwriting loss seen in Interestingly these improvements have not been attributable to substantial general increases as has been seen in the past. The two intervening years had seen average general increases in the 8% range. Rather it would seem that there is a real underlying improvement in claims trends per GT, sustainable or otherwise, since the big hike seen in In fact the absolute value of claims, on a financial year basis, has stabilised in the $ 2.7 to $ 2.8 billion range in each of the last 4 years. On a policy year basis the year sustained an underwriting loss of $ million, a shade over 65% of the loss in the preceding year at the same development point. The positive claims trend alluded to above is more evident in the policy year results, where the claims incurred figure is lower than that in both of the preceding policy years, and has yet to benefit from the favourable development generally seen as the policy year matures. The two older open policy years improved by over $ 186 million in terms of underwriting result, with incurred claims on the year falling by 2.25% between 12 and 24 months, and those on the year also improving by a further 1.4% between 24 months and 36 months (3.5% since 12 month valuation). Over the past 13 years incurred claims have improved by an average of 1.69% between 12 and 24 months, and 3.88% between 12 and 36 months. However there is significant variation in individual years with, at the extremes, improving by 11.78% between 12 and 36 months and deteriorating by 2.02% in the equivalent period. FINANCIAL YEAR UNDERWRITING RESULT IN 000S OF US DOLLARS Cumulative American -6,512-10,936-21,719-10,359 1,342-48,184 Britannia* inc Boudicca 70,731-13,326-61,774-29,832 19,719-14,482 Gard* 37,578-24,755-61,342-3,311 15,741-36,089 Japan ,308-26,797 3,957 20,852 12,026 London -29,915-18,736-14,398-16,731-21, ,244 North of England -59,783-17,500-9,830-6,773 54,828-39,058 Shipowners 11,438 2,334 8,938 28,560 26,157 77,427 Skuld 786 3, ,658 30,609 47,982 Standard ,200-39,600-44,100 17,760-70,540 Steamship 63,304 9,289-33,775-40,940 21,111 18,989 Swedish 18,692 8,084-13,372-12,893 16,022 16,533 United Kingdom* -14,807-7,069-20,052 4,459 3,524-33,945 West of England 4,549-1,397-4,136-15,544-36,669-53,197 Aggregate 96,367-60, , , , ,782 Clubs with * under called in one or more of the years in question. Results incorporate the effect of pension fund adjustments necessary in a number of Clubs, applied retroactively where appropriate. 11

14 MARINE P&I PRE-RENEWAL REVIEW of the 13 Clubs achieved underwriting surpluses on a financial year basis, as opposed to 5 in the preceding year and 2 in the previous year to that. On the other hand 5 of them incurred underwriting losses there being no obvious common characteristic evident in either grouping that might explain the disparity. Only London (with losses) and Shipowners and Skuld (with surpluses) have been consistent across the 5 year period. In , 8 Clubs improved their result when compared to the prior year. North of England s result continues to be hit by the impact on their administrative costs of the pension charge that they suffered as a result of the change in their accounting; in the last 2 years this has amounted to $ 67.4 million. They would however have sustained an underwriting loss over those years even without this charge. Gard also amended their pension accounting, resulting in extra costs which have impacted their result by $ 50.9 million in the past 3 years of the table above. The performance of the West of England continues to justify their decision to downsize the insured fleet a number of years ago, and this year they turned the corner into an underwriting profit. Skuld continue a seemingly endless run of financial year underwriting profits, now stretching over 10 years, despite the recent results being dragged down by losses in Syndicate On the positive side, two results stand out Britannia with $ 70.7 million and Steamship with $ 63.6 million surpluses. The former saw incurred claims fall by $ 45 million (almost 25%) and additionally positive back year development saw liabilities reinsured into Boudicca reduce or disappear completely; the latter saw incurred claims also fall by $ 45 million (almost 20%) during the year. The figures for Gard include the result of the Marine & Energy portfolio which is consolidated with the P&I result. Segmental analysis shows that the P&I class made an underwriting gain of $ 10.4 million and Marine & Energy surplus of $ 52.9 million: these figures are before the allocation of the pension cost adjustment, which data has not been made available. At the Swedish Club underwriting surpluses also arose on all classes. The P&I and FD&D classes contributed $ 5.5 million and M&E $ 13.1 million. P&I had sustained a loss in the previous year. We examine the underwriting results of each Club in greater detail on the Club pages later in this document. COMPONENTS OF UNDERWRITING RESULT P&I Policy year U/W deficit (267,218) Change in P&I policy year U/W result, ,303 Change in P&I policy year U/W result, ,202 Boudicca 55,400 Swedish M&E 13,100 North of England SMMI 759 Syndicate 1897 Skuld share (7,866) Other Classes, eg FDD, War etc U/W result 21,500 In the past, the table above had sought to reconcile the policy year P&I results to the financial year results of the Clubs. With diversification impacting the result ever more deeply, there are now too many variable to make this approach viable. The data in the table now summarises the components of the result, but does not seek to fully reconcile the results. The above analysis shows the results in other classes which do not flow through the P&I policy year statements, to the extent that they are disclosed be that on a policy year or financial year basis. In some cases disclosures are inconsistent. It also incorporates an estimate of results for the FD&D class which was predominantly influenced by $ 13.1 million surplus at the Standard Club (where $ nil incurred claims were seen on the class extraordinarily a deterioration when compared to last year s negative claims!) and other minor non P&I classes. The P&I policy year underwriting result improved by $ 18.2 million: Claims incurred improved by $ 37.0 million, whilst gross premium was reduced by $ 20.1 largely due to exchange differences at the Japan Club. A further $ 11.2 million of allocated investment income allowed the year to achieve maturity with a $ million overall deficit, an improvement of $ 29.5 million. P&I policy year has improved at underwriting level by $ million: Claims incurred fell by $ 58.4 million and $ 89.2 million of additional net retained premiums arose, as the Japan Club deferred call and 12

15 MARINE P&I PRE-RENEWAL REVIEW 2015 the American Club unearned premium were taken into account. Reinsurance costs fell by some $ 7.0 million, administrative costs fell by $ 10.0 million and acquisition costs fell slightly. The policy year is presently running at an $ 65.5 million deficit after an investment income allocation of $ million. and projected policy year premium which rose by 2.9%. In this context the increase in Free Reserve seems out of line, but one must take into account that the Free Reserve has to stretch further as a result of diversification. As will be seen later, the general increase once again should have led to a greater growth in premiums. On an overall basis, aggregate Free Reserves continue their inexorable rise, with a $ million overall surplus pushing them up to $ 4,621.2 million after incorporating $ 48.5 million of Sunderland Marine Free Reserves, acquired by North of England in the year. These figures assume that we accept that the UK Club s subordinated loan is quasi Free Reserve, and that Boudicca s net assets can be attributed to Britannia. Free Reserves thus rose by some 7.7% in contrast to entered owners GT which rose 3.2% (total tonnage 3.7%) Investment income continues to make a significant contribution to the overall result, and hence reserve development. Despite continuing low interest rates and volatility in certain parts of the investment markets, resulting in average yields of between 2.5 and 3.0%, the group has still earned over a billion dollars of investment income in the past 3 years. In the past this has been used to offset the underwriting losses but in years where an underwriting profit arises (admittedly few and far between) this simply adds grist to the mill. OVERALL RESULT IN 000S OF US DOLLARS Cumulative American 1,256 3,115-5,990-3,393 15,281 10,269 Britannia inc Boudicca* 73,669 33,881-22,960 6,869 78, ,674 Gard * 49,481 44,307 49,184 35, , ,642 Japan 16,358-1,534-9,403 9,122 23,458 38,001 London -3,230 6,615 9, ,644 15,988 North of England -22, ,777 1,579 72,172 49,318 Shipowners 1,418 23,222 40,873 46,546 52, ,933 Skuld 13,137 26,123 16,996 24,933 64, ,120 Standard 11,800 5,900 10,000 2,900 73, ,495 Steamship 74,988 14,992-9,631-7,469 51, ,625 Swedish 19,377 16,444 6,417-8,405 28,938 62,771 United Kingdom* 19,065 35,948 8,054 7,922 68, ,499 West of England 27,496 18,775 18,065-3,308 13,555 74,583 Aggregate 282, , , , ,965 1,430,918 Clubs with * under called in one or more of the years in question. Results incorporate the effect of pension fund adjustments necessary in a number of Clubs, applied retroactively where appropriate. 13

16 MARINE P&I PRE-RENEWAL REVIEW 2015 In current terms, premium income booked so far for stands at $3.5 billion but not all calls have been accounted for: Call Income in $ millions Policy year statement after 12 months Undercalls already levied therein Deferred calls to be booked in future ,490.5 ( 47.1) ,392.8 (34.8) 56.5 Premiums for the current year look likely to end up around 2.80% higher than the premium for the prior year, once under and over calls have been removed from the computation. The prior year projection of call income was a little under, as both Skuld and North of England policy Unearned premium adjustment Under-calls to be booked in future Excess calls to be booked in future Projected call income for year: Actual developed out , , ,481.9 year call income in increased by over $ 10 million in the period 12 to 24 months. During the same period the Japan Club policy year call income reduced by $ 15 million due to exchange rate differences. Therefore it is conceivable that the eventual increase in premium for may exceed 3%. This increase does not reflect the impact of increased tonnage entered. In the case of owners entries this was some 3.22% in , or 3.67% if one includes growth in chartered entries. So we estimate that ultimately planned premium per ton will be approximately 0.84% down on the previous policy year, as opposed to the weighted average 7.86% general increase sought at renewal of that year. These figures compare to a 2.34% increase in premiums per GT in contrasted to an 8.17% weighted general increase. The light blue line shows the change in actual policy year premium income per GT, as adjusted to negate the impact of over and under calling, which would have not been factored in to the original rating exercise. The dark blue line shows the weighted average general increase declared for the year. THEORETICAL PREMIUM RATE ACHIEVED V GENERAL INCREASE (IGNORING EXCESS CALLS) Change in Calls per GT Weighted Average GI 14

17 MARINE P&I PRE-RENEWAL REVIEW 2015 The difference between the general increase target and the theoretical increase attained has stabilised between 6 and 8% for 4 years in a row, during which time the Clubs have made general increase demands of between 3 and 8%. The two years before this saw an average difference of 15% at a time of turmoil in the global shipping industry. This is the so called churn at work a combination of the effect of scrapping older vessels and replacing them with newer less highly rated vessels. The stability of the churn rate in the 7% range over the last few years is something of a positive, but it reinforces the concept that the Clubs theoretically need a 5% general increase or more in order to offset the impact of the churn. This is before considerations such as claims inflation. However this scenario is appreciably better than the 15% average during the peak periods of the depressed shipping industry and its inferences for the required general increases at the time. What we clearly see here is the immediate impact of the severe shipping recession in the earlier years, followed by something of a settling down. The question remains, when the shipping industry returns to rugged good health, what will these churn rates show? Would we ever see negative churn as global trade picks up to such an extent that the older vessels (at least those that have not been scrapped) are called back into service at higher than average premium rates? We may never know! For so long as rates for new buildings remain under-priced, the churn will be inevitable, notwithstanding substantive general increases being applied to long standing renewing vessels. Whilst an important factor in understanding the dynamics of the market, the churn can and does impact different Clubs in different ways, based on the type of vessels they insure, the trades and routes that they ply, the proportion of their book that is charterers business and so on. Certain Clubs continue to mention the negative impact on their own situations, but we do not feel comfortable applying the methodology above on an individual Club basis, since the sample sizes are too small: at least applying it to the market as a whole should eliminate some of the stochastic variables in portfolios of business. It is generally believed that the churn is countered by reduced claims incurred, or at least that is the oft cited logic behind the low premiums charged to new buildings. The other market truism has it that poor trading conditions for shipping leads to lower frequency of claims. The recent steady decline in claims per GT (as seen later) to some extent allows the Clubs to let premium drift down or to trade some of the premium increase for deductible increases. There is however a limit to the amount that deductibles can be traded away before the essential nature of the Club as a primary insurer becomes impacted: also there is an economic limit to the amount of premium dilution that can be accepted this way, as overhead absorption rates begin to bite. Once more, the market has continued to see severity led, rather than frequency led, claims inflation in this, and the preceding four years, but was still a benign year with most Clubs seeing significant reductions in the number of large claims, and hence improved claims costs. Not all exhibit this trend, but it is a majority experience. Larger claims continue to define the market, as deductibles rises to eliminate some of the low level claims, and technological advances in new vessels make their claims more expensive to handle. The churn and severity lead claims inflation remain the two dominant impacts of shipping recession on the marine liability industry, but one does not cause the other as such they are both symptomatic of the same industry problem. If there is a link between reducing claims and reduced freight indices, it has been a long time showing its hand began to see some signs of a more benign claims environment, but this took a number of years to evolve as claims costs per GT rose in the three years starting in , has continued this trend , on a policy year basis, saw claims per GT fall for the second year in a row, continuing the decline seen in At this early stage are at the lowest levels per GT since the turn of the century. On a financial year basis, claims also fell in parallel, although as noted elsewhere in this report diversification is making the financial year trends more difficult to interpret than the more pure P&I only policy year trending. The linear trend still shows that claims per ton are declining since the beginning of the decade by some 10%. 15

