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Continued from HANSA 11/2010

North of England P&I Assocs.

Citing the 150th anniversary of the Club, Chairman Albert Engelsman stated in[ds_preview] the Club’s 2010 Annual Report: »That ›spirit‹ delivers quality, service, friendliness and a willingness to assist that is associated by many with our Newcastle roots, but in no way do we restrict it geographically. We have successfully exported all of those values to our overseas offices and we take them with us across the world, wherever and whenever North does business.

Never have those values been so vital for us as a Club than in the past two years, as we and our Members have faced the fallout of global economic meltdown. As the world’s economies appear to be picking up, albeit slowly, it is certainly no accident that North has emerged from the tumult stronger than ever, with record entered tonnage at the 20 February renewal and the highest free reserve position in the history of the Club.

On occasions such as an anniversary, it is customary to emphasise that an organisation is looking forward, not just backwards. But it’s important to take stock, to remember our roots and, in terms of the unprecedented challenges of the past two years, it’s important to reflect on the successful ›recipe‹ that enabled us to ride out the crisis.

We are proud to remain headquartered in Newcastle, the birthplace of P&I, while having a truly global reach as one of the world’s leading P&I Clubs.

North had another successful renewal, and we were pleased to welcome more highquality Members and gain further support from existing Members and old friends.

Our total entered owned tonnage increased by over 20 % to a record level of over 90 m GT; chartered tonnage brought our total entered tonnage to about 110 million GT at renewal.

We implemented a modest P&I premium increase of 5 % at renewal and are grateful to our Membership for their support in this regard. We can also report that, for the 19th year in succession, North made no unbudgeted supplementary calls on its Members.

We opened the 2010 policy year financially stronger than ever before, with a record free reserve position of US$ 240.3 m, compared with US$211.1 m at the same point in 2009. Our cautious investment strategy has served us well. We took steps during 2007 and 2008 to de-risk our investment portfolio and, as a consequence, we were able to limit the downside risk in very difficult conditions.

We maintained this defensive approach during 2009 and our investment committee continues to monitor the markets closely. In short, we remain vigilant.

Alongside our prudent investment strategy, we continue to focus on our policy of disciplined underwriting. As I pointed out last year, in such volatile times, P&I Clubs can no longer rely on investment income to subsidise losses on the claims side. North’s emphasis on technical underwriting balance and our determination to achieve break-even underwriting is crucial and last year we delivered a satisfying combined ratio of 94.8 %.

As trustees of our Members’ money, we will remain vigilant and cautious in our approach to the markets.

North’s strong financial performance was underlined and recognised when Standard & Poor’s confirmed our ›A‹ stable rating for the sixth consecutive year, an important accolade for the Club.

On the downside, North experienced an unusual Pool claims spike, with five such claims in the last policy year. This unusual occurrence followed years of North being a net contributor to the Pooling mechanism. This is an unwelcome ›blip‹ in our excellent record, but it shows the random nature of claims at this level – other Clubs have also experienced such unexpected peaks in recent years.

To put things in context, this occurred in a year which saw International Group Pool claims rising overall. Our long-term Pool record remains satisfactory.

The individual retention for IG Clubs increased at 20 February 2010 so that each Club now retains the first US$ 8 m of each claim before it is eligible for Pooling. As a Club, we supported this increase and we will continue to support gradual incremental increases, which are financially beneficial or deemed necessary by the International Group.

What remains starkly clear is that most of the claims, large and small, that we handle on behalf of Members have the same causal factor at their root – human error. The levels of competence and standards on board ship continue to cause concern and, even in times of recession, there still appears to be a shortage of qualified, properly experienced seafarers.

Many industry commentators expressed the hope that at least one positive outcome of the global slowdown would be a fall-off in claims, as shipping worked at a less pressured, frantic pace. We do see evidence of a slight fall-off in attritional claims but, while we would hope that this was the start of a trend, the underlying causes of most accidents have not gone away.

A shortage of seafarers leads to the tendency to promote inexperienced crew too quickly, with obvious implications for safety on board. It is all too likely that these problems will re-emerge with a vengeance as the world economy picks up once again.

There is danger beyond the immediate shortage of seafarers, too; where will we find the people we need, with vital seagoing experience, to step into the jobs ashore in future years? Where will we find our surveyors, our superintendents, our maritime lawyers, our harbour masters, our pilots or even our insurers?

The worry is that the next generation of seafarers will suffer because they could be learning from people who simply don’t have the requisite experience to pass on.

North continues to emphasise the need for strong, continuous training for all seafarers. We are alarmed to see, on occasions, that competence and standards on ships continue to be poor. We are concerned that, as we near the hoped-for end of recession, the problems will escalate in parallel with increased demand for personnel.

