The OIL Group of Companies www.oil.bm www.ocil.bm “Tools for Risk Transfer” Presentation to University of Houston February 7, 2007
The OIL Group of Companies • Two energy industry mutual insurance companies: • Headquartered in Hamilton, Bermuda • Established when commercial market: • Ceased to provide adequate coverages/limits. • Priced high risk energy operations at unacceptable levels. • Shareholders/Policyholders who are world-class energy companies headquartered around the world. • Over $2.2 Trillion in Gross Assets Insured globally.
Why Mutualize? • Industry ownership ensures fair treatment of Policyholders. • Mutuals provide ‘hedge’ against a frequently volatile commercial insurance market. • Shareholders maintain active control of the coverages available to them. • Highly cost-effective catastrophe insurance facility. • Generates long-term benefits for Shareholders.
Why “Bermuda”? • Bermuda is one of the three largest insurance markets in the world (London and New York being the others.) • More than 1,600 international insurers and 1,200 captive insurers are registered in Bermuda. 82 new companies in 2006 . • Favorable tax/regulatory/legal environment. • Highly developed markets in all lines of insurance coverage. • Sophisticated on-Island business infrastructure. • In 2005, the latest year for which statistics are available, the Bermuda market wrote a total of $100.7 billion in gross written premiums, up from $95.3 billion in 2004. • In excess of $13 Billion of new opportunistic capital has flowed into Bermuda since September 11, 2001, and more again in the aftermath of Katrina and Rita.
The OIL Group of Companies “Mutual” Structure • Basic structure similar to any other corporations: • - Shareholders, Board of Directors, Board Committees, Officers & Staff. • Major differences: - Shareholders are the Customers (Insureds.) - Directors are elected from the Shareholder Body. • The Investment companies are directed by a separate Board of Directors, which includes senior financial officers from major Shareholder companies. • In case of OIL, no “Underwriting” per se - each Policyholder treated equitably; premiums are formula-based.
Corporate Governance SHAREHOLDERS (Annual Meeting) Approves Shareholders Agenda Elects Board Annually BOARD OF DIRECTORS (3 Meetings) Elects Executive Committee Approves Board Agenda SHAREHOLDER INITIATIVES EXECUTIVE COMMITTEE (Meetings as required) Administers OMSL Prepares Recommendations OMSL MANAGEMENT STAFF INITIATIVES EXTERNAL INITIATIVES (Brokers, Consultants, Etc.) SHAREHOLDER/POLICYHOLDER INITIATIVES
The OIL Group of Companies Operational Structure Oil Management Services Ltd. OIL (74 Members) OCIL (77 Members) Oil Casualty Investment Corp. Ltd. (OCICL) Oil Investment Corp. Ltd. (OICL) sEnergy Asset Barbados Ltd. Excess General Liability Property Damage Well Control, Pollution OIL/OCIL Common Members = 49
OIL INSURANCE LIMITED A Case Study….
Why was OIL Formed in 1971? • Inability of petroleum companies to purchase all-risk property damage coverage at realistic rates and capacity. • Incident – 1967 Explosion and Fire at Cities Service Oil Co. refinery in Lake Charles , Louisiana. • Unwillingness of the commercial insurance industry to sell third party pollution liability to petroleum companies at any price. • Incident – 1969 Union Oil Co. oil spill in Santa Barbara Channel, California. • Realization on the part of 16 oil companies that the combined capital & surplus of the petroleum industry greatly exceeded that of the insurance industry.
OIL: An Alternative Insurance Solution • Today, OIL continues to be a very real and attractive option to many insurance buyers in the energy industry. • OIL’s $250 Million limit is one of the largest net line capacity insurers currently available to the energy industry. • OIL does not buy reinsurance so it is not subject to annual changes in conditions or restrictions on terms offered – in this way full terrorism coverage continued to be offered after September 11th. • Any rate increase in OIL is due to increased losses by the membership - not internal or external pressures - and hence is transparent.
Who are OIL’s 74 Members? • Big Companies, such as: • ConocoPhillips • TOTAL • Chevron • Small Companies, such as: • Tesoro Petroleum LOOP LLC • Murphy Oil Lyondell Chemical • Electric Utility/Power Generation Companies, such as: • TXU Corp. • Other members of varying sizes and business focus • within the broadly-based Energy Industry
OIL Membership byHeadquarter Location Number of Shareholders @ 01-Jan- 07 = 74
Membership “Count” by Industry Segment Number of Shareholders @ 01-Jan-07 = 74
OIL: Risks Insured • Physical damage to first party property. • Well Control, including Restoration and Redrilling. • Third party Pollution Liability. • Limits = $250 million per occurrence, no annual aggregate. • Single Event Limit = $500 Million. • Deductibles = $5 Million minimum, increasing in $5 million increments.
OIL Rating & Premium Plan • Formula basis – no traditional “underwriting.” • Premiums paid by Policyholders is a function of their Gross Assets. • Gross Assets = Gross value (historic cost) of property, plant & equipment before deprecation, depletion, and amortization, plus inventories, materials, and supplies. • Gross Assets are then adjusted for operational risk and coverage profile (i.e., sector and deductible weightings) = Weighted Gross Assets.
Sector Weighting • Policyholders’ Gross Assets are adjusted to recognize differences in operational risk between Business Sectors: • Offshore E&P -- Pharmaceuticals • Onshore E&P -- Mining • Pipelines -- Other • Electric Utilities • Refining & Marketing/Chemicals • Proposed new sectors (shareholder GOM hurricane initiatives): • ANWS-Onshore • ANWS-Offshore • Weighted Gross Assets are used to calculate individual Policyholders premiums.
