International Group P&I Clubs Market Update March 27, 2008

1 Marine & Energy Practice Topics  The International Group of Clubs  Mutuality and Reinsurance  Club Cover  Non-poolable and Extended Cover  Underwriting Considerations  Challenges and Opportunities

2 Marine & Energy Practice The International Group of P&I Clubs Overview  The Clubs are Associations of Shipowners and Charterers, owned and controlled by the insured shipowner or charterer "Members".  The members of the Club are both the Insurer and the Assured  13 “clubs” collectively covering 90%+ of the world’s merchant fleet  Each club has its own style, focus geographical / type of insured operation  Each club has its own strengths and weaknesses – specific expertise – financial stability, – commercial, – flexibility, – service  All 13 focus on “blue water” tonnage although some will consider “brown water” and offshore (energy) business.

3 Marine & Energy Practice The International Group Full Titles  The American Steamship Owners Mutual P&I Association Inc. U.S.A.  Assuranceforeningen Gard, Norway  Assuranceforeningen Skuld, Norway.  The Britannia Steamship Insurance Association Ltd., London.  The Japan Ship Owners' Mutual P&I Association, Tokyo.  The London Steamship Owners' Mutual Insurance Association, London.  The North of England P&I Association Ltd., United Kingdom.  The West of England Ship Owners Mutual Insurance Association Ltd., London.  Ship Owners Mutual P&I Association, Ltd, London.  The Standard Steamship Owner's P&I Association Ltd., London.  The Steamship Mutual Underwriting Association Ltd., London.  Sveriges Angfartygs Assurance Forening, Gothenburg.  The United Kingdom Mutual Steamship Assurance Association Ltd., London.

4 Marine & Energy Practice Mutuality  The Clubs operate on a non-profit making mutual basis. Shipowners created “non-profit” mutuals to combat the large profits made by underwriters 150 years ago.  Members pool their premium together in order to meet losses suffered by each individual Member.

5 Marine & Energy Practice Structure of an International P&I Club  Shipowners within a Club elect a Board of Directors that meet during the course of the year to make decisions with respect to: – Claims – Finances – Policy (Rules)  The Board of directors appoint a manager to operate daily activity of Club. The mangers primary tasks are to: – Handle Claims – Underwrite – Handle Investments  Charles Taylor (Standard Club), Thomas Miller (UK Club) Shipowners Claims Bureau (American Club). Unlike the P&I Clubs, the managers are profit making companies.

6 Marine & Energy Practice Types of Calls – (Premium) a Club can levy against its membership  Estimated Total Call (ETC) = Advance + Supplementary  Advance Call - Premium paid during the insurance year. Usually four installments. Typically 80% of ETC but more clubs are collecting 100% ETC.  Supplementary Call - Paid shortly after policy year. Is based as a % of Advance Call – In example above it would be25 % of Advance (20% of ETC).  Unforcasted Supplementary Call - If there is a shortfall because claims exceed the premium, the Members may pay a pro rata "additional call“. Estimated Supplementary Call is then increased. In example above – the 25% Supp call would be increased to say 30%. Applied across membership. – Likewise, if there is surplus, a return may be made to the Membership, or the surplus transferred to reserve to meet losses on other years. Board of Directors decision.  Release Call - Paid for all open policy years when leaving club (Typically 25% of Advance).

7 Marine & Energy Practice Supplementary Calls (as at December 2007) Club %%%%%%%% Est.CalledEst.CalledEst.CalledEst.CalledEst.CalledEst.CalledEst.CalledEst.Called American Britannia Gard London Club 40 North of England Shipowners Skuld Standard Club Steamship Swedish Club UK P&I West of England

8 Marine & Energy Practice Premium Breakdown CLAIMS Management Reinsurance

9 Marine & Energy Practice International Group Results Combined Underwriting Result – 5 year average

10 Marine & Energy Practice Free Reserves

11 Marine & Energy Practice Consequences of sharing risk  Sharing risk – Club members share risk – therefore risks must be equitable and similar in nature.  Single set of insuring conditions (Rules). The Clubs must offer the same poolable cover. All renewal dates are February 20.  Competition – Due to shared reinsurance capacity, the Clubs can not compete directly on price within the IGA.  Clubs can not attract a new Member by offering terms more favorable than the holding Club.  Release calls for movement between Clubs.

