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Annual Report and Accounts 2012

The Steamship Mutual Underwriting Association (Bermuda) Limited

02 Notice of Meeting

03 Directors

04 Report of the Directors

10 Appendix I – Policy Year Statement – All Classes

12 Appendix II – Policy Year Statement – P&I Class

14 Consolidated Income and Expenditure Account

15 Consolidated Balance Sheet

16 Consolidated Cash Flow Statement

17 Notes on the Accounts

26 Report of the Independent Auditor

Contents

The Steamship Mutual UnderwritingAssociation (Bermuda) Limited

(Incorporated under the laws of Bermuda)and its subsidiary companies

01


ManagersSteamship Mutual Management (Bermuda) LimitedWashington Mall 1, P.O. Box HM 447Hamilton HM BX, BermudaTelephone: (1441) 295 4502Telefax: (1441) 292 8787

Managers’ representativesSteamship Insurance Management Services LimitedAquatical House, 39 Bell Lane, London E1 7LUTelephone: 020 7247 5490/020 7895 8490www.simsl.com

Steamship Mutual Management (Hong Kong) LimitedRoom 1901-02, Jubilee Centre18 Fenwick Street, Wanchai, Hong KongTelephone: (852) 2838 2722/(852) 2838 2873Telefax: (852) 2838 2009/(852) 2831 0826

Representative office in BrazilAvenida Rio Branco, 151/1305-1307, CentroRio de Janeiro, R.J. CEP 20040-006 BrazilTelephone: (55 21) 2221 6074/(55 21) 2221 6461Telefax: (55 21) 2221 8747


02

Notice is hereby given that the Thirty Eighth Annual General Meeting of the Members of the Association will be held atthe Hotel de Rome, Berlin, Germany, on Tuesday, 24th July 2012 at 09:05 hours for the following purposes:

1 The Secretary to confirm that Notice of the Meeting has been given.

2 To approve the Minutes of the last Meeting of the Members.

3 To receive the Directors’ Report and Accounts for the year ended 20th February 2012.

4 To fix the number of Directors for the ensuing year.

5 To elect Directors retiring in rotation.Under the Bye-laws of the Company, one-third of the Directors are required to retire annually by rotation. TheDirectors retiring by rotation are Mr M. Bayley, Ms I. Grimaldi, Mr H. M. Juniel, Mr J. M. Macdonald, Mr A. L.Marchisotto, Mr C. K. Ong, Mr R. Otoni Andrade and Mr M. Verde. Being eligible all Directors offer themselvesfor re-election.

6 To appoint Auditors and to authorise the Directors to agree their remuneration.

7 Confirmation of acts.

8 To transact any other ordinary business of the Company.

By Order of the Board

S. DavisSecretary

8th May 2012

N.B. A Member who is entitled to attend and vote at the above Meeting is entitled to appoint a proxy to attend, speakand vote in his place. The instrument appointing a proxy may be in the form enclosed and must be deposited with theSecretary at Clarendon House, Church Street West, P.O. Box HM 666, Hamilton HM CX, Bermuda, not less than 48 hoursbefore the time specified for the holding of the Meeting.

Notice of Meeting

DirectorsH. L. F. Schoeller, Columbia Shipmanagement Ltd.(Chairman)A. Abraha, Ethiopian Shipping LinesK. H. Ahn, Korea Line Corp. (resigned 14th November2011)C. J. Ahrenkiel, Ahrenkiel Consulting ServicesM. W. Bayley, Royal Caribbean InternationalS-M. Edye, Sloman Neptun Schiffahrts AG.O. H. Fritzner (retired 26th July 2011)I. Grimaldi, Grimaldi Holdings SpA.S. Hajara, The Shipping Corporation of India Ltd.D. M. Ho, Magsaysay Maritime Corp.H. M. Juniel, Reederei F. Laeisz GmbH.J. R. Lean (retired 26th July 2011)J. M. Macdonald, Conyers, Dill & PearmanC. J. Madinabeitia, Tradewind Tankers SAA. L. Marchisotto, Moran Holdings, Inc.B. B. A. McAllister, McAllister TowingS. A. Meenai, Pakistan National Shipping Corp.(appointed 10th May 2011)S. Mehta, Essar GlobalJ. W. Murray, Hapag-Lloyd (resigned 8th May 2012)C. K. Ong, U-Ming Marine Transport Corp.R. Otoni Andrade, Log-In Logistica Intermodal SAA. Pohan, New York WaterwayK. Sheehan, Norwegian Cruise Line (appointed10th May 2011)B. K. Sheth, The Great Eastern Shipping Co. Ltd.R. Siddiqi (retired 10th May 2011)A. Tung, Island Navigation Corp. International Ltd.M. Verde, Augustea Ship Management SrL.Wang, Y-G., China Shipowners Mutual AssuranceAssociationWei, J-F., China Ocean Shipping (Group) Co. (retired26th July 2011)A. Zacchello, Seaarland Shipping Management BV.

SecretaryS. Davis, Conyers, Dill & Pearman

ManagersSteamship Mutual Management (Bermuda) Ltd.

Registered officeClarendon House2 Church StreetHamilton HM 11Bermuda

Administrative officeWashington Mall 1P.O. Box HM 447Hamilton HM BXBermudaTelephone: (1441) 295 4502Telefax: (1441) 292 8787

03

Directors


04

The Directors have pleasure in presenting their Report andthe Accounts of the Association for the year ended 20thFebruary 2012.

Principal activitiesThe principal activities of the Association were theinsurance and reinsurance of Protection and Indemnity(P&I) risks, and of Freight, Demurrage and Defence (FD&D)risks on behalf of Members. The total entered tonnageas at 20th February 2012 stood at approximately92.6 million GT.

The Association is a member of the International Group ofProtection and Indemnity Clubs (“the Group”).

DirectorsThe Directors of the Association are as shown on page 3.

In accordance with the Act of Incorporation, as amendedon 18th April 1984, and the Bye-laws, the undermentioned Directors of the Association hold office until theAnnual General Meeting to be held in Berlin, on 24th July2012, when they retire:

Mr M. Bayley, Ms I. Grimaldi, Mr H. M. Juniel,Mr J. M. Macdonald, Mr A. L. Marchisotto, Mr C. K. Ong,Mr R. Otoni Andrade and Mr M. Verde.

