Space Insurance Experience and Outlook:

A Statistical Review of Volatility

Tel: (+1) 212-859-3690Fax: (+1) 212-344-1381Mobile: (+1) 201-214-1138Email:

ckunstad@usau.com

Web: www.usau.com

Christopher T.W. KunstadterExecutive Vice PresidentU.S. Aviation Underwriters, Inc.199 Water StreetNew York, NY, 10038, USA

May 2005

2 04/20/23USAIG

When Bad Things HappenTo Good Hardware

3 04/20/23USAIG

High Profits

Relaxed UnderwritingFlight to Quality

Inadequate Reserves

Increased Capacity

Seek Market Share

Inadequate Rates

Mounting Losses

Profits Rise

Rates Increase

Capacity Decrease

Insolvencies/Withdrawals

The Insurance Market Cycle

Rates Decrease

Hard Market

Soft Market

4 04/20/23USAIG

Non-Pricing Factors Affecting Insurance Volatility

• Increased complexity of risks» Frequency and severity of losses

• Lower investment income» Interest rates and equity markets

• Uncertain global economic situation» Globalization, dollar, oil, consumer prices,

hedge funds, terrorism

• More scrutiny by regulators and rating agencies

5 04/20/23USAIG

What Is Space Insurance?

• Loss due to the failure of, or physical damage to, satellites, launch vehicles and other space payloads» Physical damage only (including hardware failure)

» May include business interruption when specified

• Types of coverage» Launch (launch vehicle flight and/or initial operations)

» In-orbit

• Geostationary communications satellites are 85-90% of the business volume

• Clients are launch vehicle and satellite manufacturers, operators and users

6 04/20/23USAIG

Characteristics of Space Insurance

• Constantly changing technology

• Each risk is unique

• “Generic” or “serial” nature of anomalies

• Volatility of underwriting results

7 04/20/23USAIG

Insured Satellites Launched

Source: IUAI SRSG

0

25

50

75

100

125

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

LEO & other satellites launched

GEO satellites launched

Insured launches

8 04/20/23USAIG

Insured Launches – Success vs. Failure

3

63

3 3

5

3

3

4

21

0

25

50

75

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Launch failures

Launch successes

Source: IUAI SRSG

9 04/20/23USAIG

$0

$5

$10

$15

$20

$25

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

($ b

illio

ns)

0

50

100

150

200

250

Total Insured Satellites* (right scale)

Insured Geo Comm Satellites** (right scale)

Total Aggregate Exposure (left scale)

In-Orbit Insured Satellites and Exposures

Source: IUAI SRSG

* Excludes constellations (Iridium, Globalstar, Orbcomm)** Includes MEO (ICO, Sirius)

GEO Population

(as of Apr 05)

10 04/20/23USAIG

First Year Satellite Reliability(based on year launched)

0%

10%

20%

30%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year Launched

Fa

ilu

re R

ate

Western-built geostationary communications satellites only

Figures are percentage of capability lost for satellites launched in the year noted

Capability lost is calculated as the total claims as a percentage of the sum insured, for each separate loss

Includes known and quantifiable uninsured failures on satellites that had previously been insured

Source: IUAI SRSG

11 04/20/23USAIG

Satellite Failure Rates, by Model(first year – cumulative since 1990)

0%

5%

10%

15%

Fa

ilure

Ra

te

Western-built geostationary communications satellites only

Figures are percentage of capability lost

Capability lost is calculated as the total claims as a percentage of the sum insured, for each separate loss

Includes known and quantifiable uninsured failures on satellites that had previously been insured

>45%!!

Source: IUAI SRSG

* ***

* Satellite models no longer marketed

12 04/20/23USAIG

Satellite Failure Rates, by Model(second and subsequent years – cumulative since 1990)

0%

2%

4%

6%

Fa

ilure

Ra

te

Western-built geostationary communications satellites only

Figures are percentage of capability lost

Capability lost is calculated as the total claims as a percentage of the sum insured, for each separate loss

Includes known and quantifiable uninsured failures on satellites that had previously been insured

Source: IUAI SRSG

122 satellites 95 satellites

* * * *

* Satellite models no longer marketed

13 04/20/23USAIG

Losses – Launch Vehicle vs. Satellite(paid and potential outstanding)

0%

25%

50%

75%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total

Launch Vehicle Losses Satellite Losses

34%

66%

Source: IUAI SRSG

14 04/20/23USAIG

Cumulative Market Results

Source: IUAI SRSG

-$500,000,000

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Earned premium (net of brokerage)

Incurred losses (paid and potential outstanding)

Net result since 1994

15 04/20/23USAIG

Warren Buffett said...

“Nothing sedates rationality like large doses of

effortless money.”

16 04/20/23USAIG

-100%

-50%

0%

50%

100%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Cumulative profit margin

Annual profit margin

Space Insurance MarketProfit Margin Since 1994

1.2% cumulative profit margin over 11 years

Source: IUAI SRSG

17 04/20/23USAIG

Market Capacity vs. Activity

$0

$500,000,000

$1,000,000,000

$1,500,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

Theoretical Maximum Market Capacity Maximum Market Insured Launch Value Insured Launches (right scale)

Projected

Source: IUAI SRSG

18 04/20/23USAIG

The Three Six Biggest Client Concerns in Space Insurance

• Price

• Exclusions for generic anomalies

• Claims handling / scope of coverage

• PRICE

• PRICE!

• PRICE!!!PRICE!!!

19 04/20/23USAIG

Where Do We Go From Here?• Plenty of capacity for growth among launch vehicle and satellite

manufacturers and operators

• Growth areas are DTH/HD, mobile radio and mobile comm’s

• New technologies and market pressures dominate industry

• Space insurance is still a catastrophe business

• Insurance market consolidation will continue

• We price our product often long before knowing its cost

• Insurers recognize that their capital can be much more effectively deployed elsewhere

• Insurance companies require larger operating margins to justify the allocation of capital to this volatile business

20 04/20/23USAIG

Winston Churchill said…

“If you’re going through hell, keep going”