WEST OF ENGLAND CLUB - 2012 Financial Analysis

The West of England Ship Owners Mutual Insurance Association (Luxembourg) and subsidiaries.

Basis of accounting: - Laws of the Grand Duchy of Luxembourg on financial statements, except for the fact that investments are not stated at historic amortised cost but valuation.

Dashboard of Key Performance Indicators

2012 Financial Results

The West of England Club has experienced a year of contraction after undertaking remedial work on the underwriting by declining renewal of some members. The plan has partially succeeded with a fall in the underwriting deficit from $38m to $18m, but the Club still reported an overall deficit and has had its credit rating downgraded to BB.

Underwriting

A reduction in tonnage has been a positive step on the road to improving the underwriting results. The net premium income fell by 12 percent, while the incurred claims fell 22 percent. This had a positive impact on the combined ratio (down from 119 percent to 110 percent), moving closer towards the Board's target of 105 percent. The 2011 Policy Year had fewer claims than any year since 2000 and follows a reduction in the frequency of claims on the 2009 Policy Year.

Last year the Club adopted a conservative approach to outstanding claims reserves and increased the reserves by 12 percent, (which may have inadvertently contributed to their rating downgrade). This year the position has been partially reversed with a $15m surplus on the closed Policy Years. The review also reported a change in the pattern of claims settlements and the 2011 policy year had payments of $29m compared to $26m on the 2010 policy year a year ago. The outstanding claims were only $138m, compared to $179m on the 2010 Policy Year last year.

Mutual Tonnage - Ship Type:- Bulker 38%, Tanker 25%, Container 17%, Cargo 15%, Ferry and Passenger 3% and Other 2%.

Mutual Tonnage - Area of Management:- Europe 46%, Asia 39%, Middle East and Africa 8%, and Americas 7%.

Investments

The investment return was 1.8 percent, which was insufficient to cover the underwriting deficit. Had the return been 3 percent, the Club would have reported a surplus.

Bonds recorded a return of 8%, Equities lost 5% and the Hedge Funds lost 7%, with little or no return on Cash.

Asset Allocation:- Bonds 57%, Cash 17%, Equities 15%, and Hedge Funds 11%.

Currency Allocation:-US dollars 81%, Euros 5% and Sterling 5%, Others 9%.

Future

The Club has experienced a difficult year, which has not been assisted by the S&P ratings downgrade to BB.

The weak underwriting result continues to be an issue and although the Combined Ratio continued to improve, assisted in the current financial year by the improvement on the closed Policy Years, the underwriting trend in the Policy Years was still negative.

The Club has adopted a "diversification policy" of producing new products and services around the core P&I business, but this may take some time to evolve. In the meantime the Club is caught in the invidious position of retaining members and being able to produce a surplus, even in a year with a low incidence of claims. The underwriting needs to be placed on a more secure footing to improve Member security and the Investment Managers need to improve their performance.

The Club's solvency was 136 percent. The Club should be able to meet the solvency requirements, but the level of Free Reserves needs rebuilding.