2019 EIM Annual Report

2019 ANNUA L REPORT

HINDSIGHT INSIGHT FORESIGHT

CON T E N T 1

20/20 VISION

2 4 8

HINDSIGHT

EIM 2019 ANNUAL REPORT

INSIGHT

FORESIGHT FINANCIALS

12 32 33 34 35 36 37

EIM DIRECTORS

BOARD COMMITTEES

INSURANCE ADVISORY COMMITTEE

OFFICERS MEMBERS

COMPANY LOCATIONS

2

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

From Scott Goodell, President and Chief Executive Officer

At this year’s Risk Managers Information Meeting, themed “2020 Vision,” EIM took the opportunity to focus on hindsight, insight and foresight. Consistent with the observation that, “To fulfill your vision, you must have hindsight, insight and foresight,” EIM highlighted how history can enlighten current thinking which, in turn, provides more informed planning and action directed to the future. During my past ten years with EIM we have experienced a number of “lessons learned” events that have helped reshape today’s reasoning and tomorrow’s direction. There is no better person than EIM’s Chairman, Carter Reid, to comment on the insights gleaned by EIM over the years, particularly as they relate to 2019 underwriting, financial and operational performance. And, this annual report is a particularly appropriate forum to share the foresight of Tommy Bolton, EIM’s incoming President and CEO, which is well articulated in the newly implemented three-year strategic plan that took effect on January 1, 2020.

20/20 VISION

Accompanying the perspectives of hindsight, insight and foresight are visual illusions highlighting the power and impact that experience, inference and anticipation have on perceptions.

1

20/20 VISION

HINDSIGHT

From Scott Goodell, (continued) “Hindsight is always 20/20”

Billy Wilder’s often repeated quote that “Hindsight is always 20/20,” has broad appeal, but is particularly apropos for EIM. As I reflect on my ten-year tenure, there are a number of instances where I can see now that I misstepped, misspoke or misunderstood what, in retrospect, were clear and undeniable facts that should have led to simple, straightforward conclusions or actions. While it happens to all of us, it is particularly disconcerting when you have just arrived in a new job and are hoping that you can “get it right” for at least a couple of years to build trust and confidence and create a “bank” for the difficult times to come. Fortunately, my oversights didn’t wreak havoc on the organization. And there was a reason for that. Over the years, I came to appreciate the solid governance foundation established by EIM’s founding members, the unwavering loyalty of our Member Companies, and the steadfast commitment of EIM’s staff, all of which made the likelihood of the disastrous outcomes I so vividly feared extremely remote. At year-end 2019, EIM’s surplus stood at $1.153 billion, climbing 77% from the January 1, 2010 surplus of $652 million. After accounting for Member Distributions totaling $318 million over that same time period, pre-distribution surplus has grown by 127%. Surplus growth was driven by both underwriting and investment performance, although not always in tandem. While the net loss ratio for the last ten years stands at 89%, this ten-year average is marked by years of high net loss ratios (140% in 2012 and 137% in 2019) and lows (38% in 2013 and 59% in 2017). Similarly, EIM’s investment return since 2010 averaged 6.1%, with a high of 12.4% in 2019 and a low of -1% in 2018. The combined effect of underwriting and investment performance enabled EIM to steadily grow pre-distribution surplus every year for the last decade. Equally compelling was EIM’s net expense ratio, which averaged under 10%. How did this happen? First, EIM’s founders appreciated the distinction between working layer and excess of loss coverages and capitalized on the clear advantages of the latter, enabling

The two sets of blue lines in the images above are in the same position and the same length. However, through the perspective of the railroad track, we perceive that the lines are not the same length. Similarly, when we critically analyze facts with hindsight, insight and foresight, EIM is better able to provide its members simple, straightforward conclusions.

