LOSS ANALYSIS. ALSO IN THIS ISSUE As another jet crashes is it safe to fly?... Page 6

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1 PLANE TALKING AVIATION NEWSLETTER OCTOBER 2014 LEAD LINES RENEWAL ANALYSIS LOSS ANALYSIS ALSO IN THIS ISSUE As another jet crashes is it safe to fly?... The final quarter of the year is by far the most important and active period for the airline insurance industry and... Following a relatively quiet couple of months October witnessed... Market News 8 Arrivals & Departures 8 Rating Changes 8 Page 2 Page 4 Page 6 Executive Summary Navigating the current conditions We are now in the all-important final quarter and as expected the renewal results we witnessed in October continue to support the changes in trend as reported last month. Rates are up, albeit the variation seen between the hull and liability rate changes of each individual renewal is large. In general a normal risk with normal growth could expect to receive a relatively minor increase, conversely those affected by loss or those with significant reductions in exposures are likely to experience greater increases. A key factor of this differentiation in rating comes as underwriters, still pushing for rate increases, remain under pressure to maintain or grow premium levels. There is also no let-up in the availability of capacity, this is driven by lack of return elsewhere, and the need of insurers to diversify their risk for Solvency II which in part also supports the underwriters focus on maintaining or growing premium income. There are of course other aspects borne from the current state of the market such as an increasing demand for further innovation. Aviation is renowned for its ability to answer the needs of its clients with new products and so perhaps unsurprisingly in the wake of recent large Hull War market losses and ongoing political tensions throughout the world, a new Non-Cancellation Hull War product has been developed. This new innovative product has been developed to mitigate these concerns and to provide better balance sheet protection and security of operation for airlines. This product is currently being adopted by a number of major airlines on renewal.

2 PROFILE 2 AEROSPACE PLANE TALKING October 2014 Lead Lines - As another jet crashes is it safe to fly? Paul Hayes Director - Air Safety and Insurance, Ascend - A Flightglobal Advisory Service. Paul Hayes has 'kept the score' for aviation accidents and insurance losses since he originally joined the Technical Information Services (TIS) division of hull surveyors Airclaims some 40 years ago (The TIS division later became Ascend and was acquired by Flight in 2011.) and is responsible for the accident/insurance content of Flightglobal's database products. Ascend's air safety data is used extensively by the insurance market and the wider aviation industry including ICAO, EASA, FAA, IATA, Airbus, Boeing etc will be remembered for the loss of the two Malaysia Airlines Boeing 777s, resulting in 510 passenger and 27 crew deaths. Given the strange circumstances surrounding the disappearance of the first 777, which is apparently considered likely due to some form of unlawful interference, and the shooting down of the second, these losses would seem to be more to do with security than safety. Nevertheless, they will have had a significant impact on the public s perception of airline safety. The perception of safety is, in many ways, as important as the actual level of safety. The fatal accident rate for Western European and North American airlines is better than 1 in 10 million flights but a large number of people are still scared of flying or are apprehensive about boarding an aircraft. The more unsafe they perceive the industry to be the less inclined they will be to fly. If the accident rate remains the same as in the 1930s, the expected growth in commercial aviation after the War will result in an unacceptable number of accidents. This will, ultimately, limit this growth. This is still true, with the industry continuing to grow, maintaining the same level of safety is not good enough. Safety has to improve at least as fast as growth or the number of accidents will increase and airlines will be perceived as becoming less safe. As the Red Queen might have explained to Alice in airline safety it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run a whole lot faster! In the late 1930s the US airline passenger fatality rate was about one per 50,000 passengers carried (the world rate was probably closer to one per 10,000 passengers carried). Airline safety, measured by the passenger fatal accident rate, is probably about 100 times better now than in 1950 and more than twice as good as ten years ago. Want to feature in Lead Lines? If so please contact us at: publications@jltgroup.com A passenger s chance of being killed in a crash is about the same as winning the lottery but people still buy lottery tickets with some expectation that their number might come up. The detrimental impact that a negative perception of airline safety, mainly based on the frequency of reports of air crashes in the media, can have was recognized very early on. As long ago as 1943 a report by Curtiss-Wright to the US Government concluded that - Airline safety did improve after the War and, by 1950, when US airlines, including major airlines like American, Eastern, Northwest, TWA etc., suffered 15 fatal accidents, the passenger fatality rate was twice as good as in the 1930s - one passenger fatality per 100,000 carried. Globally in 1950 there were at least 39 fatal accidents on revenue passenger flights resulting in some 799 passenger fatalities. In 2013 there were just 10 fatal accidents on revenue passenger flights Continued on page 3