The knock-on effect – lack of experience coming ashore – is perhaps reflected in the fact that some Members have increased the number of technical and operational enquiries made to the Club as they struggle to retain the requisite level of experience or expertise in their own office.

Add to this the constant barrage of new regulation – which often has massive contradictions as ships head from one region to another – and it is hardly surprising that North’s in-house expertise is in increasing demand.

Piracy has now reached epidemic proportions and this is of enormous concern to us all in the shipping industry. It also raises a number of difficult issues.

Can the military forces really prevent piracy attacks when the criminals’ operating area is so huge, and continues to expand? It seems that the success of pirate attacks off Somalia is encouraging piracy in other areas, perhaps because military forces have not taken effective action to nip this problem in the bud.

Should vessels carry armed guards? North recognises the increasing pressure that owners feel to make use of armed security personnel; but there are major concerns. This is a largely unregulated industry, often attracting ex-service personnel, some of whom probably have limited knowledge of ships.

As a Club, we are receiving an increasing number of piracy-related enquiries from Members, and we continue to offer our advice and support. Our advice is that if owners do choose to arm their ships, they should take enormous care in sourcing security staff, and ensure that they are indeed competent for the task.

In general terms, we would urge more concerted action by the world’s military forces to counter this direct threat to global trade and vital supply chains. Alongside this, there should be clearer, consistent penalties for pirates who are caught. We welcome thefast-tracking of trials in Kenya.

Much has been written, and said, about the ongoing criminalisation of seafarers and certainly this is an issue on which we must all speak out.

Often when seafarers are charged or accused of criminal actions, governments seem reluctant to ›interfere‹ on their behalf in the criminal justice system of another nation state. But governments must speak out for justice and must take more responsibility for their seafarers. Innocent people can face years languishing in prison, often in very poor conditions, before even facing trial – systems need to be put in place to ensure that bail can be provided. The ILO/IMO guidelines are simply not effective in picking up major abuses by flag states. We need to promote a better international standard of treatment for seafarers involved in a maritime casualty.

Seafarers present such an easy target and scapegoats for a country’s own failures, whether it is failure to implement an effective traffic separation scheme or failure to provide proper facilities for responding to pollution.

The officer on the bridge is at the sharp end of an industry that so often fails him. He may be working long hours, suffering from fatigue, and burdened with paperwork. He or she can often unwittingly find themselves at the centre of a highly politicised dispute.

Meanwhile, the regulatory burden on ship owners, operators and officers continues to increase. Of particular concern is the proliferation of uncoordinated regional regulation faced by our seafarers. We see many states developing their own legislation, often without a proper understanding of the issues that are involved.

Ballast water regulations and rules applying to fuel types and emissions are two classic examples where, unless international solutions are agreed, ship owners, crews and insurers could find themselves technically unable to comply with the demands of many separate and varying regimes.

In such a situation, we can only expect to see increasing cases of ship owners and crew being prosecuted for regulatory violations simply because it is not practical for them to work out every last detail of an individual state’s requirements.

Facing such pressures, how can we expect seafarers to focus on the most important priority – that of safely operating their vessels? We could reach the point where accidents happen because the crew are so busy reading the small print that they forget the basic navigational disciplines.

P&I Clubs, the International Group, Members, authorities and the shipping industry as a whole must work together to defend our industry against this ›invasion‹ of unhelpful, unworkable and confusing regulation. Shipping provides the infrastructure which allows the world to trade – a basic fact which warrants improved publicity.

We need to remind people what the Clubs do and why our role is important in assisting the shipping industry.

On a cost-effective basis, the mutual, not-for-profit P&I Clubs offer ship owners the high levels of cover that are increasingly being sought in response to new legislation and political demands.

P&I Clubs are efficient in handling and processing claims and, without the countless guarantees that the P&I Clubs put up, world trade would simply grind to a halt.

We don’t always explain as well as we should the unique advantages of the International Group and the Pooling system which underpins the world’s shipping industry. The International Group Excess of Loss Contract is the largest marine reinsurance contract in the world, and the collective ability of the Clubs to purchase this protection is an indispensible feature of the International Group system.

We must better inform politicians and other decision-makers about the important role of the International Group in shipping and the vital role the Clubs play in enabling our Members to facilitate global trade. At North we are matching growth of our entered fleet with investment in our personnel, premises and systems.

Our head office on the Quayside in Newcastle is being totally refurbished and extended, to give us much-needed room for expansion. In December 2009, in a well-planned operation, our entire head office staff moved across the River Tyne to our temporary offices at Baltic Place. We look forward to moving ›back home‹ in 2011. Meanwhile, we have also expanded our Singapore office, and we plan to open an office in Tokyo later this year. We have also embarked on a business efficiency review, which will take a detailed look at all of North’s processes and ways of working and includes the design of a new IT system to match our needs exactly.

