is the world becoming a riskier place? focus on energy insurance markets november 9, 2011 robert p....

Is the World Becoming a Riskier Place?

Focus On Energy Insurance Markets

November 9, 2011

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Presentation Outline

Review of Recent Events What in the World is Going On? A Review of Recent Trends in Uncertainty, Risk and Fear Energy and Insurance Market Issues

Economic Uncertainty and Volatility Global Overview & Outlook Advanced, Emerging and European Perspectives

The Unfortunate Nexus: Opportunity, Risk & Instability Growth Political Risk Arab Spring & Energy Markets

Catastrophe Loss Developments & Trends Global, Europe, US

Global Energy Market Overview Supply (Production), Demand (Consumption) and Rate Considerations The Post-Deepwater Horizon World

Summary Q&A

3

What in the World Is Going On?

Is the World Becoming a Riskier Place?

What Are the Implications for Insurance and Risk Management?

4

Uncertainty, Risk and Fear Abound

ECONOMIC & POLITICAL CONCERNS Global Economic Slowdown Echoes of the Financial Crisis European Sovereign Debt, Bank & Currency Crises Collapse of Major Financial Institutions US Debt and Budget Crisis, S&P Downgrade & Austerity Housing Crisis Persistently High Unemployment Inflation/Deflation Runaway Energy & Commodity Prices Political Upheaval in the Middle East Regulation ChinaNow the #2 Economy in the WorldCATASTROPHIC LOSS Japan, New Zealand, Turkey, Haiti, Chile Earthquakes Nuclear Fears US: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms Manmade Disasters (e.g., Deepwater Horizon) Cyber Attacks Resurgent Terrorism Risk (e.g., Bin Laden, Gadhafi Killings)

Are “Black Swans”

everywhere or does it just seem that way?

5

What is Going On in the US and Global Financial Markets?

1. Need for a Binding, Comprehensive Solution to Europe’s Debt Problems Greek Tragedy: Debt AgreementReferendumNo ReferendumPM Resigns

Attention Quickly Turned to ItalyBudget Reforms Pass, Berlusconi Resigns

Financial “Firewall” around Italy, Spain, Ireland, Portugal may be too small

Difficulties in managing multinational institutions and economic policies

ECB and individual member EU countries not all on same page

Solution: Unified approach on banks, bailout fund; Monetary easing

OUTCOME: Eurozone countries will eventually stumble into a resolution

2. Economic Slowdown in Europe and Emerging Markets China, other economies less able to stimulate global economy than in 2008

OUTCOME: Mild Recession in Eurozone in 2012

3. Realization that US Economic Growth Will Remain Lackluster Q1 GDP just 0.4%; Q2 only 1.3%; Q3 still a subpar 2.5%; Acceleration unlikely

Job growth has been anemic for months and unemployment remains high at 9.0%

Markets remain extremely volatile and jittery; Housing/Debt hangover

OUTCOME: Tepid growth in the 2% - 2.5% range in 2012; Unemployment 8.5% - 9%

4. View that Washington is Dysfunctional and “Rudderless” Lack of coherent, consistent medium and long term plan to deal with basic structural issues in the US economy

(debt, taxes, employment, regulation, etc.)

No confidence that 2012 political cycle will resolve these problems

6

Déjà Vu? Lehman II? Is This 2008 All Over Again?

Why Today is Not 2008 All Over Again The Situation Today is Very, Very Different from 2008 Credit Markets in US Are Not Seizing; Some Contraction in Europe Bank Balance Sheets Are in Much Stronger Shape

Capital up, charge offs falling

We Will Not Experience the Mega-Collapses/Near Collapses Like in 2008 No repeat of Lehman, AIG, Washington Mutual, Wachovia…

MF Global is not a “Systemically Important Financial Institution”