2

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

HINDSIGHT

the company to invest premium at higher returns and hold those dollars over longer periods of time than underlying carriers. This platform, in turn, provided the ability to better weather extreme or catastrophic occurrences. EIM’s recovery from the systemic D&O claims of the early 2000s and the investment market downturn in 2008 stand as a testament to EIM’s ability to rebound quickly from tail events. The excess of loss business model is a very good “mousetrap” that not only withstands trying times but also possesses the durability to quickly recover from such underwriting or investment challenges. This resiliency provides the flexibility to consider longer-term options not necessarily available to organizations with business models, constituents or stakeholders that demand immediate action or reaction. This sustained approach not only enables EIM to focus on longer-term underwriting and investment opportunities, but also allows examination of a broader range of options available to help Member Company risk managers best meet the challenges of emerging technology, newly enacted regulatory mandates, or shifting economic conditions. Hindsight can, in fact, be 20/20, offering valuable lessons that provide the foundation for more informed decision-making. It can, however, be a two-edged sword as well. If you dwell too much on the past, the future simply passes you by. But if you ignore the lessons learned, you cannot fully appreciate what is in store for the future. I believe that EIM has found the balance between hindsight and insight, paving the way for a vibrant future and continued success. Thanks to everyone for a great ten years!

Stare at the illusion below and you’ll eventually see spots that aren’t really there. Once you understand this illusion, you will anticipate seeing the spots the next time you look. Similarly, EIM’s decades-long history and shared experiences position it to effectively anticipate, understand and quickly respond to situational events.

Scott K. Goodell President and Chief Executive Officer

3

20/20 VISION

INSIGHT

From Carter Reid, Chairman of the Board Insight, gleaned from history, is a very powerful tool. It offers a mental vision that moves us beyond the obvious or familiar, generating original perspectives that lead us to new paths, new ways of thinking and innovative solutions. 2019 was a year in which EIM capitalized on experience, not only meeting key challenges but positioning itself for ongoing future success. Key changes in 2019 included: (1) succession planning as EIM transitioned a number of leadership roles within the organization; (2) continuing to meet Member Company risk management needs amidst hardening casualty and property insurance markets; and (3) maintaining EIM’s financial strength and stability. Succession Planning Perhaps the most significant change for EIM in 2019 was the transition of the President and CEO role. In August 2019, EIM announced Scott Goodell’s retirement, planned for May 2020, and began the process of identifying and hiring his successor. After an exhaustive search that produced a number of highly-qualified candidates, EIM selected Tommy Bolton, EIM’s Vice President - Chief Financial Officer, to succeed Scott. Not only was the EIM Board pleased with the transition process, it was even more pleased that the company’s internal succession planning efforts over the years well-positioned Tommy to assume the leadership role at EIM. As a result of Tommy’s new role, a similar search was undertaken to fill EIM’s Vice President - CFO position. After considering a number of outstanding candidates, the

Do you see black arrows going up or white arrows going down? EIM considers all factors within and outside the energy industry as it guides its members.

4

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

INSIGHT

Board appointed Jeff Tkacz, Energy Captive Management’s Controller, as EIM’s new Vice President - CFO. Jeff’s extensive mutual insurance background and strong working relationship with Tommy make him the ideal candidate to assume the CFO role. In addition to changes at EIM, the Board has also undergone transitions in 2019. Ed Holland, retired president and CEO of Southern Company’s Mississippi Power Company, completed his Board term in May, 2019. Ed was a Board member from 2010 through 2019, serving as chairman from 2010-2012. Ed was a steadying influence whose insights and experience will be missed. EIM added Dave Meador, Vice Chairman and Chief Administrative Officer of DTE Energy, to the Board in August 2019. We look forward to working with Dave in the coming years. Additionally, on behalf of the Board, a special thanks to Scott Goodell for an extraordinary ten years of leadership, wishing him and MaryAnn the very best.

Do you see movement? History has shown that the energy industry has and will continue to undergo constant change. Are you seeing the subtle shifts and changes to anticipate the future?

Meeting Member Company Needs

In addition to changes on the personnel front, history has shown that the energy industry has and will continue to undergo constant change. It is incumbent upon EIM to anticipate and meet Member Company evolving risk management needs. This was particularly evident in 2019 where, in response to a hardening casualty market and reduced capacity, EIM partnered with its mutual peers to provide additional excess General Liability capacity to members. More than 20 members bound limits excess of EIM’s traditional $100 million in GL capacity, ranging up to as much as $50 million in added limits, as they sought to build a “mutual tower” of coverage in excess of $200 million with an ultimate goal to expand this closer to $300 million.

