Airline Insurance

Market Outlook 2012

Aon Risk Solutions

Airline Insurance
Market Outlook 2012

The risk remains

Overview

Contents. Overview.
The aerospace industry continued to defy gravity during 2010, continuing a trend laid down in 2007.

Airline Insurance

Market Outlook 2012

Foreword The market view

5 6

Overview
Executive summary Overview Airline reinsurance market 8 9 16

Analysis
Regional analysis Sector analysis Fleet value analysis 20 27 32

Analysis

Quarterly/monthly data

18

Overview

Overview

The risk remains: Airline Insurance Market Outlook 2012

The risk remains

Airline Insurance

Market Outlook 2012

Foreword
The airline industry quietly delivered an exceptional claims year in 2011, with the lowest amount of claims, the lowest number of fatalities and the lowest number of incidents since at least 1995.
This is a cause for celebration across the industry, but there are a number of reasons why it may not instantly lead to the cost of airline insurance to plummet, not least of which is that 2011 is likely to have been only the second time in five years when underwriters will have seen a positive return on their airline books. That said, the low level of claims will help ensure that insurance market capacity is healthy in 2012, particularly in comparison with some other sectors where natural catastrophes may have had an impact from an insurance point of view. In the end, the level of risk that the airline industry presents continues to improve from a technological and safety management point of view, but in terms of the insurance markets, this is very much an evolution. A single year with phenomenally low level of claims does not mean that the next year will be the same, because the level of risk does not change over night. Our role as an insurance broker is to help clients understand current market conditions and help them to communicate the unique elements of their insurance programme to underwriters to ensure they are as efficient as possible. This report forms a key part of that process. If there is any part of this report that you would like to discuss in more detail, please do not hesitate to contact us. Peter Schmitz Chief Executive Officer: Aviation, Aon Risk Solutions peter.schmitz@aon.com

Airline Insurance

Market Outlook 2012

The market view

The wider aviation market is as much about general aviation, aerospace and the industrys service providers and financiers as it is airlines. The majority of insurers spread their underwriting across many product lines and reinsure for the whole account accordingly. Underwriters have been declaring positive combined performance ratios despite bemoaning airline market conditions and the increased cost of claims. Most insurers, particularly those publicly quoted, are under pressure to grow their business year on year. As airline premium leaks from their account, new income sources must be found to make up the shortfall. Risk selection is one answer but account picking shrinks the portfolio and loses spread. The aerospace sector is receiving increased attention and readily available capacity means the sector continues to soften. Insurers are entering or returning to underwrite product lines or programmes in geographies that they had previously avoided or left due to inadequate pricing. Meanwhile the general aviation market has the most obvious over-capacity and remains highly competitive. There are no untapped havens and insurers are battling to balance deploying greater appetite against further market softening. Only a small minority of insurers are blessed with management approval to scale down their aviation underwriting and wait until better times. The majority must trade through the current aviation market nadir. Insurers speak of their flexibility to move capital to better performing classes but we seldom witness this. They have to trade to pay for the cost of investment in class underwriting teams, reinsurance and other fixed costs. Risk for risk, airlines have already taken much of the advantage of the long-standing soft market and appetite. Airlines will continue to receive advantage where insurers have to worry that seeking compensation for risks above the market could challenge their share. There are also the human factors of a functioning market where insurers make commercial moves that their peers claim defy logic. This and over-capacity are certainly performing the strong role in firmly capping insurers wish for market price stability let alone a hardening. That trend could only take longer term effect if capacity leaves the market. Until then airlines can enjoy their insurance premiums being the one area of fixed costs which remains soft and encouragingly negotiable. Simon Knechtli Head of Aviation, Aon Risk Solutions simon.knechtli@aon.co.uk

The risk remains

Airline Insurance

Market Outlook 2012

Overview.
By pretty much every gauge, losses in 2011 were exceptionally low. While this is positive for 2012 trends, it follows two years where claims have exceeded previous records.

Airline Insurance

Market Outlook 2012

Executive summary

average lead hull and liability premium fell 3% average fleet values grew by 8% forecast passenger numbers grew by 7% total lead hull and liability premium was US$1.8 billion total incurred claims were US$522 million

Premium: Lead hull and liability premium fell by 3%, with the market softening as the year progressed. Total lead hull and liability premium was US$1.82 billion, compared to US$1.88 billion in 2010 on a like for like basis. In 2010 the actual premium was US$1.97 billion, but the like for like figure takes into account airlines that did not renew on a stand alone basis or those that fell beneath the criteria for inclusion in our data (see page 35). Rates: The underlying cost of insurance continues to fall with insurers prepared to trade risk exposure growth for reductions in rates. Claims: The final loss figure for 2011, excluding minor losses, is US$522 million, compared to US$1.59 billion recorded for 2010. Adding an estimate for minor losses, the overall loss total was US$1.13 billion, compared to US$2.10 billion in 2010 (see page 12).

Sector: Most of the sectors continue to conform to the global averages in terms of premium and exposure. Despite the positive claims year, the five year credit balance has deteriorated for flag, international and regional carriers, generally the result of minor claims as well as the evolution of premium levels (see page 27). Fleet: Exposure growth is strongest for airlines with a mid-range AFV of US$1-2 billion, which has also achieved an average lead hull and liability premium reduction (see page 32). Capacity: Capacity is expected to remain healthy in 2012. The over supply of capacity should keep in check any upwards price pressure due to potential losses but in reality, the majority of airlines have already used the greatest advantages of over supply and the remaining uninvolved capacity has a low appetite for current pricing.