Series of European bank failures likely: Dexia, Proton…; Big Bank Writedowns

Some Additional Regulatory Controls Are Now Place

What Would Be Helpful Now? Solution to European Bank/Sovereign Debt Problem (Part Way There?) Long-Term Fiscal and Monetary Policy Direction US Fed on Aug. 9 stated rates would remain low “at least through mid-2013” On Nov. 4, ECB’s Lower Its Key Rate to 1.25% (1st meeting w/ Mario Draghi) Both Europe and US Need to Address Excessive Spending and Entitlement Timebombs

7

Global Economic Growth Outlook: Volatility Remains

Growth is Much Greater in Developing World as Is Growth in Energy

Demand; These Areas Are Riskier to Operate In

8

World Economic Outlook: 2009-2012F

Sources: IMF, World Economic Outlook, Sept. 2011; Insurance Information Institute.

5.0

%

3.0

%

2.8

%

1.7

% 3.9

%

4.5

%

1.9

%

1.8

%

1.1

% 2.3

%

-0.5%

-3.4%

2.7%

-2.6%-4.1%

-6.3%

7.3

%

4.3

%

1.6

% 6.4

%

1.5

%

1.6

%

-0.5

%

6.5

%-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

World Output AdvancedEconomies

EmergingEconomies

United States Euro Area Japan

2009 2010 2011F 2012F

Outlook uncertain: The world economy continues to recover from the global economics, but at a weakening pace and at different speeds in

different parts of the world, according to the IMF. A clear set of “winners” has emerged with direct implications for all industries and

their insurers.

IMF says growth in emerging and developing economies will outpace advanced ones in 2011/12.

March 11 Japan

quake hurt 2011 growth

9

Real GDP Growth Forecasts: US and Major European Economies: 2011 - 2012

Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.

1.7%

0.9%

1.6%

2.9%

1.6%

0.6%

0.6%

1.9% 2.

3%

1.8%

1.1%

0.4%

0.9%

0.8%

-0.3

%

0.1%

1.1% 1.2%

-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

US UK EuroArea

Germany France Italy Spain Switz. Belgium

2011F 2012F

Growth projections for 2011 and 2012 have been revised downward as austerity measures take effect and concerns related to sovereign debt

worsen

10

Real GDP Growth Forecasts for Advanced Economies: 2011 - 2012

1.7%

1.0%

3.0%

1.6%

-0.6

%

2.2%

2.0%

1.4%

1.4%

0.9%

2.4%

2.2%

-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

UnitedStates

UnitedKingdom

Germany France Japan Canada

2011F 2012F

Growth projections for 2011 and 2012 have been revised downward as austerity measures take effect and concerns related to sovereign debt

worsen

Sources: The Economist, November 5, 2011; Insurance Information Institute.

11

Real GDP Growth Forecasts for 2011:US and Major European Economies

Sources: The Economist, November 5, 2011; Insurance Information Institute.

1.7%

0.9% 1.

6% 3.0%

2.3%

1.6% 2.

9%

-7.5

%

0.6% 1.

7%

0.6% 2.

0%

1.4%

1.4%

0.7%

4.0% 4.3%

4.2%

1.9%

-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%

US UK

Euro

Are

a

Aust

ria

Belg

ium

Fran

ce

Ger

man

y

Gre

ece

Italy

Neth

erla

nds

Spai

n

Czec

h Re

p.

Denm

ark

Hung

ary

Norw

ay

Pola

nd

Russ

ia

Swed

en

Switz

erla

nd

Growth projections for 2011 have been revised downward as austerity measures take effect and concerns related to sovereign debt worsen

12

9.0%

7.5%

4.0%

3.6% 3.8%

8.4%

7.9%

4.0%

3.9%

3.3%

0%

4%

8%

12%

China India Russia Brazil Mexico

2011F 2012F

Growth in emerging and developing economies will greatly outpace advanced country growth in 2011/12. This will accelerate the growth of insurance

exposures in emerging markets relative to the U.S., W. Europe and Japan.

Real GDP Growth Forecasts for Key Developing Economies: 2011 - 2012


Growth in China and India remain high, though China is “tapping on the breaks”

to slow inflation. These markets are promising but foreign firms must

contend with many barriers to entry.