12 Marine & Energy Practice P&I Club Cover Major Risks covered by IG Clubs  Cargo Claims  Loss of Life / Personal Injury – Crew, Passengers, Third Parties  Collision and Fixed and Floating Objects  Pollution  Wreck Removal  Repatriation & Seaman effects  Fines  Stowaways  Unrecoverable GA  Diversion Expenses  Fines  Legal costs  Sue and Labor  Risks incidental to shipowning – (Omnibus Rule)

13 Marine & Energy Practice Club Cover Other Risks –  Freight, Demurrage and Defense (FD&D) – Legal costs and other expenses which may be incurred in resolving disputes usually under charterparties – Does not cover the amounts in dispute – When ordering a new building remember to attach FD&D at the signing of the new build contract and not at delivery (i.e. when the main P&I incepts)  FD&D would provide cover legal costs and expenses in relation to disputes with the yard.  Charterers Risks – Liability – Damage to Hull – Bunkers

14 Marine & Energy Practice Club Cover Extended cover – (Buybacks)  Most Clubs will purchase specific reinsurance programs to cover those risks not covered on a poolable basis through the IGA. – Limits will vary by Club – Coverage will vary by Club depending on the appetite of the Club for a particular class or targeted business.  Common extensions include – Specialist Operations cover – Drilling/Pipe laying/dredging etc – Salvage operations cover – Contractual Liability and Towage – Shipowners Liability to Cargo (deviation risks) SOL cover – Additional Assureds (commercial market terms)  Coverage can also be purchased directly with the commercial market either on a primary or excess basis.

15 Marine & Energy Practice Level of cover provided  The International Group provides significant limits of cover.  In 1998 a new limit of liability was defined.  Overall limit: $ 5.5 billion (this limit fluctuates)  1976 Limitation of Liability for Maritime Claims Convention: - 167,000 SDR ($270,540) for ships not exceeding 500 tons - For each ton from 501 to 30,000 tons, 167 SDR ($270) - For each ton from 30,001 to 70,000 tons, 125 SDR ($203) - For each ton in excess of 70,000 tons, 83 SDR (134)  IGA Club Limits are set at 2.5% of the estimated combined world shipping fleet

16 Marine & Energy Practice Level of cover provided Sub Limits  Oil pollution – $ 1 billion  Crew and Passenger claims $ 3 billion combined  Passenger claims limited to $ 2 billion – Athens Convention on Passenger Liability 1976 as amended by the 2002 Protocol.  250,000 SDR for death or injury in respect of each passenger  Increasing to to 400,000 SDR unless the carrier can prove that the incident which caused the death or injury occurred without the fault or neglect of the carrier – Single Cruise Ship at 3,000 passengers:  400,000 SDR x 3,000 = Billion SDR ($1.944 Billion)

17 Marine & Energy Practice How do the clubs achieve these limits?  Through mutually, sharing risk between the Members of each club. – Primary $ 7 million – Some Clubs purchase their individual reinsurance programs within this layer (abatement)  Excess of the above claims are pooled and mutualised between all Clubs. – Lower Pool up to $30 million – Upper Pool up to $50 million (within the IGA Captive – Hydra)  International Group Reinsurance program – Varying layers up to $2,050 billion  Oil Pollution $1 billion  Overspill (do not confuse with pollution) – excess layer for a further $1 billion.

18 Marine & Energy Practice Pool Structure Overspill – Approx 5,500m

19 Marine & Energy Practice How is the system monitored? The International Group Agreement (“IGA”)  Gentleman's agreement until 1985 when first IGA written down.  Sets out procedures for movement between Clubs (all 13 Clubs are signatories).  Restricts free movement on a competitive basis.  Has been accused of being a cartel.  Constantly under threat from EU non competition rules. Most obtain approval from EU and Department of Justice in United States.  The system is robust and has been in place for 150+ years.

20 Marine & Energy Practice Financial Review 2007 Pool Contributions ClubContribution Gard14.80% UK14.02% Britannia12.06% West11.74% SSM8.42% NoE6.60% Japan6.26% London5.02% Standard4.95% Skuld4.49% Swedish4.37% SOP4.21% American3.05%

21 Marine & Energy Practice Pool incurred (paid) claims development Years LimitUS$000s x 526,20192,80687,03395,989103,513124,562130,713131,305133,210134, x 533,868109,298117,991123,529150,996155,138155,732156,970157,941152, x 525,93695,603121,628147,285147,871154,746154,884160,945158,385154, x 54,76032,75578,435108,286110,538112,804114,070124,435128,023129, x 51,52129,37147,34971,23689,39590,72090,88494,47794,34996, x 511,901111,729132,254136,240144,858141,785143,085144,335142,061143, x 51,15739,85541,94745,45139,89436,87640,03841,43442,10342, x 510,397107,046158,373165,773169,942174,290177,689177,605176,990184, x 541,490113,514131,697136,128138,417137,452137,770139, x 543,596142,565178,643182,159199,435200, x 62,29092,290160,549168, x 672,397259, / x 7

22 Marine & Energy Practice Major Claims 2006/07 VESSEL TYPECLAIMESTIMATE $MLCLUB 1TankerSpill 23.5SOP 2ContainerGrounding 28.2Gard 3ContainerSpill 34.0Swedish 4ContainerFire 36.4Britannia 5BulkerGrounding 42.2Gard 6Ro-RoSinking 46.8Gard 7Ro-RoGrounding 54.4Swedish Club 8BulkerGrounding 55.7West of England 9BulkerGrounding 60.5Japan Club 10ContainerGrounding 66.6London Club 448.3

