2017 EIM Annual Report

NEW FRONTIERS TRUSTED PARTNERSHIPS

2017

ANNUAL REPORT

EIM 2017 anNUAL REPORT

CONTENT

1

President’s Letter

4

EIS MBP 15

5

GridEX

8

the Energy School

10

Financials

31

EIM Directors

32

Board Committees

33

Insurance Advisory Committee

34

Officers

36

Members

37

Company Locations

the power of partnerships in dynamic TIMES A MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

The 2018 Risk Managers Information Meeting embraced the theme, “New Frontiers - Trusted Partnerships.” This theme reflects the ongoing, transformative changes in the insurance and energy industries, and captures the power of trusted partnerships in successfully meeting these challenges. The energy industry is exploring the new frontiers occasioned by the ongoing expansion of renewable energy, the exponential growth of battery storage capabilities, and the adoption of game- changing initiatives such as distributed generation. At the same time, the industry must continue to address aging infrastructure and ongoing industry consolidation. On the insurance front, a sustained soft market for property and D&O lines prevails, while insurers prepare for increasingly frequent and broadened cyberattacks. These attacks involve both personal data and hard assets, such as control systems, pipelines, and electric grids. To further complicate matters, many insurers are also grappling with the impact of recent natural catastrophes, including hurricanes, floods, and earthquakes.

the challenges of new frontiers. We’re confident that the continued collaboration between EIM, our Member Companies, and the company’s business partners will leave us well-positioned to help identify and address emerging risk management needs, both today and tomorrow. Successfully navigating new frontiers requires well-capitalized organizations. In 2017, EIM achieved strong results, growing surplus by 14% from $1.03 billion to $1.17 billion, and nearing $2 billion in total assets. Both underwriting and investment activities contributed to this growth, with underwriting achieving a net loss ratio of 59% for the year. When added to EIM’s 8% net expense ratio, this resulted in a net combined loss ratio of 67%. The investment portfolio of $1.6 billion returned 9%, more than double the 2017 budget. This return was coupled with a $41 million, one-time favorable adjustment to deferred taxes triggered by the Tax Cuts and Jobs Act of 2017. As a result, EIM’s comprehensive income—after taxes and a $40 million distribution to Member Companies—totaled $140 million. With the record $40 million distribution declared by the Board for the 2017 fiscal year, a 60% increase from 2016, EIM has now returned more than $320 million to Member Companies since its inception. We are committed to sustaining and, when prudent, increasing EIM’s annual distribution.

Trusted partnerships have long represented the cornerstone of EIM’s operations. Transparency, trust, and confidence provide the foundation for enduring relationships that have collectively met

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Although we continue to see energy industry consolidation—four transactions involving eight EIM members were completed or announced in 2017—EIM maintained consistent written premium, which should remain essentially flat for 2018. Over the next two years, EIM expects written premium growth of 2-4%, driven by new business and expansion of existing lines such as cyber, and anticipates stable premiums over the long term. Those Member Companies who have experienced losses, however, will see larger premium adjustments commensurate with their loss experience. EIM’s strong capital position and consistent underwriting approach have enabled the company to actively work with Member Companies to identify and implement solutions for cyber, wildfire, and renewable energy risks. These include expansion of existing cyber limits and creation of bespoke solutions for members facing risks that are difficult to place in the commercial market. As members tackle emerging risks, EIM will continue to work with risk managers, the Insurance Advisory Committee (IAC), and the Board of Directors to fashion meaningful responses. For example, EIM and Energy Insurance Services, Inc. (EIS), EIM’s wholly-owned South Carolina protected cell captive insurer, are working together to offer coordinated coverage for general liability, directors & officers, and property towers of insurance. By accessing traditional excess of loss capacity in tandem with a protected cell solution, members can achieve greater cost efficiencies, enhance control over risk mitigation and loss control activities, and design manuscripted coverages specifically tailored to the individual company’s risk management needs. December 31, 2017 policyholders’ surplus at $1.17 billion, a 14% increase year over year.

