Tokyo IUMI Conference Airbus A380 – How Efficient Insurance Risk

Tokyo IUMI Conference

Airbus A380 – How efficient insurance risk management can respond to this challenge

- Ingo-R. Zimmermann -

European Aeronautic Defence and Space Company

De Havilland Boeing Rockwell A+D McDonnell Douglas Hughes Space GD-Aircraft Lockheed Martin Marietta Loral Ford Aerospace LTV Missiles IBM-Federal Sys. Unisys. 26 companies 4

Grumman Northrop LTV Aircraft Westinghouse Logicon Litton Industries Newport News Raytheon Beech Aircraft BAe Business Jets TI-Defense Hughes Aircraft 19921993 1994 1995 1996 1997 1998 1999 2000 2001

Hadley Page Avro British British Aircraft Aerospace Corporation 35% Celsius Saab GEC GEC Marconi Alfa Romeo Avio Aeritalia Agusta Siai Marchetti Oto Breda Thomson CSF Racal 21 companies 4 Matra-HT Matra Aerospatiale Aerospatiale AS-Matra Dassault Aviation Dassault Av. Fokker Dornier VFW Dasa MBB MBB

CASA CASA AISA

1980 1985 1990 1995 1997 1998 1999/2000

Boeing 44.1

EADS No. 1 in Europe 34.2 No. 2 worldwide

Lockheed Martin 29.9

Northrop Grumman 24.7

BAE Systems 22.5

Raytheon 17.6

General Dynamics 17.1

Thales 10.3

Finmeccanica* 9.8

L3 Communications 7.6

Saab 2.1

* A&D activities only. Eliminations not considered Based on 2005 average exchange rates: € /$ = 1.245; € /£ = 0.684; €/SEK=9.269

EADS* No.1 worldwide 253.2

Boeing* 164.7

BAE Systems 87.4

Lockheed Martin 60.1

Northrop Grumman 45.2

General Dynamics 34.1

Raytheon 27.6

Finmeccanica** 26.2

Thales 20.2

L3 Communications* Aerospace and defence activities 5.6 ** Commercial aviation based on catalogue prices for EADS, contractual prices for Boeing Saab 4.6

* Commercial aviation based on catalogue prices for EADS, contractual prices for Boeing Based on 2005 average exchange rates: For US players, the backlog presented above is the total backlog (Funded backlog for L3) € /$ = 1.245; € /£ = 0.684; € /SEK = 9.269 ** Aerospace and defence activities only / AgustaWestland 100% consolidated. Eliminations not considered

4 Risk Management is part of Shareholders Communication. It has to be compliant with respective legal requirements in place.

4 Risk is a basic part of corporate life that, while not avoidable, is nonetheless manageable.

4 Insurance techniques are key financial tools to protect the assets and liabilities of EADS.

4 In order to know how to deal with insurance techniques it is essential that in-house competence is available.

4 Therefore, a lean organization with clear responsibilities and clear control of the insurance purchased by the group is implemented on HQ-level since 2000/2001 when EADS was founded

4 EADS Insurance Risk Management (“IRM”), centralized at EADS headquarters, is responsible for all corporate insurance activities and related protection for the Group.

4 It includes identification, evaluation, prevention and protection of insurable risks.

4 Insurance techniques are used to protect the assets and liabilities of EADS against financial consequences due to unexpected events.

4 Harmonized insurance policies and standards are in place for all insurance risks underwritten by the Group.

4 EADS pursues an insurance risk management strategy that includes operating procedures as well as policies regarding procurement and sales agreements.

4 A systematic review and monitoring procedure of protection systems applicable to all EADS sites is in place, fostering comprehensive and timely identification of risks and related adjustments of insurance coverage.

4 EADS follows a policy of obtaining external insurance coverage for all main and individual risks that can be insured at reasonable rates, on sufficient terms and limits provided by the international insurance markets.

4 However, to be more independent from volatilities of the insurance markets, EADS uses the capabilities of a corporate-owned reinsurance captive.

