The Global Financial Crisis, International Trade & Piracy: Impacts on Marine Insurance Markets

1. The Global Financial Crisis, International Trade & Piracy: Impacts on Marine Insurance Markets Insurance Information Institute 12 May 2009 Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520  bobh@iii.org  www.iii.org

2. Presentation Outline • The Global Economic Storm: Financial Crisis & Recession • Survey of International Economic Growth Statistics • Industrial Production and Global Supply Chains • Inflation Trends • Economic Threats to Marine Insurance Markets • Top Causes of Decline in International Trade • Major Trade and Marine Exposure Trends • Merchandise Trade (Import/Export) Analysis by Region • Economic Stimulus Impacts—Global Review • Financial Strength • Ratings • Investment Performance • Piracy: Trends by Region, Nature of Attack

3. THE GLOBAL ECONOMIC STORMWhat Financial Crisis and Recession Mean for the Marine (Re)Insurance Industry &International Trade

4. Real GDP By Market 2007-2010F(% change from previous year) All major economies China are in recession. Steep declines in GDP will negatively impact trade on a global scale. Source: Blue Chip Economic Indicators, 4/10/09 edition.

5. Real GDP for Selected Large Trading States,2007-2010F, (% change from prior yr.) All major economies except China are in recession Source: Blue Chip Economic Indicators, 4/10/09 edition.

6. Real GDP for Selected Large Trading States,2007-2010F, (% change from prior yr.) All major economies except China are in recession Source: Blue Chip Economic Indicators, 4/10/09 edition.

7. United States :Real GDP Growth* Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction is growing The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.4% *Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 4/09; Insurance Information Institute.

8. GDP Growth: Advanced & Emerging Economies vs. World 1970-2010F Emerging economies (led by China) are expected to grow by 3.3% in 2009 The world economy is forecast to grow by 0.5% in 2009, but could shrink for the first time since WW II —by 1% to 2% according to the World Bank. Advanced economies will shrink by 1.9% in 2009, dampening energy demand Source: International Monetary Fund, World Economic Outlook Update, Jan. 28, 2009; Ins. Info. Institute.

9. Industrial Production Sharp Decline in Production Spread by Global Supply Chains

10. Global Industrial Production Is in a Tailspin, Signaling Weakness in Trade Annualized 3-Month Percent Change Industrial demand for energy has been particularly hard hit Global industrial production was down 13% in late 2008, adversely impacting energy demand Source: International Monetary Fund, World Economic Outlook Update, Jan. 28, 2009; Ins. Info. Institute.

11. Auto/Light Truck Sales,1999-2010F (Millions of Units) Weakening economy, credit crunch are hurting auto sales; Gas prices less of a factor now. New auto/light truck sales are expected to experience a net drop of 6.7 million units annually by 2009 compared with 2005, a decline of 39.6% and the lowest level since the late 1960s Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth than problems in the housing market will on home insurers Source: US Department of Commerce; Blue Chip Economic Indicators (4/09); Insurance Information Inst.

12. Length of US Recessions,1929-Present* Months in Duration Current recession began in Dec. 2007 and is already the longest since 1981. It is now also the longest recession since the Great Depression. “We will rebuild. We will recover.” --President Barack Obama addressing a joint session of Congress February 24, 2009 * As of May 2009, inclusive Sources: National Bureau of Economic Research; Insurance Information Institute.

13. Length of U.S. Business Cycles, 1929-Present* Duration (Months) Average Duration** Recession = 10.4 Months Expansion = 60.5 Months Length of expansions greatly exceeds contractions Month Recession Started * As of May 2009, inclusive; **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

14. Inflation Trends Significant Moderation Should Help Reduce Severity Trends, but Reduces Merchandise Values

15. Inflation Rates for Largest European Economies & Euro Area, 2007-2010F, (% change from prior yr.) Inflation is down sharply across Europe, reducing claim severity concerns Source: Blue Chip Economic Indicators, 3/10/09 edition.

16. Annual Inflation Rates(CPI-U, %), 1990-2010F Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation. Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, April 10, 2009 (forecasts).

17. Baltic Dry Index: Shipping Costs of Goods Plunged as Trade Weakens The Baltic Dry Index, a measure of shipping costs, plunged more than 90% after the collapse of the commodities bubble in late 2008 Sources: InvestmentTools.com accessed 11 May 2009.

