2018 EIM Annual Report

Annual Repor t 2018 currents changing

CON T E N T 1 PRESIDENT’S LETTER 4 ALGONQUIN 6 EMERA 8 NRG 10 PLAINS ALL AMERICAN 12 FINANCIALS 33 EIM DIRECTORS 34 BOARD COMMITTEES 35 INSURANCE ADVISORY COMMITTEE

EIM 2018 ANNUAL REPORT

36 OFFICERS 37 MEMBERS

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EMBRACING CHANGE AND CAPITALIZING ON RESULTING OPPORTUNITIES. A MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

This year’s annual Risk Managers Information Meeting focused on “changing currents.” The theme highlighted transformations underway in both the insurance and energy industries that will require new and innovative solutions to meet emerging risk management challenges. The four Member Companies highlighted in this year’s annual report, along with other EIM members, have embraced change and capitalized on the resulting opportunities. These members reflect the collective foresight and innovation represented throughout EIM’s membership. EIM’s current strategic plan highlights technology-driven changes impacting the energy industry, including continued growth of renewables, enhanced battery storage, and distributed generation. EIM anticipates ongoing evolutionary, rather than revolutionary, changes in these areas, but expects many of these anticipated changes to carry over and impact EIM’s updated 2020-2022 strategic plan. In fact, through coordinated efforts with the Board and the Insurance Advisory Committee (IAC), EIM is already laying the foundation to address evolving risk management considerations driven by these continuously developing technologies.

and Officers, Fiduciary and Property—which will be augmented by targeted growth in the cyber liability and property portfolios, larger General Liability limits, and the delivery of tailored solutions for discrete risk management issues faced by Member Companies. Commitment to core products and services, financial strength, and the ability to move quickly in the face of change will continue as EIM’s hallmarks in the coming years. EIM’s current strategic plan highlights technology- driven changes impacting the energy industry, including continued growth of renewables, enhanced battery storage, and distributed generation.

Throughout 2018, EIM’s ongoing Member Company focus was highlighted in several areas, including the following:

•More than 100 renewal and Mutual Advantage meetings were undertaken by EIM management and staff •Additional General Liability capacity was established, in combination with Nuclear Electric Insurance Limited (NEIL), above $135 million for members seeking increased limits

In addition to addressing change, EIM remains committed to its longstanding core lines of business—General Liability, Directors

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•EIM’s cyber liability relationships with Associated Electric & Gas Insurance Services Limited (AEGIS) and NEIL continued to expand •AEGIS, EIM and NEIL worked together to identify cost efficiencies, product enhancements, and collaborative opportunities In addition, Energy Insurance Services, Inc. (EIS) helped two California members put together first-of-their-kind, wildfire-focused catastrophe bond transactions, providing hundreds of millions in added wildfire capacity. Numerous factors afford EIM the agility to respond quickly and meaningfully to emerging risk management challenges. First, the company remains relatively unencumbered by historical loss reserves. Given the nature of it excess of loss portfolio, EIM has only $2 million in net loss reserves for the years 2008 and prior. Without long-tail, legacy loss exposures, EIM faces less risk of adverse loss development. Overall, the company saw policyholders’ surplus grow by 2% to $1.2 billion and the 2018 Member Company distribution increase by more than 85% to $75 million. Second, the relatively short tail associated with EIM’s claim reserves frees capital that can be readily allocated on a net basis to new or expanded lines of business or returned to members. As of year- end 2018, EIM had gross loss reserves, including incurred but not reported losses (IBNR), of $696 million, or 61% of surplus. On a net basis, loss reserves drop to $432 million, or 38% of surplus. This relatively low loss reserve-to- surplus ratio ensures that there is ample capital available to respond to evolving Member Company excess insurance needs.