We are particularly proud that EIS was recently recognized as the “Captive Insurer of the Year” by the Captive Insurance Companies Association. This is a great honor for EIS and a testament to the exceptional products and services EIS and Energy Captive Management, LLC, provide to Member Companies. Net underwriting income of $46.3 million for the 12-month period ending 12/31/17. Speaking of members, they represent the company’s most trusted partners. EIM was formed more than 30 years ago by a consortium of 17 utility companies seeking more stable and enduring capacity and pricing for D&O and general liability coverages. These original 17 partners have grown to today’s membership total of 155, which now includes both utility and energy services companies. We are pleased that the company’s 2017 membership retention rate again exceeded 95% (exclusive of mergers and acquisitions) as it has since EIM was founded. Member Company support for EIM’s core excess insurance products at existing limits and attachment points is integral to the company’s ongoing strength and stability. This support not only supplies the critical mass necessary to continue offering limits of $100 million in general liability, $50 million in D&O, $25 million in fiduciary, and $35 million in property, but also provides the foundation for EIM’s sound corporate governance. EIM’s Board of Directors, comprised of senior executives from Member Companies, provides invaluable leadership on the company’s strategic direction and long-term goals and objectives.

Complementing EIM’s Board is the IAC, made up of Member Company risk managers. The committee regularly advises EIM on operational matters such as coverage terms and conditions,

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policy issuance, claims administration, and emerging risk management needs. The partnership between the Board, the IAC, and EIM ensures that short-term tactical and longer-term strategic direction remain consistent, well-reasoned, and responsive to membership needs. With more than $2.4 billion in gross claim payments made to members since 1986, EIM recognizes that a critical component of its partnership with Member Companies is the willingness and ability to pay covered claims in a timely fashion. While 2017 was a relatively benign year in terms of loss activity, with only $105 million in newly established claim reserves, EIM expects to see a more active loss year in 2018. This will be driven by natural catastrophes that moved through the insurance markets in late 2017, as well as statewide California wildfires. Given the volatility inherent in EIM’s excess of loss portfolio, EIM is mindful to maintain sufficient capital to pay covered losses, even in the most extreme loss scenarios. EIM’s risk capacity—a measure of the company’s ability to withstand a 1:200 year loss event and still maintain an A rating from A.M. Best—ended 2017 above its 100% target. This buffer provides ample ability to pay covered claims, even in extraordinary events such as a systemic loss impacting multiple Member Companies. We expect to see the risk capacity measure trend downward toward 100% over the next two years as EIM brings on new business, expands existing lines of business, and returns capital to our Member Companies. In addition to Member Company partnerships, EIM has also partneredwithothermutuals, particularlyNuclearElectric Insurance Limited (NEIL) and Oil Casualty Insurance Limited (OCIL), to share risk on general liability, D&O, property, and cyber coverages. These relationships—along with the hundreds of professionals ranging from actuaries to brokers to reinsurers, to name just a

few—support EIM on a daily basis. This collaboration, coupled with the hard work and dedication of member-focused EIM staff, ensures the company’s ongoing resiliency and responsiveness.

The three vignettes included in this year’s annual report highlight the power of partnerships, particularly in the context of exploring, understanding, and effectively addressing the new challenges posed by evolving landscapes. Whether it is Member Company collaboration, coordination with state and federal agencies, or interaction with academics, working in tandem offers a strong foundation for conquering new frontiers. Quite simply, new frontiers and trusted partnerships go hand in hand. EIM is well-positioned to work together with Member Companies and business partners to successfully meet the challenges, address the threats, and capitalize on the opportunities presented by these dynamic times. 22% increase in surplus over the last three years at December 31, 2017.

Scott K. Goodell President and Chief Executive Officer

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Retiree medical funding in program 15

partnering to find cost efficiencIes

Mutual Business Program #15 (MBP 15) is one of Energy Insurance Service, Inc.’s (EIS) longest running programs. This unique protected cell within EIS operates like a group captive to insure medical obligations for retirees. After 20 years in operation, the program continues to save participants on their retiree medical costs by funding obligations in a tax- efficient manner. There are currently five participating EIM Members in MBP 15. As of December 31, 2017, MBP 15 assets totaled $271 million. The assets within MBP 15 reimburse the Voluntary Employee Beneficiary Associations (VEBAs) of participating companies for retiree medical claims incurred. Because the policy is classified as life insurance, these assets receive tax-free investment growth. This has saved participants millions of dollars over the previous two decades.

Tom King of Spring Consulting Group, the primary actuary for MBP 15, offers this explanation: “The main reason for not funding retiree medical obligations is that it is typically inefficient, compared to pre-funding defined benefit pension plans. If a retiree medical plan is pre-funded through a VEBA, the investment income from that funding incurs Unrelated Business Income Tax (UBIT)—provided the obligations are for non-bargained employees. As a result, most plan sponsors choose not to pre-fund.”

“For eligible companies that provide retiree health benefits, joining MBP 15 can save as much as 10% of the total retiree medical obligation over the long term.”

Tom King, Spring Consulting Group.