18. ECONOMIC THREATS TO MARINE INSURANCE MARKETS Caught in the Economic Storm

19. Top Causes of Declinein Global Trade • GLOBAL RECESSION • Global nature of recession and rapid spread throughout the world • Downturn is deep and broad, sharply reducing imports/exports • GLOBAL SUPPLY CHAINS • Finished products often contain component parts from many countries with ultimate buyers in still others • Global supply chains act as a contagion mechanism that transmit and accelerate economic disturbances (positive and negative) • SHORTAGE OF TRADE FINANCING (TRADE CREDIT) • Bursting of credit bubble has made obtaining trade credit difficult and expensive to obtain • Renders some trade noneconomical • FUTURE CONCERN: PROTECTIONISM • Countries may erect or increase tariffs and quotas to protect domestict producers • This was a disastrous policy in 1930s • Ultimate reduces global trade flows and deepen global recession Source: World Trade Organization; Insurance Information Institute.

20. Global Merchandise Exports, 1979-2009F ($ Trillions and Annual Growth Rate) Recessions routinely depress trade, but the current global financial crisis is much more severe Trade is expected to decline by its largest amount in decades in 2009 Source: World Trade Organization; Insurance Information Institute.

21. Major Economic Trends Affecting Marine Insurance Markets • All Major World Economies Except China Are in Recession • Demand for Imported Products Has Plunged Globally • Global Trade Expected to Shrink by 9% in 2009, the First Decline Since 1982 and the Largest Drop Since World War II • Trans-Pacific containerized trade was down 3.9% in 2008 with a 4.1% drop projected for 2009 • Immense Amounts of Excess Shipping Capacity is Driving Down Shipping Prices • Baltic Dry Index of shipping prices fell 94% from record high 11,793 in May 2008 to 663 in December 2008 • As Much as 11.3% of Global Shipping Fleet is Idle • As Much as 45% of the New Containership Capacity Scheduled for Delivery in 2010 Will Be Delayed or Cancelled • Concern that Rising Protectionist Sentiments Could Increase Tariffs, Quotas and Further Hurt Trade and Ultimately Deepen Global Recession

22. Implications for Marine Insurance Markets • Decline in Shipping Volume Due to Collapse in Trade is Reducing Exposure (Vessels and Cargo) • Likely reducing claim frequency • Premium Volume is Flat or Falling in Most Marine Segments • Return of Major Catastrophic Losses (Hurricane Ike) Hurt Offshore Energy Segment • Competition Remains Strong in Many Marine Segments, Potentially Hurting Underwriting Performance • Global Economy Will Recover Slowly, Hurting Premium • Investment Earnings Are Declining as Returns Suffer • Global Interest Rates Have Dropped, Insurers Locking in Lower Returns for Years to Come • If Major Economies Become Protectionist, Marine Insurers Will See Further Erosion of their Business • Financial Collapse Means More/Different Regulation of Insurers Globally, Especially in US (Federal Regulation)

23. Real GDP and Trade Growth: OECD Countries: 2007:Q1—2008:Q4 Global trade (imports and exports) fell sharply in late 2008 as major economies entered recessions. WTO estimates global trade will shrink 9% in 2009 Sources: World Trade Organization: http://www.wto.org/english/news_e/pres09_e/pr554_e.pdf

24. Growth in Volume of Merchandise Trade and GDP, 1998 – 2008 (Annual % Change) Merchandise trade volume is shrinking as major economies enter recession Sources: World Trade Organization: http://www.wto.org/english/news_e/pres09_e/pr554_e.pdf

25. Merchandise Trade Exports by Region,2007 and 2008, (% change from prior yr.) Global merchandise trade growth fell by 2/3 in 2008 and will likely be negative in 2009 Sources: World Trade Organization: http://www.wto.org/english/news_e/pres09_e/pr554_e.pdf

26. Monthly Merchandise Exports and Imports, Jan. 2006- Feb. 2009 ($ Bn) Exports ----- Imports------ Exports ----- Imports------ Exports ----- Imports------ Exports ----- Imports------ Sources: World Trade Organization: http://www.wto.org/english/news_e/pres09_e/pr554_e.htm#appendix_chart1

27. Monthly Merchandise Exports and Imports, Jan. 2006- Feb. 2009 ($ Bn) Sources: World Trade Organization: http://www.wto.org/english/news_e/pres09_e/pr554_e.htm#appendix_chart1

28. Monthly Merchandise Exports and Imports, Jan. 2006- Feb. 2009 ($ Bn) Sources: World Trade Organization: http://www.wto.org/english/news_e/pres09_e/pr554_e.htm#appendix_chart1

29. THE $2.75 TRILLION GLOBAL ECONOMIC STIMULUSStimulus Spending Will Have Only a Minor Impact on Trade

30. Announced Economic Stimulus Packages Worldwide (US$ Bill)* U.S. stimulus comprises a mix of spending, tax relief and aid to states Governments around the world are seeking to soften the economic blow through spending. Deficits as a share of GDP will mushroom leading to a potential inflationary threat and higher interest rates the future. P/C insurers will provide insurance necessary for stimulus projects and will benefit from enhanced economic growth As of March 2009, these countries have approved or proposed at least US$2.3 trillion in stimulus spending *As of March 2009. Sources: Wall Street Journal, January 8, 2009 with updates by I.I.I.; Institute of International Finance and Brookings Institute.