Overview

Compared to 2010, in 2011:

Region: The different recovery rates of economies around the world are being reflected in the airline insurance data, with Asia Pacific, Latin America and the Middle East all reporting strong exposure growth forecasts while AFV continues to decline in North America (see page 20).

Airline Insurance

Market Outlook 2012

Overview
At the end of 2010, underwriters were attempting to be firm in their strategy. Industry premium needed to at least break even with the level of average five year losses even before fixed and reinsurance costs were taken into account. Given that programmes are traded in a free market however, prices continued to soften as 2011 progressed.
This culminated in an average Q4 5% reduction in premium. This was the first quarter since 2008 when lead hull and liability premium on average fell, with reductions driven by the low level of claims and the healthy availability of capacity. Our statistics are based on the lead insurer premium terms as this provides fair comparison and the composite terms are impossible for an intermediary to record with any degree of accuracy. It should be pointed out that the lead price is not always followed by the other insurers that are involved in the programme and as a result, to complete the risk, higher prices sometimes need to be paid. Following insurers continue to take a tougher stance on distressed programmes. While this may seem unscientific when distressed programmes tend to pay rates far above market average, it reflects the forces of supply and appetite in the insurance market. It should also be pointed out that in 2008, the last year when lead hull and liability premium outweighed claims, the difference was so close that that any potential profit would have been swallowed up by fixed and reinsurance costs. As a result, the airline insurance market is only likely to have been profitable once in the last five years.

Airline Insurance

Market Outlook 2012

Number of incidents

50

As a result, while underwriters will be quick to applaud the industrys 2011 achievement, they continue to write against historical loss levels of around US$2 billion per annum. This highlights the challenge of profitable underwriting. Insurers labour the fact of the rising cost of claims and the probability that an average year of claims will produce a trading loss at current levels of premium. It is important to be reminded that many insurers write broad portfolios of aviation products and reinsure on a whole-account basis. Life is better overall than the specific airline market suggests. There has been a great deal of discussion about the effect of the natural catastrophes in 2010 and 2011 on the cost of underwriters own reinsurance purchasing, but so far there is little evidence of prices rising at this stage (see page 16).

25

0 1996 1999 2002 2005 2008 2011

Average, 1995-2011

Number of incidents, global 1995-2011

Weathering the storm

Data from airline renewals in the insurance market provides a good indicator about how the industry has fared during the economic challenges of the last few years. It is very difficult to comment on overall changes in the industry, but changes in Aons data provides a useful guide. We estimate that around US$232 million of lead hull and liability premium disappeared from the insurance market during 2011.

10

Overview

After four years where premium is estimated to have outweighed claims, the majority of airline insurers will have enjoyed healthy returns in 2011 given the low level of claims, effective strategy, risk selection and good fortune.

100

75

Airline Insurance

Market Outlook 2012

100

2.5
-US$0.47bn

-US$0.42bn -US$0.13bn -US$0.67bn +US$0.12bn

75
Percentage Change
US$ billion

2.0

50 25

1.5

1.0 0.5

0
0.0

-25 2000

2007

2008

2009
Claims

2010

2011

2002

2004

2006

2008

2010

Premium Source: Aon loss data

Average quarterly percentage premium change 2000-11

Source: Aon market data

Total premium and claims 2007-2011 (inc. minor loss estimate)

2,000 1,250

750

Number of fatalities

Number of fatalities

1,000 750 500 250 0 1996 1999 2002 2005 2008 2011

500

250

0 Jan
2010

Apr
2011

Jul

Oct
Average 1995-2010

Average, 1995-2011 Source: Aon loss data

Averages exclude September 11th losses

Number of fatalities, global 1995-2011

Cumulative fatalities 2011 (passenger and third party fatalities)

11

Airline Insurance

Market Outlook 2012

2,000

1,500

US$ millions

1,000

500

Phenomenal year of low claims

There were half the average number of airline incidents in 2011 than the long term average, 37 compared 70. The previous lowest number of incidents was in 2002, when there were 53. We estimate the total value of claims to be in the region of US$522 million for the year, compared to an average of US$1,170 million and comfortably below 2003, the previous lowest year for claims since 1995, when there were US$573 million of claims.
2,000

0 Jan
2010

Apr
2011

Jul

Oct
Average 1996-2010

Averages exclude September 11th losses

Cumulative claims 2011 (including minor loss estimate)

Value of claims (US$ million)

This was mainly a result of airlines ceasing operations, consolidating, seeing their average fleet value (AFV) drop below US$150 million (the threshold used for inclusion in this data set, see page 35 for details), joining or exiting group placements or no longer insuring their programmes within the recognised international airline insurance markets. The number of airlines that have come out of the data is 35, mainly the result falling AFV, 12 organisations, joining group placements, 11 organisations. Seven airlines formerly in our data have ceased operations. At the other end of the scale, 23 airline insurance programmes, totalling just over US$132 million in terms of lead hull and liability premium, have joined the data. This is dominated by 15 airlines, representing

1,500

1,000

500

0 1996 1999 2002 2005 2008 2011

Average, 1995-2011

Value of claims, global 1995-2011

Source: Aon loss data

12

Overview

US$42 million of lead premium whose AFV forecasts climbed above the US$150 million mark. The remainder is comprised of six airlines that have left group programmes, representing US$38 million, two airlines consolidating and a solitary new carrier.