This has been an excellent year for our Club, which is now firmly established as one of the major international players.

We have chosen a variety of ways to celebrate our 150th anniversary with Members, colleagues and friends. Receptions are being held in Newcastle, and a number of other shipping centres around the world.

We have set up a 150 Years Charitable Fund in support of the Sailors’ Society, the Royal National Lifeboat Institution, and a local community-based charity.

We have published a splendidly illustrated book in which author Nigel Watson charts the creation, development and expansion of North from its inception in 1860 – a fascinating tale told against the background of key developments in the British and worldwide shipping industry«.

Shipowners Mutual P&I Associates

The Club’s Chairman, Donald A. MacLeod, in the Annual Report 2010 points out, »what a difference a year makes«. In the previous report he referred to »the perfect economic storm that had reaped carnage across the global marketplace«. Although things have not completely returned to normal, he observes a »new normal« coming up that comprehends uncertainty, volatility and government deficits. In his view the Club has adapted to this new environment and continues to provide its members with stability, continuity and security.

»To paraphrase Rudyard Kipling, it is important to keep your head when all about you are losing theirs and blaming it on you. That is exactly what the Board and management of the Shipowners’ Club did, keep their heads in the face of unprecedented market decline by staying the course.

Over the course of the last year, the unrealised investment loss of the previous year has been replaced with substantial gains. I am pleased to repor t that the total investment return for the Club year was US$ 41.6 m, and total funds under management increased by US$ 56.8 m during the year. The Club’s free reserve position grew from US$ 95.6 m in 2009 to US$ 1 5 m in 2010, surpassing the free reserve position of US$ 1 4 m in 2008, prior to the economic meltdown. In 2009, the Board took the position that it would be unwise and imprudent to sell equities at the bottom of the market. This patient and long-term outlook has proven, with the passage of time, to have been the right approach.

The Club has adopted a capital adequacy model as we prepare to meet the standards of Solvency II. As a result, in large measure, the model will dictate the composition of the Club’s investment portfolio. Over the past year, initial steps were taken to implement the capital adequacy model, which led to the decision to sell alternate investments. At the end of the Club year, the investment portfolio consisted of 70.9 % bonds and fixed income and 9.1 % equities.

On a pure year basis, the Club had an underwriting surplus of US$1.7 m, representing a combined ratio of 98. % for the Club year. With back year deterioration, we had essentially a balanced underwriting result of 101.5 %. These results bolster the trend of underwriting balances; and, over a ten-year period, the average combined ratio for the Club is 98.5 %.

I am pleased to report that our Canadian branch has received regulatory approval from the federal government and is currently seeking authorisation from provincial governments. The Shipowners’ Club will be the only International Group P&I Club authorised to conduct P&I underwriting in Canada. Our Asian office, based in Singapore, now has a full Club year under its belt and is meeting and exceeding all operational targets.

As we manage our business in the face of the »new normal«, our Members and business partners can be assured that the Club will respond nimbly to ever changing economic conditions and provide stability, continuity and security in the future as it has in the past«.

Assuranceforeningen Skuld Gjensidig

Skuld CEO Douglas Jacobsohn cited »a tremendous Club’s year«. On the back of a sluggish world fleet growth of 7 %, Skuld increased its tonnage by 15 %, adding 7.7 mill. GT to total owner entries of 57 mill.GT. It advanced strongly in the offshore sector, adding nine new operators and weathered a competitive charterers’ market very well, underwriting some 18 % more business than expected. The Club’s offshore portfolio numbers 435 vessels, from construction, cable layers and anchor handling tug supply vessels to FPSOs, drilling rigs and heavy-lift ships. Together with its new offshore specialist office in Aberdeen, Skuld has become a major market provider of comprehensive insurance cover for owners, charterers and operators of vessels working in all offshore sectors. 2009 membership grew in every ship segment– in some ship segments, one out of every three contracts tendered were secured. The Fleet grew to an increased premium volume of around 20 %. 2009 concluded one of the most successful renewals with a record growth in volume and tonnage, reflecting a rise in gross premium from US$ 213 m to US$ 255 m. Simultaneously the Club announced one of the lowest general increases of all International Group members with no unbudgeted calls. The increased premium income included charterers’ liability for fixed premium. Even though the free reserves were reduced by 40 % in 2008 following the financial crisis the Club headed into 2009 renewals in a strong position. 2009 bottom line stands at US$ 57 m, lifting free reserves to US$ 202 m. The reported positive technical result accounted for US$ 11 m which was driven by one of the lowest combined loss ratio in the industry.

