“Post Recession Outlook of the Energy & Marine Insurance Industry”

Presented By:

AFTAB HASANCEO

Maritime Management Company (MMC)/Arya Insurance Brokerage Company

Dubai - U.A.E.

18th – 19th April 2011

PRESENTATION OUTLINE

Economic Outlook & Energy / Marine Industry Executive Summary Major Factors Driving Insurance Industry after financial meltdown The ten most expensive earthquakes in History (Pre -Tohoku, Japan) The ten most expensive Operators Extra Expense (OEE) losses in History After Japan Quake: What next for the Energy Insurance Markets? Quick Recap on The Japan Quake & Effects on The Energy Insurance

Markets? After MACONDO / Deepwater Horizon – Oil Rig Explosion : What next for

the Energy Insurance Markets? General State of the Market – Post Recession The Underwriting Environment with Upstream The Underwriting Environment with Downstream Regional Overview: Marine Insurance

ECONOMIC OUTLOOK & ENERGY/ MARINE INDUSTRY

The world economy ran out of steam in 2008 while 2008 was also record year for some as the economic boom reached its peak in the first half of the year.

The worldwide Energy Industry ravaged by the economy and financial crisis over the last two years has passed through its darkest hour.

Global GDP of the key driving nations went down drastically. Global activity in the key areas – Production / Trade / Oil /

Non-Fuel Commodity Prices also affected badly. The recovery remains largely policy driven and faces

significant challenges as policy makers look to unwind the unprecedented fiscal monetary and financial support they provided to keep their economies and financial market’s from collapsing.

ECONOMIC OUTLOOK & ENERGY / MARINE INDUSTRY

When the world economy collapsed in late 2008, the order book for Shipping & Offshore industry was at an unprecedented level. Many of these new build contracts have since been cancelled or renegotiated. While some new tonnage will be delivered in 2011, in shipping there is inevitably a time lag before supply can adjust to demand.

Whilst the world fearfully debates whether there will be a double-dip recession, the energy industry and the underwriting markets are both suffering from the same problem – surplus capacity as rates are softening yet fresh capacity is queuing up to join in, particularly in Lloyd’s, almost in defiance of logic.

EXECUTIVE SUMMARY

The world is more unpredictable than it was earlier. I am giving this presentation just aftermath the tragedy in Japan, which follows a series of major natural catastrophes over the last twelve months, including a devastating oil spill in the Gulf of Mexico, earthquakes in Haiti, Chile and New Zealand, as well as floods in Pakistan and Australia.

We are also observing political disturbance in the Middle East and resulting significant energy losses already in 2011. At the same time, the global economy has still not found solid footing, the emerging nations continue to re-shape trade dynamics, and in the energy industry, the pursuit is on to develop hydrocarbons from shale deposits and ultra-deep water fields. This competition is going to involve the deployment of increasingly sophisticated technology and the attendant risks will provide a major challenge for the insurance industry.

The global energy insurance markets have had to take immediate stock of their position following the recent tragic earthquake and subsequent tsunami in Japan.

Before this tragedy struck, the Macondo blowout and oil spill had resulted in the largest Operators Extra Expense (OEE) loss in the upstream market’s history.

A genuine upstream market bifurcation is therefore becoming apparent.

Notwithstanding the impact of Macondo and the Japan earthquake, both upstream and downstream markets remain overcapitalized.

Furthermore, a new series of energy losses are also contributing to the break on any market softening, at least in the short term.

In the meantime, the statistics continue to point to overall profitability in both markets.

MAJOR FACTORS DRIVING ENERGY & MARINE INSURANCE INDUSTRY AFTER FINANCIAL MELTDOWN

MAJOR FACTORS DRIVING ENERGY & MARINE INSURANCE INDUSTRY AFTER FINANCIAL MELTDOWN

Piracy continues to be a huge concern, spreading from the Gulf of Aden into the Indian Ocean. Claims arising from piracy have exceeded $300 million and it is hard to see any solution in the short term. Meanwhile, the additional cover and support provided by a kidnap and ransom (K&R) policy has resulted in policy being expensive to those who have elected to purchase such policies.

The increase in sanctions against countries such as Iran has brought new challenges in 2010. Underwriters and brokers are constantly working to ensure they remain ‘Compliant’ within the various different sanction regimes.

The European Union’s latest sanctions directive is due to be ratified and while its impact on insurers is not yet clear, anyone even considering ways in which sanctions could be avoided may be prosecuted under the ‘Anti-Avoidance Clause’.