18 MARINE P&I PRE-RENEWAL REVIEW 2015 CLAIMS INCURRED IN US $ PER GT ALL CLUBS Financial Year Policy Year Linear (Financial Year) Linear (Policy Year) Whilst the trend over the last few years is of decreased claim frequency and increased claims severity, if one looks at a stratification of claims some interesting insights emerge. For reasons of consistency and comparability we will look more closely at the experience of 3 Clubs. This is not to invalidate observations made by other Clubs, but the three example Clubs give an interesting contrast: Attritional claims are slightly differently defined by different Clubs but they tend to be those between $ 0 and $ 250,000 or $ 500,000. As a rule the frequency of these claims have been falling, as deductibles increase, older ships are taken out of service and trading activity remains depressed. Severity is generally noted as increasing, although both Britannia and SOP note reduced claims costs in this area but three examples exemplify the mixed experiences being seen. The UK Club comment that the average attritional claim now costs 20% more than 5 years ago, but that they have about 20% less of them by number across the same period, leaving total cost broadly static; Steamship comment that the number of attritional claims has remained static for the past 2 years but the total cost of such claims has fallen by 14.7% in and 22% in the previous year, although the average size of these claims rose by 6.5% this year; The London Club do not comment but last year noted falling frequency and a fall in the aggregate cost of attritional claims. Higher value claims / large losses however have demonstrated a mixed trend. The consensus is that severity is increasing and, whilst acknowledging the more random nature of these claims, frequency shows an unpredictable trend with Britannia having only 15 large claims compared to 33 last year whilst North of England report 50 this year compared to 30 in It may be that the number of global large claims is fairly stable, but the distribution of these claims between Clubs is random. Our three guinea pig Clubs above tell much more consistent stories: Whilst only 1% by number, large claims cost the UK Club 50% of its incurred claims expense. Frequency and total cost was high in , but fell back significantly in with 3 reported large claims per month, emphasising their random nature; In contrast to , when large claims increased by 27.3% in value, Steamship state that large claims have decreased by 23.2% in value in the current year. The majority of this reduction is seen in claims between $ 1.8million and $ 9.0 million; The London Club report 14 large claims as opposed to last year s 6 with a reference to a reducing file count but an increased average large claims cost. They have also experienced 2 pool claims this year, their first since This shows the fickle and random nature of large claims. 16

19 MARINE P&I PRE-RENEWAL REVIEW 2015 Across the board it still appears that collision and FFO incidents are central to the larger more severe claims this year. Mixed reports point to the impact of cargo claims as being both up and down, and a general note is that crew claims continue to rise in severity. We will however leave the last word on this matter to North of England who have 50 large claims of over $ 1 million to sample from: A review of all 2014 claims in excess of US$500,000 indicates that the most common root causes, across all types of large claims, relate to poor operational practices, in particular procedures which are not being properly implemented or in some cases, simply not fit for purpose. Good ship and shore-side management systems and properly trained and experienced sea staff are essential if such claims are to be reduced. As regards pooling, only 10 claims were reported by 20 February to the pool for , although this has subsequently risen to 14. This affords some relief after the expensive three years which preceded it. Standard lay claim to 30% of these claims and the London Club 20%. All bar one of these claims stems from collision or FFO incidents. An examination of claims development during the first 36 months of the policy year shows how certain years have developed better than others. The policy year showed an improvement of almost 12% after 36 months, when compared to the initial claims estimates at 12 months, but this is a freakish result. The period between and saw all three years deteriorate across the 3 years of development, this being a period when the shipping industry was in good shape. TOTAL INCURRED P&I CLAIMS AT DEVELOPMENT POINTS months 17

20 MARINE P&I PRE-RENEWAL REVIEW 2015 The average of the previous 12 years shows an average improvement of just under 4% with 9 years improving and 3 years where aggregate claims actually deteriorated after 36 months maturity. It must be borne in mind that this development is only up to 36 months, and further development (be it favourable or negative) that takes place after the year is formally closed cannot be determined from public data. It seems likely that, as claims are becoming more severity led, as opposed to frequency led, and with deductibles increasing, the typical Club claim will be bigger and more complicated: but there will be less of them. The Clubs are becoming more commercial, and less an extension of the owners office: owners will have to handle more of their own incidents, which in the past would have been handled by the Clubs, because they fall below deductible. The imposition of fee deductibles and combined deductibles will also have an impact on the incidence of lower value claims. With the large claims now being more influential on the overall claims cost, a lot of the adverse development risk on these claims will not immediately fall on the Club itself. Rather it will fall upon the pool and reinsurers, only to be reflected back later via increased pool shares and through increased future reinsurance costs. In a softening reinsurance market this may be no bad thing although the group, via Hydra and pooling, is retaining more of its own higher level risk. One further aspect of the change in complexion of claims towards the more severe ones is its potential impact on abatement levels. When the majority of the claims were in the attritional range, then they would all be reflected in the owners record. With severity becoming the greater driver, then there is an implication that more of the claims incurred will be subject to abatement and not reflect in the owners loss record in the same way. This will therefore pressurise the general increase as the loss record adjustment will recover less of the owners claims via his own premium increase. 5 YEAR DEVELOPMENT OF RESERVES 2010 TO 2015 (FINANCIAL YEAR BASIS) Club In $ 000s Underwriting Investment Other Surplus/ Outside Reserve Result Income Income Shortfall Funding Change American ( 48,184) 59,826 ( 1,373) 10,269 10,269 Britannia* 8, ,898 ( 8,742) 192,574 ( 22,900) 169,674 Gard*** 109, ,038 ( 75,307) 475,845 ( 64,344) 411,511 Japan ( 2,114 46,140 ( 20,165) 23,864 14,140 38,001 London ( 101,244) 117,762 ( 530) 15,988 15,988 North of England ( 39,058) 94,393 ( 6,017) 49,318 48,529 97,847 Shipowners 77, ,678 ( 31,172) ,933 Skuld 47, ,585 ( 23,387) 146, ,180 Standard ( 70,450) 191,863 ( 16,738) 104,585 32, ,493 Steamship 18, ,081 ( 7,445) 124, ,625 Swedish 16,533 54,506 ( 8,268) 62,771 62,771 United Kingdom** ( 33,945) 178,079 ( 4,635) 139,499 ( 1,078) 138,421 West of England ( 53,197) 138,846 ( 11,066) 74,583 74,583 Total ( 69,819) 1,869,695 ( 214,845) 1,585,031 7,265 1,592,296 * Boudicca change has been included as underwriting result ** UK outside funding comprises amortisation of subordinated loan of $ 100 million *** Gard outside funding reflects return calls and acquisition of free reserves of Gard M&E in

21 MARINE P&I PRE-RENEWAL REVIEW 2015 One thing we are likely to see in this changing environment is a greater disparity of claims experience and therefore underwriting result, amongst the Clubs. With large claims dominant and seemingly random, there will usually be a few winners who avoid those claims, and a few losers who, Ballotelli like, seem to think Why always me. Turning to the overall financial strength of the Clubs, and how they got there, the following table demonstrates the sources of balance sheet growth in the last 5 years: Outside funding in the table above is defined as both excess call income and other Free Reserve growth caused by injections of capital in the case of the UK Club and the beneficial impact of accounting or structural/acquisition changes (North of England, Gard and Standard). This column also includes the effect of returns of premium as well as excess calls for premium. Free Reserves continue their inexorable rise towards $ 5 billion, which, based on recent experience is only a couple of years away, unless there is a conscious decision to scale back retained surpluses and reduce members calls either with zero premium increases or more reduced deferred calls / return calls. The past 5 years is now much easier to interpret as most of the excess calls of the mid to late noughties fall out of the above analysis. $ 1.6 billion has been added to Free Reserves in the last 5 years and the underwriting result, after allowing credit for return calls, is almost breakeven. Record levels of pool claims, increased claims severity and rising reinsurance spend characterised this period, yet the underwriting result was nonetheless respectable saw some of these trends reversing, and as the reinsurance market now starts to soften, prospects seem positive: however before we start to sound too upbeat, the note of caution still remains it s a very volatile market. Diversification looks set to continue in the immediate future and this spare capital should be useful in the Clubs development plans and diversification strategies in their individually chosen directions, but, as we have discussed at length before now, is this an appropriate use of members hard earned funds? Not all Club boards and managers agree that diversification is the way forward: although the Gard model seems to be working, and consistently allowing reduced deferred calls, there is little evidence of any tangible benefit to members in any of the other proponents of diversification. In 3 months time the spectre of Solvency II will become a reality. Although it is unlikely that the mandatory pillar 3 disclosures will allow us to assess the Free Reserve in the light of regulatory requirements at our next review, it is to be hoped that there may be some voluntary disclosure in the financial statements. The mandatory disclosures may ultimately help us contextualise the existing level of Free Reserve (which instinctively we feel is now getting to be excessive) but we are not convinced as to how useful that they will be, as they will be keyed off a different balance sheet, which will be based on different statutory valuation rules. Furthermore the disclosures may be made on a different entity level, depending on the capital structure and the domicile of various component parts of each Club. As an illustration of this, Gard is currently required by Norwegian law to submit public quarterly data on their performance, but this information only relates to parts of the entity and is hence of limited value when evaluating the Club in the round. 19

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23 02 CLUB PAGES

24 MARINE P&I PRE-RENEWAL REVIEW 2015 I&E ACCOUNT - ALL CLASSES American Britannia Gard Japan London North of England US$M US$M US$M US$M US$M US$M ETC Calls , Additional Calls 0.0 (10.1) (37.0) Total Expenditure (121.3) (254.3) (929.0) (232.4) (141.2) (530.9) Underwriting (Deficit) /Surplus (6.5) (29.9) (59.8) Investment Return Exchange 0.0 (3.2) (21.3) 11.9 (1.3) (9.1) Tax etc (0.4) (1.0) (6.3) (6.8) (3.2) (22.7) P&I CLASS ONLY 2014/2015POLICY YEAR US$M US$M US$M US$M US$M US$M ETC Calls Additional / Return Calls 16.8 (9.0) (37.0) Total Expenditure (100.0) (307.0) (667.9) (191.9) (134.3) (364.8) Underwriting (Deficit) /Surplus 1.9 (46.3) (44.5) 36.3 (34.3) (33.7) Reserve Transfer 1.0 Investment income allocation (26.3) (44.5) 45.4 (20.9) (22.8) 2013/2014 POLICY YEAR US$M US$M US$M US$M US$M US$M ETC Calls Additional Calls (33.2) Total Expenditure (114.3) (346.4) (571.7) (205.0) (118.7) (343.1) Underwriting (Deficit) /Surplus (15.3) (71.1) (22.2) (9.8) Reserve Transfer Investment income allocation (11.8) (52.4) /2013 POLICY YEAR US$M US$M US$M US$M US$M US$M ETC Calls Additional Calls (30.7) Total Expenditure (107.6) (323.3) (702.3) (166.8) (117.7) (361.7) Underwriting (Deficit) /Surplus (9.9) (39.1) (169.7) 13.1 (26.2) (36.6) Reserve Transfer 28.5 Investment income allocation (5.2) (19.6) (169.7) (19.3) OTHER YEARS BALANCES OTHER RESERVES ,168.0 (53.8) P&I CLASS RESERVE OTHER CLASS SURPLUS ETC TOTAL FREE RESERVE P&I CLASS FREE RESERVE US$M US$M US$M US$M 20-Feb Feb Feb Feb Feb Feb Feb % MOVEMENT IN FREE RESERVES % -10% -24% 6% 42% -2% % 39% 41% 8% 20% 14% % 20% 42% 17% 2% 33% % 0% 5% 6% -1% -3% % -6% 8% -6% 7% -2% % 7% 3% -5% 4% -2% % 15% 5% 15% -2% -6% Last 7 years 64% 95% 146% 39% 32% 34% Last 5 years -6% 17% 23% 9% 8% -12% Last 3 years 8% 23% 8% 9% 2% -7% Notes Inc UEP in Inc Boudicca Inc FD&D & M&E Accrued for operations as other supplementary call in PY 22