23 Marine & Energy Practice Underwriting considerations Factors driving premium – Operator’s reputation – A Club may ask current Members for their input on a prospective Member  Quality of the operation – Clubs will often undertake an audit of the operation  Nature of business – Clubs specialize in certain types of business and geography  Loss record,  Vessel details,  Fleet size  Crewing,  Trade

24 Marine & Energy Practice Club Service  Advice and information  Contract advice  Claims handling and advocacy  Clubs are working for the Members  Clubs will look for a way to pay claims rather than look for an exclusion  CLUB LETTERS OF UNDERTAKING – is a powerful security tool when vessels are under arrest in countries around the world. Club letter is well recognized world-wide and can be used in lieu of a Bank Guarantee/LOC/CASH deposit. LOUs can be quickly arranged in order to keep the vessels schedule.

25 Marine & Energy Practice Summary P&I ClubsCommercial Insurers Not for profitThe P&I Club Provide at cost insurance without profit. Fixed premium insurers aim to make a profit for their share holders. ControlUltimate control of P&I clubs is in hands of the vessel owners, through elected vessel owner boards / committees they decide policies on scope cover, claims payments, rating policies etc. Ultimate control of a commercial insurer in the hands of insurance company, and not the vessel owners. CommitmentP&I Clubs have existed continuously for more than 140 years. Commercial insurers move in and out of P&I

26 Marine & Energy Practice Summary P&I ClubsCommercial Insurers Scope of coverP&I clubs provide the most comprehensive cover available including right of board to cover "omnibus" claims. One cover fits all. Commercial insurers typically provide less cover than a P&I club, however, flexible in tailoring a policy specific to a shipowners operation. Letters of undertaking P&I Clubs cost-free letters of undertaking are generally accepted worldwide and can be provided without delay. Commercial insurers usually require bank guarantee to free ships from arrest, with resulting costs and delays. Limit of CoverHigh limits of cover provided. No option to choose lower limit – forced to purchase high limits. Shipowner free to structure limit as they see fit.

27 Marine & Energy Practice 1. UK Club$316,000, American $134,000, Gard$211,000, Japan Club$110,000, West of England $186,000, Shipowners $90,000, Britannia $170,000, Steamship Mutual$86,000, North of England $138,000, Swedish Club$86,000, Skuld $138,000, London $67,000, Standard$135,000,000 NET PREMIUM MUTUAL INCOME

28 Marine & Energy Practice The International Group - Premium Market Share Common Usage  Britannnia  London Club.  North of England  West of England  Shipowners  Standard Club  Steamship Mutual  UK Club  Gard  Skuld  Swedish Club  American Club  JPIA 65% 25% 5%

29 Marine & Energy Practice 1. UK Club95,000,0008. North of England 40,000, Gard76,400,0009. London 29,000, Britannia 74,000, Skuld 26,800, Standard64,000, American 15,500, West of England 56,500, Swedish Club14,800, Japan Club56,400, Shipowners 9,400, Steamship Mutual43,000,000 Owned Mutual Tonnage

30 Marine & Energy Practice International Group General Increase History P&I CLUB ? American Britannia Steamship Gard Japan London North of England Shipowners’ Protection Varies Skuld Standard Steamship Mutual Swedish Club UK Club “17.5” West of England Group Average: % Compounded Effect %

31 Marine & Energy Practice Future Outlook & Challenges  Most Clubs rely too heavily on investment returns to break even – more general increases may lie ahead.  Devaluation of the dollar has increased the claim expenses. Switch to multi national currency SDRs may be the answer.  Increase in labor costs / repair costs– effecting third party property claims ie. Collision, Fixed and Floating Objects type claims.  Diminishing supply of competent seafarers.  Increase of entitlements under global compensatory regimes – needs to be addressed in current pricing.  Deep pocket syndrome still exists globally – with poor judicial standards for shipping cases. Governments often overreact to major casualties in order to o further a political agenda.

32 Marine & Energy Practice Opportunities for the Fixed Premium Market  Given the rise in premium over the last 8 years – commercial markets may wish to revisit profitability of Blue Water P&I Insurance – market timing could be ripe. 160% general increase since  Vessel owners with medium to small size fleets and with good records likely to have paid the General Increases.  The Shipowners Protection Mutual and British Marine Mutual (BMM)(demutualized in 1999) that have focused on small coastal trading vessels ex. tanker, cruise ships have been profitable in recent years. One of the few niches that have made a good return over last 6 years.  Many drybulk/multi purpose vessels are forced to buy the Club’s high limits of coverage as the Club system does not allow members to buy different levels of coverage.  US market should target niche International Group business that seek lower limits of coverage and predictable insurance costs. This formula may appeal to the new class of shipowner’s – stock listed companies.