Today the Club currently employs 170 multi-national professionals in 10 global offices. One third of the staff are lawyers.

The Club operations in more than 70 countries, providing P&I Insurance products to over 1,200 members and clients and has seen 2009 as a year of expansion.

In its Annual Report the Club reiterates that the prognosis for 2009 looked grim with considerable challenges facing the global shipping and offshore industries. Still, 2009 turned out to be a successful year for Skuld.

Renewals were concluded with a record growth in volume and tonnage. Skuld announced one of the lowest general increases and again avoided unbudgeted calls. For the seventh consecutive year Skuld posted positive technical results. Financial records are strong and there is a proactive approach to Enterprise Risk Management.

Skuld membership increased in every ship segment. Skuld has advanced in the offshore sector, opened new offices in London and Aberdeen and sees opportunities for further expansion into new geographical markets as well as new lines of business.

Organisational efficiency is growing through active sharing of competence. Skilled employees lift the service level and improve the bottom line. Having financial room to manoeuvre is a critical factor in expanding the business and reaching challenging but attainable goals for the future.

The Club experienced a significant recovery on its investment portfolio during 2009 with a 12.4 % return on investments. The club has continued with a more moderate investment risk after adjusting its asset mix during the financial turmoil in 2008.

The club continues its strong operating performance with a technical surplus of USD 10.6 m equalling a combined ratio of 95.8 % and is growing which is reflected in an overall premium volume increase of 20 %. Skuld continues to diversify its fleet and market composition and will continue expanding its product range to our members. The free reserves are back in excess of USD 200 m after the reduction in 2008. Growth is important to continue as a leading P&I club and a robust and reliable service provider and must be supported by continued growth in free reserves. The club’s solvency level is monitored through the club’s proactive Enterprise Risk Management which secures that the club’s risk exposure and solvency level are maintained at an appropriate level in order to continue as an A – rated club and to be well within the new Solvency II capital requirements.

Standard Steamship Owners P&I Assocs

The principal activities of the club and its subsidiaries during the year were the insurance and reinsurance of marine protection and indemnity and related risks on behalf of the members

Both the Defence and P&I classes continue to be substantially reinsured through a 90 % quota-share reinsurance contract with Standard Reinsurance (Bermuda) Ltd, a wholly-owned subsidiary of The Standard Steamship Owners’ Protection and Indemnity Association (Bermuda) Ltd. The combined financial position of each class is set out in the Annual Report and Accounts of The Standard Steamship Owners’ Protection and Indemnity Association (Bermuda) Ltd.

The estimated total premium for the 2009/10 year amounted to $ 96.7 m, of which $ 32.0 m was paid to Standard Reinsurance (Bermuda) Ltd. under the quota-share contract. The combined P&I class position, set out in the accounts of The Standard Steamship Owners’ Protection & Indemnity Association (Bermuda) Ltd., shows that a surplus is currently expected for this policy year.

In May this year, the board decided to close the 2007/08 policy year without further call. The members were also advised that no supplementary calls were likely for the 2008/09 or 2009/10 policy years.

The estimated total premium for the 2009/10 year amounted to $4.6m, of which $ 2.9 m was paid to Standard Reinsurance (Bermuda) Ltd. under the quota-share contract. The combined Defence class position, set out in the accounts of The Standard Steamship Owners’ Protection & Indemnity Association (Bermuda) Ltd., shows that a surplus is currently expected for this policy year. In May this year, the board decided to close the 2007/08 policy year without further call. The members were also advised that no supplementary calls were likely for the 2008/09 or 2009/10 policy years.

The club is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and policyholder liabilities. The club manages these positions within an investment strategy.

The principal risks arise from inaccurate pricing, fluctuations in the frequency and severity of claims compared with expectation, inadequate reserving and impairment of financial assets. The club has developed a business model that enables it to assess the capital required to reflect the financial impact of the business risks.

The club will continue to write business under the two existing classes, following a policy of selective underwriting.

The board monitors the progress of the club by reference to the KPIs in the attached table.

Chairman of the Standard Steamship P&I Assocs. (Bermuda Ltd.) laid down in his statement for the Club’s Annual Report:

»We have much to be proud of this year, but, at the same time, we face tough challenges now and ahead. This year marks our 125th anniversary, and it is pleasing that it coincides with our having a record level of tonnage insured and a record level of free reserves to support the business. However, we have to operate within an increasingly rigorous regulatory environment and work towards a new, tougher solvency regime.

The club was founded in 1885 in the north-east of England. The club has been a mid-sized player in the P&I market throughout much of its history, but has matured into one which has, I believe, earned the respect of its members for the quality of its service and for its financial standing. We will never be complacent either about the P&I industry generally or about our place in it, and we continuously strive to perform better each year than the year before. I believe that we are well-placed to meet the challenges ahead.