Finally, EIM’s conservative use of reinsurance has always been an integral part of the company’s business platform. EIM was originally formed to insulate Member Companies from the vagaries of the commercial insurance market. Adherence to this principle continues today as, on average, EIM cedes about 31% of its gross written premium to reinsurance partners, with 50% of this ceded premium going to sister mutuals, NEIL and Oil Casualty Insurance Limited (OCIL). This judicious use of reinsurance protects EIM from catastrophic events while still ensuring sufficient capital to retain risk net and independently meet Member Company emergent risk management issues. EIM expects to maintain near-term annual distributions in the $50-$75 million range, slowly managing surplus back to around $1 billion. Further buttressing its member-focused commitment, EIM enhanced internal operational efficiencies in 2018, moving core IT systems to the cloud, while conducting cybersecurity exercises to ensure system integrity and successfully updating and testing EIM’s disaster recovery plan. Equally noteworthy, enterprise risk metrics were routinely reviewed and updated by the company’s enterprise risk management (ERM) committee, ensuring that EIM stayed within the company-wide risk tolerance parameters of no more than a 10% probability of losing 20% of policyholders’ surplus in any one year. EIM’s commitment to ERM paid off in 2018 as a volatile investment market and an active loss year delivered results which, while lower than 2017, were still in line with EIM’s expected performance over time. Although EIM’s total return on investments was below plan at -1%, financial performance was bolstered by a net loss ratio of 72% and below-budget expense ratio of 6%.

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Change can be intimidating, but it also offers great opportunity. Those who anticipate and adapt best to change will thrive. Amidst these “changing currents,” EIM remains committed to ensuring that its members thrive as, together, we assess emerging risks and fashion meaningful solutions. The IAC 2018 Member Survey responses overwhelmingly support the proposition that consistent underwriting— in terms of pricing, capacity, and coverage terms and conditions—along with a strong, stable financial base continue to be what EIM members value most.

Overall, the company saw policyholders’ surplus grow by 2% to $1.2 billion and the 2018 Member Company distribution increase by more than 85% to $75 million. We were pleased to see that even in a down year on the investment front, EIM saw surplus continue to rise and the annual distribution almost double. This is a credit to the Board’s focus on balancing underwriting and investment risk, along with the solid risk management efforts undertaken by Member Companies. EIM is a stronger company because of the insights and direction provided by the Board and IAC. EIM continues to benefit from its strong financial position, driven by a 10-year average return on investments of 6.7%, a 64.5% net loss ratio, and an 8.7% net expense ratio. These contributions accounted for EIM’s surplus growth from $467 million at the beginning of 2009, to a year-end 2018 surplus of $1.135 billion (net of seven consecutive years of distributions totaling $218 million). This result was achieved against a background of ongoing claim activity involving more than $1.4 billion in gross claim payments made to members since 2009. Absent extraordinary circumstances impacting EIM’s underwriting or investment performance, EIM expects to maintain near-term annual distributions in the $50-$75 million range, slowly managing surplus back to around $1 billion. While annual distributions are meaningful to members, the IAC 2018 Member Survey responses (portions of which are highlighted in this annual report) overwhelmingly support the proposition that consistent underwriting—in terms of pricing, capacity, and coverage terms and conditions—along with a strong, stable financial base continue to be what EIM members value most. This rings particularly true during times of change.

SCOTT K. GOODELL PRESIDENT AND CHIEF EXECUTIVE OFFICER

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Meeting the Needs of the Modern Customer

The world of energy is experiencing change at an exponential rate. Environmental factors, evolving customer requirements and technology advancements are changing the way successful power and utility companies conduct their business. The fundamental challenge we all face is how to successfully respond. Transformative changes are underway in the generation of power and the provision of utility services. Conventional energy sources are increasingly interchanged sustainable, cost-competitive, renewable energy. This ‘alternative’ source is now becoming mainstream. Customers are increasingly seeking out new choices in the way they consume their utility services. New technologies are ready to play a leading role in the utility of the future, and the unregulated power generation business is also well positioned to play an important part in this movement.

which provide rate-regulated natural gas, water, and electricity generation, transmission and distribution utility services to over 768,000 connections in the United States. The company is committed to being a global leader in the generation of clean energy, through its ownership and operation of long-term contracted wind, solar, hydroelectric and thermal generating facilities, representing approximately 1.5 GW of gross installed capacity. In response to industry evolution, Algonquin is addressing ways to provide exceptional value to customers. Differentiated services, sustainable business practices, and improved accessibility are what the customers of the future will demand. Declining costs of technology, integration of business streams and digitization represent opportunities that an entrepreneurial and agile organization can pursue to the benefit of their customers and investors.

Algonquin Power & Utility Corporation (“Algonquin”) is successfully responding to these changes through its two business groups,

Luning Solar Facility

2018 EIM MEMBER SURVEY HIGHLIGHT 69% of respondents strongly agree or agree that it is important for EIM to provide a meaningful annual distribution.

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2018 EIM MEMBER SURVEY HIGHLIGHT 80% of members with claims experience agreed or strongly agreed that EIM approaches claims handling differently than commercial carriers.

