ENERGY MARKET OVERVIEW

November 2011

Agenda

Overall Energy Business

Upstream (Property, Business Interruption, OEE)OffshoreOnshore

Downstream (Property, Business Interruption)

Liabilities

0

5

10

15

20

25

30

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

0

5

10

15

20

25

30

Losses excess US$1m Estimated Worldwide Premium (US$)

WELD energy losses 1990 – 2011 (excess of US$ 1m) versus estimated global energy premium incomeUS$bn

* incurred to date

US$bn

20 YEAR OVERALL LOSS/PREMIUM TOTALS

Source: Willis Energy Loss Database as at September 8 2011 (figures include both insured and uninsured losses)

NUMBER OF ENERGY INSURERS WORLD-WIDE

0

20

40

60

80

100

120

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Offshore Onshore

Source: Willis

The song remains the same - still no influx of new players or any significant withdrawals in either market

UPSTREAM

NOTABLE LOSSES…DRIVEN BY THE OFFSHORE

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 $ 15.0 MM

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?

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”

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

MAJOR UPSTREAM LOSSES ALREADY IN 2011…

Source: Willis Energy Loss Database as at August 19 2011 (figures include both insured and uninsured losses)

Type Cause CountryLand / Offshore PD USD OEE USD BI USD Total USD

MOPU Heavy weather UK Offshore 460,000,000500,000,00

0 960,000,000

Rig Capsize Mexico Offshore 230,000,000 230,000,000

MOPU Mechanical failure USA Offshore 150,000,000 150,000,000

Well Blowout Israel Offshore 100,000,000 100,000,000

Well Design/workmanship Norway Offshore 35,216,000 35,216,000

MOPU [unknown] Brazil Offshore 25,000,000 25,000,000

Pipeline Flood Algeria Land 23,000,000 23,000,000

Well Blowout Nigeria Land 22,400,000 22,400,000

Well Blowout USA Offshore 22,000,000 22,000,000

0

2

4

6

8

10

12

14

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

0

2

4

6

8

10

12

14

Offshore losses excess US$1m Estimated Worldwide Offshore Premium (US$)

WELD upstream energy losses 1990 – 2011 (excess of US$ 1m) versus estimated global offshore energy premium income

Source: Willis Energy Loss Database as at October 18 2011 (figures include both insured and uninsured losses)

US$bn

* incurred to date

US$bn

On a gross basis, 2010 is going to be to be the worst non-windstorm affected underwriting year of the last two decades

?

(to date)

OVERALL 20 YEAR UPSTREAM LOSS RECORD

BUT INCREASED CAPACITY AND CONTINUED PROFITABILITY..FOR NOW

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US$m

Source: Willis

Upstream Insurer Capacities 2000-2011 (Excluding Gulf of Mexico Windstorm)

Operating

Construction

2011 upstream capacity highest since records began

Estimated “realistic” market capacities

NO ONE’S IN THE MOOD TO WITHDRAW!

Lloyd’s upstream property/OEE incurred ratios, 1993-2010 (as at Q1 2011)

0

50

100

150

200

250

300

350

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Incurred Ratio - Upstream Property

Incurred Ratio- OEE

%

Source: Lloyd’s

(to date)

INSURERS ARE STILL MAKING MONEY –NO MATTER WHAT LLOYD’S SAYS!

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

Ike

Katrina/Rita

Reinsurance-driven soft market

SO IT CAN’T GO ON LIKE THIS….

Energy Insurer Capacities and Average Rating Levels, 1993-2011

(Excluding Gulf of Mexico Windstorm)US$m

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

0

20

40

60

80

100

120

Offshore Capacities Average Composite Percentage of 1992 rates

Estimated Average Rate Index(1992=100)

There is currently too much capacity to enable a long term change in market dynamics

Source: Willis

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…

TO CONCLUDE.. GLOBAL UPSTREAM

Hung Jury! Current factors balance each other out

‒ Growing Capacity, No WindVs‒ 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

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

CANADIAN MARKETPLACETemple (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

DOWNSTREAM

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

DOWNSTREAM OPERATING UNDERWRITING CAPACITIES, 2000-11 (EXCLUDING GULF OF MEXICO WINDSTORM)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US$m

Source: Willis

While North American Downstream market capacity remains stable, its International counterpart continues to grow

International

North America

0

1,000

2,000

3,000

4,000

5,000

6,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

0

20

40

60

80

100

120

Onshore Capacities Average Composite Percentage of 1992 rates

US$m Estimated Average Rate Index(1992=100)

Source: Willis

DOWNSTREAM CAPACITIES AND AVERAGE RATING LEVELS, 1993-2011

LLOYD’S DOWNSTREAM PROPERTY INCURRED RATIOS, 1993-2010(AS AT Q1 2011)

0

50

100

150

200

250

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

%

Source: Lloyd’s

(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

Ike

Katrina/Rita

Reinsurance-driven soft market

BUT ALREADY IN 2011…

Source: Willis Energy Loss Database as at September 9 2011 (figures include both insured and uninsured losses)

Type Cause Location Country PD USD BI USD Total USD

Oil sands Fire/lightning/explosion Alberta Canada 710,000,000 600,000,000 1,310,000,000

Chemical Earthquake Kashima Japan 11,000,000 162,600,000 173,600,000

Gas plant Windstorm Oklahoma USA 50,000,000 100,000,000 150,000,000

Petrochem Fire/lightning/explosion Louisiana USA 20,000,000 108,000,000 128,000,000

Chemical Earthquake Soma Japan 36,000,000 35,000,000 71,000,000

Gas plant Fire/lightning/explosion Texas USA 50,000,000 50,000,000

Refinery Ice/snow/freeze Texas USA 7,300,000 36,000,000 43,300,000

Gas plant Mechanical failure Texas USA 16,000,000 13,000,000 29,000,000

Chemical Mechanical failure Louisiana USA 25,000,000 25,000,000

Petrochem Supply interruption Bahia Brazil 25,000,000 25,000,000

Chemical Fire/lightning/explosionSouth Carolina USA 25,000,000 25,000,000

…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

0

1

2

3

4

5

6

7

8

9

10

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

0

1

2

3

4

5

6

7

8

9

10

Losses excess US$1m Estimated Worldwide Premium (US$)

WELD downstream energy losses 1990 – 2011 (excess of US$ 1m) versus estimated global downstream premium income

US$bn

* incurred to date

US$bn

DESPITE THE LOSSES, OVERALL PROFIT IN 2010 – BUT 2011 NOT LOOKING SO GOOD

Source: Willis Energy Loss Database as at September 9 2011 (figures include both insured and uninsured losses)

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

2012 OUTLOOKThree 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

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

CASUALTY

CAPACITY BY GEOGRAPHY

0

500

1,000

1,500

2,000

2,500

BermudaUSD 800m

Lloyd’sUSD 500m

London CompaniesUSD 200-300m

EuropeUSD 400m

North AmericaUSD 300m?

Down - over USD100mdisappeared in last 18 months

Most likely on Claims Made form,subject to REC exclusionand P&I clash

On varying forms and wary ofDoubling up capacity usedelsewhere (clash)

But most shy away from North America, particularly USA risk – Munich Re making noises about getting back into the NA Liability arena

Plus more “energy” capacity

USD m

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

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

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.

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?

Tom Bolt – Managing Director of Lloyd’s Performance Management Directorate (PMD)

A BOLT FROM THE BLUE…

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.

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

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

ENERGY MARKET OVERVIEWNovember 2011