31. FINANCIAL STRENGTH & RATINGSIndustry Has Weathered the Storms Well

32. US P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007 Impairment rates are highly correlated underwriting performance and could reached a record low in 2007 2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969; Previous record was 0.24% in 1972 Source: A.M. Best; Insurance Information Institute

33. Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008* P/C insurance is by design a resilient in business. The dual threat of financial disasters and catastrophic losses are anticipated in the industry’s risk management strategy. Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best were affirmations; just 3.8% were downgrades and 4.0% upgrades *Through December 19. Source: A.M. Best.

34. Historical Ratings Distribution,US P/C Insurers, 2008 vs. 2005 and 2000 2000 2008 2005 A++/A+ and A/A- gains P/C insurer financial strength has improved since 2005 despite financial crisis Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.

35. Investment Performance Investments are a Principal Source of Declining Profitability

36. Property/Casualty Insurance Industry Investment Gain:1994- 20081 Investment gains fell by 51% in 2008 due to lower yields, poor equity market conditions 1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute. 37

37. PIRACY An Ancient Scourge Impacts 21st Century Marine Insurers

38. Prime Locations for Piracy Attacks, 2008 Seven locations accounted for more than two-thirds, or 216 of a total 293 reported piracy attacks in 2008 Source: ICC International Maritime Bureau (IMB) 2008 annual report.

39. Monthly Worldwide Piracy Attacks,Jan 2008 - Mar 2009 Attacks reached a new record in March 2009 with 41 attacks, after peaking in September 2008 with 39 attacks. November 08 (37) and January 09 (36) were also busy months. Source: ICC International Maritime Bureau (IMB) First Quarter 2009 and 2008 annual reports.

40. Total Piracy Incidents WorldwideBy Region, 2008 A total of 293 incidents of piracy and robbery against ships were reported in 2008 – an increase of more than 11 percent on 263 incidents in 2007 – due to the unprecedented number of attacks in the Gulf of Aden. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

41. Countries Where Five or MoreIncidents Have Occurred, 2008 A total of 111 incidents were reported for Somalia and the Gulf of Aden in 2008, up nearly 200 percent on 2007. A total of 42 vessels were hijacked by Somali pirates and 815 crew taken hostage. In Jan-Mar 2009, a total of 61 attacks were reported for Somalia and the Gulf of Aden, continuing 2008’s trend. Out of the 61 attacks, nine vessels were hijacked and 157 crew members taken hostage. Source: ICC International Maritime Bureau (IMB) First Quarter 2009 and 2008 annual reports.

42. Piracy Attacks By Vessel Type, 2008 All types of vessels – from cargo ships to passenger ships and fishing vessels – have been attacked. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

43. Flag States of Vessels Attacked 10 Times or More, 2008 The flag of registry subject to the highest number of attacks in 2008 was Panama, followed by Singapore and Liberia. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

44. Managing Country of Ships Attacked 10 Times or More, 2008 The managing country of ships subject to the highest number of attacks in 2008 was Germany, followed by Singapore and Greece. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

45. Total Piracy Incidents Worldwide2003 - Q1:2009 A total of 293 incidents of piracy and robbery against ships were reported in 2008 – up 23 percent since 2006 – the second consecutive year of increases. Attacks in the first quarter of 2009 have almost doubled from 53 in Q1 2008 to 102 in Q1 2009 – due almost entirely to increased Somali pirate activity off the Gulf of Aden. Source: ICC International Maritime Bureau (IMB) First Quarter 2009 and 2008 annual reports.

46. Types of Arms Used During Attacks, 2008 Pirates boarding vessels are better armed and prepared to assault and injure crew. Total incidents in which guns were used rose 93 percent 2007-2008. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

47. Types of Violence to Crew, 2008 Worldwide in 2008 a total of 49 vessels were hijacked, 889 crew taken hostage and a further 46 vessels fired upon – surpassing all previous records. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

48. Total Maritime Hostage Incidents Worldwide, 2003-2008 Worldwide a total of 889 crew were taken hostage in 2008, an increase of 200 percent over 2007! In the first three months of 2009, 178 crew were already taken hostage. Source: ICC International Maritime Bureau (IMB) 2008 annual report.

49. Insurance Information Institute On-Line WWW.III.ORG THANK YOU FOR YOUR TIME AND YOUR ATTENTION!