Liberty Utilities Linemen

Deerfield Wind Farm

planet in the same way we consider our need for economic profit,” explains Ian Robertson, Chief Executive Officer, Algonquin Power & Utilities Corp. Technology solutions now provide boundless potential for growth and innovation in a utility industry that has been historically resistant to change. More than ever before, digitization is connecting people, things and activities on a global scale. Realization of a bright future in power and utilities means transforming the capabilities of people, processes and technology to meet the evolving needs of the modern customer.

By thinking big, starting small, and scaling rapidly, Algonquin is committed to building and maintaining customer loyalty by providing an attractive business and social proposition. Sustainability is a core component of Algonquin’s growth strategy and is woven throughout the way the company plans, evaluates and conducts business—from renewable energy to clean water to efficient, reliable utility operations. Being equally committed to delivering social and environmental sustainability, as well as to generating economic profit, provides the opportunity for responsible investing in a safe, reliable and agile international organization. “Our commitment to sustainability represents a strategic choice. We make this commitment in the belief that it’s the path forward to continued success, and we recognize that crafting a business for the future demands considering the needs of people and the

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Adapting to Change with Industry Leading Solutions The energy industry is changing rapidly. Dynamic technology, market and customer trends are reshaping what it means to be an energy company. Across the board, investor-owned utilities are evolving, finding ways to make energy cleaner, grids smarter, and customer service more accommodating. Gas Company in Florida, as well as New Mexico Gas Company – effectively doubling the size of its business and becoming a North American energy leader.

Part of the secret of Emera’s success has been finding clean energy solutions that make the most sense for different regions. In Atlantic Canada, this means wind and hydro. Emera company Nova Scotia Power has added more than 300 commercial wind turbines over the past decade, and is well on track to generate more than a targeted 40% of electricity from renewable sources by 2020.

Emera has built a track record of leading change, delivering on a proven strategy of cleaner, affordable energy for more than a decade. From its origins as a single electric utility in Nova Scotia, Canada, Emera has grown to serve more than 2.5 million utility customers in the USA, Canada and the Caribbean. In 2016, Emera acquired TECO Energy – including Tampa Electric and Peoples

Tampa Electric’s Big Bend solar array in Florida.

2018 EIM MEMBER SURVEY HIGHLIGHT 89% of respondents to the 2018 Member Survey agreed or strongly agreed that the premium paid for GL coverage reflected the value of the excess insurance coverage received.

Tampa Electric’s Big Bend solar array in Florida.

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2018 EIM MEMBER SURVEY HIGHLIGHT 72% of respondents view renewable energy as one of the top issues facing the energy industry.

In the Sunshine State, solar generation makes a lot more sense. Emera company Tampa Electric is currently adding 600MW of new solar generation – installing six million panels as part of 10 new large-scale arrays. Once complete, this $850 million investment will increase Tampa Electric’s total solar generation to 7%. The team at Tampa Electric is also advancing another $850 million initiative to modernize the Big Bend generating station, replacing coal-fired generation with cleaner and more efficient natural gas. As more intermittent renewables and distributed generation sources come online, investments in storage and grid intelligence are needed to manage an increasingly complex energy system. Emera is working with Tesla and other technology partners to install large-scale storage solutions across its electric utilities, enabling renewable energy to be captured when it’s readily available, and to be used later when it’s actually needed. Emera companies are also trialling and implementing tools, such as intelligent feeders, to build a smarter, more reliable grid. Since smart meters play a critical role in building grid intelligence, Emera is investing more than $375 million to deploy 1.5 million units across four utilities. This investment recognizes that customers want real time information about their energy, including where it comes from, what it costs and how much they are consuming. With the benefit of smart meters, customers can access their energy usage in real time via a digital platform. Equally important, energy providers like Emera can more quickly pinpoint system issues and failures to speed restoration and ensure a more reliable energy future.

Smart meters give customers more real-time energy information, enabling even more choice and control in future Smart meters give customers more real-time energy information, enabling even more choice and control in future.

2018 EIM MEMBER SURVEY HIGHLIGHT 86% of respondents believe that EIM is adequately capitalized.

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A Power Model That Puts Customers First

An Evolving Industry Over the last few years, the entire electricity value chain has seen changes that have fundamentally reshaped the market. These external forces fueled NRG’s desire to redefine their business strategy. Generation has been impacted by low natural gas prices and the proliferation of solar and wind power. These changes have made the traditional independent power producer (IPP) model obsolete.

NRG continues to lead the market with strong retail brands and diverse generation assets.