Being eligible all Directors offer themselves for re-election.

Audit CommitteeThe Committee acts on behalf of the Board in consideringthe Association’s financial statements and its external andinternal audit activities. In so doing the Committee liaiseswith the Managers and external auditor in monitoring thequality of all reporting which contains material financialinformation, assessing the Association’s internal controlsystems, and advising the Board on the effectiveness andobjectivity of the internal and external auditor.

The Committee meets four times a year, prior to eachmeeting of the full Board and is currently attended bythe following Directors: Mr H. M. Juniel (Chairman),Mr C. J. Ahrenkiel, Mr M. W. Bayley, Mr C. J.Madinabeitia, Mr A. Pohan, Mr H. L. F. Schoeller,Mr K. Sheehan and Mr M. Verde.

In discharging its responsibilities the Committee receivesregular financial and management reports from theManagers including a quarterly report from theCompliance Manager and the internal auditor.The Committee establishes the scope of the reporting,both to itself and the Board, and continually assessesthe quality and adequacy of this information.The Committee monitors the effectiveness of theManagers’ activities with respect to their regulatory, auditand control responsibilities with a specific focus on anyissues of enhanced strategic importance or which presenta significant risk to the Association. Within the past yearthe Committee’s work has included the following matters:

• reviewing a range of operational and riskmanagement policies;

• discussing with the Managers, the underlying causesof the deterioration in prior year claims experienced inthe first two quarters;

• receiving training in relation to the introduction ofSolvency II;

• in conjunction with the Managers, reviewing thecompany’s procedures as regards ‘Know your Client’(KYC) checks and commissioning the implementationof a proprietary system to strengthen screeningcontrols;

• reviewing internal audit reports on investmentcontrols; underwriting and pricing controls; andcontrols over claims estimating, payment andreinsurance recoveries;

• reviewing Eurozone sovereign debt exposure;

• reviewing the implementation of actions arising fromthe FSA Risk Mitigation Programme; and

• monitoring changes in the wider regulatory andcompliance environment including licensing andtaxation issues.

Report of the Directors


05

Free reservesThe balance on the Technical Account showed a surplusof US$ 1.2 million for the financial year.

The overall surplus for the financial year of US$ 4.8 millionreflects the above technical surplus together with aUS$ 4.1 million surplus on the revaluation of freeholdproperty offset by net investment losses of US$ 0.5million.

Free reserves increased from US$ 99.5 million toUS$ 104.3 million.

UnderwritingDuring the year mutual and additional premium waslevied as follows:

• for the year 2011/12 (Class 1 – P&I) 100% mutualpremium;

• for the year 2011/12 (Class 2 – FD&D) 100% mutualpremium;

The 2008/09 year was closed in May 2011.

Gross premium written totalled US$ 286.2 millioncompared to US$ 295.1 million last year.

The Directors have set the release call for both Class 1(P&I) and Class 2 (FD&D) at 20% of mutual premium forthe 2011/12 policy year; 15% of mutual premium for the2010/11 policy year and 5% of mutual premium for the2009/10 policy year.

Free reservesAs at 20th February 2012, the combined free reserves ofthe Association and The Steamship Mutual Trust stood atUS$ 270.5 million. Discounted at a rate of 2.5% over tenyears to take account of “run-off”, the combined freereserve figure is US$ 310.4 million compared withUS$ 330.8 million discounted at 2.5% last year. For theyear under review, the Directors did not order a generalincrease in Class 1 premium.

At the 2012 renewal the general increase was set at 5%.

TonnageThe level of owned entered tonnage grew by 6.9 millionGT during the year. The 2012 renewal saw both a numberof new entries and cancellations, resulting in a netdecrease in owned entered tonnage of 2.2 million GT.However taking the year on year increase into accountfor both owned and chartered entries, the overall totalentered tonnage rose to 92.6 million GT.

The Association’s policy is to achieve diversity of vesseltypes and trades within its underwriting portfolio.Similarly, the Association seeks to keep a worldwidespread of owners. This policy of avoiding an overconcentration in any one area minimises the adverseeffects of market differences or economic difficulties inparticular trades or regions. Analysis of gross tonnageby geographical area will be included within theManagement Highlights to be published in June 2012.

Pooling and reinsuranceThe Association’s reinsurance programme for the 2011/12policy year was arranged in conjunction with othermembers of the Group. The policy provided an ultimatelimit of US$ 3,052 million in excess of US$ 8 million,except in relation to oil pollution claims, which weresubject to an overall limit of US$ 1,000 million.

PoolingFor 2012/13, the individual Club retention, before Poolingwith other members of the Group, will remain at US$ 8million, and the upper limit of the Pool will remain atUS$ 60 million each event. However this year, a Clubbringing a claim to the Pool will bear a 10% retentionwithin the layer of US$ 45 million to US$ 60 million,with the balance being divided amongst all Clubs in theusual way.


06

Pooling and reinsurance - continuedHydra Insurance Company Limited (“Hydra”)With effect from 20th February 2012, the liabilities ofthe Association under the Group Pooling Agreementfor the top layer of the Pool (from US$ 30 million toUS$ 60 million each event) and for the Group’s retentionof 25% of the first US$ 500 million layer of the GeneralExcess Loss contract will continue to be reinsured intoHydra. Hydra is a cell captive set up by the Group inBermuda under the Segregated Account CompaniesAct 2000.

Excess Loss coverThe Group’s Excess of Loss programme was renewedwith the same structure as for the expiring year.The Group, via Hydra, continues to retain a 25%co-insurance of the first layer of the contract, fromUS$ 60 million to US$ 560 million each event.

The limit of the supplementary pooled cover for arestricted range of risks covered by the “Bio-Chem”exclusions in War Risk policies remains at US$ 30 million,any one event each vessel, for the 2012/13 policy year.

US oil pollutionThe Group continues to levy special surcharges for vesselscarrying persistent oil as cargo to the USA. The rates ofsurcharge for such voyages will reduce by 30% in2012/13.

Charterers’ coverThe Association provides cover for P&I and other risksfor charterers, reinsured outside the Pool. Limits up toUS$ 500 million are provided for P&I and a variety oflimits for other risks.