Airline Insurance

Market Outlook 2012

40

50

35

40

30 30 20 25

10

Fatalities (per million ights)

According to Ascent Worldwides data, there were 1.8 billion aircraft departures in 1995, a number which grew to nearly 2.9 billion in 2011. Adding Aon loss data to this gives an average number of fatalities per million departures of 19.93 between 1995 and 2010. The lowest in a single year prior to 2011 was 2004 when an average of 9.5 fatalities per million departures was reported. Last year, there were only 4.61 recorded fatalities per million departures. Similarly the average number of fatalities per million passengers carried was 0.29, and the previous lowest 0.14. The figure was drastically lower in 2011 with 0.06 recorded fatalities per million departures. The airline industry will rightly broadcast the very positive 2011 as the result of the high levels of investment in technology, quality and safety and industry standards. Ground handling and airport services should also be commended for their necessary contribution to the improvement loss statistics.

Flights (millions)

20 1995

0 1998 2001 2004 2007 2010

Fatalities (per million ights)

Flights (millions)

Source: Aon market/Ascend data Averages exclude September 11th 2001

Passenger fatalities per flight

There were 175 aviation fatalities worldwide in 2011, compared to 623 on average. There were only four fatalities in Europe covered under standard hull and liability insurance policies, and none in Africa. No region had more than 70 fatalities and there was only a single incident involving more than 30 fatalities. The total annual value of claims in North America and Europe was under 20% of the long term average. Worldwide, claims were 45% of the long term average.

13

Airline Insurance

Market Outlook 2012

Continuing the trend

The risk of an incident remains the same, and while 2011 was fantastic in terms of claims, 2007, 2009 and 2010 were well above the long term average and 2008 was only slightly below. Underwriters tend to look at the profitability of a book of business over a five year period, so the longer term numbers take some of the shine from the 2011, which may turn out to be exceptional in the true sense of the word. As stated in the executive summary however, the low level of claims in 2011 will be a single element in the downward pressure on the market in 2012. Underwriters look at the risk profile of an insurance programme on an individual basis as well as taking into account overall insurance market trends. The low level of claims will mean more airlines with improving loss histories and should improve the negotiating position for insurance brokers and risk managers. Underwriters appetite for reacting positively to 2011s results will clearly not depend purely on technical pricing, rather the commercial realities of the global market in which they are trading and set against the fact that they are currently close to the nadir of the market cycle.

The trend of increasingly aggressive forays into the aerospace and general aviation segments has only served to further soften market-wide aviation prices. We are also witnessing insurers (re) entering geographies or products from which they had previously withdrawn deeming pricing to be inadequate. Evidence of this flow of capacity at a micro-market level can be seen risk for risk. On a macro level, the aerospace and general aviation markets are also benefitting as a premium source to substitute airline loss in premium. Just to keep the positive note for buyers, underwriters are aware of the much rumoured news of new capacity entering the market. The greatest effect will be if this takes place in the direct rather than through the reinsurance market.

14

Overview

Whatever insurers debate between technical and commercial pricing, one thing is certain: if you are in the market, you have to write business to meet targets. The question is which portfolio and how broad or selective it should be. Insurers are looking at new areas to grow their business and make up for premium leaking from their airline book.

Airline Insurance

Market Outlook 2012

Asia Pacific in pole

Last year appears to have confirmed the primacy of the Asia Pacific region in the airline industry. According to the forecasts provided to insurers, the region now has the highest average fleet value (AFV), the highest number of passengers and the second highest average aircraft value. Moving to the top of the tree means that the region now reports the highest amount of lead hull and liability premium. As can be seen from the regional fleet value chart, the proportion of AFV represented by the majority of regions over the last five years has stayed relatively steady for Africa (2%), Europe (27-29%), Latin America (3-4%) and the Middle East (7-9%). The greatest change has come in the Asia Pacific region, where the proportion of global AFV has grown from 30% in 2006 to 36% in 2011. This change has occurred at the expense of North America, where the considerable economic challenges that the airline industry has faced has meant that the global proportion of AFV in the region has fallen from 31% in 2006 to 22% in 2011.

It should be pointed out that there is an unusual conflux of economic circumstances for North America as well as ultimately the fact that the region is already very mature from an aviation point of view, particularly in comparison with the Asia Pacific market, which has been enjoying a giddy period of growth over the last decade. For the latest analysis of airline insurance market trends, please go to www.aon.com/aviationinsight.
2011 3% 2010 2%
22%

