Insurance Market Update Prepared for: - PowerPoint Presentation

Slide1

Insurance Market Update

Prepared for:

AGA’s Risk Management Committee

July 16, 2012Slide2

Agenda

Market Review

– 2011 Impact

Casualty Market

– pricing / coverage trends and forecasts

Property Market

– pricing / coverage trends and forecasts

Emerging Risks

– Cyber, Railroad Protective Liability, Deposit AlternativesSlide3

MSW Office

McGriff Corporate Profile

Energy risk management/insurance is our core specialty

Company success built on niche areas of specialization; energy is our largest industry focus

More energy clients served by one office (Birmingham) than any other US broker (over 65)

Birmingham HQ office employs over 60 professional staff dedicated solely to our energy clients (over 150 corporate-wide)

Part of BB&T, the 6

th

largest insurance broker worldwide, with over $10B in annual premium volume

Company founded in 1886

Client-centered organizational structure. All service team members are qualified professionals, and executive leadership actively participates in account management

Entire Service Team chain accountable and empowered to make decisions

No profit center mentality; we are an independent broker committed to identifying and partnering with the best resources for our clients

Service Teams structured to be an extension of our clients’ risk management program

Highest rank in client satisfaction among all major brokers in 2010 Greenwich Associates Large Client Survey

Energy Resources

Claims Specialists

Loss Control Engineers

Contract Specialists

Exposure Analysis

M&A Due Diligence

Alternative Risk Transfer

Captive Analysis

Actuarial Services

Specialty Divisions

Energy & Marine (EMD)

Construction

Commercial

Accounts

Surety

Public Entity

Financial Services / Executive Risk

Healthcare

Employee BenefitsSlide4

Our Utility Specialization

Utility expertise held within individual service teams; not spread out corporately

Significant experience in all aspects of gas transmission, distribution

Niche focus makes us better identifiers of risk and able to create specific solutions

Environmental Liability

Contractual Risk Transfer

Cyber Liability

Infrastructure / ConstructionTurbine TechnologyIndustry claims trends, both in the U.S. market and abroadIn-house engineers dedicated to our energy clientsMachinery breakdown concerns/technology issues

Ash Pond ExposuresBroader energy experience (beyond utilities) allows us to monitor industry trends on a macro-level: Local Distribution Companies (LDCs)Independent Power ProducersMidstreamInfrastructure/ConstructionExploration and Production (On & Offshore)CoalRelevant Client Experience:Slide5

Property and CasualtyMarket UpdateSlide6

2012 Market UpdateProperty and Casualty

Primary Casualty

In general, the market is pushing for increases due to continued lack of investment income ($15.2Bn in 2011

vs

$34.4Bn in 2010) to help offset higher loss trends

Workers’ Compensation rates are increasingly volatile. The economic slump has reduced payroll and therefore premium, however, the loss experience continues to rise (increased medical costs, upwards litigation trend)

Excess Liability / General Energy / Utility Losses of the past few years (San Bruno, Enbridge crude pipeline rupture, dam failures, ash pond failures, wildfire losses) have caused Excess Liability markets to take a cautious underwriting approach to the gas industry

Industry mutuals (AEGIS / EIM) have stabilized their books but still pushing for inflationary increases to track industry trends (litigation, medical costs, aging infrastructure, etc.)Markets excess of the mutuals are taking a hard look at their books and are challenged to offer large blocks of capacity at current premiums given the frequency and severity of catastrophic losses (i.e., losses excess of $100MM)Slide7

2012 Market UpdateProperty and Casualty

(Excess Liability Continued)

AEGIS

A.M. Best rating A- with Stable outlook

Financial results for year end 2011 showed a 5% growth in surplus to $1.05Bn

This trend has continued into 2012 with first quarter results showing a bottom-line growth in total surplus to $1.06Bn

Losses for Excess Liability book continue to be problematic with a combined loss ratio of ~130%AEGIS continues to seek inflationary increases across the board on the Excess Liability book, but underwrites on merits of each accountUnderwriting focus remains consistent with prior yearsAging pipeline infrastructure

Wildfire risksNew focus on fracking exposuresMarine operations / non-core business

Ash pond and dam exposures, including downstream risksSlide8

2012 Market UpdateProperty and Casualty

(Excess Liability Continued)

EIM

A.M. Best affirmed A (Excellent) rating with Stable outlook

2011 audited results showed growth in surplus from $727MM to $783MM (

~7.7%)

EIM ended 2011 with a combined loss ratio of 50%The majority of EIM members have purchased the general aggregate drop down coverage endorsementEIM membership distributions remain suspended. EIM’s distribution philosophy continues to be centered on maintaining adequate surplus for A ratingEIM expects to introduce a new web “portal” which will provide members with on-line access to their policy and claims history

EIM’s underwriting focus remains much the same as AEGIS. They may request more detailed information on planned capital expenditures and proposed upgrades to key transmission and distribution resources, if any. Also, focusing on E&P fracking exposuresSlide9