3 Plane Talking 3 The improvement in airline safety has not only kept up with the huge expansion in air travel but has also got ahead of it, actually reducing the frequency of fatal accidents. Continued from page 2 resulting in 162 passenger fatalities. None of these accidents involved a US airline, major or otherwise. In fact none of the airlines involved, except perhaps Asiana, were probably known outside of the markets they serve. The improvement in airline safety has not only kept up with the huge expansion in air travel but has also got ahead of it, actually reducing the frequency of fatal accidents. In the immediate post-war years, typically, there were up to 50 fatal accidents involving revenue passengers each year. This has now fallen to between 10 and 20 a year the annual average for the ten years to the end of 2013 is At the time of writing, and excluding the two Malaysia losses, the number of fatal accidents involving revenue passengers so far during 2014 is just five. 213 passengers died in these accidents. Curtiss-Wright s fear that the public would be driven away from flying by increasing numbers of accidents has, thankfully, not been realised. So far, even including the two Malaysia losses, 2014 is still one of the safest years ever, being safer than any year before Only five years (2004, 2008 and 2011 through 2013) have been better. Without the Malaysia losses, only 2013 is safer. Airline safety, measured by the passenger fatal accident rate, is probably about 100 times better now than in 1950 and more than twice as good as ten years ago. Although individual years may be better or worse, airline safety has been improving for very many years and, certainly, for the last 15 years has been improving more rapidly than the industry has been growing. Despite the shock of the Malaysia losses and that of the TransAsia, Air Algerie and Sepahan Airlines crashes that came in quick succession at the end of July/early August, it is still safe to fly and the industry has probably never been safer. Last year the estimated global fatality rate was one per 23 million passengers carried. By this measure, 2013 was the safest year ever by far.

4 4 AEROSPACE Plane Talking October 2014 Renewal Analysis EXPOSURES Exposure growth for October remained healthy with the majority of carriers posting both growth in passengers and in fleet values. Whilst the average fleet value figure for October appears somewhat out of line with that of the year to date this is due to two carriers which significantly reduced their fleet sizes on renewal and thus distorted the overall monthly figures. With underwriters under pressure to maintain or grow their premium income exposure reduction is likely to be met with rate increases. PREMIUM The renewal results for October continue to support the sentiment that market conditions have changed. The combined hull and liability premium is up around 18% for the month, with the majority of airlines that renewed experiencing some degree of premium increase. With around 70% of the markets premium for the year still to come from the forthcoming November and December renewals and combined with the recent change in market conditions the overall 2014 premium figure looks set to finish higher than that of last year. RATES As with the premium figures for October rates were significantly up on the year to date figures. The average combined hull and liability rate change for October was around 13%, with most carriers experiencing some degree of rating increase. From our analysis it remains evident that there is a significant variation between each airline s renewal results. Those smaller accounts and/or those with poor loss records seem to be attracting higher increases than others. This is a primary factor that we expect to continue for the forseeable future. Year on Year Exposure % change. Oct. 2013/Oct based on the latest Information as at 31 Oct Source: JLT Year on Year Premium % change. Oct. 2013/Oct based on the latest Information as at 31 Oct Source: JLT Year on Year Rate % change. Oct. 2013/Oct based on the latest Information as at 31 Oct Source: JLT 25% 25% 25% 20% 20% 20% 15% 15% 15% 10% 10% 10% Change 5% Change 5% Change 5% 0% 0% 0% -5% -5% -5% -10% -10% -10% -15% -15% -15% -20% Oct YTD -20% Oct YTD -20% Oct YTD Average Fleet Value Passengers Hull Liabilities Hull Liabilities Premium Hull Liability Total YTD % Change -4% -11% -8% * At lead terms

