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ENERGY MARKET OVERVIEW

Comprehensive analysis of energy industry trends worldwide focusing on losses, premiums, insurers, and market dynamics. Includes notable losses, insurer capacities, profitability insights, and future market outlook.

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ENERGY MARKET OVERVIEW

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  1. ENERGY MARKET OVERVIEW November 2011

  2. Agenda Overall Energy Business Upstream (Property, Business Interruption, OEE) Offshore Onshore Downstream (Property, Business Interruption) Liabilities

  3. 20 YEAR OVERALL LOSS/PREMIUM TOTALS WELD energy losses 1990 – 2011 (excess of US$ 1m) versus estimated global energy premium income US$bn US$bn * incurred to date Source: Willis Energy Loss Database as at September 8 2011 (figures include both insured and uninsured losses)

  4. NUMBER OF ENERGY INSURERS WORLD-WIDE The song remains the same - still no influx of new players or any significant withdrawals in either market Source: Willis

  5. UPSTREAM

  6. NOTABLE LOSSES…DRIVEN BY THE OFFSHORE

  7. NOTABLE LOSS 1: MACONDO Company Available Insurance Coverage (USD) PD/OEE Liability (Est) BP $ 0.0 $ 0.0 Anadarko Petroleum $177.5 MM $ 0.0 Mitsui Oil Exploration $30.0 MM $ 15.0MM Transocean $700.0 MM $950.0 MM Halliburton $600.0 MM Cameron International $500.0 MM Willis EnergyLoss Database, March 28 2011: $2,560 MM 65% of PD/OEE bill uninsured?

  8. NOTABLE LOSS 2 – GRYPHON A • Significant damage to riser and subsea systems, after loss of dynamic positioning in heavy storm • Vessel likely to be shut down for up to a year • Total insurance market bill – USD 800m? • Placement written by vast majority of the market • Attempts by market to reinstate “False equilibrium”

  9. NOTABLE LOSS NO 3 – JAPAN EARTHQUAKE • Like Macondo – In the global spotlight – Management focus • Led to expectations that reinsurance market conditions would be significantly impacted

  10. MAJOR UPSTREAM LOSSES ALREADY IN 2011… Source: Willis Energy Loss Database as at August 19 2011 (figures include both insured and uninsured losses)

  11. OVERALL 20 YEAR UPSTREAM LOSS RECORD WELD upstream energy losses 1990 – 2011 (excess of US$ 1m) versus estimated global offshore energy premium income US$bn US$bn ? (to date) * incurred to date On a gross basis, 2010 is going to be to be the worst non-windstorm affected underwriting year of the last two decades Source: Willis Energy Loss Database as at October 18 2011 (figures include both insured and uninsured losses)

  12. BUT INCREASED CAPACITY AND CONTINUED PROFITABILITY..FOR NOW

  13. NO ONE’S IN THE MOOD TO WITHDRAW! Upstream Insurer Capacities 2000-2011 (Excluding Gulf of Mexico Windstorm) US$m 2011 upstream capacity highest since records began Operating Construction Estimated “realistic” market capacities Source: Willis

  14. INSURERS ARE STILL MAKING MONEY – NO MATTER WHAT LLOYD’S SAYS! Lloyd’s upstream property/OEE incurred ratios, 1993-2010 (as at Q1 2011) % Katrina/Rita Reinsurance-driven soft market Ike (to date) Generally accepted level at which the portfolio remains profitable Despite hurricane Ike in 2008 – and Macondo figures to come - Lloyd’s upstream portfolio still looked good at Q 2 2011 Source: Lloyd’s

  15. SO IT CAN’T GO ON LIKE THIS…. Energy Insurer Capacities and Average Rating Levels, 1993-2011(Excluding Gulf of Mexico Windstorm) Estimated Average Rate Index (1992=100) US$m There is currently too much capacity to enable a long term change in market dynamics Source: Willis

  16. EARLY AUTUMN 2011: A MARKET IN LIMBO • Underlying softening dynamic undermined by: • Natural catastrophe loss record • Gryphon A – significant loss caused by simple moorings break • Potential for more expensive reinsurance market in 2012 • Increased management pressure • “Market within a market” post-Macondo for: • Stand alone OEE • Marine Liabilities • Much tighter market consensus: • Apprehension as to reinsurance market conditions in 2012 • Focus on FPSO BI • But still possible that competition could reassert itself later in the year…

  17. TO CONCLUDE.. GLOBAL UPSTREAM • Hung Jury! • Current factors balance each other out • Growing Capacity, No Wind Vs • Cumulative losses, Management pressure, Reinsurance renewals • No sign of a reduction in market capacity • BUT….. • We believe there is light at the end of the tunnel • Baden Baden conference in October declared no widespread reinsurance hardening • Less punitive RI costs at Q1 may well accelerate inevitable softening