The MBP 15 Solution MBP 15 writes reimbursement policies for its Members, covering a portion of retiree medical claims each year. These policies are called Non- Cancellable Accident & Health policies. They are treated as life insurance for tax purposes. Due to this tax treatment, the investment income within the policy is tax-sheltered, as long as the policy is held until the obligations are fulfilled. At inception, MBP 15 operated with an IRS Private Letter Ruling. This ruling was superseded by the issuance of IRS Revenue Ruling 2014-15. According to Tom King, these rulings affirm that the program meets risk- shifting requirements, since the retiree health benefits provided by the plan are spread across a large group of retirees. MBP 15 stands as a shining example of Member Companies partnering to meet shared challenges.

“ONE Gas has benefited in multiple ways from its participation in MBP 15. MBP 15 has been an excellent way for ONE Gas to tax-efficiently meet its regulatory funding requirements. Working collaboratively with our peers has been an added bonus.”

Mark Smith, VP Treasury, One Gas

Why Do Companies Choose Not To Fund Retiree Medical? Retiree medical plan sponsors have traditionally funded retiree medical benefits through pay-as-you-go funding. This means they pay current retiree benefits without any advance funding.

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GRIDEX

Exploring cyber risk’s expanding frontiers

In 2011, the North American Electric Reliability Corporation (NERC) conducted its initial sector-wide grid security exercise, GridEx 2011. The exercise was designed to simulate a cyber/ physical attack on electric and other critical North American infrastructures, with the goals of assessing readiness for response to cyber incidents, hardening crisis response capabilities, and identifying areas for improvement. Seventy-five utility and government organizations participated in GridEx 2011, including many EIM Member Companies. Bulk power system (BPS) entities included generation and transmission facilities, Reliability Coordinators, independent system operators, and balancing authorities. Key government agencies taking part included the Department of Homeland Security, the Federal Bureau of Investigation, and the Department of Energy. The GridEx exercise has continued on a biennial basis, with GridEx II conducted in November 2013, GridEx III in November 2015, and GridEx IV in November 2017. While the GridEx IV report has not yet been published, the March 2016 GridEx III report highlights how the exercise has evolved over the last six years. More than 4,400 individuals from 364 organizations, including industry, law enforcement, and government agencies, participated in GridEx III. This made it the largest geographically distributed grid security exercise to date.

Like its predecessors, the third biennial grid security and emergency response exercise provided an opportunity for the energy industry to respond to simulated cyber and physical attacks. The exercise consisted of a two-day distributed play exercise, with a separate six-hour tabletop exercise on the second day. Key objectives included: (1) exercising crisis response and recovery; (2) improving communication; (3) identifying lessons learned; and (4) engaging senior leadership. Ron Rispoli, Director of Risk and Insurance at Entergy Services, noted, “We have found the GridEx biennial exercises valuable because they present theoretical cyber and physical invasions to the grid, which then require participants to apply real world solutions.”

“By engaging our three lines of defense that include cyber and physical security, operations, and senior management resources across the organization, we are better positioned to detect, respond to and neutralize attacks.”

Ron Rispoli. Director, Risk & Insurance, Entergy Services.

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As part of its first objective, GridEx III sought to increase the number of participants in the exercise, while increasing the extent to which organizations employed cyber, physical, and operations responses. With an increase of more than 130 organizations and 800 individuals from GridEx II, the 2015 exercise met NERC’s first objective. Equally important, 84% of participating companies reported exercising cyber response plans, while 92% confirmed implementation of physical security response protocols. Ninety- eight percent of participants reported accessing operational security response procedures. With regard to the second goal of improved communication, NERC sought to enhance internal communications processes, increase the level of communication with Reliability Coordinators and neighboring organizations, heighten interaction with law enforcement and other government agencies, and strengthen communication procedures with NERC’s E-ISAC and Bulk Power SystemAwareness. To this end, the “Very Well” responses from participants increased by 20% for internal communication, 17% for communication with Reliability Coordinators, 11% for government entity interaction, and 14% for E-ISAC and BPSA interchange. NERC noted that it had received a total of 25 lessons-learned reports, reflecting 24% of the actively participating utilities. Although these submissions were shared without attribution to a specific company, they provided the foundation for improvements to future exercises focused on enhanced response to cyber and physical attacks. The six-hour tabletop exercise, introduced for the first time in GridEx III, successfully engaged senior management and highlighted the significance of information sharing between the industry, consumers and government entities.