4 The captive is sufficiently capitalized and protected so as to ensure its ability to reimburse claims without limiting the scope of coverage of the original insurance policies and not additionally exposing financial assets of EADS.

Headquarter IRM department reporting to CFO. EADS-Business Dedicated responsibility within Divisions and Corporate Risk Management and Internal Business Units Control (RiMaIC) process F

Direct access Cross to Insurance S function G and Re- To the benefit of Insurance and markets services

Teamwork In-house core with competence BD‘s/BU‘s adding value USA UK

RoW

IUMI Conference 2006 © EADS N.V. all rights reserved. 13 Workflow and Tools EADS-IRM EADS Reporting & Information Relationship Business Controlling Corporate Risk transfer Tools & Divisions Support/Solutions Function Solutions Benchmark

Airbus Corporate Captive E

Military A Transport D Financial S Markets Eurocopter

I Insurance and Re- Insurance Markets Space R M Defence and Consultants Security Syst. Services Brokers

4th Qtr

New dimensions … New production facilities … New transport concept …

Length: 73 m FAL – Toulouse Sea: Germany, UK, Spain Wing span: 79,8 m Customisation, Forward – Hamburg River: UK, France Pax: 555 + Aft. Fuselage Road: France Wing – Broughton Air: Europe

4 Detailed and systematic risk assessment is mandatory for new exposures to achieve transparency of potential claims scenarios. 4 Accurate timing is key for success 4 Tasks of the IRM-process as an integrated element of the entire project – in all phases! Project phase IRM tasks Pre-industrial launch Î Core study Industrial launch Î Detailed definition and final evaluation of IRM solutions Start production Î Risk-avoidance, - mitigation, SIR and transfer solutions implemented. 4 Insurance markets always involved in time

Pre-industrial launch Identification Focusing on new, different, accumulated exposures and their triggers.

Industrial launch Evaluation Likelihood and severity to be assessed; measures of risk avoidance and mitigation, definition of uninsurable risks

Risk Until start production management Measures of risk avoidance and mitigation implemented (e.g.: “Insurance” supplier-, purchase agreements, buildings, work in process, transportation system)

Until start production Retention Setting up thresholds to be retained Self insurance Î Deductibles Î Captive Tools: case studies, actuary analysis, cost benchmark models effectiveness of risk engineering implemented.

Remaining insurable risks are transferred to insurance Risk transfer markets mainly within corporate insurance programmes adjusted respectively.

IUMI Conference 2006 © EADS N.V. all rights reserved. 19 Broughton (wings) Combined A 380 PDBI exposure* € 700M Key sites assessed regarding interdependencies and PML’s EMC’s. Risk protection systems implemented (improved/new) Combined € 1bln Meaulte (Cockpit) Hamburg (body, equipment) Combined € 200M

Toulouse Combined Laupheim Combined € 1 bln (final assembly) € 200M (cabin covering)

*preliminary 2006

IUMI Conference 2006 © EADS N.V. all rights reserved. 20 Risk assessment and risk mitigation – Case study – Targets: A380 Transport system 4 Routes 4 Transportation System € 30 M - € 62 M 4 Protection SEA 4 Values 4 Interdependencies 4 Liabilities

Max. € 15 M Mostyn RIVER Broughton Hamburg St Nazaire

Pauillac Langon ROAD Toulouse

Ro-Ro ship « Ville de Bordeaux » 4 Double hull, car – carrier type 4 Length 154 m, breadth 24 m, deadweight 2270 mt 4 Max speed 21 knots, cruise 16 knots 4 Cargo bay length 120 m, width 21 m, height 11 m Operated by controlled atmosphere, acceleration recording 4 Door 21 m, x 11,5 m, ramp 200 T, Ro-Ro lanes FRET CETAM 1800 m 4 Capacity = 6 Airbus components 4 Deck area 6700 sqm 4 2 sets of Diesel engines, 8400 kw each

Transfer Station: Our partner: SOCATRA 4 Dimensions 150 x 35 m 4 Transfer of 6 A380 components 4 Ballasting capacity for adaptation to Ro-Ro ship and to barges 4 SOCATRA investment 4 REMONTOWA shipyard (Poland)

