• Financial objectives - significant progress has been made
• Reduced reliance on investment income remains important
• Supplementary premium estimates maintained at nil for all open policy years
• 7.5 per cent general increase for 2007 policy year

Dear Sirs

At their meeting on 23rd October the Directors reviewed the development of the Club's funds and claims.

This time last year the Board drew attention to a number of factors driving the Club's financial performance, including the continuing exposure to volatility in both the investment return and the claims pattern and the inflationary pressure on claims from commodity price increases.

The impact of large claims continues to be significant, not only for the Club, but also for other members of the International Group Pool. The extent of the volatility in the claims pattern can be seen clearly from the table below, which shows the currently projected claims outcome for the policy years 2001- 2005. These figures represent the incurred claims and the expenses incurred in defending them together with an actuarial element for the projected final outcome of the year, usually known as IBNR (incurred but not reported) claims.

Projected Claims Outcome in $ million

The 2003 policy year continues to be one of the best years for claims for the Club. In contrast, the 2004 policy year was one of the worst years on record and was notable for the large number of high value Pool claims. Indeed notified claims on the Pool by all clubs in the International Group continue to run at record levels for that year. The 2005 policy year began relatively benignly but has recently deteriorated largely as a result of the increase in the level of Pool claims. After just six months of development, it is still too early to predict the outcome of the 2006 policy year, but there is nothing currently to suggest that it will be out of line with forecast projections.

Having considered these developments, the Board confirmed that the supplementary premium estimates should be maintained at nil for all open years

During the past year the Club has reviewed its investment policy in the context of the UK Financial Services Authority's (FSA) Individual Capital Assessment process, which assesses all the risks that the Club faces. Investment volatility and the expectation of modest average investment returns in the future have been commented on in the past and it remains important to reduce reliance upon a regular annual return from investments.

On current projections, the Swiss Re reinsurance contract will produce a further recovery at 20th February 2007. The contract also assists in protecting the Club from the impact of exceptionally adverse claims experience in a single policy year. However it has never been the Board's policy to rely on this reinsurance as a means of subsidising in advance a planned operating deficit on the forthcoming policy year.

One of the current developments in solvency requirements is the EU's Solvency 2 initiative, which is in the consultation stage at present and is expected to come into force in 2010. The FSA, in advance of Solvency 2, has developed its Individual Capital Assessment (ICA) approach to determining the levels of capital an insurer should hold. The ICA is seen by many, including the FSA, as a forerunner of Solvency 2.

The Club has had its ICA reviewed by the FSA and the subsequent receipt of the Individual Capital Guidance (ICG) by the Club marked a successful conclusion of that process. The Club maintains sufficient capital both for the FSA's ICG and also for capital requirements in other countries where it is regulated. The Club continues to monitor the impact of capital and regulatory developments (as well as the business environment) to ensure that its financial planning takes into account all the relevant factors.

The Board recognises that significant progress has been made in achieving the Club's Corporate Plan but it remains important to ensure that the overall premium levels are set based on the factors discussed above.

The Board has accordingly concluded that a further increase in premium levels is required and have ordered a general increase for the 2007 policy year at 7.5 per cent of Members' premium ratings plus any relevant increase in the cost of the International Group Reinsurance programme for 2007.

Mutual premiums for 2007 will be payable in four instalments, three during the policy year by 20th March, 1st June and 1st September, and the fourth by 1st December in the following year (2008).

The Board decided to maintain the existing formula for release calls which is to levy 5% of mutual premium (including the outstanding instalment of the 2006 mutual premium) on the open policy years.

Yours faithfully

THOMAS MILLER (BERMUDA) LTD.