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“Having participated in the GridEx exercise for several years, we have learned the importance of collaboration, cooperation, and communication during a crisis with other key organizations in our industry, public safety, and government,” said John Spink, National Grid Vice President of Control Center Operations.

“Not only does this improve our ability to respond effectively, but it also helps strengthen our internal processes and better prepares us to handle real-world emergencies, such as the series of severe storms we experienced during the winter of 2018.”

John Spink, National Grid, VP of Control Center Operations

Forrest Strachan, Risk Manager at PJM Interconnection, had this to say: “In recognition of our commitment to be the electric industry leader in reliable operations and efficient wholesale markets, GridEx offers PJM the opportunity to confirm the strengths of our cyber security procedures while identifying weaknesses that can then be promptly addressed.”

“GridEx provides the opportunity to capitalize on the adage that ‘practice makes perfect.’ ”

Forrest Strachan, Risk Manager, PJM Interconnection

GridEx provides a collaborative forum for like-minded participants from various professions and disciplines to share ideas and coordinate expertise for the benefit of enhanced grid security.

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KNowledge is power: the energy school

Launched in 2007, The Energy School is a customized education program intended to enhance the knowledge and skills of young, up-and-coming industry professionals and future leaders. Sponsoring companies and their attendees understand that professional development is not only vital for maintaining success and leadership, but that symposia such as the The Energy School better position attendees to meet the evolving risk management challenges within the energy industry. The Energy School helps perpetuate lifelong learning and instill values that inspire people to achieve more. In particular, The Energy School curriculum focuses on relevant areas of risk management, providing an intensive and challenging educational forum—one specifically customized to the energy industry. Classroom-based sessions include presentations, facilitated peer discussions, exercises, case studies, presentations, and vital team work. The School began as the brainchild of the chief executives of three energy mutual companies: Nuclear Energy Insurance Limited (NEIL), Oil Insurance Limited (OIL), and Energy Insurance Mutual (EIM). Initially established at the Bauer School of Management at the University of Houston, it has since relocated. The Energy School currently resides at Florida State University (FSU), which also houses one of the oldest and highest ranking insurance and risk management programs in the nation. In 2016, Associated Electric and Gas Insurance Services (AEGIS) came on board as a program co-sponsor.

“The school allowed me to see different risk management perspectives by working on cases different than my day-to-day function or industry. Also, attending the School alongside such a diverse and experienced group of individuals was invaluable.”

R. Paige Miller, Senior Analyst, Corporate Insurance. NiSource Corporate Services.

One attendee noted that, “The collaborative efforts with risk management, the mutuals, and broker[s] are extremely important in completing the class case studies. This translates well to our daily efforts.” A Challenging Curriculum Some of the essential lessons The Energy School instills in its participants include: • A big picture view of managing energy industry risk • An understanding of the unique, shared risk management issues, challenges, and opportunities • Insight into key areas of risk management discipline, as well as self-assessment of the role, responsibility, and competencies required • How to actively apply what’s learned in ways that will enhance job performance

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• Strengthening competencies that will help risk managers support their companies and embrace challenges and changes within the industry • Taking part in real-world scenarios and case study exercises • Exploring opportunities and challenges with experts and colleagues • Gaining a unique perspective of a rapidly changing energy environment • Acquiring additional skills to adapt to upcoming industry challenges In addition to the above, all attendees are provided with multiple opportunities to build meaningful relationships with industry experts and peers. The School’s environment is designed to foster knowledge sharing, applied learning, introspection, interaction, camaraderie, and professional networking.

Attendees at the 2016 Energy School

In addition to some excellent recommendations regarding new course offerings, students responded favorably to the School’s curriculum. Nearly 90% rated the current courses either somewhat or highly effective. Courses receiving the highest marks in this area included Ethics, Catastrophe Loss Analytics, and Captive Solutions. When asked about the effectiveness of the team case study, many of the respondents cited the opportunity to interact with other Energy School participants as a key benefit. “Practice in the management of a work challenge within key time constraints” also earned high marks among respondents. In an industry marked by change, where energy generation, transmission, and distribution are shifting from fossil fuels to renewables and focusing increasingly on more localized, two-way transmission and distribution of power, The Energy School provides an excellent setting to explore new risk management strategies, share experiences in providing responsive solutions, and collectively address the evolving risk management landscape.

“I thoroughly enjoyed collaborating with my fellow risk managers, our energy mutuals, and brokers on risk issues that we all commonly share in the industry. This experience has served me well in my daily efforts to better manage risk.”

Jason Tan, Treasury Portfolio Manager, BC Hydro.

