Catlin Group Limited A Global View of Today’s Insurance Issues: Macondo Stephen Catlin Chief...

Catlin Group Limited

A Global View of Today’s Insurance Issues: Macondo

Stephen Catlin

Chief ExecutiveCatlin Group Limited

September 20, 2010

Catlin Group Limited 2

Looking Back 17 Years

1993 Lloyd’s was in the middle of a

serious financial crisis Unlimited liability Names supplied

100% of Lloyd’s capacity Introduction of ‘corporate capital’ ‘NewCo’ proposed to solve Lloyd’s

‘old year’ problems Hundreds of relatively small Lloyd’s

syndicates (including Catlin)

2010 Lloyd’s has never been stronger

financially Unlimited liability Names supply

less than 5% of Lloyd’s capacity Corporate capital well-established Equitas successful and sold to

Berkshire Hathaway 80 Lloyd’s syndicates (and the

Catlin Syndicate is the largest)

Spoke at the Houston Marine Insurance Seminar in 1993 Much has changed in 17 years


However, Some Things Have Not Changed

1993 “Lloyd’s remains the dominant

force in the energy insurance market.”

A major question over how energy companies will be able to meet financial responsibility requirements following a pollution incident

2010 “Lloyd’s remains the dominant

force in the energy insurance market.”

A major question over how energy companies will be able to meet financial responsibility requirements following a pollution incident


Our Concerns Also Have Not Changed

Reprinted from

September 27, 1993

Underwriter bullish on Lloyd’sMarket has capacity to excel in energy business: Catlin

“Another question addressed a topic that weighed heavily on attendees’ minds: The Oil Pollution Act of 1990, which expands pollution liability and requires responsible parties to show evidence of financial responsibility to the US Coast Guard.”


The Macondo Disaster

The importance of the US oil and gas industry

Measuring the impact of Macondo

How can insurersrespond?

What the future holdspost-Macondo?

Agenda


The Importance of the US Oil/Gas Industry

US share of worldwide oil production 2009: 8.5%

US share of worldwide oil consumption 2009: 21.7%

Direct contribution to US GDP (2007): $450 billion

Deepwater Gulf of Mexico operations were largest contributor to global oil supply growth in 2009

Deepwater production will be major driver of offshore activities

Future offshore expansion beyond Gulf of Mexico

Renewable energy sources now supply only a fraction of the world’s power capacity

Source: BP Statistical Review 2009; PricewaterhouseCoopers 2009


US Crude Oil Production Trends

Prior to Macondo, US crude oil production was forecast to rise What will happen now?

Source: US Energy Information Administration

US Crude Oil Production Pre-Macondo

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

Year

Mill

ion

s o

f b

arre

ls p

er d

ay

Total US Production

US Crude Oil Production Post-Macondo

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

YearM

illio

ns

of

bar

rels

per

day

Total US Production

?


Impact of Macondo

11 people lost their lives

A six-month drilling moratorium estimated to cost 23,000 jobs1

9,000 jobs directly

14,000 jobs indirectly

Moratorium estimated to cost $2.1 billion in lost economic activity2

Wider impact on tourism, recreation

Sources: 1 Bloomberg 2010; 2 Institute for Energy Research 2010


Financial Impact of Macondo

Total estimated economic loss: $40 billion

Funds spent to date: $8 billion1

Combined $100 billion reduction in market capitalization of companies directly involved (as at 15th September 2010)

Estimated potential insurance recoveries: $1.5 billion to $3.5 billion2

Maximum offshore energy market capacity: approximately $5 billion (including liabilities)

Current maximum capacity not deployed for a Macondo scenario

Source: 1BP 2010 (Q2 results); 2Swiss Re 2010


Economic Loss vs. Insurance Limits

Total economic loss: $40 billion

BP spend to date: $8 billion1

Working Maximum interest insurance coverage

BP 65% Captive

Anadarko 25% $163 million

Mitsui 10% $175 million

Transocean 0% $950 million

Source: 1BP 2010


Impact To Date on BP

Amounts paid by BP as of September 13, 2010Payments to third-party claimants $500mClean-up, containment & relief wells* >$7,500mTotal >$8,000m

* Includes money spent by government and reclaimed from BP

Equivalent to $55 million per day (145 days) Does not include escrow funds established by BP

Gulf Coast Research Institute $500mUnemployed Rig Workers’ Fund $100mClaims Escrow Fund $20,000m

BP has billed Anadarko $1.2 billion, but payment has been withheld

Source: BP 2010; Anadarko 10-Q 2010


$28.4

$18.9

$0

$10

$20

$30

19 April 15 September

$bn

Impact on Market Capitalization

$184.7

$119.1

$0

$40

$80

$120

$160

$200


$bn

Source: UBS 2010

BP Transocean


Impact on Market Capitalization

$31.0

$25.3

$0

$7

$14

$21

$28

$35


$bn

$36.3

$26.6

$0

$10

$20

$30

$40


$bn

Source: UBS 2010

Mitsui & Co. Ltd. Anadarko


Other Impacts of Macondo

US deep-water drilling moratorium

Increased regulatory environment?

Increased financial responsibility standards?

More stringent requirements for operating licences?

Review of contractual responsibilities

Joint Operating Agreements

Operator/Drilling Contractor


Other Impacts of Macondo

• Impact felt globally

• EU, Norway, Australia undergoing regulatory reviews

• Indonesia seeking $2.2 billion in compensation from PTTEP for Montara oil spill


Other ‘Uninsurable’ Risks

Examples of previous responses by insurance market to similar problems

Nuclear Pool Established in 1950s Capacity grown since formation to up to $2 billion currently Liability limits aggregated over lifetime of unit

Terrorism - TRIA Response to 9/11 Reinsurance by US federal government Significant exposure retained by insurance industry Market capacity has grown to $1.5 billion


Other ‘Uninsurable’ Risks

International Group of P&I Clubs Commercial reinsurance provided to mutual insurers owned by

shipowners Combined purchase Significant pollution coverage provided including clean up Led by Catlin


Questions for Insurance Market

Can insurers provide enough capacity to adequately protect insureds from financial ruin in case of an incident similar to Macondo?

Can insurers provide appropriate coverage?

Clean up

Fines / penalties

Can insurers satisfy regulatory and other stakeholder requirements?

Speed of payment?


Chrysalis

Developed by Catlin in conjunction with Oil and Gas Industry

Launched February 2010 (pre-Macondo)

A response to uncertainty over claims costs/exposures

Additional capacity from recognized market leaders

Single point of access to market

Standard wording

Sustainable pricing

Event limit shared by policyholders

Complementary to existing market placements – OIL

Flexibility to expand


Drivers for Maximum Market Capacity

Co-ordinated response from insurers, led by requirements from Oil and Gas Industry

Committed buyers/insurers/regulators/financiers

Certain of exposure/protection

Clarity of coverage

Measure of indemnity

Transparency of risks

No clash potential

Impact of additional exposures arising from same incident

Sustainable pricing

Industry-wide solution


Conclusion

Insurance helps manage risk

Uncertain times for Oil &Gas Industry and insurers

Transocean physical damage loss paid within 16 days of incident

Insurers provide a promise to pay

Long-term viability of insurers requires adequate pricing

Success is built upon collaboration

Catlin Group Limited A Global View of Today’s Insurance Issues: Macondo Stephen Catlin Chief...

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