5

20/20 VISION

INSIGHT

Similar dynamics impacted EIM’s Directors and Officers and Property portfolios. EIM added almost 40 pieces of new business generating more than $10 million in additional premium, making 2019 the highest generating new business year in EIM’s history. Expectations are that this demand for mutual capacity will continue into 2020. In addition to addressing emerging risk management needs, EIM also paid more than $350 million in claims during 2019, bringing inception to date claim payments to almost $3 billion. EIM also established gross indemnity reserves of more than $380 million, contributing to a 2019 net loss ratio of 137%. While losses were more than offset by EIM’s 12.4% return on its $1.7 billion investment portfolio, EIM will need to closely monitor claim frequency to determine whether 2019 claim activity simply reflects the volatility inherent in an excess of loss casualty portfolio or represents a “new normal” in loss activity. Financial Strength and Stability History has taught EIM that financial strength and stability are essential to meet Member Company excess insurance needs. Without sufficient capital, EIM cannot respond meaningfully to emerging risks in the energy industry, claims inflation or insurance market conditions. With this in mind, EIM has focused on balancing its capital needs against its desire to continue providing annual distributions to members. Given the steady increase in surplus over the last decade, available capital has grown

How perceptive are you and what are your insights? Are you able to see multiple trends impacting the energy industry simultaneously? In the image above, perhaps you are able to see both the dimensional cubes and the flat pinwheel flower shape.

6

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

INSIGHT

correspondingly, allowing EIM to consistently increase the annual distribution and, in 2018, introduce a supplemental distribution, which was again approved in 2019 as EIM returned $100 million to its members. An unprecedented ten-year bull market in the U.S. has helped EIM acheive admirable surplus growth. However, recent investment market volatility suggests that this run may be slowing and, perhaps, poised for a retrenchment. If that is the case, it will be imperative that EIM position its capital to protect against a market downturn, while continuing to provide much needed capacity to members. EIM has done a commendable job of translating more than three decades of experience into information. That information has then been transformed into insight which helps define our vision of the future. 2019 stands as proof that EIM learned valuable lessons from the past and put this newfound knowledge to good use, enabling the company to prosper even in a more volatile, changing market.

Do you sense the vibrations in the image below? With trained vision, your highly tuned awareness of vibrations within the energy industry will give you greater insight into the future. EIM translates more than three decades of experience into information. That information has then been transformed into insight which helps define our vision of the future.

Carter M. Reid Chairman of the Board

7

20/20 VISION

FORESIGHT

From Tommy Bolton, Vice President and Chief Financial Officer Foresight is not really about predicting the future, it’s about minimizing surprise. The best way to keep something bad from happening is to envision it well ahead of time and make plans to avoid or reduce its impact. This means exercising foresight to anticipate and respond to even the most extreme circumstances. Whether it involved great successes or startling challenges, EIM has taken the insights drawn from our past experiences to better forecast, plan for and execute strategies in anticipation of future events. EIM’s strategic plan, encompassing 2020-2022, builds on many of the lessons learned over EIM’s 34-year history. The plan revolves around the Member Experience and is driven by four major goals: Protecting the Core , Engaging Progress , Relationships and Our People. Member Experience represents the successful culmination of EIM’s four key goals and translates into Member Company interaction that is transparent, responsive, and mutual in all respects. A successful Member Experience creates a level of trust, confidence and loyalty that sustains and grows the EIM Member Relationship. Collectively, the strategic plan’s four major goals position EIM and its members to meet emerging challenges while maintaining a “Member-First” focus. At its essence, Protecting the Core focuses on sustaining EIM’s financial strength, effectively managing risk (both internal and external), and responding to members’ underwriting and claims administration needs. Engaging Progress embodies the use of technology to better position EIM to identify, design and deliver essential excess of loss coverages to our members and to respond meaningfully to loss occurrences and claim trends.

As the world transforms, so do energy needs and solutions. Like the figure above, sometimes transformations are subtle and gradual, yet extreme. By focusing on the subtleties of change, EIM is better able to work hand-in- hand with members as they adapt in their day-to-day operations.

8

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

FORESIGHT

Technology includes assessments such as data analytics, exposure modeling and capital adequacy analysis. By focusing on evolving technology, EIM can not only operate more cost efficiently and effectively but is better positioned to work hand-in-hand with members as they adopt advanced technology in their day-to-day operations. The goal of Relationships , while primarily focused on EIM and its Member Companies, expands to the many business partners interacting with EIM on a daily basis, from brokers to accountants to actuaries, as well as EIM’s mutual insurance company peers. Building strong working relationships enables EIM to better identify and assess strategic alternatives, as well as deliver quality solutions to members. Equally important is EIM’s dedication to its staff, the focus of the Our People goal. The highest level of professionalism, continuing education, diversity and inclusion, and succession planning will all receive attention in the coming years as EIM continues to build on the strength of the EIM, EIS and ECM staff. Underpinning these plan goals will be specific areas of focus that include: Surplus: Available surplus in excess of EIM’s risk tolerance will continue to be allocated for distributions and additional Member Risk Management needs over the next three years. As EIM expands its GL limits beyond $100 million in response to Member Company demand it will continue its quarterly dialogue with the Board to ensure that surplus remains sufficient to take on additional risk while continuing to provide annual distributions. Available surplus can be allocated back to the membership in the form of supplemental distributions. Distributions: Member Distributions are expected to range between $50-100 million over the next three years, depending on available capital.

Looking at the figure below, using depth perception, we see beyond one dimension to discern a tunnel and to focus on where the tunnel is leading. Similarly, in the world of energy risk management, when we are extremely challenged, foresight keeps us focused on where we are going no matter how many twists and turns. It takes foresight and a focus on the future to see a light at the end of the tunnel.

9

20/20 VISION

FORESIGHT

EIM remains committed to returning available capital to members but will balance this against the underwriting and claims requirements of the membership. Risk Capacity: Risk capacity, the ratio designed to determine availabilty of capital and reflect maintenance of sufficient capital and surplus to withstand a 1:200 VaR (value at risk) event while still maintaining an “A” rating from A.M. Best, is targeted at 115% to 125%. EIM closed 2019 with a risk capacity ratio of 144%, down from 168% in 2018, and expects to see risk capacity continue to trend downward toward 125% to 115% depending on Member Risk Financing needs. Net Loss Ratio: EIM’s most recent three-year average net loss ratio of 92% is in line with the company’s ongoing target of a 90% net loss ratio. The underwriting volatility exhibited in 2019 highlights the inherent variability associated with EIM’s excess of loss portfolio. EIM’s commitment to offering GL limits excess of $100 million, along with expanding property and cyber coverages, all have the potential to contribute to greater volatility and a higher loss ratio. Net Expense Ratio: EIM’s expects its expense ratio to remain at 7-9% for the foreseeable future, reflecting low overhead and an ongoing commitment to operational efficiency. Enterprise Risk Management (ERM): The company will continue to quarterly track the almost two dozen metrics that address operational, financial, underwriting and strategic risks, ensuring that each of these focus areas remain within EIM’s stated risk tolerances. Investment Return: EIM will continue to target a 4% annual return on its $1.7 billion investment portfolio. However, investment guidelines, reviewed quarterly by the Board’s investment committee, will be adjusted as needed to ensure a prudent allocation of EIM’s invested assets with a focus on protection against downside risk. Data Analytics: We will use data tools to enhance EIM’s ability to gather and analyze data relating to underwriting risk as well as emerging claim trends. Moreover, EIM will work with members to analyze manuscripted forms of coverage, particularly through EIS, that provide tailored solutions for specific or unique risks.

Distracted by background noise? Do the red lines appear crooked to you?

10

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

FORESIGHT

Communication and Feedback: EIM will continue to work closely with risk managers and the Insurance Advisory Committee (IAC) to stay abreast of emerging risks and to anticipate new product or coverage needs. Communication will include quarterly IAC meetings, ongoing Member-focused “Mutual Advantage” meetings, quarterly publication of the Members Report, and Claims meetings outlined at the February 2020 Risk Managers Information Meeting that are designed to ensure an open and continuous dialogue with members regarding pending claims and emerging claim trends. The challenge for EIM and its members is to infuse hindsight with insight and turn that informed vision into a forward-thinking view of the world. EIM’s updated three-year Strategic Plan is designed to do just that and, with the collective efforts of members, EIM staff and its business partners, well-positions us to meet tomorrow’s challenges. As I am writing this, the world is going through an unprecedented time in history with regard to the COVID-19 pandemic. Jobless claims are at an all time high, stock markets have plunged, restaurants are closed and terms like “social distancing” and “shelter-in-place” are mainstream. EIM has well positioned itself over the last ten years to not only weather this storm financially, but through strong governance, technology, personnel skill sets and a solid membership commitment, to withstand and persevere through this crisis on all fronts. Please stay safe and know that your mutual is not only here for you, but is poised to meet the coming challenges ahead.