13

3.8%

4.6%

5.3%

1.8%

3.8% 4.

2% 4.5%

3.5%

0%

4%

8%

South Korea Taiwan Hong Kong Australia

2011F 2012F

Growth in industrialized Asian economies will greatly outpace much of the rest of the world in 2011/12. This will accelerate the growth of energy demand and insurance exposures in emerging markets relative to the U.S., W. Europe

and Japan.

Real GDP Growth Forecasts for Other Key Trading Economies: 2011 - 2012


Asia/Pacific trading nations should show strong growth in 2011/12

compared to Europe and the US

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook Update, Sept. 2011; Ins. Info. Institute.

Emerging economies (led by China) are expected to grow by 6.4% in 2011 and

6.1% in 2012.

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2012F

Advanced economies are expected to grow at a sluggish pace of 1.6% in

both 2011 and 1.9% in 2012.

World output is forecast to grow by 4.0% in 2011 and 4.0% in 2011,

following growth of 3.0% in 2010 and a 0.6% drop in 2009.

GDP Growth (%)

15

Relative Shares of Global Output,Advanced vs. Developing Economies, 2009

Developing Economies

47.1%

Advanced Economies

52.9%

Source: EDC Economics, “The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf

The gap is closing quickly. China became the world’s second largest economy in 2010 and before long

the developing world’s share of GDP will exceed that of advanced

economies.

http://www.edc.ca/english/docs/gef_e.pdf

16

Current Real GDP Growth vs. Pre-Crisis Average (2000-2007 vs. 2011F-2012F*)

*Percentage point difference between compound annual rates of change 2000-2007 vs. forecasts for 2011-2012.

Source: IMF, World Economic Outlook, September 2011; Insurance Information Institute.

Latin and South American markets are

in general growing more strongly than prior to the crisis

The US, Europe and Eurasia have seen

significant slowdowns

17

Current Real GDP Growth vs. Pre-Crisis Average (2000-2007 vs. 2011F-2012F*)

*Percentage point difference between compound annual rates of change 2000-2007 vs. forecasts for 2011-2012.

Source: IMF, World Economic Outlook, September 2011; Insurance Information Institute.

Growth in much of Europe today is about 2 pts.

Lower than pre-crisis

18

The Unfortunate Nexus: Opportunity, Risk & Instability

Most of the Global Economy’s Future Gains Will be Fraught with Much

Greater Risk and Uncertainty than in the Past

19

Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010

Source: Swiss Re, sigma, No. 2/2010.

Nonlife premium growth in emerging markets has

exceeded that of industrialized countries in

27 of the past 31 years, including the entirety of the

global financial crisis..

Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as

well as a lack of consistent cyclicality

Average: 1980-2010

Industrialized Countries: 3.8%

Emerging Markets: 9.2%

Overall Total: 4.2%

20

Nonlife Real Premium Growth Ratesby Region: 2000-2009 and 2010


Every emerging

market region except Central

and Eastern Europe

experienced growth during the financial

crisis and into 2010

Many emerging market economies continued to grow during the global

financial crisis and continued to benefit from foreign direct investment

21

Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2009

Sources: NAIC; Insurance Information Institute research.

Although premium growth throughout the industrialized world was negative in 2009, its share of global nonlife premiums remained very high at nearly 86%--accounting for nearly $1.5 trillion in premiums.

The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector

Premium Growth Facts

14.3%85.7%

Industrialized Economies

$1, 485.8

Emerging Markets$248.8

2009, $Billions

Developing markets now account for 47% of global

GDP but just 14% of nonlife premiums

22

Nonlife Real Premium Growth in 2010


Latin and South American markets performed

relatively well during and after the global financial crisis in terms of growth

There was also growth in the Middle East, East and South Asia as well as Australia and New

Zealand

23

Political Risk in 2010: Greatest Business Opportunities Are Often in Risky Nations

Source: Maplecroft

The fastest growing markets are generally

also among the politically riskiest

Heightened risk has insurance implications

24

The “Arab Spring” Has Exacerbated Uncertainty in an Already Volatile Part of the World

Source: Wikipedia as of Nov. 7, 2011; Insurance Information Institute research.