5 Plane Talking 5 Renewal Comment OCTOBER RENEWALS The final quarter of the year is by far the most important and active period for the airline insurance industry and produces around 70% of the markets premium for the year. October marks the start of this period and whilst it doesn t feature as many renewals as the forthcoming months of November and December it still provides us with the first real batch of major airline renewals to be negotiated and placed in the wake of this years major losses. Of the 17 airlines renewing in October, five carriers Air India, Skywest Airlines, Gol, Cebu Pacific and Qatar Amiri Flight had fleets valued in excess of USD1 billion. Whilst the renewal results of these carriers are important in helping us to try and establish some kind of new market trend the fact that these carriers all significantly differ in profile and are located in different regions of the world makes this very hard to do. Hull War In the wake of the huge losses suffered in this sector this year, underwriters were initially pushing for increases upwards of 100%. Some recent renewals however have negotiated increases around half this figure. It must be noted that at present there is great differentiation between renewal results, with the profile and exposure information of each individual risk a significant factor. Excess AVN52E This sector has been relatively quiet compared to others, with flat or modest increases seen on recent renewals. As with the hull war market there is a greater differentiation in pricing between those airlines exposed to current troubled regions of the world and those that are not. FORTHCOMING RENEWALS November has always been a significant renewal month for our industry, however this year due to the current uncertainty surrounding the market it will perhaps become of greater importance as we look to ascertain a more meaningful insight in to the current conditions and trend. This year around 40 renewals come to market in November, of which 16 carriers have an expiring average fleet valued in excess of USD1 billion. Emirates is not only the biggest of this group but by far the largest renewal of the month overall with an expiring fleet valued at USD37.1 billion. Including Emirates the Middle East/Gulf region accounts for the largest number of renewals with 12 operators of varying size coming to market. Other renewals from this region include carriers such as Saudi Arabian Airlines, Etihad, Air Arabia, Gulf Air, Oman Air, Jazeera Airways and Nas Air. Flag carrier Qantas and its associated airlines is the second largest renewal in November with an expiring fleet valued at USD19.2 billion followed by global logistics specialists UPS and DHL. Looking ahead we must reiterate our previous comments that all forthcoming renewals, regardless of policy type, will likely continue to be treated very much on a case-by-case basis, until such time that the market finds a balance. The 10 largest airline renewals in November are shown in the table below: Airline Renewal Date Expiring AFV USD Emirates 16 Nov 37.1bn Qantas 1 Nov 19.2bn UPS 16 Nov 14.0bn DHL International 1 Nov 12.6bn Etihad Airways 16 Nov 9.9bn Saudi Arabian Airlines 16 Nov 9.1bn TUI 1 Nov 8.6bn Jet Airways (India) 22 Nov 5.9bn Air Berlin 16 Nov 5.6bn Air New Zealand 1 Nov 3.9bn Additionally the 10 largest airline renewals in December are shown in the table below: Airline Renewal Date Expiring AFV USD C.A.A.C. Group 1 Dec 100.6bn Lufthansa Group 1 Dec 49.4bn American Airlines 22 Dec 34.5bn Air France/KLM Group 1 Dec 33.9bn Cathay Pacific 15 Dec 20.9bn United Continental 31 Dec 20.7bn Southwest Airlines 15 Dec 15.4bn Delta Air Lines 21 Dec 15.4bn Singapore Airlines 15 Dec 14.2bn FIN Group 1 Dec 14.1bn Source: JLT Database

