TO THE MEMBERS

Dear Sirs

Policy Year Review and Financial Year Highlights at 20th February 2003

Review of Open Policy Years

2000 Policy Year

At their meeting in May, the Directors decided to close the 2000 policy year. This was the first policy year under the new mutual premium system. No supplementary premium was required.

2001 Policy Year

No supplementary premium is anticipated, and the Board expects to close this policy year in April 2004.

2002 Policy Year

The final 25 per cent instalment of the mutual premium for the year is due for payment in December 2003. No supplementary premium is anticipated.

Financial Year Highlights

The Directors also approved the Financial Statements for the year ended 20th February 2003. As forecast, the Club incurred an operating deficit for the year but this was offset by much better than expected investment income for the year of $45 million after tax (achieving an investment return of 6 per cent). The final deficit figure after tax for 2003 is $31 million, a notable improvement over the deficit in 2002 of $138 million.

The Club's full financial statements together with the Directors' Report and Review of the Year will be published, as usual, in July. The key financial figures are reproduced in Table 1 below.

The figures shown in Table 1 are the final position of the Club after a recovery under the reinsurance contract with European Re of Zurich (the Swiss Re contract) which has enabled the Club's free reserves to remain within the target band established by the Board.

Recovery under the Swiss Re reinsurance contract

The overall deficit had the effect of reducing the ratio of total funds ($928m) to outstanding claims ($759m) to 122 per cent which is below the trigger point for the Swiss Re reinsurance contract (125 per cent). As a result the Club can make a recovery from Swiss Re of outstanding claims so as to restore the ratio to 125 per cent. The net effect of that recovery is to restore the Club's free reserves to $179 million. These figures are reproduced in Table 2 below.

The resulting reinsurance recoveries of $42 million reduce the total outstanding claims, including IBNR, from $759 million to $717 million. The contract now operates as a stop-loss reinsurance so that all future claims payments in excess of this figure in respect of all policy years up to and including 2002 will be recoverable under the reinsurance, irrespective of the year in which they are incurred, up to the contract limit of $300 million.

In the previous two years, the Club has included in its assets, under sundry debtors, the amount which would be recovered from Swiss Re if there were no claim on the contract. Since the claim now exceeds the value of this accrued premium refund, the accrual has been reversed and its value plus the 2002 year premium (totalling $32 million) is treated in the financial statements as reinsurance premium for the year. This is offset by the $42 million recovery on outstanding claims, increasing the Club's free reserves by $10 million.

Looking forward, there is no adjustment to the premium payable to Swiss Re in future years as a result of this claim. The annual premium is fixed under the contract for each financial year's protection (up to the contract's aggregate limit of $300 million), irrespective of the loss experience on prior years. This annual premium will be payable in full without any allowance for the refund value, at least until the accrued refund value again exceeds the value of the potential claims recovery.

In accordance with the original decision of the Board, this premium is paid out of the Club's Contingency Account which also receives the benefit of the reinsurance recovery and will bear the impact of any adverse results from the specialist reinsurance subsidiary established in Bermuda in connection with these arrangements. Premium payments do not therefore impact the policy year figures either now or in the future.

Yours faithfully

Thomas Miller (Bermuda) Ltd.