New York Maritime, Inc.

Annual Meeting
Wednesday, May 24, 2017
Keynote Speech

Celebrating the American Clubs Centennial: Reflecting on the past to gain perspectives for
the future.
By
Joseph E. M. Hughes
Chairman & CEO
Shipowners Claims Bureau, Inc.
Managers for
The American Club

Ladies and Gentlemen,

It is a great pleasure and more particularly an honor to be delivering this keynote speech to
the 2017 Annual Meeting of New York Maritime.

It may be considered appropriate to be doing so this year since the American Club celebrates in
2017 one hundred years of service to the domestic and international maritime community.

It may also be appropriate since the American Club was founded in New York and has always
been headquartered here. I would suggest that there are few marine insurers - of uninterrupted
lineage! - which are still doing business in their New York hometown a century after they were
established.

I want to cover four main subjects in my address this evening.

First, I will take you on a brief voyage through the mesmerizing swirls and eddies of American
Club history! Secondly, I will talk about the last 40 years of P & I in general that is to say the
period within my own personal recollection and compare how things were then and how they
are now. Thirdly, against this background, I will discuss what the future might hold, both for P &
I insurers in general and for the American Club itself. Finally, I will consider what the Club and its
Managers have learned from their experiences of recent years, and what perspectives they
provide for the future.

1|Page
 J.E.M. Hughes Keynote New York Maritime, Inc.- May 24, 2017

The history of the American Club

The history of the American Club features the enduring reality of all history: one darn thing after
another!

The American Club was founded on February 14, 1917, in the middle of World War One. At that
time, P & I insurance was available only from clubs in the United Kingdom and Scandinavia. The
establishment of the American Club was prompted by the threat of British government sanctions
against clubs in the United Kingdom which were then providing P & I cover for certain American
owners which the British claimed were trading with the enemy, that is the Kaisers Germany.

The Club was the brainchild of W. H. LaBoyteaux, president of Johnson & Higgins, the leading
marine insurance brokers in the United States at that time. In view of the British embargo, he
and his colleagues contacted a wide variety of American owners asking whether they wished to
establish their own club in light of the recent prohibitions across the Atlantic. They did indeed!
The Club was an immediate success, enjoying the support of many of the foremost US steamship
companies.

The size of the American merchant marine fluctuated in the 1920s and the 1930s. At the very
beginning of the 1920s, the American Club was possibly one of the largest clubs in the world,
having secured the cooperation of the US War Shipping Administration in mandating that all US
flag vessels in the war effort must be entered in the Club.

However, its mission accomplished in the wake of the Treaty of Versailles, the Administration
later withdrew this mandate and the American Club was compelled to compete for American
business with its counterparts overseas. Unsurprisingly, they were eager to reestablish their US
market share.

Following a patchy period during Prohibition and later into the 1930s, the Club grew again during
World War II when it was nominated as one of four insurers to provide P & I coverage for vessels
requisitioned for service in North Atlantic convoys. (The other three were Firemans Fund, the
Fulton P & I Underwriting Agency and the Marine Office of America.)

After World War II, the American Club entered a period of decline. In the decades from 1950
onward, the global merchant fleet was growing steadily, but nearly all that growth was taking
place outside the United States.

This dwindling of national flag tonnage was by no means restricted to the US. The British
merchant fleet was also reducing in size. However, the UK-based clubs were more energetic
during the 1960s and 1970s in gathering new membership from overseas, notably in western
Europe, the eastern Mediterranean, the Soviet Bloc and, increasingly, from the rising maritime
nations of Asia. They were followed by the Scandinavians about a decade later.

The American Club - One Battery Park Plaza, 31st Floor, New York, N. Y. 10004 2|Page
 J.E.M. Hughes Keynote New York Maritime, Inc.- May 24, 2017

Indeed, the American Club decided only as late as 1973 to admit foreign flag entries, and it was
not until seven years later in 1980 that the first foreign flag Member was actually enrolled.
This was Netumar Line of Brazil.

As the fortunes of the bluewater American merchant marine deteriorated in the 1970s and
1980s, the American Club experienced a parallel downturn in its business. Moreover, its not
being a member of the International Group of P & I Clubs was a handicap. The Club could not
avail itself of the highly cost-effective pooling and excess reinsurance arrangements which its
competitors from across the Atlantic could exploit to their advantage both in the United States
and in the international markets.

Not having at that time the wherewithal to compete against the European clubs in the global
arena, the American Club shifted its domestic focus from the bluewater to the brown and
greenwater sectors, the US tug and barge constituency growing in importance as a proportion of
the Clubs portfolio from the mid-1980s onwards.

By the end of the 1980s, it had become clear that the American Club needed to take decisive
action, at least in regard to improving its reinsurance arrangements. Following consultation with
some friendly clubs within the International Group, the American Club finally became an indirect
member of the Pool as of February 20, 1989, gaining access to the Groups collective
arrangements through the London P & I Club.

