Standard & Poor's affirm the Club's A (stable) rating

Standard & Poor's ("S&P") today affirmed the Club's A (stable) rating after completing its full annual review of the Club. The S&P review considers a wide range of factors including the Club's capital adequacy, industry and competitive position, risk profile and, importantly, risk management. This S&P rating therefore provides a much wider view of the Club's financial health than the more generic measures such as free reserves per ton.

In reaffirming the A (stable) rating, S&P have improved their assessment of the Club's Enterprise Risk Management ("ERM") which forms one of the building blocks upon which the overall rating rests. This reassessment endorses the Club's approach to risk selection and risk management over the past seven years and recognises that the Club has improved the quality of its book due to robust entry criteria, which focus on safety and quality. The Club has grown over recent years, but growth has not been achieved at the expense of maintaining membership standards. The Clubs conservative approach to growth and enhanced risk culture have all led to the revised assessment of the Club's enterprise risk management to adequate with strong risk controls.

The Club's stable outlook reflects S&P's expectation that the Club's capital adequacy will remain at the current "AAA" confidence level in their risk-based model over the two-year rating horizon and that the Club's focus on capital efficiency and disciplined underwriting provides strong evidence that future results will remain stable.

S&P continue to assess the Club's financial flexibility as inadequate. In making this assessment S&P are tied to a formula that considers interest cover in respect of the hybrid coupon (i.e. to what extent does the Club's overall surplus exceed interest payments). This formula rates the Club as inadequate since the Club's target of breakeven underwriting means that the forecast surplus is not consistently 400% of the Hybrid interest. S&P recognise this is just a technical issue and that financial flexibility in the Club world is not driven by debt issue but by the right to make supplementary calls. The S&P report will make a comment to draw attention to this point.

In the attached press release, S&P comment that in their view "the club has improved management of the volatility inherent in the marine P&I sector while maintaining its market share. The club's membership has been refined, reinsurance protection further strengthened, and the expense base controlled" and that the "underlying profitability has improved due to the loss of members with poor claims records. The club has refused to quote on a significant proportion of business (20%-25% of quotes by gross tonnage over the past seven years, owing to its stricter underwriting criteria. Hence, the club's average combined ratio for the previous seven years was around 100% (excluding premium discount effect), and no individual year exceeded 105%. We consider this to be strong evidence that future returns will move within a narrower band than they have in the past. Increasing capital efficiency and disciplined underwriting has allowed the club to grow capital as well as return some $25 million to mutual members through premium discounts in three of the last five years.


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