The growth in the tonnage insured is evidence that the club is proving attractive to both existing and new members. While pleased at the increased entered tonnage, which gives the club a broader footprint and improves its business and financial flexibility, my fellow directors and I are monitoring closely the club’s growth, and are satisfied both that the membership criteria remain robust and that the increased tonnage comes from good shipowners and operators. The growth has come from all sectors of shipping, with the club insuring a widely diversified membership operating across the whole spectrum of shipping activities, well-spread geographically. We aim to offer excellent, specialised technical and legal expertise in the sectors in which our members operate. Given the importance of good service to the club’s membership, we are concerned to ensure that service levels are not impacted by the larger membership.

The recovery in our free reserves after the reduction suffered during the financial crisis has been principally due to a good investment performance. This has largely been the result of remaining invested, in part, in equities. We did, however, review our investment strategy during the year and reduced the equity exposure in our investment benchmark, as well as including within the benchmark a small allocation to gold and a diversification within our bond holdings to corporate bonds. The purchase of Standard House in London has also given the club a holding in commercial property. Overall, the intention was to reduce risk in the portfolio while retaining a balanced exposure to the various asset classes.

Standard House, which we bought two years ago and have developed over the period since then, is now the home of the managers’ London agents. The building is working well and is a fitting place from which to carry out the club’s daily administration.

It is not just the investments that have performed well this year. The latest policy year is forecast to produce a small underwriting surplus, and although the combined ratio is not as strong as last year’s exceptional result, it is nevertheless a good indicator that the fundamentals of the business remain strong.

The other side of the coin is that we have experienced, in the last 12 months or so, more large claims than has historically been the case. These have included several Pool claims, bringing to an end our lucky run, which had led to us building up a large Pool credit. We are now more or less in balance on the Pool. Underlying claims, however, remain stable.

The challenges ahead include aligning ourselves with increased regulatory requirements, which include a more formal approach to corporate governance. I mentioned last year that the board had increased its focus on business risks and risk management; this is a continuing process, and more work is being done this year, with a more formal approach to risk and control issues. The club has operated successfully for many years as a private, albeit regulated, association for shipowners, but now needs to adopt a more modern approach to control and governance. This is partly a matter of formalising how the board already operates and what it does, but will also involve the introduction of revised governance arrangements.

These matters are closely related to Solvency II, the introduction of which is fast approaching. This change to all insurance businesses operating in the European Union is not just concerned with how much money the club needs to hold against its business risks, but impacts every aspect of the way in which the club operates, including in particular the way that risk is approached and the club’s governance arrangements. While in themselves the requirements are not extraordinary, the amount of work involved in compliance and proof of compliance is huge and will be a major challenge over the next two years.

Other challenges continue to include the scourge of piracy, where, despite a tougher military response and increased awareness of best practice to avoid seizure, even very large ships are still being captured by pirates in the Somali Basin. World political instability has also manifested itself recently in proposed Iran sanctions legislation, which could have dramatic consequences for shipowners and their insurers, and which is why we have had, with some reluctance, to take steps to safeguard the club from the effects of such legislation.

Steamship Mutual

Performance for the first nine months of the year has been excellent. Underwriting performance was strengthened by a 13.5 % increase in premium, including changes in terms, at the 2009 renewal, the frequency and severity of attritional claims in 2009 is to date lower than last year, there are further releases from prior year reserves and investment performance has been boosted by the recovery in financial markets.

It is too early to forecast the current year outturn as the fourth quarter can be hazardous for claims but in the absence of any serious deterioration we expect an underwriting surplus and further improvement in the three year average combined ratio. There is less scope for investment return in the short term as markets are showing signs of weakness following the rapid correction over the summer. However, assuming no major deterioration in the final quarter the Club projects an increase in its free reserves of over US$ 50 m at year end, on target with its objectives.

After the storm that was 2008 everyone in the financial and shipping world is left trying to understand exactly where we are now and how best to plan for the future. We know that the financial system has experienced a profound shock, that banks will need to re-capitalise and that their risk appetite is reduced. We know that government debt has spiralled and that this will need to be addressed, probably by a combination of reductions in public expenditure and increases in taxation. We do not know how effectively and over what timescale these accumulated problems will be addressed and hopefully resolved; clearly there is plenty of scope for further volatility in the financial markets and in the economy at large. So far as the shipping market is concerned the outlook is complicated by the delivery of large numbers of new ships in 2009–2011. This is likely to have a detrimental effect on freight markets, increase the lay-up of vessels and result in the scrapping of older tonnage. Against such an uncertain backdrop the Club is focused on ensuring that the underwriting result is sound and that investment strategy is prudent. For a number of years the Club’s underwriting results have been amongst the best in the International Group. The Board is determined that this will continue and as part of that process has authorised a standard increase of 5 %. Furthermore, the investment strategy has been revised so that outstanding claims liabilities are closely matched in amount, duration and currency by government bonds, the portfolio in excess of these amounts will be invested in accordance with a new risk budget.

