Airline Insight May 2012 1

INSIGHT

Airline insurAnce MArket OverviewAprIl reNewAlSApril, the fifth ranked month for premium volume and the second largest outside the final quarter, saw considerable activity, with a wide variety of airline programmes coming to market. The second quarter sees three times the number of renewals and five times the volume of premium compared to Q1, where less than 3% of annual premium is committed, and therefore offers the first real indication of ongoing market conditions for the year.

Although certain accounts were renewed at terms significantly at odds with the current market trend in premium reduction, there were unique circumstances which need to be considered before establishing if there has been any change in the underlying trend.

The average premium change for April was -0.4% against exposure growth of 18% in fleet value and 24% increase in passengers.

The figures represent a continuation of the rating allowances made by underwriters for exposure growth and therefore the market direction as a whole remains consistent. This comes as no surprise since capacity remains high and loss levels benign.

The exposure figures contain an element of organic growth but are also driven through programme consolidation, an example of which is the inclusion of Webjet within the GOL programme which renews later in the year. The most significant recent example of consolidation is in the largest renewal of the month, the IAG/Latam programme. This programme now includes nine airlines, with the inclusion of TAM contributing to growth in both average fleet value and passenger numbers in excess of 25%.

Contents

Airline Insurance Market Overview ..........................1

Market News ................................. 2

Losses Overview ........................... 2

Industry News ..............................4

Forthcoming Renewals .............. 5

The NewsleTTer for The AirliNe iNsurANce iNdusTry | mAy 2012

reNewAl DISTrIbuTIoN % SHAre AND premIum DISTrIbuTIoN % SHAre

2012 NeT % premIum AND expoSure movemeNTS (Hull AND lIAbIlITy)

No. oF reNewAlS

AFv % CHANGe

pAx % CHANGe

2011 NeT premIum

uS$ m

2012 NeT premIum

uS$ m

uS$ m premIum CHANGe

premIum % CHANGe

January 4 14% 25% 3.85 4.42 0.57 14.7%

February 4 12% 7% 7.13 6.70 -0.43 -6.1%

March 11 21% 23% 35.59 38.23 2.64 7.4%

Q1 19 20% 21% 46.57 49.34 2.77 5.9%

April 11 18% 24% 99.44 99.00 -0.44 -0.4%

2012 Total 30 18% 24% 146.01 148.34 2.33 1.6%

DECEMBER26%

DECEMBER42%

NOVEMBER17%

NOVEMBER19%OCTOBER

6%

Q3 22%

Q3 17%

Q2 13%

OCTOBER7%

Q12%

Q2 22%

Q1 7%

DECEMBER26%

DECEMBER42%

NOVEMBER17%

NOVEMBER19%OCTOBER

6%

Q3 22%

Q3 17%

Q2 13%

OCTOBER7%

Q12%

Q2 22%

Q1 7%

Airline Insight May 2012 2

MArket newswIllIS AeroSpACe ANNouNCeS reCruITmeNT oF ANDrew SkelToN As part of our continuing commitment to develop, differentiate and strengthen the way we interact with our Clients, Willis Aerospace are pleased to announce the recruitment of Andrew Skelton to the position of Executive Director.

For the past 12 years Andrew has been employed in industry within senior insurance management positions, including seven years working for a global vertically integrated tour operator, operating a fleet of 50 aircraft. Andrew brings with him a significant amount of cross class experience of risk transfer procurement as well as a wealth of knowledge on the wider management of both insurable and uninsurable risk.

Andrew has been specifically retained to complement our existing high calibre talent pool and is ideally placed to challenge and bolster existing Willis Aerospace practices, bringing a fresh 360 degree approach to the way we do business.

As well as the delivery of cost effective insurance management solutions, Andrew has previously been heavily involved in the direct management of captive operations and has also designed, implemented and managed enterprise risk management frameworks in his two previous positions.

Andrew’s experience spans the full breadth of commercial corporate insurance and his arrival provides a fantastic opportunity to add true value to the current Willis Aerospace Client proposition through his insight into some of the potential risk and insurance challenges, hurdles and also opportunities which are faced by our Aerospace Clients, both now and in the future.

Talking about his initial views from a ‘Buyers perspective’ on some of the challenges facing the Aviation Insurance Market in the foreseeable future Andrew commented:

“In my mind one of the main challenges centres on the enhancement of the client offer. As the corporate risk management attitudes of Buyers develop and mature, the intermediary that stands still and adopts a traditional transactional approach to business is going to struggle to

remove the ‘commodity provider’ label and differentiate themselves from their competitors. Getting close to a Client’s risk register and assisting in the development of risk treatment plans, either by risk transfer or other means, will undoubtedly shift the Clients perception of their Broker towards being a true business partner. I appreciate this approach will not suit all, with some buyers choosing to focus solely on insurance as a pure commodity purchase, without trying to understand how and why it fits into any wider corporate risk management strategy. My challenge to the aviation insurance broking community, which I am now delighted to find myself being part of, is given these days of increased corporate governance requirements, margin pressures and what seems like a never ending run of unexpected climatic and atmospheric conditions, why not consider some of the risks that fall outside of a traditional policy form, discuss these with those Clients you feel able and see where the conversation leads?

Historically, buyers have dealt with a relatively ‘siloed’ insurance market, accepting that an Insurer’s Directors & Officers Liability Underwriter has little or no relationship with the same Insurer’s Hull Underwriter sitting in the same office, two floors apart. I have constantly championed the need for a cohesive and joined up approach from both an Insurer and an Insurance Broker perspective. There is nothing more disconcerting as a buyer than to realise that two participants in your risk transfer arrangements, who work for the same organisation, have never sat down and considered how they can ensure delivery of a collective seamless solution. I have recently noticed some of the larger Insurer organisations attempting to progress in this area. The development of Industry Specific Practice Leaders is certainly a step in the right direction. It remains to be seen how successful these attempts will be, but I remain convinced that once a workable solution has been found, the ‘nut-cracker’ will quickly reap the benefits that follow.”

Andrew Skelton, ACII Direct: +44 (0)20 3124 6348 Mobile: +44 (0)77 7570 4370 Email: andrew.skelton@willis.com

lOsses OverviewThe overall industry safety record continues to be excellent. Minor incidents continue to impact the international insurance market and and these low premium levels mean that the impact of attritionals is increasingly significant, although only in relative terms rather than total volume.

The loss total for the first four months now stands at US$193 million, comprised of US$43 million for hull, zero for liabilities and US$150 million for attritionals.

The most serious passenger loss this month was that of a Bhoja Air on April 20, which killed all 127 people on board after it crashed on final approach to Islamabad, Pakistan in adverse weather conditions. We do not believe that this loss was insured in the international market.

The start to the year continues to be one of the best on record, even more favourable than 2011, further underlining the increased levels of industry safety. The dedate continues in insurer minds as to what overall premium volume is needed in what is essentially a catastrophe type business.

Airline Insight May 2012 3

Cumulative monthly inCurred reserve development (us$ million)

Current 2012 Reserve US$193 million (incl. pro rata attritionals)

JAN – APRIL JAN – APRILJAN – APRILJAN – APRILJAN – APRIL

$0

$500

$1,000

$1,500

$2,000

$2,5002008 2009 2010 2011 2012

$506m

$918m

$372m $334m

$193m

Avge $1,968m

World Wide airline hull and liability premium and Claims on a Calendar year basis 2007 – 2012 (net leaders terms us$ million)

$0

$500

$1,000

$1,500

$2,000

$2,500

0%

20%

40%

60%

80%

100%

120%

140%

160%

Net Premium* $1,542 $1,680 $2,000 $2,065 $1,913

Claims** $1,919 $1,439 $2,439 $2,075 $1,125

Loss Ratio 124.5% 85.7% 121.3% 100.5% 58.8%

Est. Att. Losses $425 $425 $450 $450 $450

$148

$193

130.4%

$450

2007 2008 2009 2010 2011 2012

Hull and Spares

Hull and Spares

Liability

Liability

Attritional

Attritional

Hull and Spares

Liability

Attritional

Hull and Spares

Liability

Liability

Hull and Spares

Attritional

Attritional

* Premium includes all known airlines with an AFV in excess of US$100 million and is based on Net London Lead Terms; it is subject to change as more information becomes available.

** Claims shown include the estimated figure for attritional losses. Claims are updated as more information becomes available.

Significant losses that have occurred since our last publication are outlined below.

On May 1, a Onur Air A300 aircraft, registration TC-OAG, sustained damage at Jeddah King Abdul Aziz International Airport, Saudi Arabia, when the aircraft landed with its nose undercarriage retracted. The hull reserve for this loss has yet to be established.

On April 22, a Shaheen Air B737, registration AP-BJN suffered a left main undercarriage collapse on landing at Karachi International Airport, Pakistan. The hull reserve for this loss has yet to be established.

On March 29, a Feeder Airlines Fokker 50, registration ST-NEX, sustained damage after the aircraft veered off the side of the runway when landing at Wau Airport, Sudan. The hull reserve for this loss is US$2.35 million.

On March 12, a Air India A319, registration VT-SCV, suffered a heavy tail strike after a late go around at Chhatrapati Shivaji International Airport, Mumbai. The hull reserve for this loss is US$1.5 million.

Airline Insight May 2012 4

industry newsANAlySIS: mArCH AIrlINe pASSeNGer TrAFFIC Passenger traffic in March yielded airlines a strong increase in load factors across the Asia, Europe and North America. Load factors were up four points in Asia, just under four points in Europe and two points in North America.

The improved load factors in Asia are driven by strong passenger traffic growth of 8%, in part reflecting the impact of the March 2011 major earthquake and Tsunami in Tokyo, which heavily hit Japanese traffic last year. All Nippon Airways (ANA), for example, saw passenger traffic up a quarter in March compared the same month in 2011. The carrier’s domestic traffic, which was down in a fifth in the aftermath of the disaster, was up a fifth in March.

ASIA-pACIFICAIrlINe

pASSeNGerS(m)

pASSeNGerCHANGe %

rpkCHANGe %

ASkCHANGe %

loADFACTor %

pTCHANGe

China Eastern Airlines 5.73 3.8% 6.3% 4.3% 79.0% 1.5ANA – All Nippon Airways 4.07 22.0% 26.4% 5.2% 70.0% 11.7Air China 3.94 – 1.7% 2.5% 79.6% -0.6Thai Airways International 1.76 7.0% 7.5% -0.1% 78.4% 5.5Singapore Airlines 1.52 10.4% 11.8% 2.9% 79.6% 6.3Skymark Airlines 0.62 41.2% – – – –EVA Air 0.62 18.0% 11.0% 6.7% 78.7% 3.0Silk Air 0.27 13.7% 20.0% 19.1% 75.5% 0.6China Airlines – – 5.4% 6.1% 77.5% -0.5Skywest Airlines – – – – – –Total 18.53 8.7% 8.0% 2.4% 77.6% 4.0

For North American carriers continued capacity discipline helped keep passenger traffic growth ahead of supply, driving load factors up in March for all but a handful of airlines. Delta for example enjoyed a 2% rise in passenger traffic despite cutting capacity more than 3%.