NRG believes companies should evolve to meet customer needs—which is why they have embarked on a transformation. Responsible for providing power to more than three million homes and businesses across the nation, NRG continues to focus on the safe generation of electricity and sale of power to organizations and communities. It’s just that now, a new corporate strategy focuses on a more customer-driven approach.

Leveraging deep industry and market knowledge, backed by robust data and analytics, NRG is providing customers with compelling choices to meet their energy needs. From homeowners to large businesses, the company’s commitment to an excellent customer experience remains strong.

2018 EIM MEMBER SURVEY HIGHLIGHT Survey respondents overwhelmingly counseled EIM that to stay relevant and responsive it must, “Continue strong, interactive communications with members and adjust quickly and decisively to changes in the industry.”

NRG Headquarters –Princeton, NJ

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NRG’s retail brand, Reliant, provides technology to help customers stay connected with their energy.

For the long term, trends in retail are evolving, as consumers are increasingly engaged with energy through smart appliances and controllable demand. This consumer engagement represents an emergent and significant opportunity for NRG. The company stays nimble and open to change. Strong values of fiscal responsibility, safety, and sustainability lead the way. As NRG brings together expertise in both managing generation and serving customers, the company has the unique opportunity to evolve its business and better align with customer demand. This transformation towards a customer-centric model equates to a modern, integrated platform for success. The Future is Bright NRG is shifting its focus from megawatts owned to customers served. It has always been the company’s mission to deliver innovative power solutions for consumers, big and small. The difference is that now, this mission is at the heart of the entire organization. Energy is a resource, full of potential, with the flexibility to fulfill robust, individualized solutions. This refined business model marks a new phase in NRG’s history—and a rare opportunity to pivot the market and put customers at the forefront of a sustainable energy future.

2018 EIM MEMBER SURVEY HIGHLIGHT 75% of respondents view cyber liability as one of the top issues facing the energy industry.

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2018 EIM MEMBER SURVEY HIGHLIGHT 93% of members with claims experience agreed or strongly agreed that EIM handles claims effectively and fairly.

Turning Change Into Opportunity

Plains All American Pipeline, L.P. (PAA) has always strived to anticipate and adapt to constant changes in the industry. Among the largest crude oil midstream service providers in North America, the company owns and operates midstream energy infrastructure in the U.S. and Canada, and provides logistics services for crude oil, NGLs and natural gas. In total, Plains handles more than 5 million crude oil and NGL barrels per day.

After several years of relative lows, the oil and gas pipeline industry saw robust growth in 2018. “Thanks to an enterprise-wide focus on continuous improvement in the preceding years, PAA was poised to take advantage of available growth opportunities and saw a 29 percent increase in full-year Adjusted EBITDA between 2017 and 2018,” stated Sharon Spurlin, VP and Treasurer of PAA. “We have a culture in which we are always looking for ways to advance while also ensuring that safety and risk reduction are at the forefront of all efforts,” Spurlin commented. These continuous improvement efforts are organized around three pillars: people, assets and systems. Assets Plains recently invested $1.9 billion on capital projects in 2018. Seizing on the boom in American oil production and ever-increasing global demand, the company is building additional capacity at its marine terminals in the Gulf Coast, and investing in pipeline projects to move oil south toward export opportunities. New

Sunset at Crude Oil Terminal in Cushing, Oklahoma

Marine terminal in St. James, Louisiana

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2018 EIM MEMBER SURVEY HIGHLIGHT The top three most important issues facing risk managers in the next five years are: cyber liability, cost of insurance and regulatory mandates.

Diamond Pipeline under construction in Oklahoma

Systems Technology is an integral part of conversations surrounding the evolution of the midstream industry, and PAA has recognized the need to implement stronger, more secure and more efficient systems across the organization. “With the increase in competition that we expect in the years ahead, implementing highly effective processes and technologies will enable us to realize a competitive advantage and ensure we continue to be the partner of choice for our customers,” said Spurlin. “Plains has always enjoyed an entrepreneurial culture and we’re leveraging the best aspects of that mindset to adapt the organization to a changing environment. This industry is always advancing, and we know we need to be forward-looking, creative and flexible in order to stay relevant. Our goal is to be the most respected midstream organization in North America, with the people, assets and systems that allow us provide the utmost in value-added services to our customers, and in doing so, deliver superior returns to our stakeholders,” Spurlin concluded.

pipeline construction is expected to increase crude oil and condensate takeaway capacity by more than 1.5 million barrels per day. People “Our people are our greatest asset,” said Spurlin. “We’re firmly dedicated to developing our employees to their full potential.” In recent years, recognizing the need to adjust in the face of planned retirements of a number of senior executives, leadership competency development has been a priority at PAA. “We need to continually grow the number and capacity of our leaders because it’s their decisions and actions that set expectations and drive execution,” explained Spurlin, “As our industry continues evolving, leadership will be among the largest factors in our success.”