6 6 AEROSPACE Plane Talking October 2014 Loss Analysis 10 OCTOBER LOSSES ACSA Air Century 12th Oct 0 Fatalities BAE Jetstream J31 (HI-816) Dominican Republic Landing at Punta Cana on a domestic charter with 11 passengers and 2 crew, the aircraft suffered a technical problem causing it to run off the side of the runway and into bushes where it was consumed by fire. All occupants escaped with only three suffering minor injuries. OCTOBER LOSS SUMMARY HULL LOSS ESTIMATE: USD 48m LIABILITY LOSS ESTIMATE: USD 0 Biega Air 25th Oct 0 Fatalities Let L410UVP (9Q-COT) PDR Congo NUMBER OF FATALITIES: 3 The aircraft crashed on approach to Shabunda airport at the end of a domestic flight with 1500kg of cargo. The aircraft was destroyed with both crew receiving serious injuries. All Known Airline Losses Net of Deductible 100 Skyway Enterprises 29th Oct 2 Fatalities Short (N380MQ) Netherlands Antilles 80 The aircraft crashed into the sea shortly after takeoff from Saint Maarten on a flight to Puerto Rico. Reports suggest the aircraft was being operated for Fedex. Both crew members perished in the accident Virgin Galactic 31st Oct 1 Fatality SpaceShipTwo (N339SS) USA 0 Hull 2013 Hull 2014 Liabilities 2013 Liabilities 2014 The spacecraft, insured predominantly in the airline market, was conducting a powered test flight when it broke up shortly after separating from its carrier aircraft. One crew member died and the other survived, parachuting from 50,000 feet. **Figures shown are provided only as a guide. Source: JLT.

7 Plane Talking 7 Loss Summary HULL ALL RISKS Following a relatively quiet couple of months October witnessed a small flurry of losses with four accidents recorded in our analysis. The largest and most high profile loss in October was not a traditional airline loss as such and came from that of Virgin Galactic s SpaceShipTwo which broke up during a powered test flight. One of the two pilots on board perished. Following the losses in October the fatality figure for the year to date now stands at 787, and the number of fatal accidents recorded so far this year is 16. The combined Hull and Liability loss figure for 2014 now stands at around USD1.01 billion for the year to date (excluding attritionals). As we have previously reported and as our Lead Lines contributor this month comments with just two months of the year remaining so far 2014 is still one of the safest years ever, being safer than any year before Only five years (2004, 2008 and 2011 through 2013) have been better. Without the Malaysia losses, only 2013 is safer. HULL WAR Hull war loss activity remained quiet throughout October with nothing to report. Non-Cancellable Airline Hull War Product In the wake of recent large Hull War market losses and the ongoing political tensions throughout the world; a new Non-Cancellation Hull War product has been developed by JLT. This new innovative product is not subject to the traditional seven-day notice period that insurers can use to trigger a change in terms or pricing following an event or even cancel the policy altogether and has been created to mitigate these concerns and to provide better balance sheet protection and security of operation for airlines. This product is supported by all of the major Hull War markets and is currently being adopted by a number of major airlines on renewal. This as an ideal product for fully scheduled airlines that can clearly illustrate and define their destinations, but it may not be suitable for airlines that have ad-hoc exposures or already fly to so called hot spots or conflict areas YEAR TO DATE LOSS SUMMARY HULL LOSS ESTIMATE: USD 279m LIABILITY LOSS ESTIMATE: USD 733m NUMBER OF FATALITIES: 787 NUMBER OF FATAL ACCIDENTS: Year to Date vs. 5 Year Average Losses** For further details on this product please contact your JLT account executive YTD 5 Year Average **Figures shown are provided only as a guide. Hull & Liability combined, includes an attritional estimate and excludes Hull War losses. Source: JLT.