NorTH AmerICAAIrlINe

pASSeNGerS(m)

pASSeNGerCHANGe %

rpkCHANGe %

ASkCHANGe %

loADFACTor %

pTCHANGe

Delta Air Lines 14.49 1.9% 2.0% -3.4% 84.1% 4.5Southwest Airlines 11.73 -1.6% -1.0% -1.0% 81.8% -0.0United Continental Holdings 8.19 -2.2% 1.0% -0.7% 81.9% 1.4American Airlines 7.60 2.4% 1.3% -1.8% 82.5% 2.5SkyWest Airlines 4.98 4.5% 4.8% 1.1% 80.5% 2.8US Airways 4.85 3.3% 4.8% 3.3% 84.6% 1.2Republic Airways Holdings 2.62 -2.0% 0.4% -2.0% 80.4% 1.9JetBlue Airways 2.57 11.3% 12.5% 9.0% 86.3% 2.7Alaska Airlines 1.58 2.5% 4.7% 3.0% 88.8% 1.4American Eagle Airlines 1.56 9.8% 9.8% 3.7% 76.4% 4.2Frontier Airlines 0.92 10.6% 11.6% 9.9% 87.5% 1.3Hawaiian Airlines 0.78 6.1% 13.8% 14.0% 84.9% -0.1Allegiant Air 0.76 23.2% 23.3% 24.2% 90.3% -0.6US Airways Express 0.65 -2.5% -3.1% -2.8% 70.5% -0.2Horizon Air 0.57 -4.0% -15.2% -14.3% 78.3% -0.8American Eagle (Executive) 0.12 -52.5% -53.9% -57.6% 60.4% 4.8Great Lakes Airlines 0.04 – 6.7% 4.4% 42.0% 0.9Air Canada – – 4.8% 2.2% 81.5% 2.0Porter Airlines – – 44.8% 20.1% 59.8% 10.2Spirit Airlines – – 18.2% 18.1% 85.9% 0.1WestJet Airlines – – 9.0% 7.0% 86.3% 1.5Total 64.0 0.4% 2.9% 0.1% 83.0% 2.2

Passenger traffic in March was also up around 4% among European carriers, though low-cost carrier giant Ryanair – which saw passenger numbers down 3.5% – was among those to see traffic fall as part of its decision to ground aircraft during the less profitable winter season.

Airline Insight May 2012 5

europeAIrlINe

pASSeNGerS(m)

pASSeNGerCHANGe %

rpkCHANGe %

ASkCHANGe %

loADFACTor %

pTCHANGe

Air France – KLM Group 6.37 6.3% 6.8% 1.8% 82.5% 3.8Lufthansa 5.89 4.7% 6.2% 2.4% 76.3% 2.7Ryanair 5.50 -3.5% – – 78.0% –EasyJet 4.63 4.4% – – 88.8% –Airberlin 2.57 -1.2% – – – –Scandinavian Airlines (SAS) 2.07 5.9% 12.7% 6.1% 73.3% 4.3Norwegian 1.36 18.0% 22.1% 17.3% 77.5% 3.0SWISS 1.34 7.6% 9.1% 3.1% 81.6% 4.4Vueling Airlines 1.04 30.7% 26.5% 16.0% 78.5% 6.6Austrian 0.89 12.0% 14.9% 9.4% 73.6% 3.5Finnair 0.77 11.6% 11.6% 3.6% 78.0% 5.6Aer Lingus 0.74 6.4% 9.3% 2.0% 75.8% 5.0Air Europa 0.66 -7.2% 1.2% -3.8% 81.2% 4.0CSA Czech Airlines 0.25 -27.8% -23.7% -23.5% 68.5% -0.1Wideroe 0.23 4.1% -0.3% 1.2% 55.9% -0.8AirBaltic 0.22 -6.4% – – – –Blue1 0.15 -10.8% -34.8% -37.6% 65.2% 2.8Cimber Sterling 0.13 -19.0% -18.5% -28.7% 72.1% 9.0Icelandair 0.12 22.7% 21.8% 15.3% 81.0% 4.3Adria Airways 0.07 -11.3% -10.9% -18.5% 64.3% 5.5Air Iceland 0.03 11.1% 9.1% 0.7% 75.6% 5.8British Airways – – 10.2% 3.7% 77.9% 4.6Iberia – – -2.5% -5.0% 81.1% 2.1Total 35.02 3.9% 7.4% 2.3% 78.9% 3.7

Source: flightglobal. April, 2012.

