A merican Club Circular No. 04 /24 1 FEBRUARY 1, 2024 CIRCULAR NO. 04/24 TO MEMBERS OF THE ASSOCIATION Dear Member: PROGRESS REPORT FOR MEMBERS. S&P GLOBAL RATINGS ANNOUNCEMENT. In November 2023, S&P Global Ratings (S&P) published a revised risk-based capital model for rating insurers and reinsurers, changing certain criteria as well as the methodology of calculating risk charges. The S&P announcement also included a list of insurance companies, including the Association, that could be affected by the changes in the methodology. These changes in criteria negatively impact narrow product line insurers, increasing capital charges for investment, reserve, and premium risk, and with greater impact on longer-tailed reserve lines, such as those in assessable P&I mutuals. Within this context, the Board and Managers of the American Club acknowledge the recent decision by S&P to lower the Association’s credit rating from BBB- to BB+ Stable based on the revised riskbased capital model, but question the rationale behind this action, including the applicability of the revised model to the unique not-for-profit assessable mutual nature of the Association. The Board and its Managers believe the resilient structure of the Association, warrants a more favorable assessment. According to the published statement by S&P, the decision was driven by their assessment of the Association’s “weakness in its capital position”. According to S&P, the Association has “not generated sufficient underwriting earnings that would be capital accretive”. While the Board and its Managers understand the explanation within the context of the revised model, affected also by the unavoidable impact of negative investment returns in the region of 10% for the 2022 financial year, they also express much disappointment and skepticism on several levels. S&P’s decision is founded on an anchor rating and assumptions applicable at a point in time dating more than 12 months ago that are no longer relevant. It is not truly reflective of the current financial position nor the trajectory of the Association, which includes: •a c onsistently decreasing combined loss ratio over the past three years; •a rebound in investment returns as of December 31, 2023 to a positive 8%; •consistent rectification of technical deficiencies which are innate to the structure of the mutual; and •year on year rising tonnage and premium reflective of the high loyalty factor recognized by the rating agency in this and past assessments. A merican Club Circular No. 04/24 2 Ultimately, the revised model does not effectively account for the not-for-profit assessable mutual structure and foundation of the Association and creates concerns affecting the transparency of the application of the model. Further, based on the agency’s own definition of the context and purpose of the rating, and the complexity of the methodology as it applies to the impact of assessments, the Board and the Managers have difficulty in reconciling the decision. The S&P website states, “The analyses, including ratings, of S&P Global Ratings and its affiliates (together, S&P Global Ratings) are statements of opinion as of the date they are expressed. ... An S&P Global Ratings issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial p