Marine and Energy—U.S.

BOBBY BIERLEYVice President, Marine & Energy

Account Executive713.458.5410

bbierley@lockton.com

L O C K T O N C O M P A N I E S

JOHN RATHMELL, JR.President, Marine & Energy Practice

713.458.5204jrathmell@lockton.com

Market Update April 2012

2012 MARINE AND ENERGY MARKET

UPDATE (Q1)The energy and marine insurance market can be summed up as relatively “FLAT” but with pressure from recent risk losses plus significant natural catastrophe losses in 2011 (the exception being energy casualty—especially offshore—which has hardened). Not bad, considering 2011 could turn out to be the worst natural catastrophe year on record.

Hot Topics

2011—A Year of Natural Catastrophe Losses

Worldwide, 2011 was the second-costliest year for insured losses on record (only eclipsed by 2005 at $123 billion). The 2011 natural catastrophe losses alone have exceeded $100 billion. Specifically, we have had:

� Thailand floods ($13 billion).

� New Zealand earthquake ($13 billion).

� U.S. tornadoes/storms ($21 billion).

� Japan earthquake/tsunami ($35 billion to $40 billion).

There were more than 820 global natural catastrophe events in

Market Update, Marine and Energy—U.S. Lockton

2011. Furthermore, in 2011, the U.S. had two of its most costly insured losses on record: Hurricane Irene ($4.3 billion) and the U.S. tornadoes/storms referenced above.

2011—A Year of Significant “Risk” Losses

We have seen 35 energy losses greater than $10 million and 12 greater than $50 million for total estimated losses of $2.8 billion. The largest 2011 energy loss of note is the Gryphon FPSO loss, which is estimated at north of $1 billion. However, as we write this report, the 2012 Total Elgin North Sea loss stands in the queue with estimates all over the board. Right now, the leak is costing Total $2.5 million per day and they are expecting to stop the leak by the end of April.

In addition to the energy losses referenced above, we have also seen some significant marine losses. The Costa Concordia loss could end up being the largest insured loss in maritime history—estimated at $1 billion—and the recent Stolt Tanker constructive total loss. The Costa Concordia alone is noted to be insured for $513 million, but consideration must be taken for personal injuries, removal of the wreck, and environmental damage.

Three Years Free of U.S. Gulf of Mexico Named Windstorm Losses

The 2011 Atlantic Hurricane Season concluded with 19 tropical storms (seven hurricanes with three of them being considered “intense,” i.e., Category 3 or greater).

None of these major hurricanes made landfall, which is the first time this has occurred since the late 1800s. With no major damage in the energy industry from these storms, it is clear that it is impossible to predict the paths

hurricanes will take. Interestingly enough, this will be the first time in 20 years that Colorado State University (CSU) will not put out a December forecast due to the inaccuracy of such early forecasts. CSU has indicated it still believes we are in an “active” time period for Atlantic windstorms.

2010—Macondo Well Loss Not Going Away Any Time Soon

The Macondo Well incident in the Gulf of Mexico still continues to fuel underwriters’ concerns in regard to “clashing,” which is still very much a hot topic. On a positive note for the energy industry, in January 2012, a federal court judge ruled that Transocean, the rig owner, was not liable for spill-cleanup costs or damages made by third parties. This ruling upheld the indemnity agreement between BP and Transocean. BP has been seeking payment from Transocean to offset its costs in the disaster. Anadarko, Cameron, MOEX, and Weatherford have settled with BP. Also, in early March 2012, it was released that BP agreed to pay $7.8 billion in an out-of-court decision to settle open claims from an estimated 110,000 people and businesses.

Market Reports

Upstream

Hydraulic fracturing (fracking) has become, and continues to be, the “talk of the town.” To some, it is no surprise that unconventional natural gas resources are now being estimated to be as large as conventional resources. The 2011 World Energy Outlook actually stated that unconventional natural gas now makes up 60 percent of the production in the U.S. Even though fracking has been done since the 1940s, it has

Market Update, Marine and Energy—U.S. Lockton

raised eyebrows from a regulatory, environmental, and insurance perspective.

From an insurance perspective, fracking has put pressure on the underwriting details required by insurers, terms and conditions being offered by underwriters, and manuscript coverage endorsements that should be negotiated. Significant gaps in coverage can exist without an appropriate review.

