Annual Report

　　H&M insurance is a highly internationalised market, meaning its dependence on the international reinsurance market is relatively high. In recent years, the improvement of the international insurance market and the management of Chinese insurance institutions has led to a rebound in China’s insurance market.

　　In the 2006 policy year, the Managers took active control of the scale of underwriting and implemented the following measures to manage the risks being underwritten more efficiently:

　　１.Striving to obtain more beneficial reinsurance terms while reducing the reinsurance cost

　　２.Strictly implementing the decision of the board of directors and the Hull committee to adjust the renewal premium

　　３.Adjusting conditions of underwriting in accordance with the insurance market

　　４.Improving efficiency in claim handling and actively mitigating the loss.

　　The implementation of these measures achieved distinct results.

　　Notes: the total insured amount includes those under HM cover and IV cover (but excludes War Risks cover). The statistical period starts from 1st January to the 31st December of the relevant policy year.

　１.Underwriting

　　From the beginning of 2006, the shipping market showed a substantial decline, as a consequence, the value of ships decreased greatly. Furthermore, some of the older vessels were withdrawn from the market. Under such circumstances, the underwriting scale of the Association in the 2006 policy year was slightly contracted. As of 31 December 2006, 128 ships from 24 members were insured by the Association for Hull & Machinery Risks (including IV Risks), with the aggregate insured value of US$1.621 billion. This represents a decrease of 7.91% and 6.68% respectively, compared to the 139 ships and US$ 1.737 billion of the last policy year.

　２.Reinsurance

　　Although there has seen no serious claims occurred in recent policy years, the loss record of reinsurance of the Association was not greatly improved. Furthermore, as a direct impact of the “9/11” event and global natural disasters such as hurricanes, the international reinsurance market suffered significant losses. This in turn reduced the numbers and capacity of reinsurance underwriters. As a result the Association’s attempt in improving reinsurance conditions yielded little success.

　　The Association was able to withstand the pressure of a significant increase in reinsurance premiums from the reinsurer. As such the reinsurance costs were successfully controlled at 49.92% of the gross premium, increasing only 3.49% compared to the 46.42% of the last policy year.

　３.Claim Handling

　　Note: estimated liability = liability pending + paid-up

　　As of 31st December 2006, The Association received 67 claims under Hull & Machinery risks, representing a decrease of 18.29% compared to the 82 cases in the policy year 2005. The total claim amount was US$ 7.57 million, representing a decrease of 40.11% when compared with that of previous policy year. The total liability of the Association for these claims are estimated at US$ 6.11 million, a decrease of 27.43% from the US$8.42 million in the 2005 policy year.

　　In the 2006 policy year, there are 5 major claims with estimated liabilities exceeding US$ 400,000.

　４.Financial Standing

　　In the 2006 policy year, the surplus of H&M insurance is estimated at US$ 2.72 million. This is the third consecutive year the H&M insurance has realised a surplus.

　　As of 31st December 2006, the free reserve of H&M insurance is US$ 13.92 million, an increase of US$ 4.56 million compared with the US$ 9.36 million of the 2005 policy year, representing an increase of 48.7%. The capacity of underwriting and risk resistance has enhanced substantially this policy year.

　５.Other Activities

　　The Hull and Machinery Committee of the Board of Directors held two meetings in 2006. During the second meeting, the Managers presented the annual report to the committee, who highly appraised their underwriting and claim handling work in H&M insurance. The committee pointed out that the H&M business of the Association relied on the support of the Members, whereas the Members placed great importance upon a steady and favorable market environment. The Committee discussed in detail the market environment, current issues and the future development of the H&M business. The Committee also provided firm support and explicit guidance for the underwriting plan of the 2007 policy year. In addition, the Committee provided some specific measures concerning the reinsurance, present operation and future development of the H&M business.

　６.The Principle Mutuality

　　In 1998, the Board of Directors of the Association decided that H&M insurance should be operated on a mutual and non-profit making basis, distinct from other commercial insurance. This general principle must be strictly followed. As such, all the general mutual terms and rules set out in the Rules of the Association in connection with the principle of mutuality shall be always applicable to H&M cover. In the event that there are any deficits in a specific policy year, the Board of Directors has the authority to collect supplementary calls from the Members to ensure the healthy and steady development of the H&M business. Furthermore, the Association can collect release calls against Members who withdraw from the Association.

　　The 2006 policy year witnessed the steady development of the H&M insurance of the Association. Even under the negative market environment, the Managers sustained the volume of underwriting. The loss prevention and claim handling work both achieved excellent results. On the other hand, notwithstanding the continuing increase in the cost of reinsurance, the Association accomplished a substantial increase of 48.7% in free reserve.