2009 2% 25% 2008 2% 26% 2007 27% 2% 31% 30%

7% 27% 8% 3% 3% 29% 4% 28% 28% 29%

35% 31% 32% 33%

8%

9%

8%

3%

3%

Africa Latin America

Asia Pacic Middle East

Europe North America

*Estimate fleet value 2006-2011 Regional

15

Airline Insurance

Market Outlook 2012

Airline reinsurance market

Overview
16

The airline reinsurance sector has been relatively stable over the last year, with only the Reno Air Show loss causing concern. As a result, the picture for 2012 is fairly positive at this stage.
In a stable reinsurance market, programmes are renewed with similar deductible levels and vertical limits of cover and, in the absence of any major loss activity, this should continue throughout 2012. Capacity is abundant for all areas of the business and there is no reason to anticipate any change in the short to medium term. Due to the lack of any major claims in the airline and aerospace sectors, excess of loss risk adjusted rates for contracts which renewed during the last quarter of 2011 softened by around 7.5%. The January 1, 2012 reductions varied between zero and 10% as reinsurers differentiated clients by acknowledging exposure changes and the potential for any excess of loss recoveries arising from the Reno Air Show loss. The Reno loss has also had an effect on the wider excess of loss market as reinsurers were surprised at the quantum of loss from a general aviation risk, highlighting the differential line structures for their clients airline and general aviation accounts. Despite increasing exposures, the total cost of excess of loss reinsurance in 2011 continued to fall and the overall spend of the 30 largest insurers was around US$325 million, a 7.5% drop from the previous year. The unprecedented natural catastrophe losses of 2011 have yet to have any effect on aviation reinsurance capacity or prices. Underwriters buy reinsurance for their entire portfolio including airline, aerospace and general aviation. Given that, with the exception of the Reno loss, all three areas of the business were healthy in 2011, and as a result, discussions about the challenges that face reinsurance programmes could be suggested to be something of a distraction.

Analysis.
The fantastic claims result in 2011 has had ramifications across the airline industry. The challenge is delivering results in 2012 to prove that the industry has achieved a genuine reduction in risk.

Airline Insurance

Market Outlook 2012

Quarterly/monthly data
Conditions softened as the year progressed, influenced by the play in market capacity and the low level of claims in the industry
Total Renewals 2010
Jan Feb Mar Quarter one Apr May Jun Quarter two Jul Aug Sep Quarter three Oct Nov Dec Quarter four Total/Average 2 2 7 11 19 19 12 50 35 6 6 47 14 37 65 116 224

Fleet Value % change

+50% -43% -36% +5% -26% +33% 0% -11% +17% 0% -6% -7% +3% -5% -3% -4%

Passenger Movement % change

+9% +20% +16% +16% +11% +2% +12% +15% +15% +38% +12% +19% +7% +5% +20% +8%

Premium Hull/Liability 2010 (US$m)

3.98 11.95 15.93 129.36 61.57 53.11 244.04 238.85 34.02 23.69 296.56 156.47 262.14 901.07 1,319.68 1,876.21

2011
3 4 7 20 14 16 50 31 7 6 44 13 38 62 113 214

% change
+45% +7% +14% +14% +10% +1% +7% +8% +10% +47% +7% 0% +8% +5% +5% +6%

2011 (US$m)
5.03 12.65 17.69 124.48 66.75 54.21 245.44 232.81 41.57 26.23 300.61 148.39 233.98 869.17 1,251.54 1,815.28

% change
+27% +6% +11%

+8% +2% +1% -3% +22% +11% +1% -5% -11% -4% -5% -3%

18

Analysis

-4%

Airline Insurance

Market Outlook 2012

The fourth quarter renewal season remains frenetic, however less than 70% of the markets premium was placed during the period. At the beginning of the century, 80% of premium was placed during the final three months of the year, but this has been eroded since 2004. There are a number of attractive arguments both for renewing in the final quarter and renewing during the first nine months of the year, but at this stage there is

only a very gradual tide in favour of renewing during the first three quarters when underwriters have the time to discuss a renewal programme in detail. Some airlines have taken out an option to extend their placement, but there have been few to that have taken it up at this stage. Placing insurance is part of an airlines wider financial strategy indicating Q4 remains as a strong preference.

Q1 11 1% Q2 11 13%

Q1 11 3% Q2 11 23%

Dec 11 29%
Dec 11 48% Q3 11 17%

Oct 11 8% Nov 11 13%

Nov 11 18%

Q3 11 21% Oct 11 6%

Airline premium profile (proportion of lead hull and liability) *Estimate

Source: Aon market data

Airline renewal profile (number of renewals)

Source: Aon market data

19

Airline Insurance

Market Outlook 2012

Regional analysis
The global economic travails have been keenly felt in the airline industry. On average premium has declined in the majority of regions, but the reasons have been different according to economic performance.
Latin America Asia Pacic Total/Average Europe North America Africa Middle East -15%
-13% -8% -5% -3% -4% 1% 3%

-10%

-5%

0%

5%

Percentage lead hull Aon market data and liability premium change by region 2011 Source:

Latin America Middle East Asia Pacic Europe Total/Average Africa North America -4% -5% -5% 15%
7% 6% 6% 10% 14%

18%

Latin America Asia Pacic Middle East Europe Total/Average North America Africa -4% -5% 5% 15% 25%
0% 13% 10% 9% 8%

33%

35%

Percentage average fleet value change by region 2011

Source: Aon market data

Source: Percentage passenger Aon market data projection change by region 2011

20

Analysis

Airline Insurance

Market Outlook 2012

Africa
2011 claims
19952010 average
Number of incidents Value of claims (US$m) Number of fatalities 9 114 119