Although this provided some respite for the American Club in terms of its overhead costs, the
steady decline in its tonnage and premium continued. The Clubs circumstances reached a crisis
point in the early 1990s. Frustrated by an inability to move ahead, the Club and its Managers
(who were originally founded by, and continued to be owned by, Johnson & Higgins) consulted
with Mercer Management to seek a solution.

This emerged in the form of a report presented to the Board in 1994. It contemplated a new
direction for the Club entitled Vision 2000. It called for new leadership, the expansion of the
Clubs membership internationally and by industry sector, the establishment of overseas offices,
the development of new insurance lines and other initiatives designed to place the Club at the
forefront of its industry peers.

A key goal was direct pooling membership of the International Group of P & I Clubs. This was
achieved in 1998. It enabled the Club to participate to the fullest extent in this alliance of leading
insurers, essential not only to reducing its reinsurance costs, but also to improving its competitive
profile in general.

Since the Vision 2000 initiative was implemented in 1995, the American Club has undergone a
remarkable transformation. Its achievements over the period include: a five-fold increase in
entered tonnage; four-fold premium growth; eight-fold growth in total funds and a ten-fold

The American Club - One Battery Park Plaza, 31st Floor, New York, N. Y. 10004 3|Page
 J.E.M. Hughes Keynote New York Maritime, Inc.- May 24, 2017

increase in free reserves; a broad and expanding international membership, 56% of its business
now coming from Europe, the Middle East and Africa, 27% from the Americas and 19% from Asia.
Twenty-five years ago less than 5% of its business came from overseas.

The Club has also developed truly global service capabilities. In addition to its New York
headquarters, it has offices in London, Athens, Hong Kong, Shanghai and Houston. It has
expanded its range of insurance products, notably Eagle Ocean Marine in the fixed premium P &
I sector, and American Hellenic, a Cyprus-based Solvency II accredited hull and war risks
underwriter. In conjunction with this, the size and professional capabilities of its management
team have also expanded impressively over the years.

So, founded in 1917 as an insurer serving US shipping alone, the American Club has successfully
recast itself as an insurer serving the international maritime community, building on the enduring
values of its long traditions. Over the last twenty years in particular, from modest and difficult
beginnings, the American Club has built a breadth, depth and reach in marine insurance
capabilities equal to any group, anywhere in the world. It is now a global player commanding
universal respect within the industry.

I hope you will forgive me, ladies and gentlemen, for speaking immodestly about the American
Clubs recent achievements. It was a tough job to get us to where we are now. We have a great
team across all our offices throughout the world. They have worked with unflagging
determination and energy to bring us to this point. Everyone has played a part in this the
Members themselves, of course, for their existential support, the Clubs board for enabling its
mission, my fellow managers in implementing that mission, the insurance broking community for
helping to create business opportunity, and all the many other counterparties and friends with
whom the Club deals.

P & I in retrospect: What the last 40 years tell us about the here and now.

Let me move on to consider the larger background of P & I as a whole over the past 40 years. It
was over 40 years ago that I first entered this business as a young lawyer at Steamship Mutual in
London. That was in April, 1977. It might be interesting to comment upon the major changes
that have taken place in the P & I sector over that period of time, and to reflect on the fact that,
perhaps uniquely in our world, plus a change, plus c'est la mme chose.

So, what has changed over the last 40 years within the P & I domain? There are, of course, many
dimensions to this analysis, but perhaps the following points of reference might prove
enlightening.

First, the scale of the industry to which the P & I clubs provide service is very much greater. The
world fleet is now about three times bigger than it was 40 years ago. Turning to other
comparisons:

The American Club - One Battery Park Plaza, 31st Floor, New York, N. Y. 10004 4|Page
 J.E.M. Hughes Keynote New York Maritime, Inc.- May 24, 2017

There were fourteen members of the London Group in 1977, including the reinsured
clubs. There are now thirteen members of the International Group.
90% plus of world bluewater fleet was insured in 1977 about the same as today.
There was an unwritten Gentlemens Agreement as to tonnage transfers in 1977, not a
formal IGA. There was no engagement with European, or other, regulators. Now the IGA
and Pooling Agreement are formal, EUapproved documents.
There was a part-time Group Secretariat in 1977 and a modest consultative infrastructure.
Now there is a full-time, fully staffed Secretariat, and a very large consultative
infrastructure.
In 1977 clubs had few regional offices, now there are many, spanning the globe.
In 1977 the club retention was about $500,000, the Pool covering claims up to $5 million.
Now the figures are $10 million and $100 million respectively. The clubs also now operate
their own reinsurance company in Bermuda, called Hydra.
In 1977 there was unlimited liability for non-oil pollution claims. Now club cover is
limited to prescribed amounts, albeit that they are very high.
In 1977 a paper-based technology prevailed. Now it is overwhelmingly electronic.
A rulebook/certificate of entry format was used to evidence coverage in 1977 it remains
the same today.
Club financial disclosure and operational oversight were modest in 1977. Now they are
extensive, and heavily regulated: the Solvency II and RBC regimes are cases in point.
There were basic risk control and loss prevention initiatives in 1977, now they are very
sophisticated by comparison.
In 1977 there was little regulatory and political interventionism in the shipping industry.
Now it is widespread and deep.
Rating agencies such as S & P and A M Best were absent from the market in 1977. Now
they have a significant presence.
Insurance broker involvement was limited in 1977, now it is ubiquitous and mature.
Fixed-premium facilities were essentially unknown in 1977. Now they are common.
There was little business line diversification among the clubs in 1977. Now it is a
widespread and growing trend.
There was a distinct first world / second world paradigm of cover in 1977 now a free
market, commercial model prevails.
In 1977 the clubs elicited little interest from the press. Now P & I appears to be the darling
of the media!

