2012 AIRLINE HULL & LIABILITY INSURANCE MARKET REVIEW MAY 2013

2012 AIRLINE HULL & LIABILITY INSURANCE MARKET REVIEW MAY 2013

2012 AIRLINE HULL & LIABILITY MARKET OVERVIEW All the premium figures shown are based on Net Leaders terms and percentage change figures are based on risks with an Average Fleet Value (AFV) in excess of US$100m (unless stated). In terms of losses, 2012 proved to be an even better year than 2011, (which was one of the safest for many years). Claims for the year totalled just US$929 million (including attritional losses). This is the lowest level of claims in 20 years. This compares with net premium income for the year in the region of US$1.75 billion (including an allowance for unknown risks and those with an AFV of less than US$100 million). For the second successive year insurers have made a technical surplus, which totals US$821 million for 2012. It should be remembered that this figure does not take into account insurers operating expenses. These are likely to be in the region of at least US$300 million annually and reduce the surplus to around US$520million. Hull & Liability and Claims (Calendar Year Basis) $3,000 $2,500 Net Claims Loss Ratio 131% 5 Year Summary : US$9,645m Inc. Claims: US$8,241m Loss Ratio: 85% Technical Surplus: US$1,404m 140% 120% $2,000 104% 100% $1,500 $1,000 78% 57% 53% 80% 60% 40% $500 20% $0 2008 2009 2010 2011 2012 Net $1,945 $1,995 $1,995 $1,960 $1,750 Claims $1,511 $2,611 $2,068 $1,122 $929 Loss Ratio 77.7% 130.9% 103.7% 57.2% 53.1% Est Att Losses $425 $425 $425 $425 $475 0% Data as at 21.3.13. s include estimates for unknown programmes. Historic claims include the estimated figure for attritional losses. Over the last five years we believe that insurers have made a technical surplus of US$1,400 million before expenses of at least US$1,500 million are taken into account. This does not take into account reinsurance recoveries made from Excess of Loss programmes, resulting in a small loss (although significantly reduced) over this five year period for insurers. levels in 2012 saw a significant reduction, falling by over US$200 million, a reduction of 12%, this was despite exposure growth for both fleet and passenger numbers. For programmes with an AFV in excess of US$100 million on a like for like basis, the Average Fleet Value (AFV) increased by 5% (+5% in 2011) and passenger numbers by 4% (+7% in 2011). In terms of rates this equated to a hull rate reduction of 16% (-9% in 2011) and calculated per passenger liability rates (the rate is calculated by dividing liability premium by passenger numbers) seeing a reduction of -12% (-8% in 2011).

Quarterly Breakdown for 2012 The annual renewal calendar continues to be dominated by the fourth quarter of the year with nearly 70% of the years premium generated during this time. The fourth quarter itself is dominated by the December renewals, when over 40% of the year s premium income is generated. Amongst the major airlines that changed their periods of insurance during 2012 was Kuwait Airways, originally due to renew in November, which opted to extend its 2011/12 period of insurance and will now renew in April 2013. Unlike 2011, which saw a lot of airlines change insurance groups, renewals in 2012 saw minimal change in the airlines included under the major group programmes. As a consequence the premium spread through the year remained consistant with only small changes. 2011 Spread 1st Qtr 2.0% April 6.7% May 4.1% June 2.4% 2012 Spread 1st Qtr 2.5% April 7.5% May 4.2% June 1.4% December 40.8% July 12.1% August 2.3% December 42.2% July 12.1% August 2.1% September 1.6% October 7.8% September 1.7% October 7.3% November 20.4% November 19.0% However some of the smaller carriers in the world, which operate smaller, less valuable aircraft elected where possible, to renew their hull and primary liability programmes in the non traditional insurance markets around the world and only place excess liability and other coverages (Hull War & Excess AVN52) in the mainstream international markets. Quarterly Breakdown for 2012. 2012 Hull & Liability Net % Changes Total Quarterly % Change Annual Percentage Change for 2012 30% 25% 20% 15% 14% 10% 5% 0% -5% -10% -15% -9% -10% 2012 Average -11.8% -13% -20% 1st Qtr 2012 2nd Qtr 2012 3rd Qtr 2012 4th Qtr 2012 Data as at 21.3.13.