Percentage Change

40 30 20 10 0 -10 -20 2005

Premium

AFV

Passenger

2010

2011

2011 compared to 2010

-67% -84% -

12 402 174

4 66 0

2008

2011

Regional premium and exposure movement 2005-11 Africa

Source: Aon market data

2011/12 insurance forecasts

2010
Total renewals Premium (US$m) Total AFV (US$m) Total passengers (m) Average liability limit (US$m) Cost per passenger (US$) Credit balance (US$m) Average aircraft value 15 110.45 18,337.88 51.33 970.59 2.15 -19.35 31.05

2011
17 102.07 19,405.76 49.36 985.29 2.07 -85.09 33.59

% change
+13% -8% +6% -4% +2% -4% -340% +8%

While the number of passengers being carried by African airlines is forecast to fall by 4% during the course of the 2011/12 renewal programmes, the total number is due to rise to 49 million as a result of operations growing to meet our criteria. In 2007, the number of passengers forecast to be carried was 33 million, so its growth to 49 million in 2011 suggests an industry in relatively good health. Seven of the 17 renewals that meet our criteria forecast an AFV increase of more than 20% during the course of their 2011/12 insurance programmes. The region has the second lowest average aircraft value, US$34 million per aircraft compared to a global average of US$37 million.

21

Airline Insurance

Market Outlook 2012

Percentage Change

Asia Pacific
2011 claims
19952010 average
Number of incidents Value of claims (US$m) Number of fatalities 18 289 205

40 30 20 10 0 -10 -20 2005

Premium

AFV

Passenger

2010
15 508 370

2011
10 198 44

2011 compared to 2010

-33% -61% -88%

2008

2011

Regional premium and exposure movement 2005-11 Asia Pacific

Source: Aon market data

2011/12 insurance forecasts

2010
Total renewals Premium (US$m) Total AFV (US$m) Total passengers (m) Average liability limit (US$m) Cost per passenger (US$) Credit balance (US$m) Average aircraft value 53 510.02 241,325.83 805.36 1,270.18 0.63 1,217.70 53.85

2011
57 513.73 266,327.25 909.73 1,300.53 0.56 693.80 57.33

% change
+8% +1% +10% +13% +2% -11% -43% +6%

The average value of an aircraft in the Asia Pacific region is just over US$57 million, compared to US$37 million on average. The high value of average aircraft reflects the significant fleet investment that has been made over the last five years, with the region one of two that is particularly active in the purchase of new generation wide-body aircraft.

22

Analysis

The growth of the airline industry in the Asia Pacific region continues, with passenger forecasts up 13% on average and AFV forecasts due to rise by 10%. There were similarly robust growth forecasts made for 2010/11.

Airline Insurance

Market Outlook 2012

Percentage Change

Europe
2011 claims
19952010 average
Number of incidents Value of claims (US$m) Number of fatalities 17 285 103

40 30 20 10 0 -10 -20 2005

Premium

AFV

Passenger

2010
15 145 0

2011
8 54 4

2011 compared to 2010

-47% -63% -

2008

2011

Regional premium and exposure movement 2005-11 Europe

Source: Aon market data

2011/12 insurance forecasts

2010
Total renewals Premium (US$m) Total AFV (US$m) Total passengers (m) Average liability limit (US$m) Cost per passenger (US$) Credit balance (US$m) Average aircraft value 71 528.35 202,631.56 800.30 1,009.24 0.66 -150.94 35.36

Airlines in Europe enjoyed a reduction in lead hull and liability premium on average during 2011, despite exposure increases.
2011
66 508.07 217,492.40 870.75 979.70 0.58 -35.99 34.85

% change
-7% -4% +7% +9% -3% -12% +76% -1%

Passenger numbers are forecast to grow by 9%, but Asia Pacifics 13% increase means that Europe no longer has the highest number in the airline industry. Given the economic conditions, this is likely to continue in the short term at least. After climbing at the joint slowest rate in 2010 (2%), lead hull and liability premium has fallen by around 4% on average for 2011/12 airline insurance programmes.

23

Airline Insurance

Market Outlook 2012

Latin America
Percentage Change

40 30 20 10 0 -10 -20 2005

Premium

AFV

Passenger

2011 claims
19952010 average
Number of incidents Value of claims (US$m) Number of fatalities 10 141 108

2010
10 205 78

2011
7 136 25

2011 compared to 2010

-30% -34% -68%

2008

2011

Regional premium and exposure movement 2005-11 Latin America

Source: Aon market data

2011/12 insurance forecasts

2010
Total renewals Premium (US$m) Total AFV (US$m) Total passengers (m) Average liability limit (US$m) Cost per passenger (US$) Credit balance (US$m) Average aircraft value 18 98.47 20,673.37 109.78 943.06 0.90 -75.97 25.26

2011
18 101.91 24,336.58 146.26 984.72 0.70 102.61 35.12

% change
+3% +18% +33% +4% -22% +235% +39%

The exposure growth reflects the robust economic conditions in some countries in the region, with five of the 13 Latin American airlines that report forecasts suggesting that passenger numbers will grow by more than 20% during the course of 2011/12 insurance programmes. Given that the value of claims was around average in 2011 and the number of fatalities very low, it is unsurprising that five year credit balance in Latin America is much improved, at US$103 million compared to -US$76 million for 2010/11 placements.