  18. UPSTREAM ONSHORE - CANADA • Canada remains an attractive region with minimal losses • Concerns with Labour shortages and operator experience • Plenty of Capacity for Property and Control of Well

  19. CANADIAN MARKETPLACE • Temple (Munich Re) open and office in Calgary • Darlynn Courage writing excess casualty.  • Ian Power  - Loss Control Engineer • QBE Canada • Val Jobson as Director of underwriting for Canada • Sovereign General hired Patti Naigle & Melissa Eldridge for Energy Property.  Capacity of up to $50M.  • GCAN bought by RSA • Mike Marino - Energy Property • Bruce Mosher - Liabilities • Jan Schebek retired • Chris Short and Liz Penney • Intact purchased Axa – some impact potentially on Smaller Oil & Gas • Zurich Global Energy • Property capacity increased from $100M in 2010 to $150M in 2011 • Casualty capacity reduced from $75M to $50M • Jeff Damberger for mid market Energy in Calgary. • Chartis • Barbara Amodeo promoted to Regional VP • Mark Johnson is now VP Energy Practice Leader • XL • Mike Baxter as VP NA Property

  20. DOWNSTREAM

  21. EARLY 2011 MARKET MOVEMENTS • No significant new entrants in the commercial market, however… • 200 + MM in new theoretical capacity from existing energy markets: • XL – USD 50MM to USD100MM • Zurich – USD 100MM to USD 150MM • Allianz – USD150MM to USD200MM • Chartis – USD200MM to USD250MM • SCOR – USD 130MM to USD 165MM • Some Withdrawals from Sector: • HCC - $50MM • Tokio - $50MM • Omega - $25MM • Antares - $25MM • Insurer Mergers: • Torus consolidated with Glacier Re • Partner Re takeover of Paris Re

  22. DOWNSTREAM OPERATING UNDERWRITING CAPACITIES, 2000-11 (EXCLUDING GULF OF MEXICO WINDSTORM) US$m While North American Downstream market capacity remains stable, its International counterpart continues to grow International North America Source: Willis

  23. DOWNSTREAM CAPACITIES AND AVERAGE RATING LEVELS, 1993-2011 Estimated Average Rate Index (1992=100) US$m Source: Willis

  24. LLOYD’SDOWNSTREAMPROPERTY INCURRED RATIOS, 1993-2010(AS AT Q1 2011) % Reinsurance-driven soft market Katrina/Rita Ike (to date) Generally accepted level at which the portfolio remains profitable Despite increasingly soft market conditions, Lloyd’s downstream property portfolio continues to look profitable Source: Lloyd’s

  25. BUT ALREADY IN 2011… …not to mention the series of natural disasters - Swiss Re's sigma indicate that insured losses from catastrophes in the first half of 2011 reached USD70bn Source: Willis Energy Loss Database as at September 9 2011 (figures include both insured and uninsured losses)

  26. DESPITE THE LOSSES, OVERALL PROFIT IN 2010 – BUT 2011 NOT LOOKING SO GOOD WELD downstream energy losses 1990 – 2011 (excess of US$ 1m) versus estimated global downstream premium income US$bn US$bn * incurred to date Source: Willis Energy Loss Database as at September 9 2011 (figures include both insured and uninsured losses)

  27. MID 2011: UNDERLYING SOFTENING DYNAMIC HALTED • Natural catastrophe loss record • Oil sands upgrader loss: • Caused market to pause for thought • Second such loss within the last 6 years • 70% of recent losses over USD10m consists of BI losses • Potential for more expensive reinsurance market in 2012? • Increased management pressure Provides a rationale for insurers to attempt instigation of a fundamental change in market conditions

  28. 2012 OUTLOOK • Three basic scenarios may develop in Q4 2011: • No further significant losses: • No capacity decides to withdraw • Insurers forced to compete once more to maintain or enhance market share • Further losses materialise: • Further increase in reinsurance rates • Management concludes class is unsustainable (ie Upgraders) • Significant capacity withdrawals and the onset of a truly hard market • A compromise: • Existing market continues to participate • Reduced overall lines and capacities to allow for increased reinsurance costs • Result would be decreased capacity for 2012 but effect of market upswing will be much more limited

  29. WHAT SHOULD BUYERS BE THINKING ABOUT? • Anticipate underwriters’ issues – which may change quickly: • Impact of increased operating margins on deductibles and limits • Impact of “new” models • Events that may move the bar • Provide quality information: • Physical Damage • Time element – direct and contingent • Catastrophe exposures • Status of recommendations • Understand and communicate the true nature of “long term” relationships internally: • Market cycles • Clearly define what constitutes a successful placement: • Set priorities • Retained risk • Coverage • Cost - Premium