25 CLUB PAGES SOP Skuld Standard Steamship Swedish UK West of England Total US$M US$M US$M US$M US$M US$M US$M US$M , (47.1) ,350.0 (235.9) (410.5) (354.4) (302.0) (162.0) (422.9) (212.3) (4,309.1) (0.4) (14.8) (26.5) (10.3) (5.7) (12.1) (6.8) (11.9) (1.3) (97.6) 1.0 (1.4) (0.1) (1.3) (1.2) (5.2) US$M US$M US$M US$M US$M US$M US$M US$M , ,567.9 (248.7) (309.1) (372.3) (322.9) (106.8) (421.7) (210.1) (3,757.5) (0.8) (18.8) (29.0) 3.5 (0.8) (18.5) (4.6) (189.6) (0.3) (0.8) (2.7) (1.1) (11.2) 0.4 (77.4) US$M US$M US$M US$M US$M US$M US$M US$M ,515.2 (33.2) ,482.0 (226.9) (307.1) (390.0) (308.6) (115.5) (452.8) (220.6) (3,720.7) (63.4) (3.3) (15.5) (53.4) (24.3) (238.7) (0.0) 20.4 (8.2) (32.8) (4.3) (10.1) US$M US$M US$M US$M US$M US$M US$M US$M ,236.5 (30.7) ,205.8 (222.7) (274.8) (309.1) (308.4) (116.2) (400.7) (214.2) (3,625.5) (0.5) (2.9) (22.3) (28.7) (24.5) (43.5) (28.9) (419.7) (24.4) (0.5) (6.6) (24.0) 0.1 (182.2) (20.3) , , , (3.0) ,621.3 US$M US$M US$M US$M US$M US$M US$M , , , , , , , % -29% -22% 1% 14% 3% -8% -10% 41% 40% 38% 36% 15% 32% 4% 30% 39% 32% 33% 22% 24% 22% 11% 27% 25% 9% 2% -3% -1% 4% 8% 4% 17% 6% 3% -5% 0% 0% 0% 2% 8% 11% -4% 3% 11% 9% 9% 4% 0% 3% -0% 28% 12% 4% -11% 6% 213% 144% 85% 100% 74% 91% 22% 94% 60% 32% 1% 21% 22% 18% 5% 17% 9% 14% -5% 31% 24% 14% -3% 10% Inc non core and Lloyd s operations as other Inc. H&M and P&I Reserve as other 23

26 MARINE P&I PRE-RENEWAL REVIEW 2015 AMERICAN STEAMSHIP OWNERS MUTUAL P&I ASSOCIATION INC Without ever quite reaching the highs of the yield, investment income continues to make a significant impact on the Club s result with the performance maintaining the Club s position in the upper half of the International Group. As noted last year this has been achieved by virtue of having an above average equity allocation of around 40%, which makes the Club more vulnerable to stock market vicissitudes. Yields on their fixed income portfolio however improved. On the underwriting front the Club incurred a $ 6.5 million financial year underwriting loss, which represents a $ 4.4 million improvement on the previous year. The policy year underwriting loss for was $ 14.9 million (although this only represents the first 10 months result) which was again an improvement on the prior year. This loss was offset by $ 12.7 million of development gains on older open years. Inferentially therefore, closed year developments, including the recently closed year, developed adversely by $ 4.3m. Since 2013 the Club has entered into a three year reinsurance arrangement with Hannover Re to protect its exposure to losses in the lower pool and sub pool. In 2014 this relationship was expanded and a reinsurance programme taken out to protect the Club s retention on a whole account aggregate basis, rather than a conventional per occurrence excess of loss basis. The Eagle Ocean Marine facility continues to grow steadily, and increased its limit to $ 500million in the year. More detail about this facility can be found in our sister commercial market review publication. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 7% Rest of World 50% Europe 2% Other 12% Americas 40% Tanker/ Gas Carrier 44% Bulker 31% Asia Pacific 14% Container/ General Cargo 24

27 CLUB PAGES 31st Floor, 1 Battery Park Plaza, New York, NY 10004, USA Tel: Fax: S&P Rating (last change: BBB- from BB+ in 2013) BBB- FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 6.00% POLICY YEAR US $ INCOME PER TOTAL GT 8.00 POLICY YEAR US $ CLAIMS PER TOTAL GT % 4.00% 3.00% % % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 25% Latest Estimate 0% 0% 0% 0% 25% GENERAL INCREASE On Advance Call 4.5% 10.0% 10.0% 31.3% 2.0% On ETC 4.5% 10.0% 10.0% 5.0% 2.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

28 MARINE P&I PRE-RENEWAL REVIEW 2015 THE BRITANNIA STEAM SHIP INSURANCE ASSOCIATION LTD Having announced the largest effective general increase in the market in , and then abated it by offering a 7.5% loyalty discount to renewing members, Britannia then had to deal with the repercussions of removing this discount in Their actual general increase for the was a modest 2.5%, but the removal of the discount took the effective figure to a slightly above average 8.1%. Subsequent to the renewal (in fact, as part of the general increase announcement) the Club then reduced the deferred call for the year by 5%, making this perhaps one of the more complex increases yet. The outcome of the renewal was a modest loss of entered tonnage accompanied by an $ 8.9 million fall in policy year call income notwithstanding the effective 16.5% general increase. In policy year premium income fell a further $ 14.6 million (despite a slight net recovery in entered tonnage), although some $ 10 million of this would be attributable to the subsequently reduced deferred call. It is therefore perhaps fortuitous that, in a time of falling call income, financial year claims fell by $ 47.3 million in the current year. Furthermore Boudicca incurred negative claims, as back year favourable development eliminated claims on the aggregate reinsurance contract with Britannia. As a result the Club saw a combined financial year underwriting surplus of $ 70.7 million. A strange year to interpret is completed by a collapse of investment income from $ 48.6 million to $ 7.1 million, excluding exchange movements. In late 2014 the Club obtained an A stable interactive rating from Standard & Poor s. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 6% Americas 1% Rest of World 1% Other 41% Europe 28% Tanker/ Gas Carrier 35% Bulker 52% Asia Pacific 36% Container/ General Cargo 26

29 CLUB PAGES Regis House, 45 King William Street, London EC4R 9AN, UK Tel: Fax: S&P Rating (last change: A from Api in 2014) A FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 6.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % 4.00% 3.00% % 1.00% 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 45% 45% 45% 40% 40% Latest Estimate 45% 40% 45% 40% 40% GENERAL INCREASE On Advance Call 2.5% 2.5% 12.5% 5.0% 5.0% On ETC 2.5% 8.1% 16.5% 5.0% 5.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

30 MARINE P&I PRE-RENEWAL REVIEW 2015 ASSURANCEFORENINGEN GARD GJENSIDIG Gard once again continued with its policy of reducing the ultimate cost of cover by discounting the deferred call, reflecting the results of their M&E operations. This has resulted in more than $ 185 million being returned to members via the premium discount in the 6 years since Gard M&E became a wholly owned subsidiary. This may of course be a double edged sword if, at some time in the future, they have to make a full call to ETC. The policy year would, at 12 months, still have showed a small deficit had the full deferred call been made, but given typical claim development levels the year should ultimately move close to breakeven. The Club changed its accounting policy for pensions in the current year, which resulted in a total additional liability of $ 50.9 million being recognised spread across the current and two previous financial years. This means that certain figures used in this report have been amended to conform with current year s presentation. On a financial year basis a $ 63.3 million underwriting profit was made ($ 37.6 million underwriting profit after allowing for the pension adjustment), which splits $ 10.4 million P&I and $ 52.9 million M&E. Since being fully integrated into the group, M&E has made an underwriting surplus in excess of $ 230 million, allowing the premium discounts noted above. On a policy year basis the P&I result was an underwriting deficit of $ 44.5 million and the older open years developed favourably by $ 48.5 million in the case of and $ 5.8 million for The policy year underwriting result has improved over time but still features an underwriting deficit of almost $ 170 million, in part caused by a run of 5 pool losses in the early part of the year. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 9% Americas 1% Rest of World 12% Offshore 3% Other 26% Asia Pacific 2% Passenger/ Ferry 36% 64% Europe Tanker/ Gas Carrier 29% Bulker 18% Container/ General Cargo 28

31 CLUB PAGES Kittelbuktveien 31, NO-4836, Arendal, Norway Tel: Fax: S&P Rating (last change: increase to A+ from A in 2012) A+ FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 8.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % 6.00% % 4.00% 3.00% % 1.00% 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 25% 25% 25% 25% 25% Latest Estimate 25% 15% 15% 15% 20% GENERAL INCREASE On Advance Call 2.5% 5.0% 5.0% 5.0% 0.0% On ETC 2.5% 5.0% 5.0% 5.0% 0.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

32 MARINE P&I PRE-RENEWAL REVIEW 2015 JAPAN SHIP OWNERS MUTUAL P&I ASSOCIATION The figures presented for the Japan Club have to be considered in light of the significant effect that the Japanese Yen : US Dollar exchange rate has had on them in the most recent years. During the dollar again strengthened against the yen, moving from Yen to the dollar at 31 March 2014 to Yen to the dollar 12 months later. This represents a depreciation of almost 16.75% in the year. This has a tendency to distort the policy year data where, in dollar terms, premium income and claims incurred are reducing significantly year on year although in Japanese Yen terms this trend is not evident. At the end of 2014, the Club established a fixed premium Gaiko class aimed at short haul operators in Asia, the Middle East and Australia. On 1st October 2015, the day of our print deadline, the Club released corrected financial statements which significantly changed policy year claims incurred data. On this page, and in section 3 where specific analysis of the Club is noted, we have updated figures. However production deadlines have made it impractical to amend all market wide statistics herein. This limitation is not considered likely to impact readers comprehension of the trends identified herein. As a result of the 16.75% depreciation in the Yen, opening Free Reserves of $ million would have been down valued by almost $ 22.5 million in the year. During the year Free Reserves actually rose to $ million, which points to a substantial operating profit which overcame the currency depreciation and added more to the pot: around $ 38.9 million. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 100% Asia Pacific 11.79% Other 18.33% Tanker/ Gas Carrier 10.39% Container/ General Cargo 59.49% Bulker 30

33 CLUB PAGES Nihonbashi-Ningyocho, Chuo-ku, Tokyo , Japan Tel: Fax: S&P Rating (unchanged since first rated in 2006) BBB+ FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 2.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % % % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 40% 40% 40% 40% 40% Latest Estimate 40% 40% 40% 40% 40% GENERAL INCREASE On Advance Call 3.0% 7.5% 5.0% 3.0% 10.0% On ETC 3.0% 7.5% 5.0% 3.0% 10.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

34 MARINE P&I PRE-RENEWAL REVIEW 2015 LONDON STEAM-SHIP OWNERS MUTUAL INSURANCE ASSOCIATION LTD The London Club continues to incur significant financial year underwriting losses, racking up a $ 29.9 million deficit in , of which $ 28.4 million related to P&I. In the past 5 years underwriting losses in excess of $ 100 million have been racked up: more than the latest policy year call income. On a policy year basis the current year generated a $ 34.3 million underwriting loss, but this was offset by improvements on the two open policy years of $ 7.5 million. By inference older years deteriorated by $ 1.4 million. After a number of years of declining policy year call income, saw a 3.6% increase in call income, however at the same time incurred claims in the policy year rose by 16%. Overall Free Reserves fell by $ 3.2 million. Having not had a pool claim since 2010, the Club sustained 2 such claims in , amongst 14 claims in excess of $ 1 million. This compares unfavourably with just 6 large claims in the preceding year. There were 4 FFO, including both pool claims, and 4 collision claims amongst these large incidents. Once again, the Club had the best investment yield in the market in and now has the best 7 year performance in the market by some way. This has been achieved even though their portfolio allocation is broadly in line with the market norm, with a steady exposure of between 20 and 25% equities within the investment portfolio. It should be noted in this context that the Club revalued its offices by $ 9.2 million in the year. In late 2014 the Club obtained a BBB+ stable interactive rating from Standard & Poor s, GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 4% Americas 26% Tanker/ Gas Carrier 34% Asia Pacific 56% Bulker 62% Europe 18% Container/ General Cargo 32

35 CLUB PAGES 50 Leman Street, London E18HQ, UK Tel: Fax: S&P Rating (unchanged in last 7 years) BBBpi FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 8.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % % % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call 6.0% 10.0% 12.5% 5.0% 5.0% On ETC 6.0% 10.0% 12.5% 5.0% 5.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

36 MARINE P&I PRE-RENEWAL REVIEW 2015 NORTH OF ENGLAND PROTECTING & INDEMNITY ASSOCIATION LTD The results for the North of England continue to be impacted by the change in the way that they have to account for their defined benefits pension scheme (which was closed to new members in March 2006) under International Financial Reporting Standards. The $ 39.7 million deficit on this scheme was required to be incorporated into the financial statements, and a further provision of $ 27.7 million has been charged in , including a proportion in respect of Sunderland Marine. For simplicity, in this review, we have treated this as an administrative cost in the relevant year and dealt with as part of the underwriting result is the first year when combined figures are presented including the newly acquired Sunderland Marine. As a consequence, an additional $ 48.5 million of Free Reserves were incorporated into the balance sheet, although this was reduced to $ 41.4 million by the operations, pension contributions and exchange losses in Sunderland Marine during the year. On a policy year basis the Club experienced a $ 33.7 million underwriting loss in On a financial year basis, ignoring the pension adjustment, the underwriting loss was $ 32.1 million, including SMI and other classes. On a policy year basis the Club experienced a $ 33.7 million underwriting loss in Open back years improved by $ 4.5 million. Investment income was at its highest level in 7 years, boosted by a $ 6.9 million gain on the revaluation of office premises. The return to holding a small proportion (7%) of their portfolio in equities has also helped to enhance the yield in the year. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 7% Americas 12% Rest of World 46% Europe 1% Passenger/ Ferry 10% Other 30% Tanker/ Gas Carrier 39% Bulker 35% Asia Pacific 20% Container/ General Cargo 34