Energy-rich nations have been among the most unstable in 2011

Longer-run, significant

investment and insurance

opportunities exist throughout

the region

Government overthrown Sustained civil disorder and governmental changes Protests and governmental changes Major protests Minor protests Protests outside the Arab world

Arab Springالربيع العربي

Catastrophe Loss Developments and Trends

25

2011 and 2010 Are Rewriting Catastrophe Loss and

Insurance History

26

Global Catastrophe Loss Summary: First Half 2011

2011 Is Already (as of June 30) the Highest Loss Year on Record Globally

Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss

$260 Billion in Economic Losses Globally

New record for the first six months, exceeding the previous record of $220B in 2005

Economy is more resilient than most pundits presume

$55 Billion in Insured Losses Globally

More than double the first half 2010 amount

Over 4 times the 10-year average

$27 Billion in Economic Losses in the US

Represents a 129% increase over the $11.8 billion amount through the first half of 2010

$17.3 Billion in Insured Losses in the US Arising from 100 CAT Events

Represents a 162% increase over the $6.6 billion amount through the first half of 2010

27Source: MR NatCatSERVICE

Natural Loss Events,January – September 2011

World Map


Worldwide Natural Disasters 2011 Significant Natural Disasters (January – September only)

Insured losses 2011 (January – June only): US$ 60bnInsured losses 2011 (January – June only): US$ 60bn

Worldwide Natural Disasters 2011% Distribution of Insured Losses Per Continent (January – June only)

29

21%21%

49%49%

<1%

29%29% <1%

<1%

Source: MR NatCatSERVICE

Insured losses 1980 - 2011 (January – June only): US$ 389bn Insured losses 1980 - 2011 (January – June only): US$ 389bn

30Source: MR NatCatSERVICE © 2011 Munich Re

58%58%

2%

21%21%

<1%

12%12%

6%

Worldwide Natural Disasters, 1980-2011% Distribution of Insured Losses Per Continent (January – June only)

31

Recent Major Non-US Catastrophe Losses

(Insured Losses, $US Billions)

Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute research.

$35.0

$10.0$9.0$8.0$5.0

$2.0$0.5$0

$5

$10

$15

$20

$25

$30

$35

$40

Cyclone Yasi(Australia) Feb

2011

AustraliaFloods (Dec -

Feb 2011)

New ZealandQuake (Sep

2010)

ChileEarthquake(Feb 2010)

Thai Flooding(Nov 2011)

New ZealandQuake (Feb

2011)

JapanEarthquake(Mar 2011)

Insured Losses from Recent Major Catastrophe Events Approach $70 Billion, an Estimated $53 Billion of that from

Earthquakes

The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current

leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)


Deadliest/Costliest Earthquakes:1900 – June 2011

33

Top 17 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

*Through November 7, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

$10.0 $11.3 $14.0 $14.9 $16.3$20.5 $20.8 $23.1 $24.9

$35.0

$72.3

$9.3$9.0$9.0$8.0$8.0$7.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

WinterStorm Daria

(1991)

ChileQuake(2010)

Hugo (1989)

Thai Floods(2011)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

Wilma(2005)

Ivan (2004)

SpringTornadoes/

Storms(2011)

Ike (2008)

Northridge(1994)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 7th

costliest event in global insurance history

5 of the top 15 most expensive

catastrophes in world history have occurred in the past 21 months

100

200

300

400

500

600

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Worldwide Natural Disasters,1980 – 2011*

Number of Events

*2011 figure is through June 30.Source: MR NatCatSERVICE 34

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

There were 355 events through the first 6

months of 2011

US

$bn

Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*

35

Overall losses (in 2011 values) Insured losses (in 2011 values)

*2011 figure is through June 30.Source: MR NatCatSERVICE © 2011 Munich Re

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

First Half 2011

Overall Losses: $265 Bill

Insured Losses: $60 Bill

36

US CATASTROPHE INSURED LOSS UPDATE

First Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most

Expensive Years on Record

37

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

3.6 $2

5.0

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

US Insured Catastrophe Losses

*Estimate through Nov. 1, 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.