Onshore control of well (COW) remains very competitive with plenty of capacity available in the market. Rate reductions and some improved terms and conditions are achievable if a program is marketed. Onshore property damage can see some rate pressure depending on the original renewal date, the location of specific property, and the impact of RMS 11.

Offshore shelf COW saw most of the rate adjustments in the prior two years, and this market remains relatively flat. However, offshore deepwater COW can still see some rate pressure depending on well dynamics, i.e., water depth, well pressure, and coverages desired. Clients are still looking at higher COW limits this year as in the past. Offshore property damage for shelf and deepwater are predicted to be relatively flat with little impact from RMS 11.

Coming off three relatively clean years from a named windstorm (NWS) perspective, the market appears stable and has even had an infusion of new capacity in London (Hardy and Brit). NWS buyers may achieve some program enhancements, i.e., improved structures and higher limits compared to last year, but we expect this market to remain flat this year.

OPA certification continues to be challenging with the market providing approximately $150 million in capacity, unless the markets offering the capacity are also on the corporate liability tower. If this is the case, then clashing may exist and the full OPA capacity may not be available.

Midstream/Downstream

2011 saw its share of losses in this class with approximately $2.1 billion in total losses excess of $10 million. The largest of these was the January Canadian Oil Sands loss, which is estimated at $1.3 billion. All in all, 2011 had a relatively moderate year of losses for this class; however, the property marketplace has been in a downward spiral with incredible rate increases. This is mostly due to the global natural catastrophes of 2011 and RMS 11. Most if not all insurers are looking very carefully at their aggregates, outstanding limits, and the return on premiums needed to stay financially viable. This is driving smaller line size, larger deductibles, lower limits, and higher premiums.

RMS 11 is taking a harder look at the Tier 2 or inner coastal locations and the damage that named windstorms can cause each individual account. The release of RMS 11 impacted the market as much as the catastrophic losses. Many loss estimates in Tier 2 hurricane zones increased by 50 percent to 100 percent. Underwriters have been forced to charge more for their natural catastrophe capacity, find another attachment point on programs, or cut their line size.

Property programs with significant natural catastrophe exposures, especially those with named windstorm exposure, are likely to experience rate increases. It will be

Market Update, Marine and Energy—U.S. Lockton

very important to manage relationships with underwriters in this hardening marketplace so expectations are properly managed.

For property accounts with no significant natural catastrophe exposure, the market capacity remains plentiful, and the renewals are expected to be relatively flat with favorable underwriting profiles.

ENERGY CASUALTY/EXCESS CASUALTY

This chart represents an estimated global breakdown of energy casualty capacity:

Market Capacity (in Millions)

Lloyd’s/London Companies $450 to $500

Dublin $75 to $100

European $60 to $75

Bermuda $350 to $450

United States $100 to $150

TOTAL $1.035 TO $1.275 BILLION

Due largely to type of risk, terms and conditions, and/or pricing, the maximum capacity is not often used or available; therefore, the usual capacity utilized in the market is lower. In general, energy casualty programs tend to “limit out” between $500 million and $750 million with pricing, terms, and conditions being the drivers.

The key concerns for energy casualty are:

� Pipelines (due to historical significant losses).

� Clashing of insureds (aggregation).

� Multistage hydraulic fracturing (fracking), shale areas in particular.

� Limits for interest.

� Removal of wreck/debris.

� Premium modeling.

There were four significant casualty losses in 2011 estimated to be in excess of $50 million: 1) the sinking of the Jupiter accommodation platform, 2) the rupture of the Plains Canada Rainbow pipeline, 3) the dispute between Chevron and the Brazilian government on pollution cleanup, and 4) the DuPont Energy product liability.

Market Update, Marine and Energy—U.S. Lockton

Considering all of the above, plus the impact on the market from the Lloyd’s Franchise Board’s directives on underwriting and business plan reviews, there has been pressure on rating but at differing levels with no real consistency. At the primary level, we have seen real pressure on individual client loss ratios and profitability with some insurers creating a hard position on the starting points for negotiations. This has been very client-specific with some insurers pushing for rate increases as high as 20 percent Programs that have excess towers up to $200 million can expect anywhere between 5 percent and 15 percent-plus increases on average. If Bermuda is participating, expect to have even greater increases in the range of 15 percent to 30 percent-plus for its layers. The Bermuda bar has moved, and price relativity has become very important. The decrease of capacity in Bermuda is also driving the pressure (i.e., the departure of Torus and the reduced line sizes being offered by several insurers). The theme from an energy casualty perspective will be to start early in order to manage the “shock and awe,” especially if the Insured has “over-the-hole” exposure, “wet” exposure, and/or poor loss experience.