37 CLUB PAGES The Quayside, Newcastle upon Tyne, NE1 3DU, UK Tel: Fax: S&P Rating (unchanged in last 7 years) A FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 3.50% POLICY YEAR US $ INCOME PER TOTAL GT 2.05 POLICY YEAR US $ CLAIMS PER TOTAL GT % 2.50% 2.00% 1.50% % % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call 4.75% 7.5% 15.0% 5.0% 3.0% On ETC 4.75% 7.5% 15.0% 5.0% 3.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

38 MARINE P&I PRE-RENEWAL REVIEW 2015 SHIPOWNERS MUTUAL P&I INSURANCE (LUXEMBOURG) As a specialist smaller vessel Club, the Shipowners performance is constrained both by its membership of the International Group and also it s more natural competition from the growing band of fixed premium underwriters (including other members of the Group itself). As a result its characteristics lie somewhere between that of a P&I Club and a commercial carrier it has abandoned Release Calls entirely and its ability to impose significant General Increases is restricted by its commercial competition. During the current year the Club has also announced that it will move its financial year end from 20 February to 31 December. Regardless of its slightly unusual nature, and despite being squeezed by both the mutual and the commercial market (its number of entered vessels fell by almost 6% in the year), the Club continues to produce good underwriting results, with an $ 11.5 million financial year surplus in However the Club also suffered a $ 26.5 million exchange loss on its investment portfolio, which no doubt was offset by compensating exchange gains on claims provisions, hence the likelihood is that the underwriting result is not as good as it first seems. The Club has achieved a policy year underwriting surplus in each of the last 5 years and boasts an above average investment income performance. In 2014 the Club changed its reinsurance programme significantly. In previous years it had retained just the first $ 0.5 million of any one claim, but from 2014 this will be increased to $ 1.5 million. This increased retention has been protected by a 3 years stop loss programmes (with a significant AAD) with Swiss Re. Excess layers are with Munich Re and Lloyd s. Simon Swallow assumed the role of Chief Executive of the Club in March 2015, following the retirement of Charles Hume. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 23.99% Rest of World 16.42% Europe 4.7% Tanker/ Gas Carrier 5% Container/ General Cargo 13.1% Passenger/ Ferry 12.03% Americas 62.1% Other 15.1% Offshore 47.56% Asia Pacific 36

39 CLUB PAGES St Clare House, Minories, London, EC3N 1BP, UK Tel: Fax: S&P Rating (last change: increase to A- from BBBpi in 2012) A- FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 7.00% POLICY YEAR US $ INCOME PER TOTAL GT POLICY YEAR US $ CLAIMS PER TOTAL GT % 5.00% 4.00% % 2.00% % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call 0.0% 5.0% 5.0% 0.0% 0.0% On ETC 0.0% 5.0% 5.0% 0.0% 0.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

40 MARINE P&I PRE-RENEWAL REVIEW 2015 ASSURANCEFORENINGEN SKULD GJENSIDIG Skuld continued its trend of making underwriting surpluses on a financial year basis in , but only marginally. On a policy year basis the P&I class made an underwriting loss of $ 18.8 million in ; improved by $ 15.8 million yet deteriorated by $ 3.0 million. Having been a major contributor to Skuld s success in recent years, the fixed premium charterer s business suffered a bad year in , losing $ 6.0 million on underwriting. Investment income allocated to the year was also negative. The preceding two policy years had made $ 21.0 million underwriting surplus and $ 36 million overall including investment income. The Club has recently released half year result for the six months ended 20 August 2014 which reveal profitable underwriting result of $ 9.9 million but an overall surplus of $ 9.0 million since investment income was negative occasioned by volatility in the equity markets. Interestingly the P&I combined ratio was 104% despite a continued benign claims environment, but the underwriting result was propped up by an 87% combined ratio on the diversified commercial book of business. The Free Reserves nonetheless fell to $ million following the Club s adoption of revised accounting policies for pension liabilities, which necessitated a $ 12 million increase in the provision. The performance of the Lloyd s syndicate has at least been consistent, with open policy year underwriting losses on each year, amounting to $ 17.5 million in total. The signs are there that the sustained run of underwriting surpluses may be under threat. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 6% Americas 4% Rest of World 10% Other 2% Passenger/ Ferry 37% Tanker/ Gas Carrier 36% Asia Pacific 34% Bulker 54% Europe 17% Container/ General Cargo 38

41 CLUB PAGES Russelokkveien 26, NO-0114, Oslo, Norway Tel: Fax: S&P Rating (last change: increase to A from A- in 2012) A FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 4.50% 4.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % % 2.50% 2.00% 1.50% % 0.50% 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call n/a n/a n/a n/a n/a On ETC n/a n/a 8.5% n/a n/a POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

42 MARINE P&I PRE-RENEWAL REVIEW 2015 THE STANDARD CLUB The Club s underwriting losses on a policy year basis have been growing to a point where the policy year was becoming frightening at 24 months the policy year underwriting loss on this year stands at $ 63.4 million and is deteriorating. In the face of this, the Club took a bold step and sought a 12.5% general increase at the start of the policy year. The results are there to see with a reduction in the policy year underwriting loss to just $ 29.0 million, but there is still some way to go, bearing in mind that was a benign year for claims in the market. On a financial year basis the loss was brought down to virtual breakeven almost exclusively due to a further $ 13.1 million underwriting surplus on the FD&D class where in effect no claims were incurred. With Standard London making a small underwriting loss, the financial year underwriting loss for P&I was $ 13.3 million. A similar situation existed in the preceding year with regard to the FD&D class as redundant IBNR was taken down resulting in negative claims incurred and an $ 18.3 million underwriting surplus being generated. The policy year underwriting result improved by $ 10.7 million but the underwriting result deteriorated by $ 9.2 million. This points to closed years yielding an improvement of $ 14.2 million: perhaps a similar exercise is happening in the P&I class as was the case with FD&D? Investment earnings remained modest compared to the three years ending in February 2013, with portfolio allocations defensive. Standard Asia, in conjunction with the Singapore Shipping Association, has established the Singapore War Risks Mutual which started underwriting on 20 February GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 13% Rest of World 5% Offshore 2% Other 15% Americas 14% Passenger/ Ferry 45% Europe 31% Tanker/ Gas Carrier 23% Bulker 27% Asia Pacific 25% Container/ General Cargo 40

43 CLUB PAGES Standard House, Essex Street, London, WC2 3AA, UK Tel: Fax: S&P Rating (last change: unchanged in last 7 years) A FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 8.00% POLICY YEAR US $ INCOME PER TOTAL GT 3.00 POLICY YEAR US $ CLAIMS PER TOTAL GT % 4.00% % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call 5.0% 12.5% 7.5% 5.0% 3.5% On ETC 5.0% 12.5% 7.5% 5.0% 3.5% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

44 MARINE P&I PRE-RENEWAL REVIEW 2015 STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD Sometimes a Club will have one of those years where everything seems to go right, and was one such for Steamship. Last year we reported that claims experience had been good, but in it just got better, albeit that the current year is not fully developed. The value of attritional (under $ 250,000) claims fell almost 15% and the value of large claims fell by over 20%. Overall the cost of claims was significantly lower than in any year in recent memory. On a financial year basis the Club made a $ 63.3 million underwriting profit, although the policy year is only currently showing a $ 3.5 million surplus. This seems counter intuitive given the upbeat discussion in the claims analysis, but it should be borne in mind that the previous year was showing a $ 37.2 million underwriting loss at 12 months. That year was being talked up at the time and subsequent events have shown the positive comments to be justified as policy year developed favourably by $ 33.9 million in the next 12 months. In contrast, deteriorated by $ 1.1 million, but if we look at the development of that year between the 12 and 24 month development points there was a $ 24 million improvement then. All of this points to an ultra conservative reserving approach in the first year, and arguably redundant IBNR setting. One has to hope that the big improvement in the underwriting result is in fact down to genuinely reduced claims rather than a less conservative approach to reserving. Next year s figures will be the acid test: how much will improve between 12 and 24 months? Investment yields continue to be amongst the lowest in the peer group, mainly due to a very conservative positioning of the investment portfolio. The gentle dipping of their toes into the equity markets which began in continued in but with just under 6% of the portfolio in equities they now have the lowest allocation of any Club that is permitted to invest in equities. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 6.5% Rest of World 11.9% Passenger/ Ferry 3.1% Other 28.4% Europe 24.6% Americas 23.8% Bulker 41.2% Tanker/ Gas Carrier 40.2% Asia Pacific 20% Container/ General Cargo 42

45 CLUB PAGES Aquatical House, 39 Bell Lane, London, E1 7LU, UK Tel: Fax: S&P Rating (last change: increase to A- from BBB+ in 2011) A- FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 4.00% POLICY YEAR US $ INCOME PER TOTAL GT 3.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % 2.00% % % TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call 0.0% 10.0% 7.5% 5.0% 0.0% On ETC 0.0% 10.0% 7.5% 5.0% 0.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

46 MARINE P&I PRE-RENEWAL REVIEW 2015 SVERIGES ANGFARTYGS ASSURANCE FORENING On a financial year basis the Club made an underwriting surplus of $ 18.7 million, which breaks down as follows: P&I surplus $ 3.7 million compared to a loss of $ 8.8 million in the previous year; FD&D surplus of $ 1.8 million (2014: $ 1.0 million) and H&M surplus of $ 13.2 million ( 2014: $ 15.9 million). All classes are therefore in surplus The P&I underwriting surplus of $ 3.7 million contrasts with a $ 0.8 million deficit on the policy year million, the year deteriorated by $ 9.4 million and the policy year deteriorated by $ 0.5 million. It should be noted however that the policy year statements are prepared at a different date to the financial year figures as the accounts are made up to 31 December but the policy year figures are to 20 February. The financial statements do disclose an interesting breakdown of the concentration of risk at one stop insurers. A few example of note: 40.4% of vessels were entered for one class only; 51.8% of vessels entered for P&I are also entered for H&M; 18.8% of vessels entered for H&M are also entered for P&I. Perversely therefore, when compared to last year s figures, a greater proportion of vessels entered for P&I took up H&M insurance during the year, but a lower proportion of vessels entered for H&M also had P&I insurance with the Club! The Club have recently announced 6 monthly figures for the period ended 30 June The Club made a loss of $ 6.3 million thanks to an underwriting loss of $ 5.9 million and negative investment income of $ 0.4 million. Free Reserves stand at $ million, including deferred taxation. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 1% Passenger/ Ferry 3% Other 17% Tanker/ Gas Carrier 45% Asia Pacific 35% Bulker 55% Europe 44% Container/ General Cargo 44

47 CLUB PAGES Gullbergs Strandgata 6, SE 40122, Goteborg, Sweden Tel: Fax: S&P Rating (last change: increase to BBB+ from BBB in 2012) BBB+ FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 6.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.00 POLICY YEAR US $ CLAIMS PER TOTAL GT % 4.00% % % % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% 0% GENERAL INCREASE On Advance Call 2.5% 7.5% 7.5% 5.0% 2.5% On ETC 2.5% 7.5% 7.5% 5.0% 2.5% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

48 MARINE P&I PRE-RENEWAL REVIEW 2015 THE UNITED KINGDOM MUTUAL STEAM SHIP ASSURANCE ASSOCIATION (BERMUDA) LTD The Club made a $ 14.8 million underwriting loss in the year to 20 February 2015, which breaks down by policy year as follows: $ 18.5 million underwriting loss; $ 1.0 million deterioration in underwriting position and $ 2.0 million improvement. A more modest favourable development ($ 6.7 million) has therefore been seen on the closure of and on closed years compared to the $ 44.4 million gain arising on closed years last year. The 2013 policy year began with a series of large losses and became one of the most expensive policy years in history, generating a policy year underwriting loss of $ 53.4 million. The number of claims reported in 2014 has fallen and the cost of attritional, large and pool claims have all declined meaning that the total claims cost for is some 20% lower than the preceding year. In terms of incurred claims, the year is projected to be one of their best in the past 10 years. The Club s pool share has fallen over the last few years, leaving them in the unfortunate position of having had a high pool share during the bad years of 2006 and 2007, yet a lower share during the more benign On the investment front the Club s performance was second best in the market, despite the annual $ 7.5 million charge for interest on their hybrid capital. Their portfolio allocation was not appreciably out of line with the market norm. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 10% Americas 4% Passenger/ Ferry 3% Other 38% Asia Pacific 38% Bulker 52% Europe 39% Tanker/ Gas Carrier 16% Container/ General Cargo 46

49 CLUB PAGES 90 Fenchurch Street, London, EC3M 4ST, UK Tel: Fax: S&P Rating (last change: increase to A from A- in 2014) A FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 5.00% POLICY YEAR US $ INCOME PER TOTAL GT 2.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % % 2.00% % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 0% 0% 0% 0% 0% Latest Estimate 0% 0% 0% 0% -2.5% GENERAL INCREASE On Advance Call 6.5% 10.0% 7.5% 3.0% 5.0% On ETC 6.5% 10.0% 7.5% 3.0% 5.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