24

Analysis

After a peak in 2009, average premium in 2011 in Latin America has risen by a relatively modest amount, despite projected passenger increases of over 40% as well as healthy AFV growth.

Airline Insurance

Market Outlook 2012

Percentage Change

Middle East
2011 claims
19952010 average
Number of incidents Value of claims (US$m) Number of fatalities 4 52 22

40 30 20 10 0 -10 -20 2005

Premium

AFV

Passenger

2010
7 162 0

2011
3 27 66

2011 compared to 2010

-57% -83% -

2008

2011

Regional premium and exposure movement 2005-11 Middle East

Source: Aon market data

2011/12 insurance forecasts

2010
Total renewals Premium (US$m) Total AFV (US$m) Total passengers (m) Average liability limit (US$m) Cost per passenger (US$) Credit balance (US$m) Average aircraft value 26 129.74 53,219.72 100.63 1,229.17 1.29 -244.03 65.45

2011
24 113.02 60,785.07 110.55 1,208.33 1.02 -59.90 82.89

% change
-8% -13% +14% +10% -2% -21% +75% +27%

After two years where lead hull and liability premium has been relatively high, Middle East based insurance programes enjoyed a healthly level of average rate reduction given the supportive factor of growth in risk exposures for 2011/12. There are a number of reasons for this, not least the economies of scale that airlines with large modern fleets tend to attract from underwriters. The average aircraft value in the Middle East is US$82 million, compared to US$37 million on average globally, and has risen by more than 25% since 2010/11 placements. Five year credit balance, while still in the red, has improved considerably since 2010. This regions statistics are influenced by one particular claim and that programmes subsequent price adjustment.

25

Airline Insurance

Market Outlook 2012

Percentage Change

North America
2011 claims
19952010 average
Number of incidents Value of claims (US$m) Number of fatalities 15 289 68

40 30 20 10 0 -10 -20 2005

Premium

AFV

2010
8 177 0

2011
5 42 36

2011 compared to 2010

-38% -76% -

2008

2011

Regional premium and exposure movement 2005-11 North America

Source: Aon market data

2011/12 insurance forecasts

2010
Total renewals Premium (US$m) Total AFV (US$m) Total passengers (m) Average liability limit (US$m) Cost per passenger (US$) Credit balance (US$m) Average aircraft value 38 499.18 174,362.04 789.11 1,177.34 0.63 720.51 23.82

2011
32 476.49 167,193.60 786.89 1,249.22 0.61 774.17 22.54

% change
-16% -5% -4% 0% +6% -4% +7% -5%

There are a number of reasons for this, but of consolidation among the US majors plays a significant role, bringing with it restructuring and fleet rationalization. The position may change as 2012/13 insurance programmes are discussed, with new aircraft deliveries set to rise, particularly in the mid-range. North America now has the lowest average value of aircraft in the industry, although the high number of aircraft relative to the rest of the world is a major factor in this.T

26

Analysis

Economic conditions in North America have made this a challenging period for airlines in the region, with fleet value projected to continue to wear away during the course of 2011/12 insurance programmes.

Airline Insurance

Market Outlook 2012

Sector analysis
Despite overall premium reductions, exposure growth was prevalent across the airline industry for 2011/12 placements.
Total Renewals 2010
Flag International Low-cost Charter Regional Cargo Other Total/Average 63 24 36 37 43 11 5 219

Premium % change
+6% +4% -11% -22% -5% +18% +40% -2%

2011
67 25 32 29 41 13 7 214

2010 (US$m)
1,114.70 160.07 214.17 84.09 201.66 92.47 9.05 1,876.21

2011 (US$m)
1,050.97 160.83 210.98 83.11 212.18 87.50 9.71 1,815.28

% change
-6% 0% -1% -1% +5% -5% +7% -3%

Fleet Value Total (US$bn)

Flag International Low-cost Charter Regional Cargo Other Total/Average 487,557.73 67,941.36 83,063.02 22,438.91 43,808.81 45,766.01 4,964.84 755,540.67

Passengers Total (m)

1,707.36 246.92 593.40 83.84 239.69 NA NA 2,873.54

% change
+6% +10% +8% -2% +7% +8% +21% +6%

% change
+5% +15% +12% +11% +15% NA NA +8%

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Market Outlook 2012

Other Regional International Charter Low-cost Total/Average Cargo Flag -10%

-6% -5% -3% -1% -1% 0% 5%

7%

0%

10%

Percentage lead hull and liability premium change by sector 2011

Other International Low-cost Cargo Regional Total/Average Flag Charter

-2% 10%

21%

Regional International

15%

15%

8% 8% 7% 6%

Low-cost Charter Total/Average

8%

12%

11%

6%

Flag

5%

-5%

5%

15%

25%

0%
Source: Aon market data

10%

20%

Percentage average fleet value change by sector 2011

Percentage passenger projection change by sector 2011

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Analysis

Airline Insurance

Market Outlook 2012

Average Liability Limit 2011 (US$m)

Flag International Low-cost Charter Regional Cargo Other Total/Average 1,503.36 1,232.00 976.56 996.90 740.98 1,071.15 892.86 1,131.96

Cost Per Passenger Total (US$)