2012 Market UpdateProperty and Casualty

(Excess Liability Continued)

London / European Markets

The London market continues to be challenging as a result of industry losses

Excluding 2010, the Incurred Loss Ratio for Lloyd’s “EA” (Onshore Claims Made Audit Code) is around 175% for 2000 to 2009 (Source: Lloyd’s). Beginning 2010, Lloyd’s effectively ceased writing Utility Excess liabilities due to pricing levels excess of $135MM

Remaining markets in this area include AEGIS Syndicate, Starr Surplus, Aspen, Scor, Canopius, Amlin, Swiss Re, XL Dublin, O’Farrell and Liberty International

Capacity has been reduced, preferred attachment points are being evaluated and premium increases are being soughtThere is greater risk evaluation, as well as scrutiny on aggregation of exposuresSlide10

2012 Market UpdateProperty and Casualty

(Excess Liability Continued)

Bermuda

Realistic Bermuda market Excess Liability maximum available energy account capacity is about $450MM – $500MM, down from over $1Bn two years ago

Accounts with exposures that are associated with recent losses such as Macondo and San Bruno pipelines are experiencing increases in premium, which in some cases are significant

Accounts with rates below $3,000 per million in the higher layers of programs are also seeing increases from a pure cost of capital basis regardless of exposure.

Bermuda Markets are pushing for rate increases in 2012Bermuda Critical UnderwritingContract Control ProcessContract Enforceability

Pipeline IntegritySlide11

2012 Market UpdateEnergy Liability Large Loss ExhibitUtility Sector – 2001 Forward

Year

Cause

Location

Estimated Loss Amount

2001

Auto Liability

USA$18 million

2001Hidden power lines caused injuryUSA$21 million2002Explosion and fire in property damage to residencesUSA$50 million2002Gas in water aquifer caused explosionUSA$270 million jury award (settled for lower amount)2002Auto LiabilityUSA>$20 million2003Blackouts across North EastUSAPending

2003Fire destroyed 20 homesUSAPending2004Gas explosion / fireUSA$25 million2004Four Marines killed when helicopter hit unlit / unmarked utility towerUSA$55 million2005Transformer explosionUSA>$20 million2005Leak in pipe resulted in gas explosion / fire>$21 million2006

Brush firesUSA$14 million2007Steam main rupture – resulting in one fatality

and damage to buildingsUSA>$20 million2007Fire erupted 1,000 feet underground in a tunnel at a hydroelectric power plant with fatalities

USAPending2007WildfireUSA>$950 million2008Impoundment failureUSA>$250 million2009WildfireUSA>$500 million2010Explosion at an unfinished power plant with fatalitiesUSA$158 million2009Explosion at a hydroelectric plant with multiple fatalitiesRussia

$200 million2010Pipeline explosion with fatalitiesUSA$238-$400 million2010Natural gas pipeline explosion with fatalitiesUSAPending2010Power plant explosion with fatalitiesUSA$100 million2011Ash retention wall breachUSAPendingSource: ACE 2011 Liability Limit Benchmarks & Large Loss Profile by Industry SectorSlide12

2012 Market UpdateEnergy Liability Large Loss ExhibitOil and Gas Sector – 2001 Forward

Year

Cause

Location

Estimated Loss Amount

2001

Fire / explosion

at chemical plantFrance

$750 Million2001Explosion of an above ground storage tankUSA$60 Million2001Gasoline leakUSA$43.8 Million2002Pipeline explosionUSA$75 Million2003Sulphur dioxide release from refineryUSA$75.5 Million2003

Water contamination caused by oil leak from a pipelineUSA$56 Million2004Rig sunk during hurricane and damaged subsea pipelinesUSAPending2004Pipeline ruptureMexico$33 Million2004Fuel gauge malfunction caused explosionUSA$97.6 Million2004Contractor hit gas line causing explosion and fireUSA

$75 Million2005Oil storage tank rupture – pollution

USA$350 Million2005Fire / explosion at oil storage plant

UK>$1 Billion2005Fire / explosion at refineryUSA>$2 Billion2005Gas pipeline explosionUSA$63 Million2005Pipeline rupture / pollutionUSA$10 Million2005Hurricane Rita – removal of wreckUSA$190 Million

VariousMTBE litigationUSA>$500 Million2006Pipeline rupture / pollutionUSA$11.5 Million2007Crude oil refinery spillUSAPending2008Refinery fire / explosionUSA$380 Million2008

Pipeline rupture and fire at gas processing facilityAustraliaPending2008

Propane plant explosion / fireCanada$300 Million2009

Fire and explosion at RefineryUSA$30 Million2009Fire and explosion at Oil storage facilityUSA$160 Million2009Gulf of Mexico Compression Platform fireUSA$60 Million2010Gulf of Mexico Subsea well blowout with multiple fatalitiesUSA$40 Billion2010Blowout and fire with injuries