Earning High Marks for Effectiveness To find out how successfully The Energy School achieved its initial objectives, 2016 participants provided feedback through an anonymous survey.

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FINANCIALS and notes to the financials

the fInancial statements to this annual report have been approved by the board of directors of energy insurance mutual limited.

statements of income and comprehensive income, changes in policyholders’ surplus and cash flows for the years then ended and the related notes to the financial statements.

Marian M. Durkin | Chairman of the Board March 1, 2018

Management’s Responsibility for the Financial Statements

Report of Independent Auditors To the Audit Committee of the Board of Directors Energy Insurance Mutual Limited

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Report on the Financial Statements We have audited the accompanying financial statements of Energy Insurance Mutual Limited (“the Company”) which comprise the balance sheets as of December 31, 2017 and 2016 and the related

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Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Report on Required Supplementary Information Accounting principles generally accepted in the United States of America require that the disclosures about short duration insurance contracts on pages 29-30 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Jacksonville, Florida February 28, 2018

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Energy Insurance Mutual Limited at December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

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ENERGY INSURANCE MUTUAL LIMITED BALANCE SHEETS (Expressed in Thousands of U.S. Dollars)

As of December 31,

As of December 31,

2017

2017

2016

2016

Assets Investments, available-for-sale Alternative investments Investment in subsidiaries Total investments

Liabilities and policyholders’ surplus Liabilities: Reserve for losses and loss adjustment expenses Unearned and advance premiums Reinsurance premiums payable and funds held for reinsurers Net deferred tax liability Policyholder distributions payable Accounts payable and accrued expenses Line of credit Payables for securities purchased

1,492,113 181,358 3,690 1,677,161

$

$

1,355,647 164,040 3,295 1,522,982

$

$

563,971 126,979

673,877 121,825

8,105 225,579 3,094 40,352 7,785 7,050 9,106 1,103 16,690 1,530

Cash and cash equivalents Reinsurance recoverables on unpaid losses Reinsurance recoverables on paid losses Prepaid reinsurance premiums

8,488 61,383 40,000 13,779 - 2,282 11,744

8,574 72,365 25,000 12,588 16,500 10,470 7,790 948,989

39,696 338,780 15,707 39,444

Accrued investment income Receivables for security sold Premiums receivable Deferred policy acquisistion costs Income taxes recoverable Other taxes

7,236 2,685 8,186 1,105

Due to subsidiaries Total liabilities

828,626

726 809

Policyholders’ surplus: Accumulated other comprehensive income Members’ account balance Total policyholders’ surplus

264,215 904,624 1,168,839

167,068 861,299 1,028,367

$

$

1,997,465

Total assets

1,977,356

$

$

Total liabilities and policyholders’ surplus

1,997,465

1,977,356

See accompanying notes to financial statements.

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ENERGY INSURANCE MUTUAL LIMITED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Expressed in Thousands of U.S. Dollars)

Years ended December 31, 2017 2016

Years ended December 31, 2017 2016

Underwriting revenue Net premiums earned

Investment income Net realized gain on investments sold Other-than-temporary impairments Net investment income Total investment income

$ 15,879 -

$ 12,426 (126)

$ 221,057 (77,140) 143,917 2,393 146,310

Direct and assumed premiums earned Ceded premiums earned Net premiums earned Ceding commission income Total underwriting revenue Underwriting expenses Net losses and loss adjustment expenses Gross and assumed losses and loss adjustment expenses

$ 222,951 (83,124) 139,827 2,421 142,248

39,161 55,040

49,295 61,595

Income before policyholders’ distribution and income taxes

101,366

96,054

(40,000) 28,765

(25,000) (17,271)

Distributions to policyholders Income tax benefit (expense)

75,670 9,750 85,420 1,944 12,620 99,984

123,118 (28,161) 94,957 2,273 10,559 107,789

$ 90,131

$ 53,783

Net income

Ceded losses and loss adjustment expenses Net losses and loss adjustment expenses

Comprehensive income Net income Net unrealized gains on available‑for- sale securities, net of taxes of $32,664 and $5,456, respectively Less: reclassification adjustment for net gains realized in net income, net of taxes of $5,558 and $4,305, respectively Other comprehensive income, net of taxes

$ 90,131

$ 53,783

Policy acquisition costs Administrative expenses

Total underwriting expenses

10,133

60,662

Income from underwriting

$ 46,326

$ 34,459

(10,321) 50,341

(7,995) 2,138

$ 140,472

$ 55,921

Comprehensive income

See accompanying notes to financial statements.

