SWEDISH CLUB - 2012 Financial Analysis

Sveriges Angfartygs Assurans Forening (Swedish Club)

Basis of accounting: prepared in accordance with Swedish Annual Accounts Act for Insurance companies.

(ARFL) the Swedish Financial Supervisory Authority rules and regulations regarding annual reports for insurance companies and the Swedish Financial Accounting Standards Council recommendations.

The Club underwrites P&I, Hull and Machinery and Energy business.

Dashboard of Key Performance Indicators

2012 Financial Results

The Swedish Club reported a significantly reduced surplus of $8m down from $29m last year. Following three years of successive underwriting surpluses with no International Group Pool claims and rising Free Reserves and Entered Tonnage, the Club has experienced a temporary reversal.

After a positive start to the year, the underwriting deteriorated and the weak investment environment produced a return of only 2 percent, resulting in an overall Deficit. The diversification programme continued with the successful launch of the Team Energy business underwriting Mobile Offshore Units and FPSOs.

Underwriting

The Club underwrites P&I, Hull and Machinery and Energy business. P&I was the largest class with an expanding membership and premium income. The P&I Incurred Claims rose by 36 percent in the financial year after suffering three IG Pool claims totalling $186m, along with a rise in the frequency and severity of claims in general. The P&I Combined Ratio was 116 percent.

The Hull and Machinery business had a net premium income of $56m, but Incurred Claims for the year rose by 50 percent to $45m, giving rise to a small underwriting Deficit and a Combined Ratio of 101 percent. The class had experienced a challenging year, but had expanded the cover to include IV (Increased Value), War and Loss of Hire. The new Energy business was performing "in line with expectations" and had 33 accounts covering 200 Units. There was a small FD&D class.

The 2011 P&I policy year reflected the deteriorating conditions with paid claims of $40m, compared to $12m for the 2010 policy year last year and outstanding claims of only $38m compared to $42m for the 2010 policy year last year. In view of the increase in paid claims the outstanding claims reserve may look a little optimistic. There were no adverse movements on the other open policy years, but there was a small Deficit on the closed years.

Premium - Geographic Area: - Germany 23%, Greece 22%, China 13%, Sweden 6% and Others 36%.

Investments

Circumstances on the financial markets were not very favorable during the year, with continued turmoil in the euro-zone, historically low bond yields and interest rates and uncertainty in the Equity markets. Against this background the Club had an Investment Return of 2 percent, which was clearly insufficient to cover the underwriting Deficit.

The year-end Asset Allocation: US$ Bonds 75%, Equities 13%, Euro Bonds 9% and Emerging Market Bonds 3%.

The Equity Allocation was reduced in August and increased again after the year-end.

The S&P Rating of the bond portfolio was: AA 47%, AAA 19%, A 18% , BBB 12% and Others 4%.

Future

There were successful results in relations with members with a 100 percent satisfaction level expressed in a survey and a reaffirmation of the club's S&P BBB Rating, this time with a "Positive Outlook". Satisfactory progress was being made towards complying with Solvency II, including the completion of an Internal Capital Model.

There was no "Unexpired Risk Reserve", which may have been appropriate for a potential loss that may have arisen in the period from 31 December to 20 February 2012, for the contracts written before the year-end. In addition there was no provision for a deferred tax liability of $40m and the outstanding claims reserve on the latest policy year may also need to be supplemented in future years.

The Club has healthy Solvency and Risk Based Capital ratios. Despite the fact that the cost of claims is expected to rise, the current level of Free Reserves should be sufficient to meet foreseeable Deficits at least in the short term.