It's simply the background that has changed. The red lines are perfectly aligned and symmetrical. The same can be said for EIM which provides a solid unwavering foundation for its Member Companies regardless of the constant changes happening within the energy industry.

G. Thomas Bolton, III Vice President and Chief Financial Officer

11

20/20 VISION

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.

sheets as of December 31, 2019 and 2018 and the related 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. 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, 2020

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

12

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

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. 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 as of December 31, 2019 and 2018, 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.

Emphasis of Matter As discussed in Note A to the financial statements, on January 1, 2019, the Company adopted Accounting Standards Update 2016‑01, Recognition and Measurement of Financial Assets and Financial Liabilities , and also reclassified its fixed maturity security portfolio to trading. Our opinion is not modified with respect to these matters. 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 30-31 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 26, 2020

13

20/20 VISION

Energy Insurance Mutual Limited Balance Sheets (Expressed in Thousands of U.S. Dollars)

As of December 31,

As of December 31,

2019

2019

2018

2018

Assets Investments, available-for-sale Fixed maturity securities, trading Equity securities 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

$

- 992,515 420,589 241,707 4,949 1,659,760

$

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

$

$

757,436 160,581

695,969 121,310

13,586 53,675 50,000 14,160 1,049,438

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

19,774 379,649 57,922 37,434 6,811 1,445 15,113 1,728 21,120 266 1,387

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

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

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

- 1,152,971 1,152,971

186,892 948,277 1,135,169

$

$

2,202,409

Total liabilities and policyholders’ surplus

2,060,890

$

$

2,202,409

Total assets

2,060,890

See accompanying notes to financial statements.

14

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

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

Years ended December 31, 2019 2018

Years ended December 31, 2019 2018

Underwriting revenue Net premiums earned

Investment income Net realized gain on investments sold Net investment income Total investment income

145,049 57,834 202,883

32,936 47,879 80,815

$

247,111 (77,835 169,276 2,271 171,547

$

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

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 Direct and assumed losses and loss adjustment expenses

)

)

Income before policyholders’ distribution and income taxes

125,664 (100,000 (1,673

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

) )

)

Distributions to policyholders Income tax (provision) benefit Net income

$

23,991

$

Comprehensive Income Net income

414,320 (182,129 232,191 2,919 13,656 248,766

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

$

23,991

$

43,653

)

)

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

Net unrealized losses on available‑for-sale securities, net of taxes of $0 and $13,638, respectively Less: reclassification adjustment for net gains realized in net income, net of taxes of $0 and $6,916, respectively Other comprehensive loss, net of taxes

)

-

(51,303

Policy acquisition costs Administrative expenses

Total underwriting expenses

)

- -

(26,020 (77,323

)

)

(Loss) income from underwriting

(77,219

34,020

)

$

23,991

$

(33,670

Comprehensive Income (Loss)

See accompanying notes to financial statements.

15

20/20 VISION

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, 2018

$

$

1,168,839

904,624

$

264,215

)

)

Other comprehensive loss, net of taxes

(77,323

-

(77,323

Net income

43,653

43,653

-

Balance at December 31, 2018

1,135,169

948,277

186,892

)

-

Impact of adoption of ASU 2016‑01 (Note A)

180,703

(180,703

)

Net income ‑ trading portfolio election (Note A) Net income ‑ all other sources Net income ‑ total

- 17,802

6,189 17,802 23,991

(6,189 -

1,152,971

Balance at December 31, 2019

$

1,152,971

-

$

$

See accompanying notes to financial statements.

16

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

Energy Insurance Mutual Limited Statements Of Cash Flows (Expressed in Thousands of U.S. Dollars)

Years ended December 31, 2019 2018

Years ended December 31, 2019 2018

$

$

23,991

Net income Cash flows from operating activities: Add (deduct) items not affecting cash: Depreciation Amortization of bond premium or discount Net realized investment gain Net change in fair value on securities held Deferred income taxes Changes in operating assets and liabilities: Reinsurance recoverables on unpaid and paid losses Prepaid reinsurance premiums Premiums receivable Other Reserve for losses and loss adjustment expenses Unearned and advance premiums Reinsurance premiums payable and funds held for reinsurers Accounts payable and accrued expenses Due from subsidiaries Policyholder distribution payable Income taxes recoverable Net cash from operations

43,653

Cash flows from investing activities: Cost of investments purchased

)