4 95 km between PAUILLAC & LANGON 4 Barges capable to carry 2 components or 1 wing

4 4 voyages to carry 1 complete airplane PAUILLAC 4 Max rate 1 airplane per week 4 Voyage schedule depending upon Pont de Pierre crossing time 4 Transport time for one voyage: 1 tide cycle 4 Transport of empty jigs during barge return trip

Operated by SOCATRA LANGON

IUMI Conference 2006 © EADS N.V. all rights reserved. 26 A380 Transport system Road Itinerary Road Transport LANGON TOULOUSE Dedicated itinerary 240 km 4 Responsible: French State 4 1 departure area at Langon, 4 parking areas alongside the itinerary 4 Night time only, weekend and bank holidays excluded 4 Voyage over 3 nights, max 1 per week

4 Max allowable dimensions: A62 • Weight 250 T • Height 13 m/ Length 50 m • Width 5 m at ground level, 8 m at 1 m height 4 Trailers, tractors, jigs return via A62 I.T.G.G Our Partner: Transports CAPELLE

9,97 m

10,07 m 22,7 m

28,26 m

10,3 m Road transport Langon Î Toulouse 4 Articulated trailers TII NICOLAS dedicated design 4 Jigs designed for trailers and fuselage 23,17 m 4 Tractors powered by 600 HP each

11,9 m

45,38 m

Position for road convoy Road transport Langon Î Toulouse 4 Trailers TII NICOLAS convertible width 11,68 m 5 m – 3m directional axles 4 Jigs designed for trailers and wings, tail- plane 27,35 m 4 Tractors each 600 HP, 4 axles Position for road convoy

Road signs dismantling Workshop van Convoy master

Convoy Element No1 Convoy Element No2

Convoy Element No3 ConvoyElement No4

Convoy Element No5 Convoy Element No6

Road signs reinstalling

4 Transport operations: 34

4 More than 60 Pont de Pierre crossing

4 16 road convoys

4 7 complete aircraft transported

4 All operations within schedule and no damages

4 Good adaptation of the transport system to the industrial constraints

4Beluga operator: Airbus Transport Intl (created 1996) French Airline, subsidiary of Airbus 4Fleet: 5 Beluga (A300 – 600ST) Broughton Bremen Hamburg 4Airbus Network: 10 Stations across Europe ( 13 by 2006) Méaulte 4Flight Crew: 35 Crew Members Augsburg St Nazaire 4Activity since 14 500 Flights Nantes 1996 24 000 Flights Hours 4Averages activity 2 100 Flights Toulouse per year all 3 400 Flight Hours Airbus types: 2 428 Aircraft Sections Madrid delivered Naples (Alenia) Section Manufacturing Final Assembly Line

4 All risks PDBI gross exposures in terms of severity and likelihood significantly decreased to become “remaining gross exposures”

4 Financial consequences out of remaining gross exposures further reduced by transferring

• Into Corporate self-insurance system (Captive) primary layer • Exceeding exposures into existing corporate insurance policy.

4 Therefore, a predictable net exposure within common deductibles is left

4 A robust physical and financial protection system is successfully implemented

Prod.-line Prod.-line Transporta- Final Suppliers Testflights Pre-delivery parts components tion FAL assembly

Product Liability 9 * Retention

All Risks incl. - FLEXA - EC 9 9 9 9 - Transport - CAR/EAR Retention Retention Retention Retention

BU - FLEXA 9 9 9 9 - EC * Retention Retention Retention Retention

Hull Test-, training-, acceptance flights 9 9

Aviation Third party liability 9

4 It is essential to consider technical risk engineering and insurance techniques from the beginning of each project.

4 Dedicated investments and operating procedures to reduce severity and likelihood of unexpected claims are key for success.

4 “Can we insure it” is the wrong question !

4 Both, the manufacturer and the insurer having the same interests to avoid and mitigate claims

4 Go together. Even there are only a few insurer providing leading edge expertise for technical risk engineering Î use them !

! Keep your risks manageable !