50 MARINE P&I PRE-RENEWAL REVIEW 2015 WEST OF ENGLAND SHIP OWNERS MUTUAL INSURANCE ASSOCIATION Last year we commented on the fact that West of England s downsizing strategy of a few years ago appeared to be working; this year we can definitely confirm this as the improving underwriting performance has culminated in a $ 4.6 million financial year underwriting surplus. The last time the market overall made a financial year underwriting profit, in , West of England lost $ 36.7 million: quite a turnaround. The financial year underwriting surplus of $ 4.6 million comprises a $ 5.7 million underwriting surplus on the P&I class and a $ 1.1 million loss on FD&D. The P&I policy year result is a loss of $ 4.7 million. Other open policy years collectively deteriorated by a total of $ 1.0 million, suggesting a significant $ 11.4 million gain on the closure of and in closed years. In terms of numbers of incidents, the last 3 years have produced the lowest claims in the past 10 years. In terms of dollars, the Clubs own claims experience looks to be the most benign for many years, following three years where claims had also been consistently low. The Club s share of pool claims has fallen substantially since the downsizing, from almost 10% immediately prior to the changes to under 6% going forward into The investment yield was strong although it includes a $ 10.9 million gain on revaluation of the company s offices. The Club has downsized its portfolio allocation to equities to around 10% from 15% in the preceding year. The Club has also restructured and simplified its fixed income portfolio, these changes will no doubt reduce the return for next year, but have significantly derisked the portfolio in preparation of Solvency II. GEOGRAPHIC SPREAD OF BUSINESS TYPE OF VESSEL ENTERED 4.3% Americas 6% Rest of World 2.5% Passenger/ Ferry 1.7% Other 30.7% Tanker/ Gas Carrier 37.2% Bulker 36.9% Asia Pacific 52.8% Europe 27.9% Container/ General Cargo 48

51 CLUB PAGES 90 Fenchurch Street, London, EC3M 4ST, UK Tel: Fax: S&P Rating (last change: change to BBB from BBpi in 2013) BBB FINANCIAL YEAR INVESTMENT INCOME, % AGE OF TOTAL FUNDS 7.00% POLICY YEAR US $ INCOME PER TOTAL GT 3.50 POLICY YEAR US $ CLAIMS PER TOTAL GT % 5.00% 4.00% 3.00% 2.00% % 0.00% TONNAGE Owned Tonnage Chartered Tonnage CALL HISTORY Forecast Call 35% 35% 35% 30% 30% Latest Estimate 35% 35% 35% 30% 30% GENERAL INCREASE On Advance Call 2.5% 7.5% 3.5% 5.0% 5.0% On ETC 2.5% 7.5% 7.5% 5.0% 5.0% POLICY YEAR DATA Call Income Incurred Claims Total Outgoing Underwriting Result FREE RESERVES P&I Class Other Class Unallocated Total Free Reserve

52

53 03 INDUSTRY STATISTICS

54

55 INDUSTRY STATISTICS 7 YEAR COMBINED RATIO 7 YEAR COMBINED RATIO, AFTER ELIMINATING EXCESS CALL INCOME, POLICY YEAR BASIS AVERAGE BEST WORST Japan 92.71% % % Shipowners 93.60% % % Skuld 96.99% % % Steamship 97.89% % % UK % % % North % % % Average % % % Gard % % % American % % % Swedish % % % Standard % % % West % % % Britannia % % % London % % % GROUP AGGREGATE COMBINED RATIO 120% 100% 80% 60% 40% 20% 0%

56 MARINE P&I PRE-RENEWAL REVIEW 2015 PREMIUM & CLAIMS PER GT EXPRESSED IN US$ PER TOTAL ENTERED TON (POLICY YEAR FIGURES) POLICY YEAR American Premium Claims Britannia Premium Claims Gard Premium Claims Japan Premium Claims London Premium Claims North of England Premium Claims Shipowners* Premium Claims Skuld Premium Claims Standard Premium Claims Steamship Premium Claims Swedish Premium Claims United Kingdom Premium Claims West of England Premium Claims * Undercalling impact of Shipowners Club is not significant on figures Orange shaded areas are policy years when excess calls have been accounted for. Green shaded areas are policy years when under calling has happened, and we have adjusted the figures to reflect this. 54

57 INDUSTRY STATISTICS $ PER GT OF TONNAGE Premium Premium Exc xs Call Claims 55

58 MARINE P&I PRE-RENEWAL REVIEW 2015 FREE RESERVES FREE RESERVES AS PERCENTAGE OF POLICY YEAR PREMIUM (EXC. SUPPLEMENTARY CALLS) 20th February: American 57.53% 57.94% 55.53% 58.07% 59.32% 48.23% 33.30% Britannia * % % % % % % % Gard ** % % % 99.55%% % % 87.01% Japan 75.51% 73.45% 87.58% 77.28% 63.18% 49.86% 48.40% London % % % % % % % North of England ** 71.77% 93.69% 96.05% 98.70% % 96.10% 94.04% Shipowners % % % % 95.25% 77.66% 57.50% Skuld % % % % % 83.43% 70.61% Standard % % % % % 96.51% 86.12% Steamship % 98.67% % % % 92.94% 71.13% Swedish ** % 95.63% 87.10% 81.68% 93.90% 69.42% 66.83% United Kingdom *** % % % % % % 82.30% West of England % % % 90.98% 76.76% 71.92% 62.82% Market Average % % % % % 76.81% * Includes pledged assets in Boudicca Insurance Co Ltd. ** Based on group free reserves and financial year premium including all classes (North from , Gard from and Swedish all years) *** Includes subordinated loan note as part of free reserve 120% 110% 100% 90% 80% 70% 60% Free Reserve / PY Premium 56

59 INDUSTRY STATISTICS FREE RESERVES FREE RESERVES PER OWNED MEMBERS GT ENTERED 20th February: American Britannia * Gard ** Japan London North of England ** Shipowners Skuld Standard Steamship Swedish ** United Kingdom *** West of England Market Average Market average is selected Clubs only, ie excludes Gard & Swedish * Includes pledged assets in Boudicca Insurance Co Ltd. ** Composite nature of Free Reserves makes this figure incalculable on any meaningful basis. *** Includes $ 98.3m subordinated loan note as part of free reserve. FREE RESERVES PER OWNERS GT (SELECTED CLUBS) $ per GT

60 MARINE P&I PRE-RENEWAL REVIEW 2015 TONNAGE ENTERED TONNAGE EXPRESSED IN MILLIONS OF GT (p) American Owned Charter Britannia Owned Charter Gard Owned Charter Japan Owned Charter London Owned Charter North of England Owned Charter Shipowners Owned Charter Skuld Owned Charter Standard Owned Charter Steamship Owned Charter Swedish Owned Charter United Kingdom Owned Charter West of England Owned Charter Totals Owned Charter Total

61 INDUSTRY STATISTICS TONNAGE INTERNATIONAL GROUP TONNAGE DEVELOPMENT GT Millions Owned Chartered Total 59

62 MARINE P&I PRE-RENEWAL REVIEW 2015 COMPARATIVE GROWTH FACTORS GROWTH IN KEY STATISTICS BETWEEN AND Club Tonnage PY Call Income Free Reserve Total Free Reserve Natural Note (1) (2) (3) (4) American 9.27% 1.70% 21.33% Britannia 15.88% -3.81% 45.14% Gard 55.88% 33.68% 73.83% 59.32% Japan 1.64% % 28.27% 18.01% London 15.86% -8.59% 11.32% North of England 44.44% 32.44% 40.70% 20.52% Shipowners 46.50% 42.23% % Skuld 55.09% 20.21% 72.56% Standard % 36.45% 56.63% 43.08% Steamship 37.68% 20.58% 49.52% Swedish 58.30% 34.69% 51.65% United Kingdom 18.69% 41.13% 33.84% West of England 14.29% % 44.02% (1) This ratio is the growth in owned tonnage; (2) This ratio is the growth in policy year P&I premium income, stripped of the effect of any excess calls and adjusted for any under-calling in the two years in question; (3) This ratio is the growth in Free Reserve caused by any activity in the period, including calling patterns and capital raising through debt issuance; (4) This ratio shows the change in Free Reserve attributable to normal trading activity, ie it excludes the impact of over calling and also the impact of new capital and structural changes. Where a figure is not shown, the column 4 figure is the same as column 3. 60

63 INDUSTRY STATISTICS MARKET SHARE MARKET SHARE BY OWNED TONNAGE 5.45% West of England 2.09% Shipowners 3.73% Swedish 3.92% London 1.5% American 18.79% Gard 6.24% Steamship 7.47% Skuld 11.81% North of England 8.46% Japan 11.54% UK 9.18% Standard 9.82% Britannia MARKET SHARE BY POLICY YEAR PREMIUM 2.80% London 2.85% American 2.97% Swedish 5.76% West of England 17.47% Gard 6.4% Japan 6.95% Shipowners 11.30% UK 7.31% Britannia 9.62% Standard 8.14% Skuld 9.15% Steamship 9.28% North of England 61

64 MARINE P&I PRE-RENEWAL REVIEW 2015 GENERAL INCREASES EFFECTIVE ETC BASIS Class Y Cum American P&I 4.5% 10.0% 10.0% 5.0% 2.0% 4.2% 29.0% % FD&D 4.5% 10.0% 10.0% 5.0% 10.0% 4.2% 29.0% % Britannia P&I 2.5% 8.1% 10.5% 5.0% 5.0% 5.0% 12.5% % FD&D 0.0% 0.0% 10.0% 0.0% 0.0% 50.0% 15.0% % Gard (1) P&I 2.5% 5.0% 5.0% 5.0% 0.0% 0.0% 15.0% % FD&D 10.0% 5.0% 5.0% 5.0% 10.0% 20.0% 15.0% % Japan P&I 3.0% 7.5% 5.0% 3.0% 10.0% 12.5% 21.2% % FD&D 0.0% 7.5% 0.0% 0.0% 0.0% 0.0% 0.0% % London P&I 6.0% 10.0% 12.5% 5.0% 5.0% 5.0% 15.0% % FD&D 6.0% 10.0% 12.5% 5.0% 7.5% 20.0% 15.8% % North of England P&I 4.75% 7.5% 15.0% 5.0% 3.0% 5.0% 17.5% % FD&D 2.5% 5.0% 10.0% 10.0% 10.0% 10.0% 20.0% % Shipowners P&I 0.0% 5.0% 5.0% 0.0% 0.0% 5.0% 10.0% % Skuld (2) P&I 0.0% 0.0% 8.5% 0.0% 0.0% 5.0% 15.0% FD&D 0.0% 0.0% 8.5% 0.0% 0.0% 5.0% 15.0% Standard P&I 5.0% 12.5% 7.5% 5.0% 3.5% 3.0% 15.0% % FD&D 5.0% 12.5% 15.0% 5.0% 3.5% 15.0% 15.0% % Steamship P&I 0.0% 10.0% 7.5% 5.0% 0.0% 5.0% 17.5% % FD&D 0.0% 10.0% 7.5% 5.0% 0.0% 0.0% 15.0% % Swedish P&I 2.5% 7.5% 7.5% 5.0% 2.5% 2.5% 15.0% % FD&D 5.0% 5.0% 5.0% 5.0% 10.0% 2.5% 15.0% % United Kingdom P&I 6.2% 10.0% 7.5% 3.0% 5.0% 5.0% 12.5% % UK Defence FD&D 0.0% 5.0% 7.5% 3.0% 5.0% 5.0% 12.5% % West of England P&I 2.5% 7.5% 7.5% 5.0% 5.0% 5.0% 19.2% % FD&D 0.0% 7.5% 9.0% 10.0% 7.5% 10.0% 20.0% % Above Average Below Average Note: 1) Gard express their premium plans in terms of Combined Ratio Net which is then converted to an effective General Increase. 2) Skuld have abandoned General Increases and figures shown in this table are their anticipated incremental premium requirements. 62

65 INDUSTRY STATISTICS % % % % % % 8.000% 6.000% 4.000% 2.000% 0.000% P&I FD&D 63

66 MARINE P&I PRE-RENEWAL REVIEW 2015 AVERAGE EXPENSE RATIO Policy Year: American 21.60% 19.30% 19.30% 18.30% 16.50% 15.30% 15.20% Britannia 8.43% 8.03% 8.49% 8.49% 8.09% 8.16% 8.39% Gard 11.40% 11.30% 14.10% 13.00% 11.40% 11.80% 11.40% Japan 5.25% 5.73% 5.69% 6.18% 6.27% 6.56% 6.69% London 8.78% 8.36% 9.63% 9.00% 8.70% 8.90% 9.40% North of England 12.40% 12.50% 13.10% 12.60% 11.90% 11.40% 10.80% Shipowners 20.00% 18.00% 20.00% 20.00% 19.00% 19.00% 19.00% Skuld 12.90% 12.30% 12.30% 12.40% 12.10% 12.20% 12.70% Standard 11.40% 10.90% 13.20% 13.40% 13.30% 13.30% 16.50% Steamship 11.80% 11.30% 12.40% 12.30% 12.00% 11.80% 11.60% Swedish 13.00% 12.10% 13.30% 13.00% 11.60% 11.40% 10.90% United Kingdom 9.66% 9.35% 9.47% 9.46% 9.16% 9.37% 9.96% West of England 14.86% 14.24% 15.43% 14.75% 13.66% 13.79% 13.82% After an initial drop in as the negative investment income of dropped out of the system, the AER has risen again, possibly due to a strengthening dollar. In practice the past 15 years have shown that no real discernible pattern exists (as the graphic to the right indicates) and this measure has basically fallen into disrepute. 64