2018 EIM MEMBER SURVEY HIGHLIGHT Over 95% of respondents agreed or strongly agreed that it was important for EIM to provide substantial excess insurance limits for the long term and to price its products so capacity remains stable.

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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 (loss) income, changes in policyholders’ surplus and cash flows for the years then ended and the related notes to the financial statements. Management’s Responsibility for the Financial Statements 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.

Carter M. Reid | Chairman of the Board March 1, 2019

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

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, 2018 and 2017 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 31-32 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.

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

Jacksonville, Florida February 27, 2019

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, 2018 and 2017, 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,

2018

2018

2017

2017

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

$

1,453,717 212,867 4,266 1,670,850

$

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

$

695,969 121,310

$

563,971 126,979

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

60,416 264,056 1,364 32,553

8,105 225,579 3,094 40,352

7,640 39,296 50,000 11,506 925,721

8,488 61,383 40,000 16,061 816,882

Accrued investment income Receivables for security sold Premiums receivable Deferred policy acquisistion costs

7,519 4,431 8,006 1,373 8,677 284 1,361

7,785 7,050 9,106 1,103

186,892 948,277 1,135,169

264,215 904,624 1,168,839

Income taxes recoverable Due from (to) subsidiary Other assets

16,690 (11,744 1,530

)

Total liabilities and policyholders’ surplus

$

2,060,890

$

1,985,721

Total assets

$

2,060,890

$

1,985,721

See accompanying notes to financial statements.

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Energy Insurance Mutual Limited Statements Of Income And Comprehensive (Loss) Income (Expressed in Thousands of U.S. Dollars)

Years ended December 31, 2018 2017

Years ended December 31, 2018 2017

Underwriting revenue Net premiums earned

Investment income Net realized gain on investments sold Net investment income Total investment income Income before policyholders’ distribution and income taxes Distributions to policyholders Income tax benefit Net income

$ 32,936 47,879 80,815

$ 15,879 39,161 55,040

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

$ 226,780 (70,613 156,167 2,166 158,333

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

)

)

114,835 (75,000 3,818 $ 43,653

101,366 (40,000 28,765 $ 90,131

)

)

Comprehensive (Loss) Income Net income Net unrealized (losses) gains on available‑for-sale securities, net of taxes of $(13,638) and $32,664, respectively Less: reclassification adjustment for net gains realized in net income, net of taxes of

190,964 (77,797 113,167 2,148 8,998 124,313

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

$ 43,653

$ 90,131

)

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

)

(51,303

60,662

Policy acquisition costs Administrative expenses

Total underwriting expenses

)

)

(26,020

(10,321

$6,916 and $5,558, respectively Other comprehensive (loss) income, net of taxes

Income from underwriting

$ 34,020

$ 46,326

(77,323

50,341

)

$ (33,670 )

$ 140,472

Comprehensive (Loss) 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, 2017 Other comprehensive income, net of taxes Reclassification of stranded tax (Note A) Net income Balance at December 31, 2017

$

167,608 50,341 46,806 - 264,215

$

861,299 - (46,806 90,131 904,624

$

1,028,367 50,341 - 90,131 1,168,839

)

)

)

Other comprehensive loss, net of taxes Net income

(77,323 -

- 43,653

(77,323 43,653

Balance at December 31, 2018

$

186,892

$

948,277

$

1,135,169

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, 2018 2017

Years ended December 31, 2018 2017

$

$

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 Purchases of fixed assets Net cash from investing Cash flows from financing activities: Draws on line of credit Repayments on line of credit Net cash from financing Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Income taxes paid, net of refunds

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

43,653

90,131

)

)

$

(634,199 472,566 109,021

$

(682,378 555,794 59,640

314 2,133 (32,936 (1,533

226 3,865

)

(15,879 (38,306 ) )

345 (7,553 (576 (171 (60,567 30,000 (30,000 - 52,401 8,015 60,416

(12,553 2,839 (395 (1,006 (78,059 56,000 (72,500 (16,500 (31,681 39,696 8,015

) )

) ) ) )

) ) )

(36,747 7,799 1,100

125,814 (908 (920

)

) )

Premiums receivable Reserve for losses and loss adjustment expenses

)

) ) )

131,998 (5,669

(109,906 5,154

)

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

)

(848 (2,281 (12,028 10,000 8,013 112,968 $

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

$

$

) ) )

)

) (11,478

$

$

13,600

Income taxes recoverable Net cash from operations

)

See accompanying notes to financial statements.