2011 Will Likely Become the 5th or 6th Most Expensive Year for Insured Catastrophe Losses in the US, After Adjusting for Inflation

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2011*Number of Events (Annual Totals 1980 – 2010 and First Half 2011)

*Through June 30.Source: MR NatCatSERVICE 38

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

There were 98 natural disaster events in the first

half of 2011

37

8

51

2

Number of Federal Disaster Declarations, 1953-2011*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

1 86

43

0

10

20

30

40

50

60

70

80

90

100

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*

*Through September 30, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011

The number of federal disaster declarations set a new record in 2011, with 86 declarations through Sept.

30. It is no wonder that FEMA is broke!

There have been 2,036 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

http://www.fema.gov/news/disaster_totals_annual.fema

40

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11

0.2%

2.4%

3.4%4.9%

6.6%

8.0%

31.8%

42.7%

1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2.Excludes snow.3.Does not include NFIP flood losses4.Includes wildland fires5.Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $160.5

Fires (4), $9.0

Tornadoes (2), $119.5

Winter Storms, $30.0

Terrorism, $24.9

Geological Events, $18.5

Wind/Hail/Flood (3), $12.7

Other (5), $0.6

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

41

GLOBAL REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

Source: Holborn; RAA.

* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses, 1985-2011*

Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.

Significant Market Losses by Event, 1985-2011*

Reinsurers are bearing a very high

share of recent catastrophe losses

Losses are putting pressure on property cat reinsurance prices in affected

regions. The impact for US property catastrophe pricing is uncertain.

Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.

Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)

A modest increase in global property catastrophe reinsurance pricing was

evident in June 1 renewals in the wake of record global catastrophe

losses. Larger increase could occur for the Jan.1, 2012 renewals

45

Change in US Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since

Pricing turned positive (+0.9%) in Q3:2011, the first increase in

nearly 7 years (Q4:2003)

KRW Effect: No Lasting Impact

Trough = 2007:Q3 -13.6%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

US Policyholder Surplus:1975–2011*

* As of 6/30/11.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.78:$1 as of6/30/11, A Near Record Low (at Least in Recent History)**

Surplus as of 6/30/11 was a near-record $559.1 down 1% from the record $564.7B as of 3/31/11, but up 27.9% ($122B) from the crisis trough of $437.1B

at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 6/30/11 was 7.1% above 2007 peak.

47

Much Uncertainty Exists in the World, But Energy Demand Grows Under All Scenarios

Energy is One of the Few Major Markets/Industries With Clear

Growth Long-Term Trends

34

7.7

47

2.4

50

8.3

55

1.5 59

5.7

63

7.3

67

8.3

46

2.1

0

100

200

300

400

500

600

700

800

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World Primary Energy Consumption, 1990-2030P

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

Between 2006 and 2030, energy consumption in projected to increase

annually by 1.5% worldwide but only 0.5% in the US

Quadrillion BTUs

Global energy consumption is

expected to increase by 33.4% between 2010 and 2030 but by only 12% in

the US

Avg. Annual Change in Total Energy Consumption by Country/Region:2006-2030P

Average Annual Change in Consumption (Quadrillion BTUs)3.2%

2.6% 2.5%

1.5%

0.9%0.5% 0.5%

1.1%1.2%1.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Ch

ina

Bra

zil

Ind

ia

Can

ada

S.

Ko

rea

Mex

ico

Au

st/N

Z

Ru

ssia US

Eu

rop

e(O

EC

D)

Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute

US/Europe have the slowest growth rates for energy

consumption through 2030, growing at less than 1/6 the rate

in China and 1/5 that of India

49

50

Global Oil Demand and Production,by Region

Source: IMF, World Economic Outlook, Sept. 2011; Insurance Information Institute.