OIL “Underwriting” Gross Assets by Business Sector Sector Weighting Factors Weighted Gross Assets = X Gross Assets Offshore E&P = $ 30B Pipelines = $ 10B Total $ 40B Sector Weight Factors Offshore E&P = 1.50 Pipelines = 0.25 Weighted Gross Assets Offshore E&P = $ 45.0B Pipelines = $ 2.5B Total $47.5B Weighted Gross Assets $47.5B Premium Rate Annual Premium = X
OIL’s History: 35 Years 1972 16 $160 Thousand $160 Thousand $ 48 Billion 2007 74 $0.7 Billion $4.4 Billion $2.2 Trillion Membership Shareholders’ Equity Assets Gross Assets Insured Inception To Date: Net Premiums Earned Net Losses & Loss Expense Investment Income Dividends Paid $6.1 Billion $7.8 Billion $3.6 Billion $0.8 Billion
Insurance Crisis # 2 (1985-86) • Oil Casualty Insurance, Ltd. (OCIL) • Energy industry-owned company insuring • Excess General Liability • D&O Liability (now discontinued) • Formed in 1986 by 14 interested members of OIL. • Lack of D&O capacity was key driver in OCIL’s formation. • (Today OCIL no longer writes this coverage) • Today - 77 Shareholders headquartered around the world with total gross assets in excess of $2.1 Trillion.
…and again in 1993 • TOPS (Total Loss Only Platform Structures) • Petroleum industry-owned company providing high-level Excess Property Damage coverage for large production structures located in the North Sea. • Established in response to commercial insurance market’s overpricing of coverage specifically related to such structures. • Formed in 1993 by 16 petroleum companies headquartered in Europe and North America. • No losses in entire history of operations. • Liquidated in 1999 when rational pricing returned to the commercial market.
…and once again in 2002! • sEnergy Insurance Limited (sEnergy) • Energy industry-owned company providing • Business Interruption • Property Damage (excess of OIL) • Lack of affordable, long-term and stable commercial market capacity was key driver in sEnergy’s formation. • Formed in 2002 by 12 energy companies. • sEnergy operated with an “OIL-like” Rating & Premium Plan. • Currently in “run-off”.
The Evolution of Energy Mutuals TOPS 1993-99 sEnergy 2002 (in runoff) OIL 1972 Traditional Insurance Market AEGIS 1975 OCIL 1986 EIM 1986 NEIL 1980 Commercial Market Premium Lost Since 1972 Estimated at excess of $10 billion
The OIL Group: Efficiency & Control Why we are different from the Commercial Market… Commercial Market ~30-40% Expense Ratio PREMIUM Insured (Buyer) LOSS PAYMENT PREMIUM “OIL Group” ~ 5% Expense Ratio Member • LOSS PAYMENT • OWNERSHIP • CONTROL • RETURN ON • CAPITAL
OIL Financial Management • Membership comprised of the leading global energy companies. • Certainty of loss recovery from membership. • Strong financial ratings = A- (negative watch -S&P.) • Access to capital markets to enhance capital structures. • Catastrophic insurer, above working layer losses. Investment portfolios are structured with less need for liquidity which allows for greater diversification by major asset classes and potential return.
Investment AllocationsOIL vs. Commercial Insurers Typical Commercial Insurer Asset Allocation OIL Asset Allocation
Target Benchmark Current Allocation including cash Equity Range: 55% - 45% Fixed Range 45% - 55% OIL Asset Allocation as at December 31, 2006
OIL Investment Strategy • Key Differences from Commercial Markets • Broader range across major asset classes (US equities, international equities, hedge funds, and currencies, in addition to fixed income.) • Greater opportunities for capital growth through investment returns. • Less need for immediate liquidity from portfolio to cover insured losses – i.e., Commercial Paper issued to cover losses. • All funds managed by external money managers (as opposed to significant internal management typically used by commercial insurers.) • Diversity = Preservation of value in down markets. • Substantial upside in rising markets (18.5% return for in 2003 vs. 4% - 7% returns typically for commercial insurers.) • Portfolio has qualities more like a pension fund than a typical insurance company.
Historical Hurricane “Tracks” Impacting OIL Rita $1,000M 135mph Andrew $144M 145mph Katrina $1,000M 150mph Lili $98M 110mph Ivan $561M 140mph
Hurricanes Katrina and Rita Hurricane Katrina as of December 31, 2006: • Total of 25 notices received • 18 Active, 1 Monitor, 1 Precautionary, 5 Closed • Gross for interest losses $3,849M • Gross OIL reserves $2,089M, net $1,000M Hurricane Rita as of December 31, 2006: • Total of 27 notices received • 21 Active, 1 Monitor, 3 Precautionary, 2 Closed • Gross for interest losses $2,393M • Gross OIL reserves $1,466M, net $1,000M
Hurricanes Past Payout Patterns As of December 31, 2006*Net of Scaling Factor Application
OIL Business Model • Business model that has worked successfully to service the energy industry for over 30 years. • Insurance facility is tailored to the needs of the energy industry. • Mutualization of losses assures fairness and recovery of losses. • Among the largest limits available in the world market. • Highest form and reliability of coverage. • Strong access to capital markets when necessary. • Investment strategy promotes capital growth, as well as, security. • Low cost, most efficient vehicle for managing major risk transfer. • Biggest Challenge:Natural Catastrophes. How do we insure them? How do we calculate premium for them in a mutual setting?