As profit margins continue to be squeezed, we foresee increased divergence between those underwriters who are looking to build or expand their accounts and those who may become increasingly defensive or selective. This means a market place where it will be essential to employ a SOUND BROKER!

THE TEN MOST EXPENSIVE EARTHQUAKES IN HISTORY(PRE-TOHOKU,JAPAN)

Year Location Loss (USD Bln) Insured Loss (USD Bln)1994 California - Northridge 44.0 15.3

2011 New Zealand - Christchurch 20.0 10.0

2010 Chile 30.0 8.0

2011 New Zealand - Christchurch 6.5 5.0

1995 Japan - Kobe 100.0 3.0

2004 Sri Lanka, Indonesia, Thailand etc. 10.0 1.0

1989 California 10.0 1.0

2004 Japan 28.0 0.8

1999 Taiwan 14.0 0.8

1989 Australia 1.2 0.7

With the upper end of the insured loss estimates currently standing at approximately USD 35 billion, the recent Tohoku earthquake and subsequent tsunami is very likely to prove the costliest in the insurance market’s history. But what will be its long term effect on the global insurance energy markets?

Source: Munich Re, Geo Risks Research, NatCat SERVICE

Year Type Location Country OEE Indexed USD2010 Rig Gulf of Mexico USA 2,000,000,000

2005 Platform Gulf of Mexico USA 636,047,629

1989 Well North Sea Norway 396,419,527

2008 Platform Gulf of Mexico USA 384,080,640

2005 Platform Gulf of Mexico USA 341,560,173

1984 Well Nova Scotia Canada 320,593,818

1988 Platform North Sea UK 308,109,489

1987 Platform Gulf of Mexico USA 264,476,529

1975 Well Dubai UAE 246,250,219

2004 Rig Mediterranean Egypt 230,104,683

The Macondo loss of April 20, 2010 dwarfs all other OEE losses in the Energy Loss Database – even on an inflation-adjusted basis. But what lessons have been learned in its immediate aftermath?

Source: Willis Energy Loss Database, April 1, 2011

THE TEN MOST EXPENSIVE OPERATORS EXTRA EXPENSE (OEE) LOSSES IN HISTORY

We all know that the catastrophe caused by the recent Japanese earthquake and tsunami which has brought enormous tragic loss to life and almost incomprehensible destruction of assets, our first thoughts will be what next for the energy insurance markets?

It is of course far too early to try completely accurate calculation of the way in which the energy markets might react over the course of the next few months. However, what we can do is summarize what we know to date and express both the positive and negative factors that need to be considered by energy insurance buyers. To begin with, we will consider some questions that we believe may be in the minds of many of us as this tragedy continues to unfold.

AFTER JAPAN QUAKE: WHAT NEXT WITH THE ENERGY INSURANCE MARKETS?

WHAT HAPPENED?

HOW MUCH DAMAGE HAS BEEN CAUSED?

HOW MUCH OF THE DAMAGE HAS BEEN INSURED?

HOW WILL THE JAPANESE DOMESTIC INSURANCE MARKET RESPOND?

WHAT ABOUT GLOBAL POLICIES ISSUED OUTSIDE JAPAN?

WHAT HAS BEEN THE INITIAL IMPACT ON THE REINSURANCE MARKETS?

HOW WILL THIS EVENT AFFECT THE UPSTREAM AND DOWNSTREAM MARKETS?

QUICK RECAP ON THE JAPAN QUAKE & EFFECTS ON THE ENERGY INSURANCE MARKETS?

“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.”

Source: National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, January 2011

If 2010 will be remembered for anything in the offshore Exploration and Production (E&P) industry, it will of course be the tragic events that unfolded on the evening of April 20 in the Gulf of Mexico. A year on, the full implication of the Macondo well blowout for energy risk managers remain unclear, as Congress returns to the Senate following the mid-term elections in the United States. However, on one thing risk managers, brokers and insurers alike are in full agreement: the marine liability underwriting environment, most specifically for pollution from wells risks, has been fundamentally misused – almost certainly permanently.

AFTER MACONDO / DEEPWATER HORIZON OIL RIG EXPLOSION : WHAT NEXT FOR

THE ENERGY INSURANCE MARKETS?

GENERAL STATE OF THE MARKET POST RECESSION

ENERGY UPSTREAM

Almost five months to the day after the tragic blowout of its Macondo well on April 20, BP announced that the well had been permanently sealed, and abandonment operations had commenced. The immediate disaster may be over for BP but the aftermath for the Oil and Gas Industry in general has only just begun. Whilst BP themselves did not buy insurance, the loss the market is ultimately likely to suffer from control of well (including clean-up costs) and Liability Policies purchased by BP's Joint Venture Partners and Contractors has been estimated by some commentators to be in excess of USD 3Bn.