8 8 AEROSPACE Plane Talking October 2014 Market News MAPFRE GLOBAL IN LONDON SPECIALTY PUSH Mapfre announced that it will start offering specialty lines of business in aviation, energy, marine, construction and engineering from its London offices in The global specialty insurance arm of the Spain-headquartered insurance group has been operating in the UK for the last seven years, focusing on property lines. The firm said that, subject to obtaining the appropriate licences, it also plans to extend its property line to other markets such as the US, Asia, South Africa and the Middle East. GLOBAL AIR PASSENGERS TO MORE THAN DOUBLE IN 20 YEARS - IATA In a recent press release the International Air Transport Association (IATA) announced that the number of people travelling by plane each year is expected to more than double to 7.3 billion by That would represent average annual growth of 4.1% from the 3.3 billion passengers expected to travel this year, IATA said in its first 20-year passenger growth forecast. China is expected to overtake the United States as the world's largest passenger market, in terms of passengers travelling to, from and within the country, by 2030, IATA added. While Asia-Pacific is predicted to enjoy annual growth rates of 4.9% over the next 20 years and North America 3.3%, Europe is set to have the slowest growth at 2.7%, according to the report. NSM INSURANCE GROUP ACQUIRES SAU US based NSM Insurance Group announced that it has acquired Specialty Aviation Underwriters (SAU), a US company that was founded over 20 years ago and specialises in aviation products. GECAS TO ACQUIRE MILESTONE AVIATION GECAS, the aircraft leasing unit of General Electric (GE), announced the signing of an agreement to acquire Milestone Aviation Group, the Dublinbased helicopter lessor, for USD1.78 billion. Milestone s fleet includes 168 helicopters worth USD2.8 billion as well as a strong forward order and option book of USD3 billion with a variety of helicopter manufacturers. The transaction remains subject to customary closing conditions, including regulatory approvals, and is targeted to close in KAZAKHSTAN HOPING TO REMOVE AIRLINES FROM EU 'BLACKLIST' BY 2015 Kazakhstan s airlines could be withdrawn from the European Union s blacklist as early as 2015, according to the Kazakhstan Ministry of Investment and Development. At present all Kazakh airlines except for Air Astana, which had its restrictions removed in April 2014, remain on the blacklist. ARRIVALS & DEPARTURES Nick Bridges has joined Amlin after leaving Brit Aviation. Wayne Murphy, formerly of Swiss Re has joined the Hardy Syndicate as Senior Underwriter for Aviation. David Hammond has left Lockton s to join Tysers. SIGNIFICANT RATINGS CHANGES Ratings agency Standard & Poor s (S&P) has raised its financial strength rating on Korean Re to A from A-. The outlook on the ratings is stable. Ratings agency AM Best has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings of a of Mapfre Re and Mapfre Global Risks. The outlook for all ratings is stable. Ratings agency AM Best has revised the outlook to stable from negative and affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of a of Assicurazioni Generali S.p.A. (Generali) and its main subsidiaries.

9 JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference using insight, intelligence and imagination to provide expert advice and robust - often unique - solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. 9 AEROSPACE PLANE TALKING October 2014 CONTACTS SUBSCRIPTIONS & GENERAL QUERIES publications@jltgroup.com EDITORIAL TEAM Richard Adams Aerospace, JLT Specialty Limited +44 (0) richard_adams@jltgroup.com Brad Hills Aerospace, JLT Specialty Limited +44 (0) brad_hills@jltgroup.com BUSINESS CONTACTS Nigel Weyman Aerospace, JLT Specialty Limited +44 (0) nigel_weyman@jltgroup.com William Smith Aerospace, JLT Specialty Limited +44 (0) william_smith@jltgroup.com LET US KNOW WHAT YOU THINK JLT is always looking to improve the services and information we provide to our readers. We value your opinion and welcome your feedback on our Plane Talking publication. Should you have any feedback please contact us at: publications@jltgroup.com JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No VAT No October 2014 This publication is compiled and published for the benefit of certain clients for whom companies within the Jardine Lloyd Thompson Group act as agent or consultant. It is intended only to highlight general issues relating to the subject matter which may be of interest and does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide specific advice on the subject matter. Views and opinions expressed in this publication are those of Aerospace unless otherwise stated. Whilst every effort has been made to ensure the accuracy of the content of this publication, neither Aerospace nor any other company within the Jardine Lloyd Thompson Group accepts responsibility for any error, omission or deficiency in its content. 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 professional advice. This document is protected by copyright law. Unauthorised reproduction, copying and distribution of this document or any part of it may result in civil and criminal penalties and will be prosecuted to the maximum extent permitted under law.