Oil Demand in Advanced Economies is Weak but Production Gains Continue to Satisfy Demand in Emerging Countries

Percentage Change (%)-3

.5%

2.9

%

3.3

%

-0.3

%

-4.0

%

2.2

%

-5.8

%

1.9

%

1.5

%

5.1

%

2.2

%

2.0

%

-0.6

%

3.5

%

4.8

%

0.8

%

-0.2

%

4.4

%

-0.4

%

0.7

%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

AdvancedEconomies

EmergingEconomies

OPEC Non-OPEC

2007 2008 2009 2010 2011P

51

US Natural Gas Production and Non-Hydro Renewable Electricity Generation, 1990-2035P

Source: US Energy Information Administration, Annual Energy Outlook 2011; Insurance Information Institute.

Shale gas production is expected to grow rapidly in the US

Wind is expected to account for the majority of renewable

electricity generation

11.3

14.6

18.0

20.6

23.2

26.0

28.9

31.8

12.6

0

5

10

15

20

25

30

35

1990 1995 2000 2006 2010 2015 2020 2025 2030

World Net Effective Electric Power Generation, 1990-2030P


Global electric power generation was dampened about 3% by the

global financial crisis, but will still grow at 2.9% per year through 2030 compared to 1.9% for total energy

consumption

Trillions of Kilowatt Hours

Avg. Annual Change in Electricity Generating Capacity by Country/Region:2006-2030P

Average Annual Change in Generating Capacity (Gigawatts)4.6%

3.3%3.0%

2.1%1.5% 1.4% 1.3% 1.3%

0.9%

1.9%1.9%2.1%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

Ch

ina

Ind

ia

Bra

zil

Afr

ica

Mid

dle

Eas

t

Mex

ico

S.

Ko

rea

Eu

rop

e (O

EC

D)

Can

ada

Ru

ssia

Au

st/N

Z

US


Electrical generation capacity in Europe is expected to grow

faster than in the US. Post-Japan quake, it may grow

faster still.

53

54

Massive Investments in Global Energy

Infrastructure Are Needed

Upgrading an Antiquated Energy Infrastructure is Also Critical for

Future Energy Security

Biofuels, $0.3 , 1%

Oil, $10.1 , 27%

Natural Gas, $9.5 ,

25%

Power, $16.9 , 44%

Coal, $1.1 , 3%

Projected energy infrastructure investment

through 2035 total $38 trillion; Implies substantial

incurrence of risk.

Cumulative Projected Investment in Global Energy Infrastructure, 2011-2035 ($ Trill.)

Source: International Energy Agency, World Energy Outlook 2011.

Electricity Supply Infrastructure:Despite Crisis, Huge Investments Needed Along With Insurance: 2001-2030 (Est.)

$ Billions

$1,351

$1,876

$809

$377

$744

$258

$609$783$799

$1,913

$0

$500

$1,000

$1,500

$2,000

$2,500

Eu

rop

e

No

rth

Am

eric

a

Pac

ific

Ru

ssia

Ch

ina

E.

Asi

a

S.

Asi

a

Lat

inA

mer

ica

Mid

dle

Eas

t

Afr

ica

Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

Investments in electricity supply infrastructure

globally are expected to total $9.841 trillion

between 2001 and 2030

European investment could total $1.351

trillion

56

57

Oil Demand Will Rise, Oil Prices Will Rise Still Faster

Long-Run Demand and Price Dynamics Remain Strong for Oil and

Associated Insurance Markets

58

Commodity Price Changesin 2010-2011*

100

150

200

250

300

350

400

1/1

/20

10

1/1

5/2

01

01

/29

/20

10

2/1

2/2

01

02

/26

/20

10

3/1

2/2

01

03

/26

/20

10

4/9

/20

10

4/2

3/2

01

05

/7/2

01

05

/21

/20

10

6/4

/20

10

6/1

8/2

01

07

/2/2

01

07

/16

/20

10

7/3

0/2

01

08

/13

/20

10

8/2

7/2

01

09

/10

/20

10

9/2

4/2

01

01

0/8

/20

10

10

/22

/20

10

11

/5/2

01

01

1/1

9/2

01

01

2/3

/20

10

12

/17

/20

10

12

/31

/20

10

1/1

4/2

01

11

/28

/20

11

2/1

1/2

01

12

/25

/20

11

3/1

1/2

01

13

/25

/20

11

4/8

/20

11

4/2

2/2

01

15

/6/2

01

15

/20

/20

11

6/3

/20

11

Metals Food Raw Materials Crude Oil Gold

*data are through June14, 2011Source: International Monetary Fund World Economic Outlook June 2011 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv

Index (Jan 3, 2006 = 100)

Raw materials prices doubled over the course of 2010. Some other commodity

prices dropped during the year but ended 20-30% higher. The upward

trend has continued in to 2011.

High Demand is Driving Up Prices And Fueling Trade

http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv

Global Oil Consumption and Price, 2008 – 2035F

Millions of Barrels per Day Nominal Price/BBL

*Source: US Energy Information Administration; Insurance Information Institute

85

.5

83

.7 86

.0 87

.4 88

.9 90

.3

90

.4

91

.1 92

.5

92

.9

93

.5

94

.3

95

.1 96

.1

97

.1

98

.2 99

.3

10

0.5

10

1.8

10

3.2

10

4.5

10

6.1

10

7.6

10

9.1

11

0.8

92

.0

91

.5

89

.6

$108

.10

$112

.36

$114

.21

$115

.96

$117

.54

$118

.99

$120

.25

$121

.34

$122

.30

$123

.09

$123

.71

$124

.20

$124

.53

$124

.68

$124

.94

$110

.30

$105

.71

$103

.15

$100

.50

$97.

62

$94.

58

$91.

38

$83.

21

$61.

66

$100

.51

$85.

73

$88.

03

$78.

03

80

85

90

95

100

105

110

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

0

20

40

60

80

100

120

140

Total Consumption Nominal Price (Light, Low Sulfur Crude)

Oil Will Become Relatively More Expensive Over Time, With Price Increases Outstripping Income Growth in Many Parts of the World

The nominal price of oil is expected to rise by 2.8% per year

on average through 2035

Global oil consumption is expected to rise by 1.1% per

year on average through 2035

60

Efforts to Reduce Global Carbon Emissions Have Weakened Since 2008

Global Financial Crisis, Japan Nuclear Experience, Politics, Economics Have

All Taken Their Toll

Avg. Annual Change in Carbon Dioxide Emissions by Country/Region:2006-2030P

Millions of Metric Tons2.8%

2.5%2.1%

1.9%

0.8%0.6% 0.6%

0.3%0.1%

1.1%1.2%1.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Ch

ina

Bra

zil

Ind

ia

Mid

dle

Eas

t

Afr

ica

S.

Ko

rea

Mex

ico

Can

ada

Au

st/N

Z

Ru

ssia US

Eu

rop

e (O

EC

D)


CO2 emissions in Europe are expected to just 0.1% per year through 2030, among the slowest in the world and

about 1/30th the rate in China

61

21

,48

8

29

,02

8

30

,96

7

33

,11

1

35

,42

8

37

,87

9

40

,38

5

28

,29

6

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

Global Carbon Dioxide Emissions, 1990-2030P


Between 2006 and 2030, CO2 emissions are projected to

increase by 1.4% worldwide, just 0.1% in Europe and 0.3%

annually in the US

Millions of Metric Tons

Global CO2 emissions are expected to increase by 30.4% between 2010

and 2030

1,9

09

2,6

60

2,7

61

3,0

45 3,3

85

3,6

46

3,8

44

2,6

39

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World Nuclear Energy Consumption, 1990-2030P


Between 2006 and 2030, nuclear energy consumption in projected to increase by 1.5% annually worldwide

Billion Kilowatthours

Global nuclear energy consumption is expected to increase by 39.2% between 2010 and 2030 but could be lower if Europe reduces use

of nuclear power

Avg. Annual Change in Nuclear Energy Consumption by Country/Region: 2006-2030P

Billions of Kilowatthours9.