0.62 0.65 0.36 0.99 0.89 NA NA 0.63

Credit Balance (US$) 2010

558.49 324.73 515.68 181.86 -138.43 -15.02 20.62 1,447.92

% change
0% +3% +1% 0% +4% 0% +4% +1%

% change
-11% -13% -12% -11% -9% NA NA -11%

2011
273.07 282.81 699.60 343.56 -249.27 12.32 27.51 1,389.60

Flag
Flag carriers have enjoyed relatively benign treatment from the airline insurance markets during 2011, with 66% of placements enjoying lead hull and liability reductions compared to an industry average of 54%. The reductions come in spite of relatively healthy exposure increases (while 6% AFV and 5% passenger increases appear relatively modest in comparison with some other sectors, given the size of the numbers involved, even a 1% increase is significant). The sectors credit balance deteriorated significantly. This was the result of minor incidents and historic claims being settled, rather than a disproportionate number of incidents (see page 12). As would be expected for flag carriers, the average aircraft value is slightly above the industry average at US$41 million per aircraft compared to an industry average of US$37 million the sectors AFV is more than the rest of the industry put together.

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Airline Insurance

Market Outlook 2012

International
Despite significant exposure increases during 2011, lead hull and liability premium for the international sector has been flat on average, meaning that rates overall have fallen. The exposure increases have been fairly universal, with only six of the sectors 25 carriers forecasting a reduction in AFV, only three of which by more than 5%. This suggests that the sector is in fairly rude health, despite the challenging economic headwinds. It potentially reflects the sectors position as enjoying many of the benefits of flag carriers in terms of economies of scale and bargaining power with both the insurance markets and more widely without the involvement of government. This forces them to be more efficient and innovative and removes some of the funding uncertainties that must be being discussed as governments in many parts of the world respond to fiscal constraints. The sectors average aircraft value is second only to the others sector, which is mainly comprised of private non-commercial Middle Eastern carriers.

Low-cost
Similar to the international sector, low-cost carriers enjoyed positive treatment from the airline insurance markets, with average reductions in lead hull and liability premium despite healthy increases in both passenger and AFV forecasts. The sector now represents around 12% of total annual lead hull and liability premium, compared to 5% in 2005. Nine of the 32 low-cost carriers that meet the criteria for inclusion in this data set have seen their AFV forecast fall below the 2010/11 total, while only four are expecting a lower number of passengers. Interestingly, the majority of the reductions in AFV are relatively minor, reflecting a reduction of fleet size by three aircraft or simple depreciation. In keeping with the sectors philosophy, low-cost carriers have the lowest insurance cost per passenger, US$0.36 compared to an industry average of US$0.63. This has fallen by 12% compared to 2010/11 programmes, a reduction that is broadly in line with the industry average.

30

Analysis

Airline Insurance

Market Outlook 2012

Charter
Lead hull and liability premium is down 1% on average, AFV down 2% but projected passenger numbers are up 11% as a result of healthy projections across the sector. Over a third of the airlines in the charter sector have a deteriorating credit balance, although six of these are within US$3 million of their 2010/11 total, suggesting that minor losses have reduced the sectors credit balance, rather than significant claims. Overall the sectors credit balance has appreciated. Of the 41 renewals in the regional sector, only four are projecting a decline in the number of passengers, while 10 are expecting to see their AFV fall. The sectors credit balance, the worst in the industry, appears to have been gnawed away by a string of minor losses: 19 of the sectors 41 carriers have seen their credit balance deteriorate over the last 12 months, 12 of which are within US$3 million of the 2010/11 credit balance.

Regional
Lead hull and liability premium in the regional sector increased by 5% on average for 2010/11 insurance programmes, but this was coupled with significant increases in exposure, up 7% in terms of AFV and 15% in terms of passenger forecasts. While broadly in line with the industry averages, this is something of a deceleration for the sector compared with 2010/11 renewals, when regional carriers had the highest AFV and passenger increases forecast, as well as the highest increase in lead hull and liability premium.

Cargo
After suffering as badly as any during the worst of the economic downturn, the cargo sector appears to be investing in fleet once again, with nine of the sectors 13 placements forecasting AFV increases. Credit balance has also improved since 2010, with only three airlines seeing deterioration in the position, none of which is by more than US$1 million suggesting minor rather than major losses are the issue for the sector. Only a single carrier has a negative five year credit balance with the airline insurance market for 2010/11 placements.

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Market Outlook 2012

Fleet value analysis

Examining the sector by fleet value highlights the trend for rate reductions based on exposure growth to maintain the premium base.
Total Renewals 2010
US$5bn+ US$2-5bn US$1-2bn US$500m-1bn US$150-500m Total/Average 39 27 31 38 84 219

Premium % change
-3% +11% +13% -26% -1% -2%

2011
38 30 35 28 83 214

2010 (US$m)
1,113.57 281.98 171.05 97.29 212.33 1,876.21

2011 (US$m)
1,049.07 274.73 168.82 97.03 225.63 1,815.28

% change
-6% -3% -1% 0% +6% -3%

Fleet Value Total (US$bn)

US$5bn+ US$2-5bn US$1-2bn US$500m-1bn US$150-500m Total/Average 564,484.41 98,542.11 50,004.79 19,396.38 23,112.97 755,540.67

Passengers Total (m)