In the first nine months of the year, owned tonnage increased by approximately 3.2 m GT, net of disposals. This net figure includes the impact of the UK Treasury’s Financial Restrictions (Iran) Order 2009, which has obliged the Club to terminate its very longstanding entry with the Islamic Republic of Iran Shipping Lines (IRISL). The growth in the Club has reflected continuing increases in world tonnage, resulting in new entries from existing Members.

The world fleet has continued to grow in spite of the recession, although more slowly than forecast last year because of cancellations and delays in the new building order book. The degree to which this process will continue remains very uncertain. Scrapping is likely to continue at a high level and the Club is also likely to feel the effect of laid-up returns. Cold lay-ups have not yet been as common as, perhaps, might have been expected, but it is not easy to establish the full extent of laid-up tonnage at any time, and the current Rules allow for a considerable delay in making a claim for a return of premium. For the coming policy year, the Directors have authorised changes to the Rules which should make it easier to claim laid-up returns, though the time allowed for making such claims is considerably shortened.

The Club continues to experience the phenomenon of »churn« whereby well-rated older vessels leave the Club to be replaced by modern vessels, rated very competitively. This structural change cannot be avoided, but the Club will have to pay careful attention to its effects during renewal discussions, to ensure that any discussion of record takes account of real levels of premium for current vessels. The Club has made a satisfactory start to underwriting without dependence upon subsidy from investment income. The current forecast indicates a financial year combined ratio for 2009 at or near 100 %. Routine, lower value claims appear to be lower than last year, both in terms of frequency and severity, although it is, of course, too early to be able to present a clear picture of the year. Claims from the International Group Pool, however, are showing a significant increase over the 2008 year. A modest standard increase of 5 % for 2010 thus represents a continuation of the Club’s prudent underwriting policy. The Club’s new cover for yacht owners has been launched successfully and has attracted several members, with good performance so far.

In respect of Class 2 (Defence), we expected and saw an increase in legal disputes and litigation during 2008, the effect (particularly upon contractual performance) of the economic downturn. However, in 2009 the level of claims has thus far reflected more normal levels, and no standard increase has been ordered for 2010.

The International Group has agreed to raise the level of the individual Club retention before pooling from US$ 7 m to US$ 8 m for the 2010 policy year. Although Steamship Mutual Directors voted in favour of this increase, it remains their conviction that it is unwise to raise the retention in a very substantial way, bearing in mind that, for most Clubs, the result is that a highly efficient pooling system is to some extent replaced by a relatively expensive market alternative. Having accepted this increase in recognition of the need for compromise within the Group, they will be likely to resist further change in this direction in the near future.

The Excess Loss layer is, of course, still more volatile than the Pool. At the time of writing, the ten year record on the International Group’s contract is still positive, even taking into account only the premium of the first layer, where all the claims lie. Furthermore, the 2008 year (and 2009 so far) looks extremely positive for underwriters. However, the five year record of incurred claims against first layer premium now shows a loss to underwriters. The Group participates in the results of this layer through a 25 %co-insurance which is then placed with the Group’s captive Hydra. It would obviously be open to the Group to alter the present structure of Hydra’s participation in the risk if this were economically attractive.

Swedish Club

In 2010 the Club is celebrating its »100 years of P&I«. The demand for insurance to provide protection against personal injury, death and collision liabilities was growing rapidly among Swedish shipping companies. In 1910 the Board, together with ship owner Dan Broström and our Managing Director Einar Lange, decided that a move should be made into the world of Protection & Indemnity. That proved to be one of the most important decisions in the Club’s history.

Chairman Lennart Simonsson commented in the Club’s Annual Report: »All industries – shipping included – found 2009 challenging in the extreme. Describing the year as very tough is an understatement. It became no easier towards the end, when people also were confronted with hard decisions concerning values of their assets and their investments. Conditions during 2009 were harsh enough to force everyone to rethink some longcherished business strategies. We can expect no »instant« return to 2007/2008 trade volumes. Instead, we must budget for another hard year for shipping, although outcomes may differ widely from owner to owner – depending largely on the nature of their business and the financial arrangements in place. Looking to the longer term, there will be a new focus on local and regional consumption of production, the Chinese auto industry being one obvious example. We are heading towards a very different world.