Quarterly Breakdown for 2012 (Continued) As stated earlier overall airline premium levels in 2012 saw a significant reduction, reducing by over US$210 million, a reduction of -12%. In 2012 the fourth quarter generated US$1,085 million in premium. This was a reduction of -13% or US$168 million despite AFV increasing by 5% and projected passenger numbers by 4%. This equates to a reduction in hull rates of -17% and calculated per passenger liability rates also seeing a reduction of -17%. This compares with the first nine months of 2012, which generated US$495 million in premium, a reduction of -9% or a reduction of US$44 million, with AFV increasing by 6% and passengers by 5%. This equates to a reduction in hull rates of -12% and calculated per passenger liability rates seeing a reduction of -14%. It would appear that once again, despite insurers attempting to restrict the level of reductions seen in the fourth quarter they were unsuccessful and that renewals during this period achieved larger reductions than those renewing in the first nine months of the year. Many of the world s larger programmes (including the majority of the mega sized programmes) renew in the fourth quarter and these programmes benefit from economies of scale and generate a larger volume of premium, thus enabling brokers to leverage this premium and achieve higher rate reductions than the smaller programmes. Programmes with AFV between US$1,000m & US$100m AFV % Change PAX % Change 2011 Net 2012 Net Change % Change January 12.7% 25.0% 2.5 2.7 0.2 8.2% February 14.9% 13.3% 7.7 7.6-0.1-1.6% March 28.0% 26.4% 24.8 29.5 4.6 18.7% Q1 Summary 34.6% 11.4% 35.0 39.7 4.7 13.5% April 9.1% 8.0% 136.0 119.5-16.4-12.1% May 6.4% 6.1% 71.5 66.4-5.1-7.2% June -0.5% 2.7% 21.5 21.7 0.1 0.7% Q2 Summary 7.3% 7.1% 229.0 207.6-21.4-9.3% July 2.5% 1.1% 215.9 192.3-23.6-10.9% August 3.0% 4.5% 36.0 33.3-2.6-7.3% September 15.2% 15.2% 28.7 27.6-1.1-3.9% Q3 Summary 3.1% 2.6% 280.6 253.2-27.4-9.8% October 6.0% 1.8% 123.5 115.2-8.2-6.6% November 3.5% 2.8% 351.9 301.3-50.6-14.4% December 5.5% 4.0% 777.6 668.7-108.9-14.0% Q4 Summary 4.7% 3.5% 1,252.9 1,085.2-167.7-13.4% 2012 4.9% 3.9% 1,797.5 1,585.7-211.8-11.8% Programmes with AFV between US$1,000m & US$100m The annual premium figures and percentage change figures advised earlier in this review includes airlines with an AFV in excess of US$100m. As a consequence the top 50 programmes in the data sample in terms of AFV have a significant impact on the annual figures for the year. We believe this results in misleading trends being advised for those carriers with an AFV below US$1,000 million. In the following figures we have extracted the data from the overall figures for these programmes. The reason for this distortion occurring is that despite accounting for 49% of our data sample of 203 renewals these programmes accounted for just US$278 million (or 18% of the US$1,585 million in premium generated in 2011 on a like for like basis).

Programmes with AFV between US$1,000m & US$100m (Continued) Fleets between US$100m & US$1,000m AFV % Change PAX % Change 2011 Net 2012 Net Change % Change January 12.7% 25.0% 2.5 2.7 0.2 8.2% February 14.9% 13.3% 7.7 7.6-0.1-1.6% March 54.4% 10.9% 13.3 17.0 3.7 28.1% Q1 Summary 34.6% 11.4% 23.5 27.3 3.8 16.3% April -9.6% 16.6% 27.0 26.4-0.6-2.3% May -0.1% 3.7% 21.0 20.6-0.4-1.8% June 6.8% -4.8% 8.6 8.0-0.6-6.6% Q2 Summary -5.3% 12.9% 56.6 55.1-1.6-2.7% July -27.2% -20.9% 51.4 47.8-3.6-7.0% August 30.9% -10.2% 14.4 13.4-1.1-7.4% September 14.3% 20.5% 19.8 19.6-0.2-1.0% Q3 Summary -16.9% -12.6% 85.7 80.8-4.9-5.7% October 50.2% 21.3% 18.9 19.7 0.8 4.2% November 12.4% 1.7% 32.3 31.3-1.1-3.3% December 6.0% 5.2% 75.0 63.9-11.1-14.8% Q4 Summary 9.4% 7.6% 126.2 114.9-11.4-9.0% 2012 1.7% 5.7% 292.0 278.0-13.9-4.8% In 2012 the smaller carriers saw a premium reduction of 5% compared to a 12% premium reduction for carriers with larger AFV s, despite seeing smaller increases in hull exposures, as can be seen in the tables. As previously stated although this differential would seem unfair it is often a consequence of the larger carriers paying much larger volumes of premium than the smaller carriers. This enables the brokers to leverage the larger premium volumes in their negotiations with insurers and achieve larger rate reductions. 2012 Hull & Liability Net % Changes for programmes with an AFV between US$1,000m & US$100m 30% Total Quarterly % Change Annual Percentage Change for 2012 - AFV between US$1,000m & US$100m Annual Percentage Change for 2012 - AFV Excess of US$100m 25% 20% 15% 16% 10% 5% 0% -5% -10% -15% -3% 2012 Average -4.8% -6% -9% 2012 Average -11.8% 1st Qtr 2012 2nd Qtr 2012 3rd Qtr 2012 4th Qtr 2012 Data as at 21.3.13.