)

(536,316 613,813 82,013

(634,199 472,566 109,021 345 (7,553 (576 (171 (60,567

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

324 1,190 (30,703 (114,346 16,025

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

4,399 (11,720 (682 (1 151,506

) )

)

) ) )

) ) ) )

)

(172,150 (4,881 (7,107 (12,438 ) ) ) )

(36,747 7,799 1,100 -

)

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

- - -

30,000 (30,000 - 52,401 8,015 60,416

)

61,467 39,271

131,998 (5,669

)

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

(40,642 60,416 19,774

)

5,946

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

$

$

) ) )

1,245 18

Supplemental disclosure of cash flow information:

- - (192,148

(11,478 )

Income taxes paid (refunded), net

1,825

$

$

)

See accompanying notes to financial statements.

17

20/20 VISION

Energy Insurance Mutual Limited Notes To Financial Statements Years ended December 31, 2019 and 2018

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. 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 of America (“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 cells’ 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 that most significantly impact their economic performance. As of December 31, 2019, EIS has assets (exclusive of assets held in MBPs) of approximately $11.6 million, policyholder’s equity of $4.2 million and net income of approximately $660,000. As of December 31, 2018, EIS had 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. 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, 2019, ECM has assets of approximately $954,000, member’s equity of $783,000 and net income of $13,000. As of December 31, 2018, ECM had assets of approximately $940,000, member’s equity of $770,000 and net income of $13,000.

18

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note A - Organization and Significant Accounting Policies (Continued)

Investments – 2019 Reclassifications and Adoption of New Accounting Standard Effective January 1, 2019, EIM elected to reclassify its fixed maturity security portfolio to trading from available‑for‑sale. The reclassification did not change the carrying value of the portfolio, but resulted in prospective reporting of fair value changes as a component of net income, as opposed to the prior treatment of reporting such changes as a component of other comprehensive income. The accumulated difference between the portfolio’s amortized cost and fair value at January 1, 2019 in the amount of $7.8 million was recognized as a realized gain, along with a reduction to accumulated other comprehensive income, net of tax. Also effective January 1, 2019, EIM adopted Accounting Standards Update (“ASU”) 2016‑01, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance requires that equity securities, with certain exceptions, be measured at fair value, with changes in fair value reported as a component of net income. The adoption did not change the carrying value of the Company’s equity security portfolio, but resulted in a reclassification of $180.7 million from accumulated other comprehensive income to Members’ Account Balance. Fixed Maturity Securities For 2019, investments in fixed maturity securities are classified as a trading portfolio and reported at fair value, with changes in fair value reported on the income statement. Prior to January 1, 2019, the Company’s fixed maturity securities were classified as available‑for‑sale and reported at fair value, with changes in fair value reported as a component of other comprehensive income. Purchase premium or discount is amortized to net investment income based on the scientific method. Equity Securities Investments in marketable equity securities are carried at fair value. For 2019, changes in fair value on securities held are reported as a component of investment

income. Prior to the adoption of ASU 2016‑01, fair value changes were reported as a component of other comprehensive income.

Alternative Investments Alternative investments include interests in shares of investment funds (“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. The Company has elected the fair value option with respect to the Funds, with all gains and losses associated with the Funds recorded 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. 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 Federal Deposit Insurance Corporation. Management does not believe these balances represent a significant credit risk to the Company.

19

20/20 VISION

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note A - Organization and Significant Accounting Policies (Continued) 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 nature of the insured exposures, 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 are 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, 2019 and 2018, 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 any related ceding commissions, to the extent deemed recoverable. 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 2019 and 2018, the Board of Directors approved the declaration of policyholder distributions in the amount of $100 million and $75 million, respectively. Subsequent Events The Company has evaluated subsequent events for disclosure and recognition through February 26, 2020, the date on which these financial statements were available to be issued.