Meanwhile, shipowners must continue to grapple with lower trade volumes and supply/demand imbalance. Future prospects are likely to be dominated by severe overcapacity for some years to come. How things have changed! Until relatively recently, an ambitious newbuilding programme was seen as a major asset. Now, in many cases, it is perceived as a liability. The Swedish Club is very conscious of the heavy burdens of our members. In deciding to set the second lowest P&I General Increase within the International Group, at 2.5 %, we took into account the easing of claims inflation, our strong P&I performance, the absence of major claims and our satisfactory combined ratio over the past two years. In addition we acted on our strong desire to support our loyal members in difficult circumstances.

Last year I commented on the problem of piracy. Frankly, if ships were civil aircraft, the global community would not tolerate the present situation. It is an international disgrace that hundreds of innocent seafarers are held captive; yet piracy continues to develop as a highly profitable »industry«. Sadly, there has been no real progress over the past year in confronting the fundamental causes of piracy: extreme poverty and lawlessness. These problems have political solutions and the international community can no longer afford to ignore them.

The Swedish Club continued to develop in a positive way during 2009. We performed strongly; we set ambitious goals and we saw the first fruits of them during the year. Our financial strength is at a good level, all classes are in surplus and new initiatives have been taken to further enhance risk management and to improve our reinsurance arrangements. Operating costs are under great pressure and we will continue to be watchful. Loss prevention remains a top priority and the Maritime Resource Management (MRM) programme went from strength to strength. Also safety and the environment must be safeguarded and here MRM is a powerful force for good in this area. Furthermore, positive and correct behaviour is not just a matter for those on the Bridge; best practice is just as important in the Boardroom! Looking ahead, The Swedish Club will continue to be worthy of its members’ loyalty. Our priorities remain constant: service excellence and competitive but sustainable premiums. The size is a secondary issue. Naturally, we want to grow, but only in a selective and controlled manner. We have no wish to repeat the mistakes of those who built huge underwriting deficits in their blind pursuit of volume. Growth is a positive development only when the product is priced correctly.«

United Kingdom Mutual

In his Annual Report statement Dino Caroussis, Chairman of the UK P&I Club, expressed his pleasure about being able to report »that the Club has successfully weathered the storms of the last 18 months and that our free reserves and capital (including hybrid) have now increased to more than $ 400 m. Holding capital at this level puts the Club in a strong position as we look forward, both to meet the stern regulatory challenges expected under the new European solvency regime and also to give confidence to Members in the overall financial strength of our Club. The Board’s decision last October to levy the supplementary premium on the 2008 policy year at 20 % as estimated, has achieved the overall objective the Board set in October 2008 of minimising the deficits on the then open policy years – 2006, 2007 and 2008. Indeed, the surplus generated on the 2008 policy year has now effectively eliminated the remaining deficits on the other two policy years.

A number of positive features have contributed to this year’s surplus of $ 75 m. Investment income has made an important contribution with an investment return of more than 8 per cent, which has been most welcome when compared to the negative investment return of last year. Encouragingly, claims levels in the 2009 policy year have begun to show the reduction we expected to see as a result of the slow down experienced in most world shipping markets. This is of great significance as lower claims mean that our goal of achieving balanced underwriting, with a combined ratio of 100 %, is made easier without the need for more substantial premium increases. The early signs of this better claims experience enabled the Board to set the general increase for the 2010 policy year at 5 %, a happily lower level than for many years. The Board however remains conscious of the need to maintain premium levels against an anticipated increase in claims activity as economic conditions improve. Although it is still too early to make an accurate forecast of the eventual result of the 2009 policy year the reduction in the number of claims reported at this stage, particularly cargo claims and injury and illness claims, is encouraging, even if the average value of those claims is slightly higher than in previous years. The number and cost of the more serious casualties in any year is more random and after what now appears to have been an exceptionally good year for Pool claims in 2008, the 2009 Pool has seen a higher incidence of claims including two claims from the UK Club. Despite this, the cost of Pool claims in 2009 has not approached the very high levels of 2006 and 2007. The cost of the Club’s own casualty claims in 2009 is also marginally below the five year average at this stage.

Claims levels will always remain difficult to predict in advance of any policy year, and during this past year we have conducted an extensive review of reinsurance protection for the Club’s own claims. As a result of this review, which was closely monitored by the Board’s Strategy Committee, the Club has now put in place for the 2010 policy year a more comprehensive reinsurance programme than we have ever had before, in addition of course to the Group reinsurance contract which continues with the same structure. This new programme is designed to protect the Club against not only single major losses but also a materially adverse aggregation of claims at lower levels, both within the Club retention and at Pool level.

The cost of this programme is offset by the expiry, at 20th February 2010, of our ten year contract with Swiss Re under which no further premium is now due. The ability of the new programme to substantially reduce the impact of claims volatility, not only assists in restraining our combined ratio mentioned previously but also has a beneficial effect on the Club’s capital requirements under the regulatory regimes with which we must comply and also those of the rating agencies’ models.