9%

8.9%

3.5%

3.2%

1.2%

1.1%

0.8%

0.6%

0.6%

-0.1

%

1.5%2.

0%2.3%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Ind

ia

Ch

ina

Ru

ssia

Afr

ica

S. K

ore

a

Bra

zil

Can

ada

Jap

an

Mex

ico

Can

ada

Ru

ssia US

Eu

rop

e*

*OECD Countries.Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute

Europe will see small a decrease in nuclear energy consumption through 2030

64

65

As Energy Demand Rises, Exploration and

Distribution Risks Abound

Deepwater Horizon (Macondo) Will Not Be the Last Major Energy Market

Catastrophe

66

After Deepwater Horizon…

“Deepwater energy exploration and production, particularly at the frontiers of experience, involves risks for which neither industry nor government has been adequately prepared, but for which they can and must be prepared in the future.”National Commission on the BP Deepwater Horizon Oil Spill

and Offshore Drilling, January 2011.

10 Most Expensive Operators Expense (OEE) Losses in History

Year Type Location, Country OEE Indexed US$

2010 Rig (Deepwater) Gulf of Mexico, USA $2,000,000,000

2005 Platform Gulf of Mexico, USA 636,047,269

1989 Well North Sea, Norway 396,419,527



1984 Well Nova Scotia, Canada 320,593,818

1988 Platform North Sea, UK 308,109,489


1975 Well Dubai, UAE 246,250,219

2004 Rig Mediterranean, Egypt 230,104,683

Source: Willis Energy Loss Database, April 1, 2011; Insurance Information Institute.

Deepwater Is By Far the Most Expensive OEE Loss in Global History, Even After Adjusting for Inflation

Largest International Oil Well Blowouts by Volume

Date Well Location Bbl Spilled

April 20 2010-July 2010

Deepwater Horizon Gulf of Mexico, USA est. 4,900,000 thru July 15*

June 1979-April 1980

Ixtoc I Bahia del Campeche, Mexico 3,300,000

October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000

April 1977 Ekofisk Bravo North Sea, Norway 202,381

January 1980 Funiwa 5 Forcados, Nigeria 200,000

October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000

December 1971 Iran Marine International Gulf, Iran 100,000

January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000

March 1970 Main Pass Block 41 Platform C

Gulf of Mexico 65,000

October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643

December 1970 South Timbalier B-26 Gulf of Mexico, USA 53,095

*Based on official estimate by U.S. scientific teams of 53,000 barrels per day leaking from BP well immediately preceding it being capped on July 15. Includes offset for capture of approximately 800,000 barrels of oil prior to capping of well.

Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.

http://www.api.org/ehs/water/spills/upload/356-Final.pdf

69

Global Offshore Blowouts, 1984 - 2009: Frequency

Source: Willis Energy Loss Database, February 9, 2011; Insurance Information Institute.

Frequency in recent years is generally below

the 25-yr. average

70

Global Offshore Blowouts, 1984 - 2009: Severity

Source: Willis Energy Loss Database, February 9, 2011; Insurance Information Institute.

Severity was rising even before

Deepwater Horizon

71

Annual Average US Offshore Spillage per Unit Barrel, 1969-2007

Source: American Petroleum Institute Analysis of U.S. Oil Spillage, 2009, from Willis Energy Market Review, April 2011 ; Insurance Information Institute.

Spillage rates pre-Deepwater were down substantially. Likely

also true in most other parts of the

world as well.

72

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

Capacity has nearly doubled since 2006

Source: Willis Energy Market Review, April 2011; Insurance Information Institute.

73

Energy Insurer Capacities & Average Rating Levels, 1993-2011 (Excl. GoM Wind)

*Willis Marketplace Realities, October 2011

Source: Willis Energy Market Review, April 2011; Insurance Information Institute.

Capacity and rates were up in early 2011, flattening

headed into 2012*

74

QUESTIONS?

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Thank you for your timeand your attention!

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