UK Club - 2012 Financial Analysis

The United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited

Managers: Thomas Miller (Bermuda) Limited

Basis of Accounting: Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS) - for the first time.

Dashboard of Key Performance Indicators

2012 Financial Results

The UK Club has reported another underwriting surplus and an overall surplus of $7m after a rather disappointing performance from the Investment Managers who produced a return of just 1.5 percent.

Underwriting

The underwriting continued to improve with a small increase in tonnage and a general reduction in the level of claims, following the trend of the last few years. In the last three policy years the average number of claims has been around 5,000 per annum, down from 7,000 in the 2008 Policy Year. The average cost per claim has risen by five percent per annum, but the overall cost has been falling due to fewer large claims. The net notified claims greater than $500k were lower for the 2011 Policy Year after 12 months than any year since 1998. Claims exceeding $2m were only 15 percent of the historic average. The net notified claims after 12 months for the 2011 Policy Year were $130m, compared to $172m for the 2010 Policy Year and $163m for the 2009 Policy Year.

The policy year analysis showed reductions in the expected cost of claims of $5m for the 2009 Policy Year and $9m for the 2010 Policy Year. For the 2011 Policy Year after 12 months the paid and outstanding claims were $140m compared to $186m for the 2010 Policy Year after 12 months. The IBNRs for the 2011 Policy Year were $13m higher, indicating a very conservative loss reserving policy. This was borne out by the claims development table in the financial statements, which showed improvements over the lives of the policy years of up to $50m a year.

The underwriting has now been given a degree of protection by the purchase of some additional reinsurance contracts, which will cover a run of large claims, either within the retention or from the Pool and also to cover a one-off large claim.

Owned Tonnage - Ship Type: Bulker 34%, Tanker 30%, Container 14%, Gas 12%, Passenger 4%, Car Carrier 3% and Others 3%.

Ship - Age Profile: 0-4 years 35%, 5-9 years 26%, 10-14 years 16%, 15-19 years 11%, 20-24 years 5% and over 25 years 7%.

Owned Tonnage - Area of Management: Europe 50%, Asia Pacific 38% and Americas 12%.

Investments

The Club's investment return was reported as $19m (1.5 percent), but after the deduction of foreign exchange losses, hedging costs, taxation and the interest on the perpetually subordinated capital securities, the total fell to $3m.

This disappointing result came after reducing the equity allocation from 15 percent to ten percent and increasing the bond holdings.

Asset allocation: Bonds 69%, Absolute Return Funds 10%, Equities 10% and Cash 11%.

Future

The UK Club's underwriting has improved with two successive surpluses. The level of claims, particularly large claims, has fallen and the Club seems to have maintained a selective underwriting policy, rather than embarking on a policy of (unrestrained) expansion. This has kept the underwriting in surplus and, although an element of chance may be ascribed to incurring large claims, the Club's recent Pool record may indicate a prudent underwriting policy. The tonnage turnover, or "churn", has left the premium income lower but this should diminish in the near future as new deliveries slow.

The only disappointment was the investment return, which was substantially absorbed by the interest on the perpetual subordinated capital securities and the hedging costs. Even with balanced underwriting, it is not possible to increase the free reserves without a healthy investment return, and in a low investment return environment, the Investment Managers clearly need to improve their performance.

The Club had a successful 2012 renewal which should boost the premium income. On the basis of the Report & Accounts at 20 February 2012, the Club looks satisfactorily funded with good solvency, good Risk Based Capital ratios and an S&P "A" rating.