Non-Poolable coversThe Club continues to provide cover for a range of riskswhich are ancillary to Members’ core operations, reinsuredoutside the Pool with limits up to US$ 500 million.

The Steamship Mutual TrustAt the beginning of the financial year, the Associationarranged, through its wholly-owned subsidiary,The Steamship Mutual Underwriting Association(Reinsurance) Limited, to extend the existing reinsurancecontract with The Steamship Mutual UnderwritingAssociation Trustees (Bermuda) Limited as CorporateTrustee of The Steamship Mutual Trust (“the Trust”), a dulyauthorised insurer under the Insurance Act 1978 ofBermuda, to cover all its retained liabilities in respect ofthe 2011/12 policy year, on existing terms and conditions.The Chairman of the Association is an ex-officio Directorof the Corporate Trustee which administers the Trust.The beneficiaries under the Trust are the Members of theAssociation. These arrangements performed entirelysatisfactorily during the year.

ClaimsGross claims and related expenses, including Pool claims,paid during the financial year, increased by 35.0% toUS$ 278.6 million in respect of all policy years, ascompared to US$ 206.4 million during the previousfinancial year, 2010/11. After recoveries from the GroupPool and Excess of Loss contract, claims paid for all yearsduring the financial year amounted to US$ 200.0 million,an increase of US$ 19.4 million (10.8%) over the previousyear. Claims paid by the Association, net of reinsurancerecoveries but including claims handling costs, remainedunchanged at US$ 24.1 million during the year to20th February 2012.

Net claims paid during the financial year, on a combinedbasis including both Associations and Trust, amounted toUS$ 192.6 million, an increase of 10.6% from the figure(US$ 174.2 million) for the 2010/11 financial year.Net outstanding claims rose by US$ 81.6 million toUS$ 616.1 million, an increase of 15.3% from the netoutstanding claims as at 20th February 2011.

Report of the Directorscontinued


07

Gross claims arising in respect of the policy year 2011/12,including IBNR, are projected to be US$ 448.3 million,an increase of 88.5% over 2010/11 (US$ 237.9 million).Claims net of reinsurance recoveries in respect of thepolicy year amounted to US$ 232.2 million on a combinedbasis, an increase of 12.6% to the comparable figure for2010/11 (US$ 206.3 million).

During the policy year, through the Association’smembership of the International Group, the Managershave monitored developments concerning the proposalto amend the limits of liability provided for in the 1996Protocol to the Convention on Limitation of Liability forMaritime Claims (LLMC 1996) and the discussionsregarding loading and carriage provisions contained in theInternational Maritime Solid Bulk Cargoes (IMSBC) Codefollowing a series of vessel losses as a result of cargoliquefaction. The development and implementation of thenew pollution prevention regulations in China havecontinued to be monitored as have the discussions at theIOPC Fund regarding interim funding and the handling oflarge claims volumes. The Managers have also beenclosely involved in issues in the United States in relation tothe use of dispersants in oil clean-up operations underOPA and proposed changes to pollution legislation inAlaska, California and Massachusetts. Sanctions that havebeen developed in the USA, the EU and the UK in relationto Iran, Libya and Syria have continued to be an issue.The Somali piracy problem continues to be of greatconcern, and the loss prevention DVD commissioned bythe Managers on the subject of piracy – “Piracy : theMenace at Sea” has been welcomed by the maritimeindustry and has been shortlisted for the 2012 SeatradeAwards in the Safety at Sea category.

The Association only experienced one Pool claim duringthe policy year; the grounding of the “Costa Concordia” inItaly on 13th January 2012. This vessel was entered withthe Club on a 50/50 quota share basis with the StandardP&I Club.

The 18th and 19th issues of “Sea Venture” were publishedin September 2011 and March 2012 respectively, andthroughout the year the Managers also published variouscirculars, Risk Alerts, articles and news bulletins on theissues described above and other matters of topicalinterest on the Association’s website. The 2012/13 editionof the Association’s DVD guide to casualty investigationand claims handling, “A Team Effort” will shortly bedistributed to Members and correspondents incorporatingSpanish, Chinese, Korean, Russian and BrazilianPortuguese versions.

The Managers have continued to work with VideotelMarine International in the production of trainingprogrammes on Leadership and Team Working Skills,Dangerous and Difficult Bulk Cargoes, and LifeboatAccidents. Further details of the Association’s lossprevention activities will be included in the ManagementHighlights.

Policy year statementsThe figures in Appendices I and II to this Report areprepared under the accounting policies and in the formatused within the financial statements providing a summaryand breakdown by both class of business andunderwriting year. No allowance has been made for theallocation of any future investment income.

InvestmentsThe total level of cash and investments held by theAssociation increased by 12.4% to US$ 113.1 million.The total gain on financial investments was US$ 4.2 million.


08

RulesWith the support of advice from the Association’s lawyers,the Directors have approved Rule changes effective from20th February 2012, to clarify and in some cases broadenthe scope of existing cover, and to take account oflegislative changes.

Class 1 – Protection and IndemnityRule No. 24 i – Imprudent or Unlawful TradingThis amendment provides for the possibility of recovery,subject to the Managers’ discretion, for liabilities arisingwhere, for example, unlawful or contraband cargo iscarried without knowledge and intent on theMember’s part.

Rule No. 24 ii – Bribes and other Corrupt ActivityWhilst bribery has never been condoned by the Club,following the coming into force in the UK in July 2011of the Bribery Act 2010, this new provision introducesan express exclusion of recovery from the Club in respectof any sums which are determined by the Directors tohave been paid by way of a bribe or other corrupt orillicit activity.

Rule No. 42 – SubrogationThis amendment clarifies that the Club’s rights ofsubrogation apply not just where it reimburses theMember directly, but also where it makes paymentunder a guarantee or other security issued on behalf ofa Member.

Rule No. 43 – Provision of BailThis amendment makes clear that the Club may have thebenefit of the Member’s rights of recourse against thirdparties, which are assigned to the Club, in circumstanceswhere the Club makes a payment pursuant to a guaranteeor other security issued on behalf of a Member.