Marine

In general, the marine market is competitive; however, the Costa Concordia loss could end up being the largest insured loss in maritime history, which will likely have an impact on the market.

Hull and Marine/P&I

This market remains competitive and capacity remains plentiful. However, we have already seen the market begin pushing for increases as a result of Costa Concordia. New tonnage has continued to replace old tonnage, which has driven some market competition.

Cargo

This market remains competitive with many market options. We forecast a flat renewal and some decreases depending on whether or not it is new business to a given market.

Protection and Indemnity (P&I)

P&I renewals saw some slight uptick with average increases of between 3 percent and 5 percent (a couple clubs were flat, such as Shipowners).

Excess Marine Liability

The excess marine liability market has been impacted by the energy casualty market as discussed above but not with much consistency. It is very important to assess the layering of a program to get the best results.

Market Update, Marine and Energy—U.S. Lockton

© 2012 Lockton, Inc. All rights reserved.Images © 2012 Thinkstock. All rights reserved.

Market Movement � Alison Clarke moved from CV Starr London to Zurich London.

� Ben Holborow moved from IGI Jordan to Oilfield Offshore

Underwriting Ltd. London.

� Bob Clarkson moved from QBE London to Brit London.

� Brad Berg moved from ACE Bahrain to Chartis Singapore.

� Brian Randall moved from Watkins London to Brit London.

� Carl Bhend has left Swiss Re with destination TBD.

� Giles Hussey moved from Lancashire Dubai to Swiss Re Dubai.

� Greg Parker moved from Zurich London to Arch Re.

� John Swan moved from Aon London to Zurich London.

� Julia Aasberg moved from Allianz London to Chaucer London.

� Julian Harris moved from Chaucer London to NMB London.

� Kevin Dunmore moved from QBE London to Unknown.

� Kevin Hannington moved from Price Forbes London to Catlin

London.

� Luc Tricard moved from JLT London to Scor London.

� Mark Cubitt moved from Marsh London to Brit London.

� Mark Johnson moved from Zurich London to Ascot London.

� Mark Mckay moved from Infrassure to Zurich Allianz Singapore.

� Matt Holmes moved from Catlin London to Beazley London.

� May Hallieh moved from Allianz Singapore to Amlin Singapore.

� Mel Causer has left Zurich Houston with destination TBD.

� Mojgan Khoshabi moved from ACR Bahrain to ACE Bahrain.

� Neil Baldwin moved from Beazley London to Hardy London.

� Nick Wooton moved from Amlin Singapore to Amlin London.

� Oliver Decombes moved from CV Starr Paris to CV Starr London.

� Paul Calnan moved from CV Starr London to Unknown.

� Paul Dawson moved from Beazley London to Hardy London.

� Paul Millen moved from Aon London to WR Berkley.

� Pete Connors moved from Zurich New York to Allianz New York.

� Phil Finlay moved from CV Starr Hong Kong to Starr Asia

Singapore.

� Phillip Sexton moved from Torus London to XL London.

� Poorna Chandra moved from Q Re to Trust Re.

� Rachael Weatherup moved from Chaucer London to Beazley

London.

� Ricardo Garcia has moved from CV Starr Houston to Allianz

Houston.

� Richard Dare moved from QBE London to QBE Singapore.

� Richard Hooks moved from Kiln London to Catlin London.

� Simon Bramsiepe moved from Chaucer London to Hannover Re

London.

� Steve Miller moved from Marsh London to Axis London.

� Susan Swails moved from Chartis London to Chartis Houston.

� Thomas Tidbury moved from Cooper Gay to Argo London.

� Tim Burrows has returned to Catlin London on a short-term

basis.

� Will Martin moved from Catlin London to Atrium London.

Key Security Rating Changes*

� Swiss Re (upgraded by A.M. Best from A to A+)

� Swiss Re (upgraded by S&P from A+ to AA-)

All estimated pricing ranges are subject to an individual insured’s specific risk profile and loss history.

*The above does not indicate all security rating changes. Please see the applicable rating agencies for complete listings. Loss estimates provided by Willis Energy Loss Database and Lockton market knowledge as of the date of March 29, 2012.