NOTES TO THE FINANCIAL STATEMENTS OF HM COVER

DECEMBER 31ST 2010

Note 1-Purpose & Constitution

The Association stands on a mutual basis and is to uphold prestige and safeguard the interests of its Members, for which the Association affords insurance cover and offers professional services. The liability of the Members is to pay Calls and premiums to the Association, In the event of the termination of the Association, any net assets of the Association are to be returned equitably to the Members insured by it in the policy year during which the Association is terminated in accordance with the Bye-Laws.

Note 2-Accounting Principle

a Accounting Convention

These Financial Statements have been prepared in accordance with the material Accounting Principles based on applicable Chinese accounting standards and Generally Accepted Accounting Principles.

b Accounting Year

These Financial Statements reflect the period from January 1st 2010 to December 31st 2010.

c Annual Accounting and Policy Year Accounting

The Income And Expenditure Account is prepared on an annual accounting basis and includes all the Calls and premiums levied in the accounting year and the cost of claims and reinsurance for the current year and any adjustments relating to previous years together with operating expenses, financial expenses and investment income. All revenue transactions appear in the Income and Expenditure Account and are allocated to the relevant policy years or to a reserve.

Calls and premiums, reinsurance premiums, claims and claim recoverable from reinsurers or third parties are allocated to the policy years to which they relate. Both the realised and unrealised investment income and operating expenses are allocated to the current policy year.

d Valuation basis

The Association adopts accrual basis in accounting unless otherwise stipulated. The values of assets are to be recorded at historical costs at the time of acquisition.

e Bookkeeping base currency

The United States Dollar is the bookkeeping base currency of the Association. The Association adopts the principle of separate accounting for similar accounts. Balances of RMB accounts at the end of the year shall be translated into the US Dollar at the official exchange rate prevailing on December 31st, 2010. The differences arising from the translation are stated as gains or losses in the Income and Expenditure Account.

f Cash Balance

Cash in hand, bank deposits and other monetary assets are listed separately for their different keeping place and certain purpose in bookkeeping. Their total amount in the name of cash balance is showed as a current asset in the Balance Sheet.

g Calls and Premiums Receivable

It refers to the accumulated amount of Calls and premiums receivable due from Members. The Association conducts the direct write-off method and the bad debts are charged to the reserves directly under the Board decision when the Calls and premiums are discovered to be uncollectible.

h Guarantee

It refers to cash balance held by domestic or overseas Banks for issuing letters of guarantee.

i Long-term Investments

The equity method is used when the Association has significant influence, control or co-control over the operation of the invested listed company. In the equity method, the initial or supplementary investment is firstly recorded at cost but later is adjusted each year for changes in the equity in the invested company. The Association recognizes the balance from the changes of the equity in the invested company as an investment income or loss. The cost method is used for other long-term investments.

The investment income includes all the gains and losses. The investment income (or loss) less the investment management cost is stated in the Income and Expenditure Account.

Since the policy year of 1998 when the Association afforded the cover against Hull and Machinery risks, its income has been involved in the whole investments of the Association. Ensuring to share equally and separately the full benefits of investments of the Association for the Members of P&I cover and Hull and Machinery cover, the Association distributes the amount of long-term investments together with their benefits according to the actual running condition of the funds for years.

j Liabilities Provision

Liabilities provisions and reinsurance recoveries receivable for open and closed policy years are drawn based on the best estimates of the Managers and consent of the chief underwriter to prepare for the claims incurred in the relevant policy years and their difference is charged to the Income and Expenditure Account. They are also stated in the Balance Sheet separately.

k Reserves

The reserves are the net assets of the Association and available to meet any deterioration in the open and closed policy years and to contribute to actual or potential investment losses or other certain purposes.

l Calls and Premiums

Calls and premiums include Advance Calls, Supplementary Calls, Release Calls and other premiums, less return premiums. These Calls and premiums are the total receivables for the whole period of cover provided by the contracts incepting during the accounting period together with any premium adjustments relating to prior accounting periods. The amount of Calls and premiums less reinsurance premiums is credited to the Income and Expenditure Account.

m Reinsurance Premiums

The liabilities of the Association are reinsured above certain levels in the market. This item shows the amount of the reinsurance premiums the Association paid for the reinsurance.

n Claims

The claims include all claims incurred during the year, whether paid or estimated, and the adjustments for claims outstanding of previous years. The estimates for outstanding claims are based on the best estimates and judgement of the Managers of the likely final cost for individual cases on current information. The recoveries from the reinsurers and the recoveries from the third parties are both credited into the Income and Expenditure Account as the anti-items to the claims.

o Claims Recoveries From the Third Party

It refers to the amount recovered from the third party, which is credited into the Income and Expenditure Account as the deduction of claims.

p Reinsured Recoveries

The liabilities of the Association are reinsured above certain levels in the market. It is the anti-item to the claims paid and credited in the Income and Expenditure Account. Accordingly the reinsurance recoveries receivable are listed as assets in the Balance Sheet.

q Operating Expenses

These include management costs and costs of the Board. The management costs include the cost of the offices, staff, communications, travel and administration. The costs of the Board include the cost of annual General Meetings of Members and Board meetings, travels and other costs. It has been drawn on the ratio in accordance with the Board's instruction and is listed in the Income and Expenditure Account.

r Taxation

The Association enforces the relevant tax policies of the People’s Republic of China.

s Related Party Disclosures

The Association has no share capital and is controlled by the Members who are also the insureds. The subsequent insurance transactions are consequently deemed to be the transactions between the related parties, but they are the only transactions between the Association and the Members.