The work of the Board’s Strategy Committee has become increasingly important to the effective governance of the Club.

West of England

The Club’s Chairman also expressed his pleasure about the year 2009 that has been more satisfactory in many aspects than the previous year. »Over the past twelve months the Club has made steady progress in recovering from the effects of the banking and credit crisis which so adversely affected our business that year. Most importantly a recovery in investment markets in most asset classes enabled us to recoup a significant proportion of the unrealised investment losses that we experienced in the final months of 2008. An overall investment gain on liquid assets of more than $55 m during 2009 has contributed to a 5 % increase in the Club’s free reserve to a total of nearly $ 170 m at year end.

The Club’s current free reserve does, however, include the full value of the additional call for the 2008 policy year which was set by the Board in December 2008. At its meeting in May this year the Board confirmed that the second instalment of the call would be payable by August 2010 as scheduled, because despite the generally more favourable position that the Club experienced during 2009, significant uncertainties remain.

On the positive side, the claims experience for our Members for 2009 has been encouraging. Despite an unwelcome surge in the number of larger claims in the last two months of the year, volumes overall are significantly lower than prior years and the cost appears so far to be developing to a lower level than for any of the years from 2004. It remains the case that 2006 and 2007 were the most expensive claims years in the Club’s history no doubt reflecting the very positive trading conditions enjoyed by shipowners during those years. However, as freight rates and volumes declined in 2008 and 2009, claims for our Members appear to have moderated both in number and in value. This development does not however appear to have been evident from claims involving the International Group Pool. Although Pool claims declined significantly in 2008, there appears to have been a resurgence to nearer 2006 and 2007 levels in 2009. At year end recoverable Pool claims for 2009 totalled about $ 230 m compared with just $ 87 m at year end for 2008 and $ 310 m and $ 303 m for 2006 and 2007 respectively.

It remains to be seen if such a pattern for Members’ claims will continue for 2010, not least because the incidence of large claims is largely random. Trading prospects and freight rates generally have been recovering steadily for some markets for the first few months of this year with fewer vessels idle than for some time. It is not possible to predict whether or not these more favourable conditions will lead to a renewed increase in the cost of claims, but, as I noted a year ago, the cost of certain categories of claim is in any case unlikely to reduce regardless of any market movements. The cost of personal injury and environmental damage will continue to rise along with liabilities that are set by reference to International Conventions or national laws. The environmentally catastrophic losses that may result from the destruction of the »Deepwater Horizon« drill rig in the Gulf of Mexico this April will no doubt have long-term and direct consequences for all shipowners. Discussions already under way indicate that pollution claims resulting from vessels trading to or in the United States in particular are likely to be treated more harshly than ever before, and amendments to OPA 90 and other legislation that will affect shipowners seem inevitable irrespective of the fact that this catastrophic pollution incident has arisen not from a seagoing vessel but from a deep sea oil rig. Furthermore, reinsurance rates for pollution risks worldwide are likely to be affected, and the present limit of cover to $1 billion for oil pollution risks may now be hought to be too low, especially for vessels trading with large volumes of oil as cargo or bunkers to some jurisdictions around the world.

The claims extremes of recent years and the investment volatility of the last two years have required us to review whether or not our current investment strategy remains appropriate. During 2009 your Board examined in great detail whether or not our long standing allocation to fixed income, equity, absolute return and property (primarily Tower Bridge Court in London) continues to offer the most robust and effective investment balance to preserve capital. The Board’s deliberations have been assisted by the Board of ISRe, the Club’s reinsurance subsidiary responsible for investment management, which now includes two non- executive investment professionals. The conclusion reached by ISRe and the Board this February is that broadly, the balance remains appropriate but with some reduction in the neutral position for absolute return funds from 20 % to 15 % and an increase in the neutral position for fixed income from 45 % to 50 %. The annualised return objective has been reduced to 4.5 % to reflect a generally lower investment expectation, with the currency exposure remaining in line with the currency profile of the Club’s claims at 60–90 % invested in the US dollar. For 2010, by a narrow majority, Group Clubs agreed to increase the individual Club retention from $7 m to $ 8 m. We did not support this increase. The efficiency of the Pool is assured if Clubs absorb working layer losses within their retention, but we are concerned that at $ 8 m per claim a Club is carrying individual claims which are too infrequent to be termed ›working layer‹ losses even if there is evidence that larger claims are becoming more frequent. This has resulted in an increase in the buying of separate retention reinsurance by most Clubs to control claims volatility on terms that are less financially efficient than the »at cost« basis on which claims are pooled.