67 INDUSTRY STATISTICS 13.25% 12.75% 12.25% 11.75% 11.25% 10.75% 10.25% 9.75% 9.25%

68 MARINE P&I PRE-RENEWAL REVIEW YEAR INVESTMENT INCOME SUMMARY 7 Year Investment Return expressed as a % of Total Assets. Average Best Worst London 4.32% % % Britannia 3.25% % % Gard 3.10% % % American 3.07% % % Shipowners 2.97% % % Standard 2.79% % % Market Average 2.56% % % West of England 2.51% % % UK 2.39% % % Skuld 2.05% % % Swedish 1.59% % % Japan 1.56% % % North of England 1.33% % % Steamship 1.09% % % GROUP COMBINED INVESTMENT INCOME AS A % OF TOTAL ASSETS 2.39% 2.82% 3.76% 2.67% 4.93% 7.26% -8.52% -10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

69 INDUSTRY STATISTICS INVESTMENT ALLOCATION BY CLUB 20 FEBRUARY 2015 Club Equities Fixed Interest Cash Other American 40.05% 52.45% 5.77% 1.73% Britannia 18.96% 66.25% 15.09% -0.30% Gard 33.85% 58.74% 2.87% 4.54% Japan % 34.47% 0.00% London 22.84% 62.01% 9.28% 5.86% North of England 6.95% 63.72% 26.38% 2.95% Shipowners 22.92% 57.73% 19.35% 0.00% Skuld 18.86% 56.43% 18.97% 5.74% Standard 17.22% 70.27% 9.52% 2.98% Steamship 5.65% 60.39% 24.77% 9.19% Swedish 20.77% 70.75% 8.48% 0.00% UK 23.07% 72.69% 4.12% 0.12% West of England 9.20% 51.36% 29.80% 9.64% Market 19.35% 62.54% 14.60% 3.51% Highest Lowest PROPORTION OF EQUITIES HELD BY CLUB OVER TIME Club American 40.05% 40.63% 40.84% 34.82% 33.23% 27.74% 21.21% Britannia 18.96% 20.00% 17.22% 16.12% 16.44% 20.53% 14.99% Gard 33.85% 32.42% 21.57% 20.29% 15.50% 14.39% 20.61% Japan 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% London 22.84% 25.11% 22.95% 22.21% 22.34% 20.61% 20.72% North of England 6.95% 6.86% 0.01% 0.01% 0.01% 0.01% 2.09% Shipowners 22.92% 24.00% 25.58% 22.94% 25.00% 25.60% 26.38% Skuld 18.86% 19.69% 17.24% 17.32% 17.10% 11.17% 10.76% Standard 17.22% 20.66% 17.47% 20.22% 29.03% 34.03% 31.98% Steamship 5.65% 3.64% 3.59% 3.39% 2.34% 6.56% 12.54% Swedish 20.77% 23.41% 11.79% 11.81% 19.38% 17.44% 12.59% UK 23.07% 25.97% 28.39% 19.31% 23.74% 22.94% 11.55% West of England 9.20% 15.20% 13.26% 24.15% 29.19% 26.93% 22.87% Increased by >5% Reduced by > 5% 67

70 MARINE P&I PRE-RENEWAL REVIEW 2015 P&I CALL HISTORY STATISTICS EXPRESSED IN TERMS OF SUPPLEMENTARY CALL PROJECTED/ULTIMATE Year Commencing: American Original 0% 0% 0% 0% 25% 25% 20% 0% 0% 0% Latest 0% 0% 0% 0% 25% 25% 20% 25% 30% 35% Britannia Original 45% 45% 45% 40% 40% 40% 40% 40% 30% 30% Latest 45% 40% 45% 40% 40% 40% 32.5% 40% 30% 30% Gard Original 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% Latest 25% 15% 15% 15% 20% 15% 10% 25% 25% 20% Japan Original 40% 40% 40% 40% 40% 40% 40% 30% 30% 30% Latest 40% 40% 40% 40% 40% 50% 40% 30% 30% 60% London Original 0% 0% 0% 0% 0% 0% 40% 40% 40% 40% Latest 0% 0% 0% 0% 0% 0% 40% 75% 89% 89% North of England Original 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Latest 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Shipowners Original 0% 0% 0% 0% 0% 10% 10% 25% 25% 25% Latest 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Skuld Original 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Latest 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Standard Original 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Latest 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Steamship Original 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Latest 0% 0% 0% 0% 0% 0% 0% 20% 14% 12.50% Swedish Original 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Latest 0% 0% 0% 0% 0% 0% 0% 0% 35% 35% United Kingdom Original 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Latest 0% 0% 0% 0% -2.50% 0% 0% 20% 25% 20% West of England Original 35% 35% 35% 30% 30% 30% 30% 20% 20% 20% Latest 35% 35% 35% 30% 30% 30% 30% 65% 55% 55% Club under-called original estimate Club over-called original estimate 68

71 INDUSTRY STATISTICS P&I RELEASE CALL STATISTICS EXPRESSED IN TERMS OF PERCENTAGE (%) OF ORIGINAL AC Policy Year: American 20% 20% 20% C Britannia 15.0% 7.5% 7.5% 0% Gard 20% 15% 5% 0% Japan 5% 5% 5% 5% London 15% 15% 12.5% 5% North of England 20% 10% 5% 5% Shipowners not applicable Skuld 15% 5% 0% C Standard 7% 3% 2% C Steamship 15% 5% 5% C Swedish 20% 12.5% 7.5% C United Kingdom 15% 15% 10% C West of England 20% 10% 5% C The above amounts are in addition to any as yet uncalled parts of the original ETC, and also in addition to excess supplementary calls levied but as yet unbilled, if any. The above amounts are believed to be current at the end of August 2015, but are prone to alter as circumstances change. Accordingly please consult your AJG contact or your Club for specific rates appropriate at the time you may wish to release. Following the cessation of the EU investigation into the International Group in 2012 the Clubs have introduced a degree more transparency into the calculation of the Release Call levels. The factors to be used in determining the level of Release Call is now laid out in Clause 8 of the 2013 IG Agreement, and include: a) Premium risk b) Reserve risk c) Catastrophe risk d) Market risk e) Counterparty Default risk f) Operational risk Whilst the above is largely a codification of existing practice, this should ensure a high degree of correlation between the Solvency II calculations and the Release Call assessments, in that they can both emerge from the same risk model. Release calls have continued to fall steadily under the new regime and Shipowners Club has abolished them completely. 69

72 MARINE P&I PRE-RENEWAL REVIEW 2015 LAY UP RETURNS In the current continued recessionary environment, the laying up of vessels still remains an alternative for owners. It is thus important for the owner to appreciate the insurance implications of laying up his vessels, particularly in terms of return premiums. Each Club has a different approach to returning premiums, and some leave it simply to the discretion of the managers. The amounts quoted below are usually applied to the premium after deduction of the International Group reinsurance cost. Further allowance is made for within retention reinsurance costs, pooling and administration expenses. This allowance tends to be the inverse of the Club s acceptable loss ratio and will vary from vessel to vessel, even within the same fleet. In some cases adjustments are also made for brokerage, although this is not universally the case. Also a return premium is usually not calculated on that element of the premium which is attributable to overspill risks this is usually a premium for capacity issue and so ought not be subject to any pro rata time or risk related refund. Club Minimum Days Percentage Allowance American 45 days 80% Britannia 30 days 50% with crew on board 95% without crew Gard 30 days as agreed by managers Japan 30 days 75% with crew 95% with no crew London 30 days 50% with crew 75% with no crew North of England 30 days as agreed by managers Shipowners 30 days 40% P&I risks 15% FD&D risks Skuld 30 days a rate as appropriate Standard 30 days 75% Steamship 30 days 50% with machinery operative 90% with machinery shut down Swedish 30 days not specified UK 30 days as agreed by the managers West of England 30 days 75% 50% with crew but not cargo 70

73 INDUSTRY STATISTICS RATINGS AGENCIES STANDARD AND POOR S RATINGS Current American BBB- BBB- BBB- BB+ BB+ BB BB Britannia A A pi A pi A pi A pi A pi A pi Gard A+ A+ A+ A+ A A A Japan BBB+ BBB+ BBB+ BBB BBB pi BBB pi BBB pi London BBB BBB pi BBB pi BBB pi BBB pi BBB pi BBB pi North of England A A A A A A A Shipowners A- A- A- A- BBB pi BBB pi BBB pi Skuld A A A A A- A- A- Standard A A A A A A A Steamship A- A- A- A- A- BBB+ BBB+ Swedish BBB+ BBB+ BBB+ BBB+ BBB BBB BBB United Kingdom A A A- A- A- A- A- West of England BBB+ BBB BBB BBB- BBpi BBB pi BBB pi pi ratings are based on public data only, others are based on a periodic review by S&P analysts. Ratings BBB or higher are regarded as having financial security characteristics that outweigh any vulnerabilities, and are likely to have the ability to meet financial commitments. AA: Very Strong financial security characteristics. A: Strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings. Ratings BB or lower are regarded as having vulnerable characteristics that may outweigh the strengths. BB: Marginal financial security characteristics. Positive attributes exist, but adverse business conditions lead to insufficient ability to meet financial requirements. B: Weak financial security characteristics. Adverse business conditions will likely impair the ability to meet financial commitments. + or signs show relative standing within the major rating category. BBB: Good financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated insurers. 71

74 MARINE P&I PRE-RENEWAL REVIEW 2015 INTERNATIONAL GROUP REINSURANCE PROGRAMME STRUCTURE & RATES Cumulative Value $6,200m Layers Uninsured Overspill: reverts to Pooling Approximately $ 3,150m (2014: $ 3,120m) $ 3,080m (90%) Collective Overspill Layer $ 1,000 million $ 3,100m (10%) General One Reinstatement $ 2,080m (90%) 3rd Excess Layer $ 1,000 million $ 2,100m (10%) General Unlimited Reinstatements $ 1,080m (90%) 2nd Excess Layer $ 500 million $ 1,100m (10%) Towers: General & Oil Pollution Unlimited Reinstatements $ 580m (90%) 1st Excess layer $ 500 million Coinsured by Hydra $ 600m (10%) Towers: General & Oil Pollution and private placements * Unlimited Reinstatements $ 80m Upper Upper Pool $ 20m, 5% ICR reinsured by Hydra $ 60m Upper Pool $ 15m, 10% ICR reinsured by Hydra $ 45m Lower Pool (B) $ 15m, reinsured by Hydra $ 30m Lower Pool (A) $ 21m $ 9m Individual Club Retention ( ICR ) $ 9m *At the 2014 renewal a 5% private placement line on the group programme was placed, on a 3 year fixed premium basis, between $ 100 million and $ 1.1 billion with Berkshire Hathaway. At the 2015 renewal a further 5% private placement line was placed, also on a 3 year basis, with the same limits, with Liberty Mutual. Hydra participation was increased at the 2015 renewal such that it now reinsures 70% (2014: 35%) of the first $ 20 million on the 1st Excess layer; 60% (2014: 30%) on the next $ 20 million and 30% (2014: 30%) between $ 120m and $ 580m. REINSURANCE COST Cost of reinsurance programme in US $ per GT Excess Point $ 80 m $ 70 m $ 60 m $ 60 m $ 50 m $ 50 m $ 50 m Dirty tanker Clean tanker Dry Passenger

75 INDUSTRY STATISTICS REINSURANCE COST IN US$ PER GT The following chart shows the development of the cost of the International Group programme as regards different types of vessel Dirty Tanker Clean Tanker Dry Passenger VESSEL SURCHARGE PER VOYAGE FOR TANKER > 1,000 GT IN US $ PER TON In addition, a surcharge was made in respect of vessels transporting oil to the United States, different rates applying to vessels with and without segregated ballast tanks in accordance with regulation 13 of Annex 1 to MARPOL 73/78. This rate steadily fell since its introduction and was scrapped in % 0.4% 0.35% 0.3% 0.25% 0.2% 0.15% 0.1% 0.05% 0% SBT Non SBT 73

76 MARINE P&I PRE-RENEWAL REVIEW 2015 LOSSES TO POOLING The figures below show the development of pooling claims on an historic basis in the past decade. POOLING LOSSES IN MILLIONS OF US $ HISTORIC THRESHOLDS After Policy Year # 12m 24m 36m 48m 60m 72m 84m 96m 108m 120m The approximate shares that each Club pays of a residual pool loss (ie net of the ICR s where appropriate), are as follows: Club 2014/5p 2013/4p 2012/3pp American 3.1% 2.9% 2.9% Britannia 7.8% 9.9% 10.2% Gard 16.5% 18.2% 15.9% Japan 9.4% 8.8% 8.4% London 3.7% 4.2% 4.6% North of England 12.1% 8.3% 7.9% Shipowners 3.8% 4.2% 3.4% Skuld 4.8% 5.4% 5.8% Standard 8.7% 8.5% 7.9% Steamship 7.9% 8.1% 8.7% Swedish 7.8% 7.6% 7.1% UK 8.5% 7.5% 10.0% West of England 5.9% 6.4% 7.2% The above amounts are at different development points and will vary slightly based on the future development of the three factors noted above over time, as well as the loss experience moderator. 74