FOrthcOMing renewAls May has a number of renewals that could be considered of market significance, but overall the month is relatively small in terms of both the volume of renewals and overall premium, generating less than 5% of the annual premium total.

The largest renewals during May are the Virgin Group of airlines Virgin Atlantic, Virgin America and Virgin Blue which are placed on a parallel basis. Other sizeable programmes renewing this month are the low cost carriers easyJet and Air Asia.

Looking a little further ahead, the impact of the London Olympics on the summer renewals remains uncertain. It is believed that many August and September renewals

could choose to renew early with a view to avoiding any potential logistical challenges in their pre renewal and renewal process. After July 1st,the level of activity falls away dramatically until the final quarter renewal season, so market significance of any timing changes would be relatively small.

The wave of consolidation that has swept the industry in recent years looks set to continue as the industry rumblings and rumours regarding further industry change in the US appear to be gathering pace. This will continue to impact both the size and shape of the airline insurance programmes along with the global exposure distribution for the foreseeable future.

10 yeAr expoSure AND premIum DevelopmeNT

$300

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$350

$400

$450

$500

$550

$600

$650

$700

$750

$800 3,500

3,000

2,500

2,000

1,500

1,000

AFV

Billi

ons

Net Premium

and Passenger Development (M

illions)

AFV Passengers Net Premium

Airline Insight May 2012 6

mAy reNewAlSAIrlINe reNewAl DATe expIrING AFv uS$

EasyJet 01-May-12 5,727,894,691Transaero Airlines 01-May-12 2,106,097,505Air Transat 01-May-12 1,013,315,688Royal Brunei Airlines 01-May-12 576,700,000Porter Airlines 01-May-12 512,745,205Tarom 01-May-12 407,388,480Yamal Airlines 01-May-12 101,025,068Armavia 06-May-12 205,022,760Yakutia Air 10-May-12 152,359,000BH Air 10-May-12 106,558,904Virgin Blue 14-May-12 4,458,228,486Virgin Atlantic 14-May-12 4,416,305,457Virgin America 14-May-12 1,992,725,507Air Asia 15-May-12 4,718,687,078Ryan International 15-May-12 350,231,507Siberia Airlines 17-May-12 1,009,124,500Airblue 18-May-12 233,862,296Maximus Air Cargo 28-May-12 136,958,904

This is the Willis Airline Insurance Insight, which is our vehicle to keep our clients and others informed of developments in the airline insurance market. We welcome any comments or suggestions you may have to improve this publication. All data and analysis within this newsletter includes all known information at the time of production and is based on the net lead terms of airline insurance programmes renewing with fleet values in excess of US$100 million. The analysis does not take into account any coverage changes and is not weighted in relation to the size of the programme’s exposure or volume of premium paid. Loss information includes western built equipment and our attritional loss threshold is below US$1 million. These figures are based on a like for like basis and exclude those risks that incepted in 2009/2010 and are no longer in operation and those risks that have commenced operations in 2010/2011 as these will distort the percentage change figure.

This newsletter offers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specific advice relating to individual situations and we do not offer, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specific advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The views expressed are not necessarily those of the Willis Group. Copyright Willis Limited 2012. All rights reserved.

Willis Limited, Registered number: 181116 England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. Tel +44 (0)20 3124 6000. www.willis.com A Lloyd’s Broker, Authorised and regulated by the Financial Services Authority for its general insurance mediation activities only.

CoNTACT DeTAIlS

10861/06/12

Steve Doyle Tel: +44 (0)20 3124 7208 Email: steve.doyle@willis.com

airline.insight@willis.com

kelly CrudgingtonTel: +44 (0)20 3124 7377Email: kelly.crudgington@willis.com

Holly ConnellTel: +44 (0)20 3124 8521Email: holly.connell@willis.com

Jason motaTel: +44 (0)20 3124 6945Email: jason.mota@willis.com