Rule No. 45 – Amendments to RulesAn amendment to permit a change to the Club Rules toenable the scope of cover to respond as a result of thecoming into force of any legislation, regulation orinternational convention during a policy year.

Class 2 – Freight, Demurrage and DefenceRule No. 5 xAn amendment to broaden the availability of Class 2cover for disputes relating to salvage, towage andpilotage services rendered by or to an entered ship.The cover will be available for tug and salvage vesselsprovided they are declared as such and properly rated.

Rules 8 and 9An express provision clarifies that the discretionary natureof Class 2 cover also includes the right to impose a“pay-first” requirement in respect of costs covered underClass 2 prior to seeking reimbursement from the Club.In addition the language in Rule 9 is amended to reflectthe day-to-day superintendence of Class 2 claims bythe Managers and to include a more generic provisionreferring to the appointment of lawyers and other expertsrather than a sole reference to the solicitors of the Club.

Report of the Directorscontinued


09

The Steamship Mutual Underwriting AssociationLimited (“SMUA”)Under an agreement made on 20th February 2003, theAssociation entered into a reinsurance contract with SMUAunder which the Association indemnified SMUA in respectof 95% of the first US$ 30 million of its net underlyingliabilities in respect of each policy year and 100% of anysuch liabilities which exceed US$ 30 million in respect ofeach policy year. From 20th February 2006, the indemnitywas reduced to 90% of the first US$ 30 million of SMUA’snet underlying liabilities. From 20th February 2009, theindemnity is in respect of 90% of the first US$ 50 millionof SMUA’s net underlying liabilities and 100% of anyexcess over US$ 50 million. All Members of SMUA areautomatically Members of the Association and thusbeneficiaries of the Trust.

Management HighlightsThe Management Highlights will be published inJune 2012.

Statement of Directors’ responsibilitiesThe Directors have prepared financial statements for eachfinancial year in accordance with European CommissionInsurance Accounts Directive (91/674/EEC) as adopted inthe United Kingdom through Section 396 of theCompanies Act 2006 and Schedule 3 of The Large andMedium-sized Companies and Groups (Accounts andReports) Regulations 2008 and United Kingdomaccounting principles applicable to insurers.

In preparing those financial statements the Directors arerequired to:

• select suitable accounting policies and then applythem consistently;

• make judgements and estimates that are reasonableand prudent;

• state whether applicable accounting standards havebeen followed, subject to any material departuresdisclosed and explained in the financial statements;and

• prepare the financial statements on the going concernbasis unless it is inappropriate to presume that theAssociation will continue in business.

The Directors are responsible for keeping properaccounting records which disclose with reasonableaccuracy at any time the financial position of theAssociation. They are also responsible for the system ofinternal control, for safeguarding the assets of theAssociation and hence for taking reasonable steps toprevent and detect fraud and other irregularities.

H. L. F. SchoellerChairman

Barcelona, Spain8th May 2012


2011/12) 2010/11) 2009/10) TToottaall))US$ 000) US$ 000) US$ 000) UUSS$$ 000000))

10

Gross premium 285,934) 289,116) 297,580) 887722,,663300))Less:Group Excess Loss reinsurance premium (20,748) (21,558) (20,285) ((6622,,559911))Other reinsurance premium (1,381) (1,553) (1,479) ((44,,441133))The Trust reinsurance premium (206,818) (203,787) (206,493) ((661177,,009988))

Net premium 56,987) 62,218) 69,323) 118888,,552288))

Gross claims paidOwn claims paid (26,016) (79,533) (83,327) ((118888,,887766))Group Pool claims (3,561) (7,342) (6,105) ((1177,,000088))Claims administration expenses (17,268) (17,597) (20,252) ((5555,,111177))

(46,845) (104,472) (109,684) ((226611,,000011))

Less:Group Excess Loss reinsurance recoveries –) –) –) ––)Group Pool reinsurance recoveries –) 1,048) 537) 11,,558855))The Trust reinsurance recoveries 29,579) 83,631) 88,313) 220011,,552233))

Net claims paid (17,266) (19,793) (20,834) ((5577,,889933))

Own claims outstanding including IBNR (384,428) (97,345) (80,106) ((556611,,887799))Group Pool claims outstanding including IBNR (34,335) (18,183) (15,213) ((6677,,773311))Future claims administration expenses (10,120) (2,290) (975) ((1133,,338855))Less:Group Excess Loss reinsurance recoveries 106,875) –) –) 110066,,887755))Group Pool reinsurance recoveries 98,408) 7,829) 3,454) 110099,,669911))The Trust recoveries 198,400) 101,831) 86,129) 338866,,336600))

Net provision for claims outstanding (25,200) (8,158) (6,711) ((4400,,006699))

Brokerage (7,350) (12,322) (17,090) ((3366,,776622))Underwriting administration expenses (1,647) (5,312) (6,366) ((1133,,332255))Other expenses (6,544) (7,366) (6,532) ((2200,,444422))

Balance on the technical account (1,020) 9,267) 11,790) 2200,,003377))

Net investment income (including realised 4,219) 1,577) 7,108) 1122,,990044))and unrealised)Non-technical account administration expenses (594) (722) (853) ((22,,116699))Other income 30) 100) 12) 114422))Taxation (6) –) (1) ((77))

Open policy years funds available 2,629) 10,222) 18,056) 3300,,990077))

Open Policy Years - All Classes

Appendix I – Policy Year StatementAll Classes


11

Available balance as at 20th February 2011 85,593)Add: Balance of 2008/09 year as at 20th February 2011 220)Movements during financial year:Net premium (2,150)Net claims paid (3,877)Expenses (2,083)Other income ––))

Available balance as at 20th February 2012 77,703)

Own claims outstanding including IBNR (251,658)Group Pool claims outstanding including IBNR (38,782)Future claims administration expenses (2,617)Less:Group Excess Loss reinsurance recoveries 6,716)Group Pool reinsurance recoveries 50,734)The Trust recoveries 230,536)

Net provision for claims outstanding (5,071)

Closed policy years funds available 72,632)

SummaryOpen and closed years funds available 103,539)Reinsurance balance and statutory reserve 803)

Total projected funds available 104,342)

Total))US$ 000))Closed Policy Years - All Classes


2011/12) 2010/11) 2009/10) TToottaall))US$ 000) US$ 000) US$ 000) UUSS$$ 000000))