2012 LOSSES Including three non-operational weather related losses there were 13 losses in 2012 with a reserve for each loss in excess of US$10 million (the same as 2011), compared to the 10 year average of 17 losses. Unusually there was not a single loss with an incurred reserve in excess of US$50m (including liability reserves). 2012 also saw one of the lowest numbers of passenger fatalities seen in many years, with 325 passenger deaths. This was significantly below the ten year average of 618 passenger fatalities. As a consequence the monetary value of all these losses totalled US$929 million. According to Ascend, this is in the lowest incurred claims figure for 20 years, with fatal accident and passenger fatality rates being the lowest ever. By their nature, losses are unpredictable, with liability reserves very much dependant on the location of loss and the nationalities involved. As can be seen in the following table the number of passenger fatalities has varied significantly in the past ten years but would appear to be on a downward trend, although it would only take the destruction of a wide-bodied aircraft with the death of all passengers on board to change this. No. of Losses excess of US$10m Total Reserves US$m Total No. of Passenger Fatalities Year 2012 13 929 325 2011 13 1,149 375 2010 17 1,871 745 2009 21 2,417 604 2008 21 1,511 353 2007 21 1,919 760 2006 18 1,300 880 2005 18 1,180 1,050 2004 9 1,000 530 2003 19 950 560 10 year Average 17 1,477 618 In possibly a sign of future events and potential losses, there were three significant non-operational weather related losses during 2012, which all took place in the USA and resulted in hull losses of around US$50m arising from hailstorms or hurricane related weather. Indicating how good a year 2012 was in terms of losses, the largest hull loss was the partial loss of a Corenden Airlines (Turkey) B737-800 at Antalya Airport, Turkey when a fire broke out on-board the aircraft on pushback in October. The worst loss in terms of the number of fatalities and the largest loss in terms of Hull & Liability reserves was the total loss of a MD83 aircraft operated by Dana Air (Nigeria) that crashed on final approach to Runway 18R at Lagos - Murtala Muhammed Airport, Nigeria killing all 147 passengers on board in June.

MARKET PREVIEW FOR 2013 There is very little renewal activity in the first quarter of the year with around 2% of the worlds airline premium likely to be generated. The quarter therefore has a minimal impact on the annual figures. April is the first time that any realistic analysis can be made with a number of significant renewals, including Aerolineas Argentinas, Air Mauritius, Hainan Airlines (China), IAG (British Airways, Iberia, Aer Lingus, LATAM (Chile & Brazil), Jet Airways (India), Qatar Airways and Spicejet (India) and for the first time Kuwait Airways. Air Berlin previously an April renewal, cancelled and replaced its policy in November 2012 to renew at the same time as its major shareholder Etihad Airways. With some of the information for April renewals still to be confirmed we believe that they have (in the main) continued to see reductions at around the same level of the fourth quarter of 2012. As ever it is likely that the April renewals will set the benchmark for the treatment that renewals will receive in the following months up to the end of September. Airline claims for 2013 were very low for the first quarter of 2013 and continued the trend of 2012, although the total loss of 2 aircraft (Lion Air and National Airlines) in April totalling around US$100 million has increased losses to around US$150m (excluding attritional losses), this is still a relatively low figure when compared to earlier years. This combined with the amount of overcapacity in the market is likely to further increase the pressure on insurers to continue reducing rates as the second quarter continues even if the market were to see a major loss or series of major losses.

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