77 INDUSTRY STATISTICS HYDRA INSURANCE COMPANY LIMITED Hydra Insurance Company Limited is a Bermudian segregated cell company which reinsures, from onwards, via segregated accounts, elements of pooling and first excess layer of the International Group s P&I risks: The Upper Upper Pool, the Upper and the 2nd layer of the Lower Pool ie $ 50 million xs $ 30 million for both and , inclusive of individual Club retentions; The Clubs coinsurance of, for : 70% (2014: 35%) of the first $ 20 million of the First Excess Layer of the excess of loss contract, 60% (2014: 30%) of the next $ 20 million and 30% of the next $ 460 million of the First Excess Layer in both years. Hydra partially protects this latter exposure with a stop loss policy. The vehicle is designed to enable the Clubs to increase their risk retention in the future and thus reduce their dependence on the commercial reinsurance market. HICL Cell: Cell Performance (US$) Britannia Hydra itself does not make financial information available, but Britannia has given details of the performance of its Hydra cell (which is some 14% of Hydra). Based on this, experience has been volatile, as might be expected, with the result for the 3 years prior to reflecting a marginal loss, as pool losses remained buoyant was however a good year for the pool and thus a good year for Hydra, which arguably made a collective surplus of around $ 100 million: its best year since inception. Since Hydra first started in , the Britannia cell has received in excess of $ 150 million of premium from its Club. Should the Britannia cell be typical (and ICR s will impact this, as well as investment performance in the individual cells) it would appear that almost $ 1.1 billion of premiums have flowed into Hydra since it started to trade, with almost $ 1 billion of claims being incurred. Hydra may have some $ 225 million of collective free reserve in it, but this amount may well have been dealt with differently in individual Club s accounts: ie if consolidated, these reserves will already be included in the overall free reserve figures cited elsewhere in this report. Net Premiums 20,567,000 21,163,000 Net Claims (6,379,000) (20,207,000) Other Expenses 24,000 (71,000) 14,212, ,000 Inv. Income 283, ,000 Surplus 14,495,000 1,078,000 Cell Equity 31,733,000 17,238,000 Cost 7,962,600 7,962,600 75

78

79 04 MAJOR LIMITING CONVENTIONS AND STATUTES AFFECTING P&I RISKS DEVELOPMENTS IN THE LAST 12 MONTHS

80 MARINE P&I PRE-RENEWAL REVIEW 2015 DEVELOPMENTS IN THE PAST 12 MONTHS COMINGS AND GOINGS The past 12 months has seen the introduction of the Nairobi International Convention on the removal of Wrecks (2007) in April 2015 and the introduction of new, 51% higher, limits of liability under the LLMC 1996: both are covered later in this section. MARITIME LABOUR CONVENTION ( MLC ) As reported last year, the MLC came into force on 20 August 2013 having presented the Clubs with a couple of coverage dilemmas. Most liabilities under the MLC fell under normal Club cover, but there are a number of areas which were considered likely to cause problems. At the same time, the end of 2014 saw the 1971 IOPC Fund being wound up. This proved to be a far from formal matter, being agreed only by majority vote (29-14). The decision had been opposed by the P&I Clubs, not least on the grounds that there were still pollution cases outstanding involving them. The Fund, which has paid out in excess of $ 350 million in compensation since its creation, had latterly been embroiled in a long standing dispute with Gard over the Nissos Amorgos claim. This claim was eventually settled in April 2015, but claims cooperation between the P&I Clubs and the successor Funds is still somewhat sensitive. The Clubs are presently reviewing settlement guidelines and potentially the need for contractually binding agreements to underpin the continuance of interim payments. SANCTIONS Maintaining the trend of recent years, sanctions continue to be used on an ever expanding basis saw the creation or extension of sanctions by the EU, USA and some other individual states: the principal targets of these sanctions remain unchanged Cuba, North Korea, Iran and similar so called rogue states. In the past 12 months sanctions have been imposed or extended against Russia, Ukraine Crimea and Syria. However the recently renegotiated JPOA agreement concerning Iran promises an easing of circumstances in the future. In turn the western bloc sanctions have spawned tit for tat sanctions, in particular by Russia. The MLC requires financial security to be in place to cover abandonment and repatriation of crew where the shipowner becomes insolvent. This issue was addressed by extending Club cover to insure this aspect of credit risk, on a non-pooled basis. When it came into force, the MLC did not, extend the financial security requirements to encompass unpaid wages in the event of shipowner insolvency. However in June 2014 the Special Tripartite Committee of the ILO approved a number of amendments to the MLC which will effectively extend liability under the MLC to encompass loss of up to 4 months wages in the event of shipowner insolvency, and to require certification and securitisation thereof. This obligation is not part of current P&I cover unlike most of the original elements of the MLC which are presently covered. Indeed, the risk is essentially a financial guarantee risk and relates to the owner s solvency rather than any characteristic of their fleet. Nevertheless the Clubs boards have individually considered the implications of this and have agreed to find a P&I solution to the new requirements: at least up to the individual Club retention. Primarily the sanctions are used to prompt regime change, enforce foreign policy objectives or to avoid financing of terrorism. As such, they appear to be part of the international economic, and hence trade, environment, in one form or another, for the foreseeable future, with economic pressures being used to enforce political objectives. 78

81 MAJOR LIMITING CONVENTIONS & STATUTES AFFECTING P&I RISKS 1. CONVENTION ON LIMITATION OF LIABILITY FOR MARITIME CLAIMS (LLMC), 1976 (IN FORCE 1 DEC 1986) This convention applies to all vessels involved in incidents in signatory states, except such incidents to which the Civil Liability Convention (See Section 2) applies. In effect it replaced the 1957 Brussels Convention. At 14 August 2015, it has been ratified by 53 states, covering 53.68% of world tonnage. The right to limit losses under this convention is lost if the incident involves a personal act or omission carried out intentionally or recklessly and with the knowledge that loss would result. Liability under the convention is calculated in accordance with the following formulae (note that, at 14 August 2015, SDR 1 = approximately US$ 1.40): 1.1 PERSONAL INJURY / LOSS OF LIFE VESSEL SIZE FORMULA 500 GT or less Minimum SDR 333, ,000 GT Add SDR 500 per GT to the above sum 3,001-30,000 GT Add SDR 333 per GT to the above aggregate 30,001-70,000 GT Add SDR 250 per GT to the above aggregate 70,001 GT or more Add SDR 167 per GT to the above aggregate EXAMPLE 25,000 GT SDR 8,909,000 75,000 GT SDR 21,409, PROPERTY VESSEL SIZE FORMULA 500 GT or less Minimum SDR 167, ,000 GT Add SDR 167 per GT to the above sum 30,001-70,000 GT Add SDR 125 per GT to the above aggregate 70,001 GT or more Add SDR 83 per GT to the above aggregate EXAMPLE 25,000 GT SDR 4,258,500 75,000 GT SDR 10,508,500 79

82 MARINE P&I PRE-RENEWAL REVIEW A PROTOCOL TO THE 1976 LLMC (IN FORCE 13 MAY 2004) This amends the limits of compensation payable and has been adopted by 52 states encompassing 53.58% of world tonnage at 14 August Until 8 June 2015 (see below) these limits were as follows: 1A.1 PERSONAL INJURY / LOSS OF LIFE VESSEL SIZE FORMULA 2,000 GT or less Minimum SDR 2,000,000 2,001-30,000 GT Add SDR 800 per GT to the above sum 30,001-70,000 GT Add SDR 600 per GT to the above aggregate 70,001 GT or more Add SDR 400 per GT to the above aggregate EXAMPLE 25,000 GT SDR 20,400,000 75,000 GT SDR 50,400,000 1A.2 PROPERTY VESSEL SIZE FORMULA 2,000 GT or less Minimum SDR 1,000,000 2,001-30,000 GT Add SDR 400 per GT to the above sum 30,001-70,000 GT Add SDR 300 per GT to the above aggregate 70,001 GT or more Add SDR 200 per GT to the above aggregate EXAMPLE 25,000 GT SDR 10,200,000 75,000 GT SDR 25,200,000 80

83 MAJOR LIMITING CONVENTIONS & STATUTES AFFECTING P&I RISKS 1B AMENDMENTS TO THE 1996 PROTOCOL (IN FORCE 8 JUNE 2015) This further amended the limits of compensation payable. It was dealt with via the tacit acceptance system whereby it was deemed acceptable to all contracting states after 18 months following notification, and entered into force after a further 18 months: it thus came into force on 8 June The increased limits are 51% higher and are now as follows: 1B.1 PERSONAL INJURY / LOSS OF LIFE VESSEL SIZE FORMULA 2,000 GT or less Minimum SDR 3,020,000 2,001-30,000 GT Add SDR 1,208 per GT to the above sum 30,001-70,000 GT Add SDR 906 per GT to the above aggregate 70,001 GT or more Add SDR 604 per GT to the above aggregate EXAMPLE 25,000 GT SDR 30,804,000 75,000 GT SDR 76,104,000 1B.2 PROPERTY VESSEL SIZE FORMULA 2,000 GT or less Minimum SDR 1,510,000 2,001-30,000 GT Add SDR 604 per GT to the above sum 30,001-70,000 GT Add SDR 453 per GT to the above aggregate 70,001 GT or more Add SDR 302 per GT to the above aggregate EXAMPLE 25,000 GT SDR 15,402,000 75,000 GT SDR 38,052,000 81

84 MARINE P&I PRE-RENEWAL REVIEW INTERNATIONAL CONVENTION ON CIVIL LIABILITY FOR OIL POLLUTION DAMAGE (CLC), 1969 (IN FORCE 19 JUN 1975); PROTOCOL TO CLC, 1992 (IN FORCE 30 MAY 1996) The Civil Liability Convention covers those who suffer oil pollution damage resulting from maritime casualties involving oil-carrying ships. The Convention places the liability for such damage on the owner of the ship from which the polluting oil escaped or was discharged. The original Convention has been largely replaced by the 1992 Protocol, which has been adopted by 134 states, encompassing 96.69% of world shipping as at 14 August states encompassing 2.70% of world shipping remain under the original 1969 regime. Liability is strict, and insurance is compulsory. Liability under the convention is calculated in accordance with the following formulae: 2.1 LIABILITY UNDER CLC (1992 PROTOCOL) VESSEL SIZE FORMULA 5,000 GT or less Minimum SDR 3,000,000 5,001 GT or more Add SDR 420 per GT to the above sum Maximum SDR 59,700,000 (equivalent to 140,000 GT) EXAMPLE 25,000 GT SDR 11,400,000 See earlier comment regarding the mechanics of the calculation 75,000 GT SDR 32,400,000 Following the spill resulting from the loss of the Erika, the limits were increased under an amendment, without objection, in 2000 as follows: 2.2 LIABILITY UNDER CLC AS AMENDED IN 2000 (IN FORCE 1 NOVEMBER 2003) VESSEL SIZE FORMULA 5,000 GT or less Minimum SDR 4,510,000 5,001 GT or more Add SDR 631 per GT to the above sum Maximum SDR 89,770,000 (equivalent to 140,000 GT) EXAMPLE 25,000 GT SDR 17,130,000 75,000 GT SDR 48,680,000 82

85 MAJOR LIMITING CONVENTIONS & STATUTES AFFECTING P&I RISKS 3. INTERNATIONAL CONVENTION ON THE ESTABLISHMENT OF AN INTERNATIONAL FUND FOR COMPENSATION FOR OIL POLLUTION DAMAGE (FUND), 1992 PROTOCOL (IN FORCE 30 MAY 1996) The purpose of this Fund is to provide compensation for pollution damage to the extent that the protection afforded by the 1969 Civil Liability Convention is inadequate. It is also intended to give relief to shipowners in respect of the additional financial burden imposed on them by the 1969 Civil Liability Convention, with such relief being subject to conditions designed to ensure compliance with safety at sea and other conventions. The Fund is financed by receivers of persistent oil cargoes in signatory states, via a governmental levy. It is managed by an inter-governmental organisation, the IOPC Funds. The original 1971 Fund was denunciated in 2002 when the number of contracting states fell below 25, being effectively replaced by the 1992 Fund which entered into force in Subsequently the limits in the 1992 Fund were increased by amendment in 2000, effective November states have adopted the 1992 Protocol at 14 August 2015 covering 94.16% of the world fleet. The 2000 protocol increased this maximum sum to SDR 203 million via a tacit approval procedure, inclusive of the primary contribution under the 1992 CLC Protocol. 4. SUPPLEMENTARY FUND, 2003 (IN FORCE 3 MAR 2005) The aim of this Fund is to supplement the compensation available under the 1992 Civil Liability and Fund Conventions with an additional, third tier of compensation. The Protocol is optional and participation is open to all States which are party to the 1992 Fund Convention. 31 states have adopted the 2003 protocol at 14 August 2015, covering 18.26% of the world fleet. As with the 1992 Fund, the Supplementary Fund is financed by levies on receivers of persistent oil cargoes. The total amount of compensation payable for any one incident will be limited to a combined total of SDR 750 million inclusive of the amount of compensation paid under the existing CLC/Fund Convention system. 5. TANKER OIL POLLUTION INDEMNIFICATION AGREEMENTS In recognition of the potential disparities between contributions by shipowners and receivers of cargo towards the cost of pollution incidents, two agreements came into force in 2006 which sought to remedy the situation. Under STOPIA, owners of small tankers of 29,548 GT or less indemnify the 1992 Fund for the difference between their 1992 CLC liability and SDR 20 million. Under TOPIA, all tanker owners indemnify the 2003 Supplementary Fund in respect of 50% of any claim falling on that fund. 83