12

Gross premium 249,497) 250,475) 260,318) 776600,,229900))Less:Group Excess Loss reinsurance premium (20,748) (21,558) (20,285) ((6622,,559911))Other reinsurance premium (1,381) (1,553) (1,479) ((44,,441133))The Trust reinsurance premium (176,313) (173,210) (177,099) ((552266,,662222))

Net premium 51,055) 54,154) 61,455) 116666,,666644))

Gross claims paidOwn claims paid (21,884) (64,546) (66,566) ((115522,,999966))Group Pool claims (3,561) (7,342) (6,105) ((1177,,000088))Claims administration expenses (14,355) (13,679) (16,254) ((4444,,228888))

(39,800) (85,567) (88,925) ((221144,,229922))

Less:Group Excess Loss reinsurance recoveries –) –) –) ––))Group Pool reinsurance recoveries –) 1,048) 537) 11,,558855))The Trust reinsurance recoveries 25,447) 68,644) 71,551 116655,,664422))

Net claims paid (14,353) (15,875) (16,837) ((4477,,006655))

Own claims outstanding including IBNR (358,740) (85,250) (71,721) ((551155,,771111))Group Pool claims outstanding including IBNR (34,335) (18,183) (15,213) ((6677,,773311))Future claims administration expenses (8,849) (2,042) (850) ((1111,,774411))Less:Group Excess Loss reinsurance recoveries 106,875) –) –) 110066,,887755))Group Pool reinsurance recoveries 98,408) 7,829) 3,454) 110099,,669911))The Trust recoveries 172,712) 89,736) 77,744) 334400,,119922))

Net provision for claims outstanding (23,929) (7,910) (6,586) ((3388,,442255))

Brokerage (6,493) (10,149) (14,940) ((3311,,558822))Underwriting administration expenses (1,416) (4,332) (5,415) ((1111,,116633))Other expenses (5,808) (6,134) (5,650) ((1177,,559922))

Balance on the technical account (944) 9,754) 12,027) 2200,,883377))

Net investment income (including realised 3,760) 1,323) 6,188) 1111,,227711))and unrealised)Non-technical account administration expenses (522) (590) (723) ((11,,883355))Other income 30) 100) 12) 114422))Taxation (6) –) (1) ((77))

Open policy years funds available 2,318) 10,587) 17,503) 3300,,440088))

Open Policy Years - P&I Class

Appendix II – Policy Year StatementP&I Class


13

Available balance as at 20th February 2011 78,408)Add: Balance of 2008/09 year as at 20th February 2011 2,546)Movements during financial year:Net premium (2,155)Net claims paid (3,875)Expenses (2,073)Other income –))

Available balance as at 20th February 2012 72,851)

Own claims outstanding including IBNR (234,774)Group Pool claims outstanding including IBNR (38,782)Future claims administration expenses (2,472)Less:Group Excess Loss reinsurance recoveries 6,716)Group Pool reinsurance recoveries 50,734)The Trust recoveries 213,653)

Net provision for claims outstanding (4,925)

Closed policy years funds available 67,926)

Summary All Classes FD&D Others P&I

Open and closed years funds available 103,539 (2,076) 7,281 98,334Reinsurance balance and statutory reserve 803

Total projected funds available 104,342

Total)US$ 000)Closed Policy Years - P&I Class


22001122)) 2011)Note UUSS$$ 000000)) US$ 000)

14

Earned premium, net of reinsuranceGross premium 2 228866,,221177)) 295,111)Outward reinsurance premiumGroup Excess Loss ((2211,,991100)) (22,755)The Trust 3 ((220088,,008800)) (209,013)

Earned premium, net of reinsurance 5566,,222277)) 63,343)

Claims incurred, net of reinsuranceClaims paidGross amount 4 227788,,558899)) 206,371)Reinsurers’ share:Group Pool and Excess Loss 4 ((7788,,663344)) (25,849)The Trust 4 ((117755,,886666)) (156,425)

Net claims paid 2244,,008899)) 24,097)

Change in the provision for claimsGross amount 5 223300,,553377)) (9,606)Reinsurers’ share:Group Pool and Excess Loss 5 ((114488,,554477)) 32,696)The Trust 5 ((6699,,444422)) (21,308)

Change in the net provision for claims 1122,,554488)) 1,782)

Claims incurred, net of reinsurance 3366,,663377)) 25,879)

Net operating expenses 6 1188,,442288)) 26,415)

Balance on the technical account for general business 11,,116622)) 11,049)

Non-Technical AccountBalance on the general business technical account 11,,116622)) 11,049)Investment income 7 4499)) 3,690)Unrealised gains/(losses) on investments 8 8833)) (2,112)Investment management expenses ((660099)) (718)Other income 9 44,,111177)) 230)Other charges ––)) –)Taxation 10 ((66)) –)

Surplus for the financial year 44,,779966)) 12,139)

The results for both years are in respect of continuing operations.

There are no recognised gains or losses in either year other than the transactions reported in the above income andexpenditure account.

The accompanying notes to these accounts form an integral part of this income and expenditure account.

Technical Account

Consolidated Income and Expenditure Accountfor the year ended 20th February 2012


InvestmentsLand and buildings 11 1100,,999977 6,910Other financial investments 12 9933,,994488 85,855

Reinsurers’ share of technical provisionsClaims outstanding 5 889900,,991111 672,922

DebtorsDebtors arising out of direct insurance operations 1111,,445599 19,674Debtors arising out of reinsurance operations 13 2299,,997744 21,374Other debtors 14 77,,998888 4,469

Other assetsCash at bank and in hand 88,,112211 7,855

Prepayments and accrued incomeDeferred acquisition costs 8888 94Other prepayments and accrued income 665566 73

Total assets 11,,005544,,114422 819,226

LiabilitiesCapital and reservesFree reserves 15 110044,,334422 99,546

Technical provisionsProvision for unearned premium 558855 605Claims outstanding 5 993366,,005522 705,515

Provisions for other risks and chargesProvision for taxation 10 33 –))

CreditorsCreditors arising out of direct insurance operations 55,,117777 3,697Creditors arising out of reinsurance operations 16 44,,445544 5,744Other creditors 33,,552299 4,119

Total liabilities 11,,005544,,114422 819,226

The accompanying notes to these accounts form an integral part of this balance sheet.