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ENERGY INSURANCE MUTUAL LIMITED STATEMENTS OF CHANGES IN POLICYHOLDERS’ SURPLUS (Expressed in Thousands of U.S. Dollars)

Accumulated Other Comprehensive Income

Members’ Account Balance

Total Policyholders’ Surplus

Balance at January 1, 2016 Other comprehensive income, net of taxes Net income Balance at December 31, 2016 Other comprehensive income, net of taxes Reclassification of stranded tax (Note A) Net income

$

$

164,930 2,138 - 167,068 50,341 46,806 -

$

807,516 - 53,783 861,299 - (46,806) 90,131

972,446 2,138 53,783

1,028,367 50,341 - 90,131

Balance at December 31, 2017

$

$

$

264,215

904,624

1,168,839

See accompanying notes to financial statements.

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ENERGY INSURANCE MUTUAL LIMITED STATEMENTS OF CASH FLOWS (Expressed in Thousands of U.S. Dollars)

Years ended December 31, 2017 2016

Years ended December 31, 2017 2016

$

$

Net income Cash flows from operating activities: Add (deduct) items not affecting cash: Depreciation Amortization of bond premium or discount Net realized investment gain Deferred income taxes Changes in operating assets and liabilities: Reinsurance recoverables on unpaid and paid losses Prepaid reinsurance premiums

90,131

53,783

Cash flows from investing activities: Cost of investments purchased Proceeds from sales of investments Proceeds from maturities of investments Change in amount due from purchase/sale of securities Income from alternative investments Equity in earnings of subsidiaries

(682,378) 555,794 59,640

(548,234) 542,854 18,152

$

$

226 3,865

150 4,141 (12,300) 3,580

(15,879) (38,306)

(12,553) 2,839 (395) (1,006) (78,059)

5,437 (9,882)

(136) (276) 7,915

Purchases of fixed assets Net cash from investing

125,814 (908) (920)

47,753 4,190 (740)

Cash flows from financing activities: Draws and repayments on line of credit Net cash from financing

Premiums receivable Reserve for losses and loss adjustment expenses

(16,500) (16,500)

16,500 16,500

(109,906) 5,154

(165,345) 850

Unearned and advance premiums Reinsurance premiums payable and funds held for reinsurers Accounts payable and accrued expenses Due to subsidiaries Policyholder distribution payable

Net change in cash and cash equivalents Cash and cash equivalents, beginning of year

(31,681) 39,696

(36,329) 76,025

(86) 703 3,954 15,000 (15,964) 62,878 $

(11,557) 979

Cash and cash equivalents, end of year

7,661 5,000 1,111 (60,744)

8,015

$

$

39,696

Supplemental disclosure of cash flow information: Income taxes paid, net of refunds

Income taxes recoverable Net cash from operations

$

13,600

$

$

2,877

See accompanying notes to financial statements.

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ENERGY INSURANCE MUTUAL LIMITED NOTES TO FINANCIAL STATEMENTS Years ended December 31, 2017 and 2016

As of December 31, 2017, EIS has assets (exclusive of assets held in MBPs) of approximately $14.3 million, shareholder’s equity of $2.9 million and net income of approximately $386,000. As of December 31, 2016, EIS had assets (exclusive of assets held in MBPs) of approximately $10.6 million, shareholder’s equity of $2.5 million and net income of approximately $277,000. The Company considers EIS a variable interest entity, which is not consolidated due to the lack of obligations, rights and powers described above. EIM accounts for its investment in EIS using the equity method of accounting because EIM is not the primary beneficiary of EIS’ operations. During 2015, EIM formed Energy Captive Management, LLC (“ECM”) in the State of South Carolina to provide captive management services to EIS. As of December 31, 2017, ECM has assets of approximately $917,000, member’s equity of $757,000 and net income of $10,000. As of December 31, 2016, ECM had assets of approximately $915,000, member’s equity of $747,000 and net income of $25,000. Investments Management determines the appropriate classification of marketable fixed-maturity and equity securities at the time of purchase. The Company’s policy is to hold securities for investment purposes and, as such, has reported all securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of policyholders’ surplus. The Company releases the income tax effects from accumulated other comprehensive income as individual securities are sold or mature. Interest and dividends on securities classified as available-for-sale are included in net investment income. Declines in value judged to be other-than-temporary are included as realized losses in the statement of income. The cost of securities sold is based on the specific identification method. Alternative investments include interests in shares of investment funds, limited partnership funds, and real estate funds (“the Funds”), which are considered non- marketable. Alternative investments are structured such that the Company holds interest in the Funds and not the underlying holdings of such Funds. The Company’s ownership does not provide for control over the related investees, and financial risk is limited to the funded and unfunded commitment for each investment. These Funds are stated at fair value, which is from the most recently reported net asset value as reported by their investment managers or administrators. The Company has elected the fair value option with respect to the Funds, with all gains and losses associated with the Funds recorded directly to the statement of income and comprehensive income, as a component of net investment income. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate the net asset value is a permitted practical expedient.