USAPending2010Pipeline leakUSA$60 Million2010Coal mine explosion with multiple fatalitiesUSA$89 Million2010Onshore pipeline blast with multiple fatalitiesUSA$7 Million2010Refinery fire & explosionUSAPending

Source: ACE 2011 Liability Limit Benchmarks & Large Loss Profile by Industry SectorSlide13

2012 Market UpdatesProperty and Casualty

Property

Significant worldwide catastrophe losses in 2011 – Japanese earthquake, Thailand floods, U.S. floods and tornados, New Zealand earthquakes

Nat Cat losses throughout 2011 are over $105 Billion

2011 was the costliest year ever for Lloyd’s

High attritional losses

Contingent Business Interruption (CBI) losses were also significant and underwriters are extremely concerned with the complex and “unquantifiable” nature of the exposureUnderwriting losses prevalent in 2011Slim to none investment returnsRMS11 mandated for all 2012 renewals

RMS11 significantly changes underwriters’ accumulation models, especially for storm surge and inland penetrationGlobal market is unified in looking for rate increases in 2012 and reducing NatCat exposure via higher deductibles, elimination of deductible caps and/or reduction in line sizeSlide14

Property & Casualty Market Review

Utility Insurance Pricing

Casualty Price Change YOY

Property Price



YOY

Industry

Mutuals – Driven By Loss Ratios and Investment Results

LDC’s exposures changed since 2001Growth in non-regulated business increased since 2001 as percent of operationsAEGIS Loss Ratio ~130% Excess of The MutualsSince 2001 – min. pricing increased significantly for London/BermudaOne large industry related loss can ruin a yearDependable long-term capacity hard to findCasualty pricing is sensitive to large losses but largely linked to AEGIS pricing

While Non-CAT pricing stable, CAT pricing remains volatileEstablishing a strategy to effectively manage both markets is crucial to achieving the most competitive insurance programSource: MSW internal databaseSlide15

Property & Casualty Market Review

Leader

Appetite

Competitiveness

Wording

Flexibility

Engineering

Property

ACE / Starr Tech   

AEGIS

  Chartis

   Lloyd’s

 Liberty  

 Zurich 

EIM (Follow

Market)

Scor (Follow Market)   

McGriff’s Utility Market Heat Map

–2Q 2012

Selection of Key Gas Utility UnderwritersOverall capacity generally exceeds demand and remains firmEnergy sector in 2011 experienced not only significant NatCat losses, but attritional losses with frequency higher than expectedCurrent pressure on rate and NatCat limits / deductiblesNew RMS 11 model focuses more on storm surge and inland penetration which changes underwriters appetite for certain risksFocus on CBI and “unquantifiable” nature of the exposureSlide16

Emerging Risk IssuesCyber Liability –

Exposure becoming hot button issue for risk managers

Losses expected to be coming…and significant

Budgetary concerns are biggest hurdle to purchase but binding orders are on the rise

Most want to bring the rifle, not the bazooka to the fight

Railroad Protective Insurance –

AEGIS/Liberty Product: Option for Guaranteed Cost of full reinsurance by the members AEGIS XSLiab policy (pass through of the SIR)Unclear as to the competitiveness/value compared to commercial market, which remains cost and coverage effectiveSome RR’s are demanding increased limits of $5MM / $10MM and we see this trend continuing – No issues with the markets so far with this trendDeposit AlternativeCompelling alternative to customer depositsInsures the risk of customer bad debt

Removal of bad debts immediately accretive to earningsFeasibility depends on your regulatory environmentSlide17

Forecasts – Property

- Without major CAT loss in 2012, market hardening will be subdued, expect flattening to occur at YE2012 / 1Q2013

AEGIS / EIM –

Continuation of soft (≤5%) rate increases for clean accounts in order to contain Loss Ratio. There will be separate negotiations for anomalies (i.e. accounts with legacy losses but favorable 5 year loss records)

Excess Liability –

Underwriters will seek to retain key accounts. Competition will increase as alternative capacity remains

Innovative Approaches to renewals with eye toward the long term will be all-important to successful insurance programsSlide18

Patrick Maguire – Assistant Vice President Energy & Marine Division – Birmingham, Alabama (205) 581-9290 /

pmaguire@mcgriff.com

Since joining McGriff in 2007, Patrick focuses on the service of Property and Casualty insurance programs for utilities and infrastructure concerns including the design and placement of catastrophe exposed property programs, developing solutions for complex liability risks in excess of $500M, and unique environmental programs. Patrick’s experience includes serving clients with over $150 Billion in assets and international operations. One particular area of focus is in Climate Change mitigation and risk assessment where he has collaborated with insurance markets and state governments to create the first policies for certain exposures.

Prior to McGriff, Patrick worked as an energy/infrastructure insurance broker at Miller Insurance Services, an independent insurance broker in London. Graduating from Marist College with a B.A., he spent brief tenures at Marsh, Dewey &

Leboeuf, LLP, and AEGIS Insurance Services. Patrick is a frequent writer and speaker on the topics of infrastructure insurance and climate change risk management.