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Energy Insurance Mutual Limited Notes To Financial Statements Years ended December 31, 2018 and 2017

Note A - Organization and Significant Accounting Policies

As of December 31, 2018, EIS has assets (exclusive of assets held in MBPs) of approximately $15.3 million, shareholder’s equity of $3.5 million and net income of approximately $570,000. As of December 31, 2017, EIS had 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. 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, 2018, ECM has assets of approximately $940,000, member’s equity of $770,000 and net income of $13,000. As of December 31, 2017, ECM had assets of approximately $917,000, member’s equity of $757,000 and net income of $10,000. 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 and comprehensive (loss) 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 (loss) 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.

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. EIM operates as an eligible surplus lines insurer in all other 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 extent the Company writes property insurance for its members. All members have casualty policies in place, approximately one-third of those members have property policies as well. The Company also provides cyber liability coverage to its members. 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.

18 | ENERGY INSUR ANCE MU T UAL - 2018 ANNUAL REPOR T

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note A - Organization and Significant Accounting Policies (Continued)

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 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.

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, 2018 and 2017, 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 2018 and 2017, the Board of Directors approved the declaration of policyholder distributions in the amount of $75 million and $40 million, respectively. Reclassifications In 2017, 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 loss and members’ account balance as of December 31, 2017. Subsequent Events The Company has evaluated subsequent events for disclosure and recognition through February 27, 2019, the date on which these financial statements were available to be issued.

19 CHANGING CURREN T S |

Energy Insurance Mutual Limited Notes To Financial Statements (Continued) Note B - Insurance Activity Premium activity for 2018 and 2017 is summarized as follows (in Thousands of U.S. Dollars): 2018 Premiums written Change in unearned premiums Premiums earned 217,054 5,855 222,909 $ $ $ $ Direct

Assumed

Ceded

Net

4,472 (601 3,871

$

(79,134 8,521 (70,613

$

142,392 13,775 156,167

)

)

$

$

)

2017 Premiums written Change in unearned premiums Premiums earned

Direct

Assumed

Ceded

Net

$

223,271 (6,028 217,243

$

3,687 127 3,814

$

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

$

150,726 (6,809 143,917

)

)

$

$

$

$

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

2018

2017

$

$



563,971 (225,579 338,392 )



673,877 (338,780 335,097 )

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

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

158,000 (44,833 113,167

150,707 (65,287 85,420

)

)

186 19,460 19,646 431,913 264,056 695,969

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

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

$

$

20 | ENERGY INSUR ANCE MU T UAL - 2018 ANNUAL REPOR T

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note B - Insurance Activity (Continued)

IBNR Plus Expected

Cumulative Number of Reported Claims

Development on Reported Claims

Cumulative Paid

During 2018, incurred losses and LAE attributable to events of prior years decreased by approximately $44.8 million. The favorable development of prior year losses related primarily to prior accident years 2016 and 2017, which decreased by approximately $53.7 million. Unfavorable development occurred in accident year 2015, which increased $11.2 million. For the year ended December 31, 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 $49M. Remaining favorable development of $16.3 million was due to all other accident years with varying redundancies.

Accident Year Incurred

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total

$

121,369 107,209 11,753 86,057 125,340 54,037 169,930 69,607

$

120,671 106,521 10,712 77,104 106,280 13,474 142,445 12,580 2,270 187 592,244

$

698 688 869

210 178 209 223 221 207 212 301 253 168

4,235 9,235

)

(1,308 26,292 31,520 65,189 48,965 186,383

112,609 153,984 1,011,895

$

$

$

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, 2018 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 LAE at each reporting date.

Net liabilities for unpaid losses and allocated LAE

$

420,413 264,056

Reinsurance recoverables on unpaid losses and allocated LAE

Unallocated LAE

11,500

Gross liabilities for unpaid losses and LAE

$

695,969

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, 2018 (in Thousands of U.S. Dollars, Except Number of Claims Data):

21 CHANGING CURREN T S |

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