86 MARINE P&I PRE-RENEWAL REVIEW US OIL POLLUTION ACT (OPA), 1990 The USA is not party to any of the above pollution related conventions, instead there are specific statutes which affect any vessels discharging oil, oil products or oil by-products in US waters. The main one of these is OPA 1990, which imposes strict liability the only defence being acts of war, acts of God or that the loss was caused solely by the actions of a third party. In July 2006, the US Coast Guard & Maritime Transportation Act 2006 amended limits under OPA 1990 as set out in the table below. For non tank vessels the above increases were immediate, and for tank vessels they came into force in October LIMITS OF LIABILITY UNDER OPA 1990 AS AMENDED IN 2006 VESSEL SIZE FORMULA Single Hull Tanker: 3,000 GT or less US$ 3,000 per GT with minimum US$ 6,000,000 Single Hull Tanker: 3,000 GT or more US$ 3,000 per GT with minimum US$ 22,000,000 Double Hull Tanker: 3,000 GT or less US$ 1,900 per GT with minimum US$ 4,000,000 Double Hull Tanker: 3,000 GT or more US$ 1,900 per GT with minimum US$ 16,000,000 Other Vessels US$ 950 per GT with minimum US$ 800,000 EXAMPLE 25,000 GT Single: US$ 75,000,000 Double: US$ 47,500,000 75,000 GT Single: US$ 225,000,000 Double: US$ 142,500,000 The US Coast Guard has subsequently announced increases in liability limits to reflect inflationary erosions since the 2006 change. These came into effect on a provisional basis on 1 July 2009, and were formally adopted with effect from 5 February Further increases are likely every three years. 6.2 AMENDED LIMITS OF LIABILITY UNDER OPA 1990 WITH EFFECT FROM 5 FEBRUARY 2010 VESSEL SIZE FORMULA Single Hull Tanker: 3,000 GT or less US$ 3,200 per GT with minimum US$ 6,408,000 Single Hull Tanker: 3,000 GT or more US$ 3,200 per GT with minimum US$ 23,496,000 Double Hull Tanker: 3,000 GT or less US$ 2,000 per GT with minimum US$ 4,272,000 Double Hull Tanker: 3,000 GT or more US$ 2,000 per GT with minimum US$ 17,088,000 Other Vessels US$ 1,000 per GT with minimum US$ 854,400 EXAMPLE 25,000 GT Single: US$ 80,000,000 Double: US$ 50,000,000 75,000 GT Single: US$ 240,000,000 Double: US$ 150,000,000 Deepwater Port, unless established US$ ,000 under Reg 33 U.S.C. 2704(d)(2) LOOP US$ 87,606,000 84

87 MAJOR LIMITING CONVENTIONS & STATUTES AFFECTING P&I RISKS The US has also established an Oil Spill Liability Trust Fund ( OSLTF ) administered by the National Pollution Funds Center which supports OPA 90 and is funded by a tax on oil produced and imported into the USA. The OSLTF responds where a responsible party denies liability or fails to meet that liability or where the first level of liability is insufficient to fund all claims. It can provide up to $ 1 billion any one oil pollution incident. 7. US COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT (CERCLA), 1980 This legislation is focussed on hazardous substances, however there are circumstances where both CERCLA and OPA could apply to an incident involving a shipowner, operator, bareboat charterer etc. Club cover is discretionary as regards CERCLA related claims. Limits of liability are as follows: a) for vessels over 300 GT carrying a hazardous substance as cargo the greater of US$ 5 million or US$ 300 per GT; b) for any other vessel over 300 GT the greater of US$ 500,000 or US$ 300 per GT. These limits did not change when the OPA 90 limits were raised in July In respect of obligations under both OPA and CERCLA, Certificates of Financial responsibility (COFRs) are required. As Clubs are unwilling to certify financial responsibility as required by the US regulators, the COFR is generally provided by an independent issuing company, and covers the aggregate of the CERCLA and OPA limits of liability. EXAMPLE A double hull tanker of 25,000 GT will need a COFR of US$ 55 million, comprising US$ 47,500,000 under OPA 1990 as amended plus US$ 7,500,000 under CERCLA. 8. ATHENS CONVENTION RELATING TO THE CARRIAGE OF PASSENGERS AND THEIR LUGGAGE BY SEA (PAL), 1974 (IN FORCE 30 APR 1989) & 2002 PROTOCOL THERETO (IN FORCE 23 APRIL 2014) The Convention consolidated and harmonised two earlier Brussels conventions dealing with passengers and luggage, which were adopted in 1961 and 1967 respectively. It establishes a regime of liability for damage suffered by passengers carried on a seagoing vessel. It declares a carrier liable for damage or loss suffered by a passenger if the incident causing the damage occurred in the course of the carriage and was due to the fault or neglect of the carrier. However, unless the carrier acted with intent to cause such damage, or recklessly and with knowledge that such damage would probably result, it can limit its liability. For the death of, or personal injury to, a passenger, this limit of liability is set at SDR 46,666 per passenger. Liability is however further limited for losses arising from acts of terrorism to the practically insurable amount. As of 2006, this amount is SDR 250,000 per passenger with an aggregate limit of SDR 340 million. Subsequent to the ratification of this convention (by 26 states to date, covering 32.03% of the world s fleet) the limitation amount has become more and more inadequate. A 1990 protocol increasing the limit to SDR 175,000 was not adopted (being ratified by only 4 minor states) and has been superseded by the 2002 protocol. 85

88 MARINE P&I PRE-RENEWAL REVIEW 2015 Through 14 August 2015, 23 contracting states, including the European Union, representing 42.23% of world tonnage have acceded to this protocol. Notwithstanding the above, the principle provisions of this protocol came into effect within the European Union and the European Economic Area via the EU Passenger Liability Regulation # 329/2009 on 31 December LIMITS UNDER 2002 PROTOCOL TO PAL TYPE OF LOSS Strict Liability Passenger Personal Injury / Death Operator Negligence Passenger Personal Injury / Death Loss or Damage to Cabin Luggage Loss or Damage to Vehicle and Luggage therein Loss or damage to Other Luggage LIMIT SDR 250,000 per passenger SDR 400,000 per passenger SDR 2,250 per passenger SDR 12,700 per vehicle SDR 3,375 per passenger 9. INTERNATIONAL CONVENTION ON CIVIL LIABILITY FOR BUNKER OIL POLLUTION DAMAGE, (BUNKERS) 2001 (IN FORCE 21 NOV 2008) The Bunker Convention reached its required criteria of 18 states ratification in November 2007, and by 28 July 2014 had 77 acceptances covering 90.52% of the world fleet. The Convention covers pollution caused by spills of oil carried as fuel on board the vessel. The limits are the same as those imposed under LLMC 1976 as amended by the 1996 Protocol. 10. ILO MARITIME LABOUR CONVENTION (MLC) 2006 (IN FORCE 20 AUGUST 2013) 30 countries were required to ratify the Maritime Labour Convention for it to start the 12 month countdown to coming into force. On 20th August 2012 the 30th country signed up, being the Russian Federation. At 14 August 2015 there were 66 ratifications, although in some 16 of these jurisdictions the convention is not yet in force. In the majority of these 4 cases, in force status is expected within the next 12 months. In 2007 the European Union authorized its member states to ratify the Convention by the end of 2010, but in a number of EU states this process is still incomplete. Accordingly the MLC came into force in August The Convention is kept under continuous review by a tripartite committee including representatives of shipowners, seafarers and governments. Following the first committee meeting various amendments were agreed to the liability and financial security rules, which seem likely to come into force in early Whilst most liabilities under MLC are typically covered by P&I insurance, the amendments to the financial security requirements include, inter alia, unpaid crew wages following abandonment which is very much not a traditional P&I risk. It remains to be seen how this develops. 86

89 MAJOR LIMITING CONVENTIONS & STATUTES AFFECTING P&I RISKS 11. INTERNATIONAL CONVENTION ON LIABILITY AND COMPENSATION FOR DAMAGE IN CONNECTION WITH THE CARRIAGE OF HAZARDOUS AND NOXIOUS SUBSTANCES BY SEA (HNS), 1996 AND PROTOCOL, 2010 (NOT YET IN FORCE) The original 1996 HNS Protocol established a two tier compensation regime for amounts up to SDR 250 million and has been ratified by 14 states or 14.14% of world fleet by 14 August A Focus Group was established in 2007 in order to address administrative concerns of the ratifying states particularly in respect of the operations of the 2nd tier of compensation, and the difficulty in establishing how much HNS was received in any country. A revised 2010 protocol, based on the findings of the above focus group, was adopted in April 2010, but has not yet been ratified by any states, with 8 states signing the protocol subject to ratification. Under this protocol the total compensation remains the same, but the shipowner s maximum liability for an incident involving packaged HNS is increased from SDR 100 million to SDR 115 million. Thereafter compensation would be paid by a second tier HNS Fund, financed by cargo receivers. The shipowners liability for bulk HNS remains unchanged at SDR 100 million. The revised protocol will enter force eighteen months after at least 12 States (including at least 4 with over 2 million GT) express their consent to be bound by it. Additional conditions relate to cargo receiving country contributions LIMITS OF LIABILITY UNDER HNS 1996 VESSEL SIZE FORMULA BULK HNS FORMULA PACKAGED HNS 2,000 GT or less Minimum SDR 10,000,000 Minimum SDR 11,500,000 2,001-50,000 GT Add SDR 1,500 per GT to the above Add SDR 1,725 per GT to the above 50,001 GT or more Add SDR 360 per GT to the above aggregate Add SDR 414 per GT to the above aggregate Maximum SDR 100 million SDR 115 million EXAMPLE 25,000 GT SDR 44,500,000 SDR 51,175,000 75,000 G SDR 91,000,000 SDR 104,650, NAIROBI INTERNATIONAL CONVENTION ON THE REMOVAL OF WRECKS (NAIROBI WRC) 2007 (IN FORCE 14 APRIL 2015) The Convention provides a sound legal basis for coastal states to remove, or have removed, from their coastlines, wrecks which pose a hazard to the safety of navigation or to the marine and coastal environments, or both. It makes shipowners financially liable and requires them to take out insurance or provide other financial security to cover the costs of wreck removal. It also provides states with a right of direct action against insurers. The Convention has been adopted by 23 states representing 39.46% of the world fleet at 14 August 2015, however not all of these states have extended the operation of the convention to their territorial waters. 87

90 MARINE P&I PRE-RENEWAL REVIEW UN CONVENTION FOR THE INTERNATIONAL CARRIAGE OF GOODS WHOLLY OR PARTLY BY SEA (ROTTERDAM RULES) 2009 (NOT YET IN FORCE) In 1996, in order to harmonise liability regimes, the United Nations Commission on International Trade Law (UNCITRAL) began a review of laws in the area of the international carriage of goods by sea. An additional aim was to update the regimes to reflect more modern transportation systems. This resulted in the Rotterdam Rules which became open for signature in September 2009 and will enter into force 12 months after 20 states have ratified it. By 30 November 2012, 24 nations have signed the Rules, including major shipping nations such as Greece, Norway and the United States: collectively these signatories account for 25% of world trade. Noticeably none of the major Asian trading nations have signed the Rules. The Convention will come into force one year after ratification by the 20th UN Member state. Whilst 24 have signed the Convention, only 3 states (Congo, Spain and Togo with no new additions this year) have ratified it at 14 August A recent survey of various jurisdictions on the question of ratification suggests that there is very little progress being made on the subject within the legislative processes of the countries asked. The European Parliament has recommended member states to move speedily towards ratification, but lethargy seems to be the watchword, and no significant progress is expected to be made in the immediate future. The Rotterdam Rules have eroded some of the traditional defences available to sea carriers, for example the elimination of the nautical fault defence. The obligation of due diligence has been extended to apply throughout the duration of the voyage, and limits of liability per package, or unit of weight, have been significantly increased, beyond Hague-Visby and Hamburg Rules limits. The table below contrasts the liability under the various regimes: 13.1 CONTRASTING LIABILITY UNDER RULES RULE LIMITATION OF LIABILITY LIABILITY FOR DELAY Hague (1934) 100 per package/unit N/A Hague Visby (1968) Higher of SDR 2 per kg or SDR 667 per package N/A Hamburg (1978) Rotterdam (2009) Higher of SDR 2.50 per kg or SDR 835 per package/shipping unit Higher of SDR 3 per kg or SDR 875 per package/shipping unit US COGSA (1936) US$ 500 per package/unit N/A 2.5 times freight on goods delayed subject to an upper limit if lost 2.5 times freight on goods delayed not to exceed limit under rules 88

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93 05 CONTACTS