These financial statements were approved by the Board of Directors on 8th May 2012.

H. L. F. Schoeller H. M. Juniel Managers:Chairman Director Steamship Mutual Management (Bermuda) Limited

15

22001122 2011Note UUSS$$ 000000 US$ 000

Consolidated Balance Sheetas at 20th February 2012

Assets


22001122)) 2011)UUSS$$ 000000)) US$ 000)

16

Operating surplus before taxation after interest 44,,880022)) 12,139)

Increase in general insurance technical provisions 1122,,552288)) 1,581)Unrealised (gains)/losses on investments ((8833)) 2,112)Unrealised gain on revaluation of property ((44,,008877)) –)(Increase)/decrease in debtors ((44,,448811)) 24,942)Decrease in creditors ((339999)) (42,775)

33,,447788)) (14,140)

Net cash inflow/(outflow)from operating activities 88,,228800)) (2,001)

Cash flow statementNet cash inflow/(outflow) from operating activities 88,,228800)) (2,001)Taxation paid ((44)) –)

88,,227766)) (2,001)

Cash flows were invested as follows:Increase in cash holdings 226666)) 19)Net portfolio investmentPurchase/(sale) of bonds and loans 66,,330000)) (39,297)(Sale)/purchase of money market instruments ((2299,,114411)) 32,334)Increase in cash on short term deposit 3300,,885511)) 4,943)

88,,001100)) (2,020)

Net investment of cash flows 88,,227766)) (2,001)

Movement in opening and closing portfolio investments net of financingNet cash inflow for the period 226666 19)Portfolio investments 88,,001100 (2,020)

Movement arising from cash flows 88,,227766 (2,001)Changes in market values and exchange rate effects 8833 (2,112)

Total movement in portfolio investments net of financing 88,,335599 (4,113)

Portfolio investments net of financing at 20th February 2011 9933,,771100 97,823)

Portfolio investments net of financing at 20th February 2012 110022,,006699 93,710)

Surplus on ordinary activities before tax

Consolidated Cash Flow Statementfor the year ended 20th February 2012


17

1. Accounting policies(a) Accounting conventionThe consolidated accounts have been prepared in accordance with the European Commission Insurance AccountsDirective (91/674/EEC) as adopted in the United Kingdom through Section 396 of the Companies Act 2006 and Schedule3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and generallyaccepted United Kingdom accounting principles applicable to insurers. The Association has adopted all materialrecommendations of the Statement of Recommended Practice on Accounting for Insurance Business issued in December2005 and amended in December 2006 by the Association of British Insurers (“ABI SORP”).

After making enquiries, the Directors have a reasonable expectation that the Association has adequate resources tocontinue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concernbasis in preparing the accounts.

(b) Basis of consolidationThe Group accounts consolidate the accounts of The Steamship Mutual Underwriting Association (Bermuda) Limited andits subsidiary undertakings The Steamship Mutual Underwriting Association (Reinsurance) Limited, Steamship MutualProperty Holdings Limited and its share of Hydra Insurance Company Limited at 20th February 2012.

(c) Calls and premiums writtenCalls and premiums, less returns, comprise the total premiums receivable for the whole period of cover provided bycontracts incepting during the financial year. All premiums are shown gross of commission payable to intermediaries.

(d) Unearned premiumsThe proportion of the premiums written relating to periods of cover after the year end is carried forward as a provision forunearned premiums.

(e) Deferred acquisition costsAcquisition costs, comprising commission and other costs related to the acquisition of new business are deferred to theextent that they are attributable to premiums unearned at the balance sheet date.

(f) Claims and related expensesClaims and related expenses are charged to the income and expenditure account when they have been settled. A provision is made on a claim by claim basis for the estimated cost of claims notified but not settled by the balancesheet date. A provision for claims incurred but not reported is established on a statistical basis having regard to pastexperience as to the number and magnitude of claims reported after previous balance sheet dates.

(g) Reinsurance premiums and recoveriesPayments made to and recoveries from other Associations under the Group Pooling arrangements are brought into theincome and expenditure account when debited or credited. Other reinsurance premiums are brought into the income andexpenditure account on an accruals basis.

(h) Land and buildingsLand and buildings are revalued every three years and are held at the revalued amount. Any losses or reversal of lossesarising upon revaluation are recognised in the income and expenditure account.

(i) Other financial investmentsQuoted investments have been valued at their bid value as at the balance sheet date. Unquoted investments are held atcost less any provision for impairment in value. The unrealised gains and losses on the movement during the year in themarket value of investments compared to their cost are included in the non-technical account.

Notes on the Accounts


18

1. Accounting policies continued(j) DebtorsReceivables arising from insurance and reinsurance operations are reviewed for impairment throughout the financial yearand as at the balance sheet date.

(k) Foreign currenciesMonetary assets and liabilities, other than unquoted investments, are converted to US dollars at the rate of exchangeruling at the balance sheet date. Unquoted investments are included at their original dollar cost.

Income and expenditure items are translated to US dollars at the rate of exchange ruling at the relevant month end. All exchange differences are included in the income and expenditure account. Land and buildings have been translated at the historic rate of exchange prevailing on the date of revaluation.

The rates of exchange ruling on the balance sheet date and used for the purpose of preparing the accounts were asfollows:

(l) Allocation to policy years and classesMutual premium, additional premium, fixed premium, reinsurance premium payable, claims and reinsurance recoveriesare allocated to the policy years and classes to which they relate. Administration expenses, investment income andexchange gains or losses are allocated to the current policy year in line with total premium income.

22001122 2011

Canadian dollars C$ 00..999977 0.983Euro € 00..776600 0.733UK sterling £ 00..663322 0.617

22001122)) 2011)2. Gross premium UUSS$$ 000000)) US$ 000)

Mutual and fixed premiums written 228855,,227755)) 293,722)Deferred premium and releases 11,,002244)) 1,577)Additional premium ((110022)) (389)Movement in unearned premiums 2200)) 201)

228866,,221177)) 295,111)

Gross premium by destinationEurope 9999,,884499)) 106,464)North America 7777,,117700)) 65,703)Far East 6600,,003388)) 61,194)Africa and Middle East 1122,,330000)) 22,987)Latin America 2244,,335566)) 24,532)Indian Sub-Continent 1122,,550044)) 14,231)

228866,,221177)) 295,111)

Gross premium relates predominantly to one class of business: Protection and Indemnity.