Softening pressures are beginning to mount, despite recent losses capacity is at a ten-year high

Major losses are particularly felt by the fledgling Singapore Market

Although 2009 was not a bumper year in terms of profitability, it was hardly a disastrous one either

The new Gulf of Mexico rating model remains untested following a benign windstorm season

There has been an upswing in activity in the Offshore Construction Sector

THE UNDERWRITING ENVIRONMENT WITH UPSTREAM

THE UNDERWRITING ENVIRONMENT WITH UPSTREAM INSURER CAPACITIES

UPSTREAM ENERGY LOSSES VERSUS ESTIMATED GLOBAL OFFSHORE ENERGY

PREMIUM INCOME

So in reality 2010 – despite including both Macondo and the Gryphon A loss – might still turn out to be a profitable year for most direct and reinsurance underwriters; indeed, it could even be argued that both losses were blessings in disguise for much of the direct upstream market.

UPSTREAM ENERGY PORTFOLIO STILL LOOKS PROFITABLE

UPSTREAM INSURER CAPACITIES AND AVERAGE RATING LEVELS

UPSTREAM INSURER CAPACITIES AND AVERAGE RATING LEVELS

Downstream insurers are beginning to compete for business in a manner not seen since the last truly soft market in 1999-2000. While North American market capacities remained stable, its International counterpart continued to grow. Various markets became more prominent, including Chartis, CV Star, Talbot, Validus, Torus and Zurich.

Following a benign underwriting year in 2009, the portfolio remained profitable, despite the softening market conditions. The level of attritional losses has fallen to the point where rates could fall further before the inherent profitability of the class is threatened.

The degree of aggression shown by individual insurers is now driving competition in the market, rather than overall capacity. Regional markets are contributing to the softening process.

THE UNDERWRITING ENVIRONMENT WITH DOWNSTREAM

THE UNDERWRITING ENVIRONMENT WITH DOWNSTREAM INSURER CAPACITIES

DOWNSTREAM ENERGY LOSSES VERSUS ESTIMATED GLOBAL OFFSHORE ENERGY

PREMIUM INCOME

The improved loss record since 2001 may well be down to general improvements in risk control and mitigation by the downstream industry, encouraged by the risk engineering approach taken by the market in recent years.

DOWNSTREAM ENERGY PORTFOLIO STILL LOOKS PROFITABLE

DOWNSTREAM MARKET DYNAMICS 2011

DOWNSTREAM INSURER CAPACITIES AND AVERAGE RATING LEVELS

GLOBAL INSURANCE MARKETS IN FLUX

ASIA: GROWING CONFIDENCE

EUROPE: REGIONAL STRENGTH, INTERNATIONAL CAPACITY

SCANDINAVIA: DOWN, BUT NOT OUT

THE UNITED STATES: RISING PRICES

LONDON MARKET: TRAVELLING WELL

REGIONAL OVERVIEW: MARINE INSURANCE

MARKETS MOVE CLOSER TO CUSTOMERS

ASIA GAINS CONFIDENCE

EUROPE FLEXES MUSCLES

SCANDINAVIA TAKES STOCK

US SEES PRICE RISES

LONDON REMAINS AT THE CENTRE OF INNOVATION

HIGHLIGHTS

A DECADE OF UNDERWRITING RETURNS

DOWNTURN HITS INVESTMENT INCOME

HULL VALUES FALLING

INCREASING REINSURANCE COSTS

UNDERWRITERS PRESS FOR RATE RISES

PREMIUM VOLUMES FALL

PLENTIFUL CAPACITY

H & M – CHALLENGES AHEAD

CLUBS TAKE DECISIVE ACTION

BIG CLAIMS DRIVERS

TIME LAG

ASSET RE-ALLOCATION

REGULATION

P&I: SIGNS OF STABILITY

Plenty of options open for buyers, but beware of the long-term implications.

The current market conditions are now causing insurers to think again about long term policies.

Recently, the unrest in the Middle East/North Africa region has led to an increased interest in strikes, riot and civil commotion coverage.

Intelligent ‘INSURANCE BROKER’ can help identify and quantify risks and bring them under control. They can create and implement customized solutions employing the most effective blend of risk mitigation, risk transfer, and advanced risk financing. These solutions go beyond traditional property / casualty insurance programs to encompass strategies that can help increase a firm's revenue growth, enhance its net income, and strengthen its balance sheet.

CONCLUSION

THANK YOU