  30. CASUALTY

  31. CAPACITY BY GEOGRAPHY USD m North America USD 300m? Plus more “energy” capacity Europe USD 400m But most shy away from North America, particularly USA risk – Munich Re making noises about getting back into the NA Liability arena On varying forms and wary of Doubling up capacity usedelsewhere (clash) London Companies USD 200-300m Lloyd’s USD 500m Most likely on Claims Made form, subject to REC exclusion and P&I clash Bermuda USD 800m Down - over USD100mdisappeared in last 18 months

  32. 2011 – NO MARKET MOVING LOSSES • Losses – nothing much in 2011…. • However… • Older losses that impact 2011 and 2012 renewals…. • Enbridge – pipelines, pollution • Macondo – deep water, GOM, pollution structures, JV, and other exposures • Buncefield – JV wordings • Pacific Gas & Electric – gas pipelines, High Consequence Areas (HCA) • Sempra and Slave Lake – forest fires

  33. IT NOT ALL IT’S FRACKED UP TO BE! Hollywood brings Fracking to the big screen • Risk of Loss: pollution, earthquake, loss of enjoyment/nuisance • Coverage issues: fortuity, attachment, number of occurrences • Too many social issues, but increased employment, ascending land values, and tax revenues cause politicians to smile. • Check out this website for a great primer video on hydraulic fracturing: http://marcellus.psu.edu/resources/drilling/index.php

  34. IT’S 2011 - DO YOU KNOW WHERE YOUR PIPELINES ARE? • Major losses have focused liability insurers on integrity issues: • Enbridge - $500mm+, operational issues, pipeline integrity • PG&E – High Consequence Areas (HCA) • Scrutiny on: • Age • Line Pack • Integrity • Risk mitigation measures • HCA and water crossings, environmentally sensitive areas.

  35. LIMITS – WHO’S INTERESTED? • Macondo, Buncefield focuses market attention on JV clauses and involved Insureds • Lloyds, Bermuda is pushing back on “For Interest” limits, want pure scale to “interest” • Interest? • Ownership • In the liability of the JV • Manuscript • Insurers try to determine aggregation, including overall exposure to individual insureds • How about contractors and other interested parties?

  36. A BOLT FROM THE BLUE… Tom Bolt – Managing Director of Lloyd’s Performance Management Directorate (PMD)

  37. WHAT WILL BE THE EFFECT OF THE RECENT LLOYD’S ANNOUNCEMENT? • Latest letter from Lloyd’s Director of Performance Management Tom Bolt: • Pollution: All offshore pollution business, including the Seepage and Pollution element in Operators Extra Expense (OEE) risks, Offshore Voluntary Pollution Liability Agreement (OPOL) risks and Oil Pollution Act/Certificates of Financial Responsibility (OPA/COFRs), is to be written into the liability policy/account. • Sudden and Accidental Pollution: Pollution cover is to be written on a sudden and accidental (time element) basis and not on a gradual basis. • Contingent OEE for drilling contractors: Syndicates should not write contractors contingent OEE in the liability policies and should instead address contingent OEE requests in the OEE portfolio. • Removal of Wreck/Debris: Syndicates should not write ‘First Party’ Removal of Wreck/Debris in the liability policy unless coverage provided for removal of wreck is limited to legal liability at law. Where statutory removal of first party property is given, consideration of this exposure should be accounted for in the pricing methodology and included in aggregations arising out of catastrophe events. • Limits: Syndicates should write 100% limits scaled for interests, subject to a joint venture clause. Policies should have an overall each accident, and in the annual aggregate, limit for the coverages provided, and all policies should be written on a CSL (combined single limit) basis for all Insureds, Named Insureds and Additional Insureds combined. • Legal Costs: Limits should be inclusive of legal costs.

  38. WHAT TO EXPECT • Expect UPWARD pressure on premiums and rates • Differentiation is not about price, it is about coverage • Insureds who commit senior operations individuals to the marketing process can create differentiation: • What makes you “really good” at what you do? Don’t compare! • Pipeline integrity • Fracking • Vegetation Management • You may not be saving money this year, make sure you get the coverage • Form coordination – make sure policy triggers align • Pay attention to the benefits of admitted coverage in certain jurisdictions

  39. CONCLUSION – ENERGY MARKETS • In summary: • Market is in a state of flux and the answer is, it depends? • - Assets and Business Segment Insured • Catastrophe exposure • Clients losses and Segment losses • - Line of Coverage • - Capacity required • - Relationship with the markets

  40. ENERGY MARKET OVERVIEW November 2011

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