Note 3-Reinsurance recoveries receivable(see Note 2p)
		2010	2009
	Reinsurance recoveries receivable	615,680.84	2,700,874.41
	Estimated reinsurance recoveries receivable	33,609,205.20	10,264,140.19
	Gross reinsurance recoveries receivable	34,224,886.04	12,965,014.60
Note 4-Long-term investments & Investment income(see Note 2i)
	Net investment income
		2010	2009
	Long-term investment income	3,720,251.80	5,596,315.45
	Other investment income	(755,481.13)	234,854.17
	Investment income	2,964,770.67	5,831,169.62
	Less: Investment management cost	237,181.65	466,493.57
	Net investment income	2,727,589.02	5,364,676.05
	The balance amount with P&I current account at the balance sheet date which is credited in these Financial Statements as the Long-Term Investments is USD23,532,606.99.

Note 5-Liabilities provision (see Note 2j)
			2010	2009
	Policy year
	2010		9,726,922.29
	2009		(30,079.74)	934,160.12
	2008		424,967.12	1,303,253.21
	2007		(86,827.30)	759,418.59
	2006		(1,320,493.50)	(1,099,105.28)
	2005		663,805.72	701,305.25
	2004		(8,031.01)	192,967.00
	1998-2003		93,204.13	468,019.16
	Total		9,463,467.71	3,260,018.05
	Gross liabilities provision		43,072,672.91	13,524,158.24
	Reinsurance recoveries receivable for outstanding claims		(33,609,205.20)	(10,264,140.19)
	Net liabilities provision		9,463,467.71	3,260,018.05
Note 6-Reserves (see Note 2k)
			2010	2009
	Policy Year
	2010		(2,372,592.79)
	2009		8,845,088.14	9,024,979.95
	2008		7,004,949.19	6,392,926.30
	2007		4,520,660.52	4,250,160.42
	2006		5,401,400.30	5,358,759.52
	2005		4,271,116.44	4,166,406.89
	2004		2,807,795.33	2,700,384.05
	1998-2003		4,487,959.54	3,952,453.03
	Total		34,966,376.67	35,846,070.16

Note 7-Calls & premiums (see Note 2l/m)
	Net Calls & Premiums
			2010	2009
	Calls & premiums	A	15,503,545.37	13,164,209.38
	Reinsurance premiums	B	8,698,120.78	7,441,578.26
	Net calls & premiums	A－B	6,805,424.59	5,722,631.12
	Calls & Premiums
			2010	2009
	Policy year
	2010		15,609,676.32
	2009		(75,931.71)	13,154,997.89
	2008		(30,199.24)	9,211.49
	2007		-	-
	2006		-	-
	2005		-	-
	Total		15,503,545.37	13,164,209.38
	Reinsurance Premiums
			2010	2009
	Policy year
	2010		8,636,153.31
	2009		61,967.47	7,618,715.33
	2008		-	(173,969.38)
	2007		-	(3,167.69)
	2006		-	-
	2005		-	-
	Total		8,698,120.78	7,441,578.26

Note 8-Claims (see Note 2n/o/p)
Net Claims
		2010	2009
Gross claims paid	A	8,348,606.33	7,076,966.49
Less: Recoveries from 3rd party	B	239,811.34	-
Other P&I association	C	5,861,534.99	8,816,910.21
Net claims paid	A-B-C=D	2,247,260.00	(1,739,943.72)
Movement in provision for outstanding claims:			-
Provision carried forward		43,072,672.91	13,524,158.24
Provision brought forward		(13,524,158.24)	(17,308,688.89)
Transfers to liabilities provision	E	29,548,514.67	(3,784,530.65)
Less: Movement in provision for reinsurance recoveries
Provision carried forward		(33,609,205.20)	(10,264,140.19)
Provision brought forward		10,264,140.19	16,532,633.40
Provision for reinsurance recoveries	F	(23,345,065.01)	6,268,493.21
Net changes in claims provision	G=E+F	6,203,449.66	2,483,962.56
Net incurred claims	D+G	8,450,709.66	744,018.84

Gross Claims Paid
Policy year	2010	2009	2008	2007	2006	2005	2004	Total
Items
Correspondents fee	-	4,420.35	-	3,540.12	2,065.85	-	-	10,026.32
Survey fee	30,325.22	40,162.26	14,406.18	747.43	-	-	-	85,641.09
Lawyer's fee	-	-	9,571.47	87,600.56	-	-	-	97,172.03
Particular average	2,281,555.12	240,283.33	281,033.99	2,263,672.42	149,457.09	-	-	5,216,001.95
Collision liabilities	127,520.69	93,711.89	369,514.61	2,017,280.88	114,385.90	111,757.35	105,414.84	2,939,586.16
Others	-	-	-	178.78	-	-	-	178.78
Total	2,439,401.03	378,577.83	674,526.25	4,373,020.19	265,908.84	111,757.35	105,414.84	8,348,606.33