Note A - Organization and Significant Accounting Policies

Organization Energy Insurance Mutual Limited (the “Company” or “EIM”) is a mutual insurance company incorporated in Barbados on June 13, 1986 and licensed as a Qualifying Insurance Company under Insurance Act Cap. 310 of the Laws of Barbados. On June 9, 1988 EIM was licensed by the State of Florida as an industrial insured captive insurance company. Pursuant to its Florida license, the Company is authorized to write excess insurance in all 50 states and the District of Columbia. The Company is a mutual insurance company with membership available to any utility or member of the energy services industry that meets EIM’s underwriting standards. The Company provides excess general liability, excess fiduciary liability and excess directors and officers liability policies written on a claims first made basis. In addition, to a lesser extenttheCompanywritespropertyinsuranceforitsmembers.Allmembershavecasualty policies in place, approximately one-third of those members have property policies as well. During 2015, the Company started providing cyber liability coverage to itsmembers. Basis of Reporting The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) promulgated by the Financial Accounting Standards Board Accounting Standards Codification (“ASC” or “the guidance”). Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment in Subsidiaries The Company is the sponsor and 100% common stockholder of Energy Insurance Services, Inc. (“EIS”), a sponsored cell captive insurance company domiciled in South Carolina. As a sponsored captive, EIS allows EIM members, known as Mutual Business Programs (“MBPs”), to insure or reinsure the risks of their sponsoring organizations, including property, general and environmental liability, asbestos, workers’ compensation and retiree medical stop loss. Through Participation Agreements with the MBPs, the insurance risks underwritten by the MBPs are contractually limited to the funds available in the individual cell’s account and neither EIS nor EIM has any obligation to absorb losses of the MBPs. Likewise, EIS has no right to the capital and accumulated profits of the MBPs cells. EIM does not have the power to direct the activities of the MBPs, which most significantly impact economic performance.

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ENERGY INSURANCE MUTUAL LIMITED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note A - Organization and Significant Accounting Policies (Continued)

Management periodically reviews the financial condition of its existing reinsurers and concludes as to whether any allowance for uncollectible reinsurance is required. At December 31, 2017 and 2016, no such allowances were deemed necessary. Deferred Policy Acquisition Costs Commissions and other costs of acquiring insurance that are directly related to the successful acquisition of new and renewal business are deferred and amortized over the life of the policy to which they relate. These costs are deferred, net of related ceding commissions, to the extent recoverable, and are amortized over the period during which the related premiums are earned. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated based on separate return calculations. Policyholder Distributions As a mutual insurer, EIM is owned by its policyholders. Policyholder distributions are released from excess surplus and are charged to income when declared by the Board of Directors. During 2017 and 2016, the Board of Directors approved the declaration of policyholder distributions in the amount of $40 million and $25 million, respectively. Reclassifications The Company has elected to early adopt Accounting Standards Update 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update was issued directly in response to the Tax Cuts and Jobs Act of 2017, to alleviate certain stranded tax effects. As shown on the Statements of Changes in Policyholders’ Surplus, this resulted in the Company reclassifying stranded taxes on net unrealized gains of $46.8 million between accumulated other comprehensive income and members’ account balance. Subsequent Events The Company has evaluated subsequent events for disclosure and recognition through February 28, 2018, the date on which these financial statements were available to be issued.

These alternative investment funds give investors the right, subject to predetermined redemption procedures, to redeem their investments at net asset value. Since the funds are not actively traded on an exchange, the estimated fair values are subject to judgment and uncertainty. The financial statements of the Funds are audited annually by independent auditors, although the timing for reporting the results of such audits may not coincide with the Company’s financial reporting. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains certain cash and cash equivalent balances that are not subject to FDIC insurance. Management does not believe these balances represent a significant credit risk to the Company. Losses and Loss Adjustment Expense Reserves The reserve for losses and loss adjustment expenses (“LAE”) represents the estimated ultimate gross cost of all reported and unreported losses unpaid through December 31. Case reserves represent the estimated future payments on reported losses. Case reserves are continually reviewed and updated; however, given the uncertainty regarding the extent of the Company’s ultimate liability, a significant additional liability could develop. Supplemental reserves (e.g., IBNR) are recorded based on actuarial projections. Although considerable variability is inherent in these estimates, particularly due to the limited number of claims to date, management believes that the aggregate reserve for losses and LAE is adequate. These estimates are periodically reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations. Premiums Direct and assumed premiums are recognized as revenue on a pro-rata basis over the policy term. The portion of premiums that will be earned in the future is deferred and reported as unearned premiums. The Company pays commissions on assumed business, which is initially capitalized and expensed over the life of the policy. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from large claims, catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other insurance companies. Reinsurance premiums, ceding commissions, loss reimbursement and reinsurance recoverables on unpaid claims are accounted for on a basis consistent with that used in accounting for the original policies or claims.