Notes on the Accountscontinued


19

3. Reinsurance contracts(a) Under contracts dated 11th March 1983, the Association, through its subsidiary company, The Steamship Mutual

Underwriting Association (Reinsurance) Limited (note 19), reinsured with The Steamship Mutual Underwriting Association Trustees (Bermuda) Limited all of its Protection and Indemnity risks and Freight, Demurrage and Defence risks for the period up to 20th February 1983 and subsequently further contracts for each of the policy years ended, respectively, 20th February 1984 through to 20th February 2012.

(b) Under an agreement made on the 20th February 2003, the Association agreed to indemnify SMUA in respect of 95% of the first US$ 30 million of SMUA’s net underlying liabilities and 100% of any such liabilities which exceed US$ 30 million for all policy years through to 2005/06; in respect of 90% of the first US$ 30 million of SMUA’s net underlying liabilities and 100% of any such liabilities which exceed US$ 30 million for all policy years from 2006/07 through to 2008/09 and in respect of 90% of the first US$ 50 million of SMUA’s net underlying liabilities and 100% of any such liabilities which exceed US$ 50 million for all subsequent policy years.

4. Claims paid – gross amount22001122)) 2011)

UUSS$$ 000000)) US$ 000)

Claims and related expenses 223388,,227755 175,119)Group Pool claims 1199,,666633 10,489)Claims administration expenses 2200,,665511 20,763)

227788,,558899 206,371)

Less reinsurers’ shareGroup Pool 4433,,001166 13,089)Group Excess Loss 3355,,661188 12,760)The Trust 117755,,886666 156,425)

225544,,550000 182,274)

Net claims paid 2244,,008899 24,097)


20

22001122)) 2011)UUSS$$ 000000)) US$ 000)

Gross outstanding claimsProvision brought forward ((770055,,551155)) (715,121)Provision carried forward 993366,,005522)) 705,515)

223300,,553377)) (9,606)

Group Pool and Excess Loss reinsurers’ share of outstanding claimsProvision brought forward 112255,,446699)) 158,165)Provision carried forward ((227744,,001166)) (125,469)

((114488,,554477)) 32,696)

The Trust’s share of outstanding claimsProvision brought forward 554477,,445533)) 526,145)Provision carried forward ((661166,,889955)) (547,453)

((6699,,444422)) (21,308)

Change in net provision for claims 1122,,554488)) 1,782)

The estimates for known outstanding claims are based on the best estimates and judgement of the Managers of the finalcost of individual cases based on current information. The individual estimates are reviewed regularly and include thisAssociation’s share of other Associations’ Pool claims. Full provision is also made for claims incurred but not reported bythe balance sheet date using detailed statistical analysis having regard to past experience as to the number andmagnitude of claims reported after previous balance sheet dates.


5. Change in net provision for claims


21

22001122)) 2011)UUSS$$ 000000)) US$ 000)

Acquisition costsBrokerage 77,,994488)) 11,633)Underwriting administration expenses 22,,771155)) 6,250)

1100,,666633)) 17,883)

Administrative expensesOther administration expenses 77,,118800)) 7,919)Directors’ remuneration 445544)) 426)Auditor’s remuneration – audit fees 113311)) 187)

77,,776655)) 8,532)

1188,,442288)) 26,415)

Transactions with related partiesSteamship Mutual Management (Bermuda) Limited (“SMM(B)”) provides management and administrative services to theAssociation. Under the terms of its management contract SMM(B) receives as remuneration for its services, a fee which isbased in part on premiums payable by Members in each accounting year together with reimbursement of its office andadministration expenses and those of its worldwide Representatives.

For the financial year to 20th February 2012 these fees and expenses amounted to US$ 28.4million (2011: US$ 32.8 million) with US$ 5.4 million prepaid at the year end (2011: US$ 1.9 million). Since 21st February 2000 the Association has provided SMM(B) with an unsecured, indefinite long term loan amounting to US$ 2,031,185. There were no other related parties transactions requiring disclosure under FRS 8.

22001122)) 2011)7. Investment income UUSS$$ 000000)) US$ 000)

Dividends and interest 113377)) 611)

Realised (losses)/gainsInvestments ––)) 2,922

Exchange ((8888)) 157

((8888)) 3,079

4499 3,690

6. Net operating expenses


22

22001122)) 2011)UUSS$$ 000000)) US$ 000)

Investments 8888)) (2,113)Exchange ((55)) 1)

8833)) (2,112)

22001122)) 2011)9. Other income UUSS$$ 000000)) US$ 000)

Surplus on revaluation of property (see note 11) 44,,008877)) –)Profit commission earned from the Origin joint venture with AEGIS ––)) 131)Bail commission 3300)) 99)

44,,111177)) 230)

10. TaxationThe charge for the year consists of an estimated liability for the accounting year to 20th February 2012 of US$ 2,573 and an underprovision of US$ 3,697 in respect of the previous financial year (2011: US$ nil) based upon negotiationswith the United Kingdom HM Revenue & Customs and assessed on the investment income of the Association and SMUA for the year.

At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda. Accordingly no provision forsuch taxes has been recorded by the Association. In the event that such taxes are levied, the Association has received anundertaking from the Bermuda government exempting it from all such taxes until 31st March 2035.

11. Land and buildingsThe freehold property consists of office premises in London E1. It is occupied under licence, free of rent, by the LondonRepresentatives of SMM(B). The property was valued by CB Richard Ellis Limited at £6,950,000 (US$ 10,996,835)reflecting the market value at 20th February 2012. This resulted in a revaluation surplus of US$ 4,086,964 since the lastvaluation at 20th February 2009. The original costs incurred when the property was purchased in 1987 amounted to US$ 16,952,226.