20

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note B - Insurance Activity

Premium activity for 2019 and 2018 is summarized as follows (in Thousands of U.S. Dollars):

2019 Premiums written Change in unearned premiums Premiums earned 2018 Premiums written Change in unearned premiums Premiums earned

Direct

Assumed

Ceded

Net

280,857 (38,953 241,904

5,159 48 5,207

(82,716 4,881 (77,835

$

$

203,300 (34,024 169,276

$

$

)

)

)

$

$

$

$

)

Direct

Assumed

Ceded

Net

217,054 5,855 222,909

4,472 (601 3,871

(79,134 8,521 (70,613

$

$

$

142,392 13,775 156,167

$

)

)

$

$

$

$

)

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

2019

2018

$

$

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



695,969 (264,056 431,913



563,971 (225,579 338,392

)

)

Incurred related to: Current year Prior years Total incurred

126,600 105,591 232,191

158,000 (44,833 113,167

)

Paid related to: Current year Prior years Total paid

233 286,084 286,317 377,787 379,649 757,436

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

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

$

$

21

20/20 VISION

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note B - Insurance Activity (Continued)

During 2019, incurred losses and LAE attributable to events of prior years increased by approximately $105.6 million. The unfavorable development of prior year losses related primarily to prior accident years 2017 and 2018, which increased by approximately $107.1 million. Favorable development occurred in accident year 2016, which decreased $12.3 million. 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. 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, 2019 is as follows (in Thousands of U.S. Dollars):

IBNR Plus Expected

Cumulative Number of Reported Claims

Development on Reported Claims

Cumulative Paid

Accident Year Incurred

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total

107,341 11,565 97,646 121,508 44,411 182,232 59,243

106,521 10,725 79,786 106,890 13,483 143,574 45,963 55,505 194,978 1 757,426

820 681 15,190 4,456 (10,926 4,485 13,243 37,638 23,030

176 207 221 218 205 209 304 254 200 163

$

$

$

)

144,520 232,998 120,841 1,122,305

116,175 204,792

$

$

$

Net liabilities for unpaid losses and allocated LAE

$

366,287 379,649

Reinsurance recoverables on unpaid losses and allocated LAE

Unallocated LAE

11,500

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. 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.

Gross liability for unpaid losses and LAE

$

757,436

The following is information about incurred and cumulative paid losses and allocated LAE, net of reinsurance, total incurred‑but‑not‑reported (“IBNR”) reserves plus expected development on reported claims, net of reinsurance and the cumulative number of reported claims as of December 31, 2019 (in Thousands of U.S. Dollars, Except Number of Claims Data):

22

ENERGY INSURANCE MUTUAL - 2019 ANNUAL REPORT

Energy Insurance Mutual Limited Notes To Financial Statements (Continued)

Note B - Insurance Activity (Continued) The Company uses excess of loss reinsurance to protect against severe losses on the directors and officers, general partner, general liability and fiduciary liability books of business. After certain deductibles or retentions have been satisfied, the maximum amount that could be recoverable under the 2019 and 2018 reinsurance treaties is $240,000,000 with respect to general liability and $87,000,000 with respect to directors and officers, general partner and fiduciary liability. In 2019, the Company amended the 2018 treaty covering 61.5% of the risk to include extended reporting of claims related to certain wildfires. The reinsurers will be bound to the same coverage as above but the Company will pay additional premium in the amount of 25% of any ceded claim resulting from wildfire losses over $5,000,000 up to $25,000,000. There were two wildfire claims reported under this contract in 2019 to the reinsurers. The Company has incurred $6,150,000 related to the ceded losses. Beginning in 2003, the Company entered into a reinsurance arrangement with Nuclear Electric Insurance Limited (“NEIL”) whereby NEIL provides excess of loss reinsurance on the directors and officers and general partner book of business for 80% of $20,000,000 in excess of $30,000,000.

The property book of business is primarily reinsured by NEIL. In addition, the Company also has an arrangement with NEIL whereby its non‑nuclear property book of business is fronted by EIM. The Company writes directly and assumes certain members’ cyber liability risk. A portion of this business is ceded to NEIL. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that the reinsurer does not meet the obligations assumed under the reinsurance agreement. The reinsurance recoverable on paid and unpaid losses is substantially due from NEIL, OCIL, National Indemnity Company and various Lloyds of London syndicates, comprising 31%, 10%, 15% and 16%, respectively, of the balance at December 31, 2019. At December 31, 2018 the reinsurance recoverable on paid and unpaid losses due from NEIL, OCIL, National Indemnity Company and various Lloyds of London Syndicates comprised of 30%, 14%, 15% and 15%, respectively . The remaining balance is comprised of amounts due from various reinsurers, each not exceeding 12% of the total for 2019 and 2018.

23

20/20 VISION

Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40

Made with FlippingBook - professional solution for displaying marketing and sales documents online