GARD CLUB - 2012 Financial Analysis

Gard P&I (Bermuda) Limited and its subsidiaries.

Basis of accounting:- In accordance with "regulations for annual accounts for insurance companies "

approved by the Norwegian Ministry of Finance which requires limited use of certain IFRS …in accordance with Norwegian generally accepted accounting principles.

Dashboard of Key Performance Indicators

2012 Financial Results

Gard had a modest year compared to more recent performances, with a small surplus of $36m, down from $152m last year. There was a small underwriting deficit of $12m after the Deferred Call on the 2011 Policy Year was reduced and the Investment Managers failed to deliver previous standards with a return of 2.8 percent.

Underwriting

The Club underwrites P&I and Marine and Energy Insurance. The P&I business has been concentrating on growth and their International Group entered tonnage has increased by 45 percent in the last five years. The P&I tonnage rose by 7 percent in the year compared to a 10 percent increase in net premium income and a 12 percent increase in incurred claims. The frequency of P&I claims fell, but the severity increased with some cargo claims proving particularly challenging. There was also a sharp increase in the cost of Environmental Fines.

The marine business saw gross premiums increase by 9 percent and there were three claims greater than $5m. The gross premiums of the energy business were $108m but higher reinsurance costs were incurred. Collectively the Marine and Energy premium income was flat with claims 12 percent higher and the surplus before reinsurance commission and investment income was down from $34m to $19m.

There were improvements in the anticipated cost of claims on the 2009 & 2010 Policy Years as well as the closed P&I Policy Years. The claims paid on the 2011 P&I Policy Year were $147m, compared to only $60m on the 2010 Policy Year after twelve months and the outstanding claims were $302m compared to $314m a year earlier. This would tend to indicate a fundamental shift in the claims payment pattern and require a judgment call on the adequacy of the reserve difficult. It was also interesting that the general expenses allocated to a P&I Policy Year had fallen from $88m per annum to $41m per annum, (potentially raising questions over the allocation of expenses between classes.)

Investments

The Investment Managers have had a quiet year with a return of 2.8 percent, in marked contrast to some of the Club's more spectacular recent performances. The investments were held in the Gard Common Contractual Fund in Ireland and were predominantly Low Risk Bonds.

Asset allocation:- US bonds 56%, non US bonds 20%, Equities 15%, Emerging Market Bonds 4%, Property 4%, Cash 1%.

Bond Portfolio:- AAA 17%, AA (including US treasury bonds) 54%, A 16%, BBB and below 13%.

Future

Since the disastrous deficit of $150m in 2009 Financial Year, the Free Reserves have risen by over 90 percent to a record $826m. The Club has clearly been targeting growth in the International Group with entered tonnage up 45 percent since 2008 and although the overall underwriting has only been breaking even, the investment income on the massive $2bn portfolio should always be sufficient to cover any short term reversals and keep the Capital and Reserves moving forward.

In the last three years their tonnage has increased by 16 percent compared to a rise in the P&I outstanding claims of 22 percent, which tends to indicate that the outstanding claims reserves have grown with the increase in risk.

At over $800m the Free Reserves were 60 percent higher than any other club in the survey and they have a strong Solvency and Risk Based Capital ratios. The Club was the first to embark on the recent diversification trail and the plan seems to have been successful as they are clearly the largest and strongest P&I Club and can boast an S&P A rating with a Positive Outlook.