2,039.89 437.05 224.59 49.68 122.33 2,873.54

% change
+6% +6% +16% +9% +6% +6%

% change
+5% +17% +25% +5% +15% +8%

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Analysis

Airline Insurance

Market Outlook 2012

US$150-500m US$500m-1bn US$1-2bn US$2-5bn Total/Average US$5bn+ -10%

-6% -3% -3% -1% 0%

15%

6%

11%

0%

10%

Percentage Source: Aon market data premium change by average fleet value 2011 lead hull and liability

US$1-2bn US$500m-1bn Total/Average US$2-5bn US$5bn+ US$150-500m 0%

-6%

15%

16%

US$1-2bn US$2-5bn US$150-500m Total/Average US$5bn+ US$500m-1bn

5%

15%

25%

9%

9%

17%

6%

6%

15%

6%

8%

6%

6%

5%

10%

20%

0%

10%

20%

30%

PercentageSource: Aon market data average fleet value change

by average fleet value 2011

Percentage

Source: Aon market data passenger projection change

by average fleet value 2011

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Airline Insurance

Market Outlook 2012

Average Liability Limit 2011 (US$m)

US$5bn+ US$2-5bn US$1-2bn US$500m-1bn US$150-500m Total/Average 1,763.16 1,410.00 1,042.86 1,001.79 823.98 1,131.96

Cost Per Passenger Total (US$)

0.51 0.63 0.75 1.95 1.84 0.63

Credit Balance (US$) 2010

1,004.26 5.58 226.60 166.67 44.81 1,447.92

% change
+1% +1% 0% -2% +3% +1%

% change
-10% -17% -21% -5% -8% -11%

2011
802.54 176.75 140.51 171.49 98.31 1,389.60

In line with previous years, airlines with the largest average fleet value (AFV) have received the best average premium movements. There are a number of factors involved in this, including the economies of scale that programmes of this size bring, as well as the amount of an underwriters target that they can fulfil at a stroke. It should be pointed out that the US$5 billion+ segment is also the most profitable in the industry in terms of the five year credit balance and generates the most premium on an annual basis by some margin.

That said, looking at the data on a cost per passenger basis which reflects the rating of a risk, shows that the real cost of insurance has improved most for the US$2-5 billion and US$1-2 billion segments. These segments have also enjoyed the highest level of exposure growth.

34

Analysis

Airline Insurance

Market Outlook 2012

Inclusion Criteria/Notes
The information featured in this report is representative of market trends only. With vertical or fragmented marketing, sourcing exact percentage rate movements and/or shifts in premiums can sometimes prove difficult. Our analysis is therefore representative of airline programmes with an insured average fleet value equal to or greater than US$150 million. Average fleet values are the average projected value of a fleet during the entire length of an insurance programme, rather than at a specific date. Flag carriers are classified as national airline, international carriers are airlines that fly intercontinental but are not flag carriers. Rate and premium movement percentages are based on the London nett lead hull and liability terms. Five year credit balance describes the difference between the total value of claims and the total amount of premium collected over five years. Insurance cost per passenger is worked out by taking the total cost of hull and liability premium for an industry segment and dividing it by the total number of expected passengers.

Where airlines have replaced their programmes or have implemented short-term policies, the full annual figures have been used for calculation purposes on their accounts. If placements have changed, through the addition or deletion of airlines, no allowance has been made in the expiring figures. Unless otherwise stated, all data is based on Aon market data. Aon loss data is based on information from Aon Benfield Aviation Reinsurance. Loss data excludes 9/11. The loss regions are based on the domicile of the airlines involved, rather than where the loss occurred. It should also be noted that for comparison purposes all local currencies are converted to US dollars. This review focuses on western built, non-military aircraft and airline organisations. Unless otherwise stated long-term loss refers to the period 1995 to 2010. Please note figures may differ due to rounding. Due to the sensitive nature of the issues involved, the losses overview features only those incidents with an incurred hull and liability loss value of US$1 million or above.

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Airline Insurance

Market Outlook 2012

Feedback on issues, suggestions for future coverage, comments and editorial enquiries, please contact: Magnus Allan magnus.allan@aon.co.uk +44 (0)20 7086 1277 For information and analysis, please contact: Paul Mitchell paul.mitchell@aon.co.uk +44 (0)20 7086 3641

We must point out that due to the nature of this type of document, Aon cannot be held responsible for any loss or damages caused through the use of any information contained herein. While we try to comment on issues we know to be fact, we are fully aware that in gathering the information contained herein from various sources there is always the possibility of inaccuracy. We can therefore only claim that the information is correct to the best of our knowledge at the time of publication.

36

Analysis

For more information, please contact: Simon Knechtli Head of Aviation simon.knechtli@aon.co.uk +44 (0)20 7086 4554 David Boyle during Head of APAC 2010, david.boyle@aon.co.uk +44 (0)20 7086 4940 John Levack Head of EMEA john.levack@aon.co.uk +44 (0)20 7086 4555

Overview.
The aerospace industry continued to defy gravity Stephen Alexandris continuing a trend laid down in 2007. US Airline Practice Leader
stephen.alexandris@aon.com +1 (0)214 989 2211 Mike Smith Head of Americas mike.smith@aon.co.uk +44 (0)20 7086 4568

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