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ENERGY INSURANCE MUTUAL LIMITED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note B - Insurance Activity Premium activity for 2017 and 2016 is summarized as follows (in Thousands of U.S. Dollars): 2017 Premiums written Change in unearned premiums Premiums earned 223,271 (6,028) 217,243 $ $ $ $ Direct

Net

Assumed

Ceded

3,687 127 3,814

(76,232) (908) (77,140)

$

$

150,726 (6,809) 143,917

$

$

2016 Premiums written Change in unearned premiums Premiums earned

Ceded

Net

Direct

Assumed

217,863 1,570 219,433

4,831 (1,313) 3,518

(87,314) 4,190 (83,124)

$

$

$

135,380 4,447 139,827

$

$

$

$

$

Activity in the liability for losses and LAE is summarized as follows (in Thousands of U.S. Dollars):

2017

2016

$

$

Gross balance, beginning of year Less: reinsurance recoverables on unpaid losses and LAE Net balance, beginning of year



673,877 (338,780) 335,097



839,222 (402,203) 437,019

Incurred related to: Current year Prior years Total incurred Paid related to: Current year Prior years Total paid

150,707 (65,287) 85,420

106,091 (11,134) 94,957

93 82,032 82,125 338,392 225,579 563,971

483 196,396 196,879 335,097 338,780 673,877

Net balance, end of year Plus: reinsurance recoverables on unpaid losses and LAE Gross balance, end of year

$

$

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/ energy insurance mutual - 2017 annual report

ENERGY INSURANCE MUTUAL LIMITED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note B - Insurance Activity (Continued)

Cumulative Paid

IBNR Plus Expected

Cumulative Number

During 2017, incurred losses and LAE attributable to events of prior years decreased by approximately $65.3 million. The favorable development of prior year losses related primarily to prior accident years 2013, 2014, 2015 and 2016, which decreased by approximately $49 million. Remaining favorable development of $16.3 million was due to all other accident years with varying redundancies. For the year ended December 31, 2016, incurred losses and LAE attributable to events of prior years decreased by approximately $11.1 million. The favorable development of prior year losses related to prior accident years exclusive of 2003, 2005 and 2015 of approximately $39.6 million. Accident years 2003, 2005 and 2015 experienced unfavorable development totaling approximately $28.5 million.

Accident Year Incurred

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total

51,081 121,486 107,382 11,946 87,776 118,521 57,845 158,105 87,042 146,429 947,613

50,044 120,671 106,520 10,649 72,804 100,665 13,411 142,183 6,555 93 623,595

1,033 815 862 1,100 1,771 8,901 3,361

184 209 178 209 223 219 206 208 298 228

$

$

$

14,614 78,321 113,562 224,340

The reconciliation of the net incurred and paid losses development tables to the liability for losses and LAE on the balance sheet as of December 31, 2017 is as follows (in Thousands of U.S. Dollars):

$

$

$

Methodology for Determining Losses and LAE Reserves: With the assistance of a consulting actuary, generally accepted actuarial reserving techniques are utilized to project the estimate of ultimate losses and LAEat each reporting date.

Net liabilities for unpaid losses and allocated LAE

$

326,892 225,579

Reinsurance recoverables on unpaid losses and allocated LAE

Unallocated LAE

11,500

Gross liabilities for unpaid losses and LAE

$

563,971

Methodology for Determining Cumulative Number of Reported Claims: Cumulative number of reported claims include open and closed claims by accident year at the claimant level.

The following is information about incurred and cumulative paid losses and allocated LAE, net of reinsurance, total incurred-but-not-reported (“IBNR”) liabilities plus expected development on reported claims, net of reinsurance and the cumulative number of reported claims as of December 31, 2017 (in Thousands of U.S. Dollars, Except Number of Claims Data):

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