The American Club - One Battery Park Plaza, 31st Floor, New York, N. Y. 10004 5|Page
 J.E.M. Hughes Keynote New York Maritime, Inc.- May 24, 2017

Despite these changes, of which there have been many, the essential manner in which
International Group P & I clubs operate has itself remained constant over the period.

This enduring business model comprises the following elements: the culture of mutuality; the
basic design of clubs in ownership and governance terms ownership by the members,
governance by member boards; the catalog of essential P & I cover; the mechanism of club
funding; the service provider/insurance carrier balance of consumer value; the collective
purchase of reinsurance protection; the cooperative deployment of Group resources.

This model has undoubtedly stood the test of time. You will be interested to know that, even as
an centenarian, the American Club is the second youngest P & I club in the International Group.
The infant sibling is the Japan Club which is a mere 67 years old. The two oldest clubs in the
Group celebrate their 162nd birthday this year.

The fact that the system has survived for so long is a reflection of the value proposition I have
just described, and the approval with which it is viewed by the clubs customer base, that is to
say the global maritime community. This continues to justify the entire system. The International
Group is sometimes described as a cartel. It is, in fact, no more a cartel than a whale is a fish. It
is a consumer collective first and foremost and continues to flourish by virtue of the enduring
approbation of the industry it serves.

Accordingly, plus a change, plus c'est la mme chose is an entirely apt way to describe the
developments of recent years, as I hope you will agree.

The future

Turning now to the contours of the business landscape ahead, what do the next several years
hold both for the American Club and for the P & I industry as a whole?

I discern the following trends: Political and regulatory challenges will grow and regionalize;
member and shipping industry expectations will continue to rise; the flexibility and value of the
system will continue to be recognized; the club/Group business model will endure; the Group
will maintain its basic shape; the cooperative deployment of Group resources will strengthen;
there will be a growing emphasis on financial and risk modeling; group market share will be
maintained; regionalization of service delivery will expand; there will be continuing product
diversification by the clubs; and specialist, fixed-premium insurers will continue to have an
important role in the market.

The American Club will continue to flourish in this environment and continue to represent the
New York maritime community with pride. The Club is particularly well positioned for further
growth in the future in North America, Europe and Asia - both in the provision of P & I and the
other marine insurances it has added to its product range in recent years.

The American Club - One Battery Park Plaza, 31st Floor, New York, N. Y. 10004 6|Page
 J.E.M. Hughes Keynote New York Maritime, Inc.- May 24, 2017

We are proud to fly the US flag as the only mutual P & I insurer domiciled in the Americas. The
Clubs future is a bright one, and its interests will continue to be pursued with energy over the
years ahead.

Lessons for the future?

In conclusion, what lessons are to be learned from the American Clubs experience of recent
years?

Perseverance is the most basic resource upon which the American Club has relied in developing
its position in the global market. As I have already said, things have not been easy for the Club
in building its business over the past twenty years. And, as I think you will agree from the
description of its history, they never were particularly easy. The decline of its traditional markets
forced the Club to develop internationally. This required hard work in taking an organization that
was exclusively an American operation in notable decline to a confident player on the world
stage. But it had to be done for survivals sake.

As Churchill said, The key to success is the ability to go from one setback to another with
undiminished enthusiasm. We did, and we have been seasoned by the experience of competing
against counterparts elsewhere in the industry, many of whom have been more comfortably
ensconced in strong domestic shipping communities, and in the international markets, for very
much longer than we have.

I am not sure that the particular experience of the American Club over recent years necessarily
provides the paradigm for other enterprises interested in expanding overseas or broadening their
horizons generally. Every business sector has its own dynamics both at home and globally.

But I am firmly of the view that the New York and indeed American brand counts for
something. Indeed, from the perspective of the International Group of P & I Clubs, I have
consistently argued that it is in the best interest of the industry to have an energetic and
flourishing American Club able to compete against other insurers in London, Scandinavia and
elsewhere.

So, as the American Club celebrates its centennial, let us equally celebrate the distinctions of its
hometown of which it is proud to be a centenarian daughter. New York has always celebrated
its strivers, and the American Club will continue to strive, in that worthy tradition, over the years
to come, flying the flag of both the city of its birth and the nation of whose principles and deep
entrepreneurial instincts it seeks to remain an example for all to see.

Ladies and gentlemen, many thanks indeed.

The American Club - One Battery Park Plaza, 31st Floor, New York, N. Y. 10004 7|Page