8. Unrealised gains/(losses) on investments


23

22001122)) 2011)UUSS$$ 000000)) US$ 000)

Market valueBonds and loans 77,,662299)) 1,240)Equities 114466)) 152)Money market instruments 4477,,448844)) 76,625)Deposits with credit institutions 3388,,668899)) 7,837)Cash accounts ––)) 1)

9933,,994488)) 85,855)

CostBonds and loans 77,,446666)) 1,167)Equities 448855)) 485)Money market instruments 4477,,448844)) 76,625)Deposits with credit institutions 3388,,668899)) 7,837)Cash accounts ––)) 1)

9944,,112244)) 86,115)

Unquoted investments of US$ 146,307 (2011: US$ 151,637) are carried in the accounts at their original euro cost less aprovision for a permanent diminution in value.

22001122)) 2011)13. Other financial investments UUSS$$ 000000)) US$ 000)

Group Clubs 558899)) 1,978)The Trust 2222,,772266)) 17,602)SMUA 44,,886655)) –)Other reinsurance debtors 11,,779944)) 1,794)

2299,,997744)) 21,374)

22001122)) 2011)14. Other debtors UUSS$$ 000000)) US$ 000)

Balances with agents 551199)) 539)Other debtors 77,,446699)) 3,930)

77,,998888)) 4,469)

12. Other financial investments


24

22001122)) 2011)UUSS$$ 000000)) US$ 000)

Statutory reserve 224400)) 240)Accumulated fund brought forward 9999,,330066)) 87,167)Surplus for year 44,,779966)) 12,139)

110044,,334422)) 99,546)

The balance carried forward, of US$ 104,342,228 together with any additional premium to be ordered by the Board ofDirectors and recoveries under the reinsurance contracts, will be available to meet liabilities not yet passed or ascertained.The Members of the Association are liable for their rateable proportion of any deficiency arising from an excess ofliabilities over premium. The Directors and Managers are of the opinion that the Association has adequate assets andcontractual arrangements to meet known and anticipated liabilities.

22001122)) 2011)16. Creditors arising out of reinsurance operations UUSS$$ 000000)) US$ 000)

Group Clubs and Excess Loss 44,,445544)) 4,488)SMUA ––)) 1,256)

44,,445544)) 5,744)


15. Free reserves


25

17. Wholly-owned subsidiary companiesThe Steamship Mutual Underwriting Association (Reinsurance) Limited is a wholly-owned subsidiary company which in turn holds 100% of the share capital of Steamship Mutual Property Holdings Limited.

18. Hydra Insurance Company Limited (“Hydra”)Hydra is a reinsurance captive created by the Members of the Group. Each Member has its own cell which is legally separate from the liabilities of the other cells. Under the provisions of FRS 5 this cell has been classified as a quasi-subsidiary and has been consolidated.

19. SecurityDuring the course of the year to 20th February 1997, the Directors authorised the setting up of a trust to secure the payment of recoveries to US resident Members of the Association in accordance with the standard terms of the US National Association of Insurance Commissioners. As at the balance sheet date assets with a total value of US$ 5.4 million (2011: US$ 7.8 million) had been allocated to the trust. For many years the Association has depositedfunds with the Wells Fargo Bank, NA as trustee of the Trust Agreement dated 7th April 1966, between various members of the Group and the US Federal Maritime Commission in connection with the provision of evidence of financial responsibility under Sections 2 and 3 of US Public Law 89-777. As at the balance sheet date the funds deposited had a total value of US$ 1.4 million (2011: US$ 1.2 million).


26

To the Members of The Steamship MutualUnderwriting Association (Bermuda) LimitedWe have audited the financial statements of TheSteamship Mutual Underwriting Association (Bermuda)Limited for the year ended 20th February 2012, whichcomprise the consolidated income and expenditureaccount, the consolidated balance sheet, the consolidatedcash flow statement and the related notes 1 to 19. These financial statements have been prepared under the accounting policies set out therein. These financialstatements have been prepared for the purpose ofMember and policy holder information.

This report is made solely to the Company’s Members inaccordance with Section 90 of the Bermuda CompaniesAct 1981. Our audit work has been undertaken so that we might state to the Company’s Members those matterswe are required to state to them in an independentauditor’s report and for no other purpose. To the fullestextent permitted by law, we do not accept or assumeresponsibility to anyone other than the Company and theCompany’s Members as a body, for our audit work, forthis report, or for the opinions we have formed.

Respective responsibilities of Directors and AuditorAs described in the statement of Directors’ responsibilities,the Company’s Directors are responsible for thepreparation of the financial statements in accordance withthe European Commission Insurance Accounts Directive(91/674/EEC) as adopted in the United Kingdom throughSection 396 of the Companies Act 2006 and Schedule 3of The Large and Medium-sized Companies and Groups(Accounts and Reports) Regulations 2008 and generallyaccepted United Kingdom accounting principles applicableto insurers.

Our responsibility is to audit the financial statements inaccordance with International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financialstatements give a true and fair view and are properlyprepared in accordance with the relevant financialreporting framework and whether the financial statementshave been properly prepared in accordance with theBermuda Companies Act 1981. We also report to youwhether in our opinion the information given in theDirectors’ Report is consistent with the financialstatements.

Report of the Independent Auditor


27

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amountsand disclosures in the financial statements sufficient togive reasonable assurance that the financial statementsare free from material misstatement, whether caused byfraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’scircumstances and have been consistently applied andadequately disclosed; the reasonableness of significantaccounting estimates made by the directors; and theoverall presentation of the financial statements. Inaddition, we read all the financial and non-financialinformation in the annual report to identify materialinconsistencies with the audited financial statements. If we become aware of any apparent materialmisstatements or inconsistencies we consider theimplications for our report.

Opinion on financial statementsIn our opinion the financial statements:

• give a true and fair view of the state of the Company’saffairs as at 20th February 2012 and of its surplus for the year then ended;

• have been properly prepared in accordance with the European Commission Insurance Accounts Directive (91/674/EEC) as adopted in the United Kingdom through S396 of the Companies Act 2006 and Schedule 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and generally accepted United Kingdom accounting principles applied to insurers; and

• have been properly prepared in accordance with the Bermuda Companies Act 1981.

Opinion on other matterIn our opinion the information given in the Directors’Report is consistent with the financial statements.

Deloitte LLPChartered Accountants and Registered Auditor

London8th May 2012


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