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The OIL Group of Companies www.oil.bm www.ocil.bm “Tools for Risk Transfer” Presentation to University of Houston April 11, 2013.

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Presentation on theme: "The OIL Group of Companies www.oil.bm www.ocil.bm “Tools for Risk Transfer” Presentation to University of Houston April 11, 2013."— Presentation transcript:

1 The OIL Group of Companies “Tools for Risk Transfer” Presentation to University of Houston April 11, 2013

2 The Evolution of Energy Mutuals Traditional Insurance Market EIM 1986 sEnergy AEGIS 1975 OCIL 1986 OIL 1972 NEIL 1980 TOPS

3 Insurance Crisis # 1 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.

4 Insurance Crisis # 2 ( ) Oil Casualty Insurance, Ltd. (OCIL) Energy industry-owned company insuring Excess General Liability D&O Liability (now discontinued) Assumed Reinsurance (Energy Industry Risks) Formed in 1986 by 14 interested members of OIL. Lack of D&O capacity was key driver in OCIL’s formation. Today – 99 Shareholders and Policyholders headquartered around the world with total gross assets in excess of $3.5 Trillion.

5 …and again in 1993 S 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.

6 …and once again in 2002! 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. Closed down in sEnergy Insurance Limited (sEnergy)

7 OIL INSURANCE LIMITED A Case Study….

8 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. The two companies have a total combined membership of over 121 different Shareholders/Policyholders who are world-class energy companies headquartered around the world.

9 Why Mutualize? Industry ownership ensures fair treatment of Policyholders. Being a mutual or member owned 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 Policyholders.

10 Over $2 trillion in assets insured globally for 52 members $300 million broad and stable “cornerstone” capacity $6 billion in assets Over $3.0 billion in shareholder’s equity Over $11 billion in claims paid over 40 years S&P A- rating (stable outlook) Expense ratio = approx. 3-6 % Not dependent upon reinsurance Who is OIL? World’s Largest Energy Mutual –by the numbers

11 OIL is an Energy Industry Mutual Insurance Company headquartered in Hamilton, Bermuda Formed by 16 major energy companies in 1972 after two incidents in the late 60’s that resulted in inadequate coverage / pricing Today, OIL is a world leader in global energy insurance 52 Shareholders / Policyholders - medium to large public / private world- class energy companies headquartered around the world 46% of membership has been with OIL for over 20 years Who is OIL? World’s Largest Energy Mutual

12 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. Favorable tax/regulatory/legal environment. Highly developed markets in all lines of insurance coverage. Sophisticated on-Island business infrastructure.

13 Second largest insurance / reinsurance market in the world –Over 1200 international insurers and reinsurers listed on its books –Writes nearly $108 billion in gross written premium –Capital & Surplus nearly $185 billion –Total assets of approximately $525 billion World’s largest captive domicile –Home to 600+ licensed captives –Total assets over $86Bn and $21Bn in annual gross premium Location: quick access from main hubs (East Coast / London) Friendly regulatory environment Why Bermuda? Source: Bermuda Monetary Authority 2011 Annual Report

14 The OIL Group of Companies “Mutual/Member Owned” 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—”Post lost funding”.

15 Corporate Governance SHAREHOLDERS (Annual Meeting) BOARD OF DIRECTORS (3-5) Meetings per year) OMSL MANAGEMENT Compensation Committee Audit Committee Governance Committee Executive Committee Elects Board Annually Chairman Nominates Committee members and Board Approves All Officers and Support STAFF reside in Management Company

16 The OIL Group of Companies Operational Structure OCIL and OIL have no employees, The Companies are administered by Oil Management Services Ltd. Property Damage Well Control, Pollution Excess General Liability Excess Property Facultative Reinsurance Oil Casualty Investment Corp. Ltd. (OCICL) Oil Casualty Insurance, Ltd. (112* members) Oil Management Services Ltd. (“OMSL”) Oil Insurance Limited (52 members) Oil Investment Corp. Ltd. (OICL) *112 Members at December 31, Shareholders.

17 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 $300 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 11 th. Any rate increase in OIL is due to increased losses by the membership - not internal or external pressures - and hence is transparent.

18 Who are OIL’s 52 Members? Big Companies, such as: ConocoPhillips TOTAL Chevron Small Companies, such as: Tesoro PetroleumLOOP LLC Murphy Oil Electric Utility/Power Generation Companies, such as: Electricity de France (EDF), DTE Energy Other members of varying sizes and business focus within the broadly-based Energy Industry.

19 Apache Corporation Arkema* BASF SE* BG Group plc* BHP Billiton Petroleum (Americas) Inc. Buckeye Partners, L.P. Canadian Natural Resources Ltd* Canadian Oil Sands Limited CEPSA* Chevron Corporation Chevron Phillips Chemical Company LLC CITGO Petroleum Corporation* ConocoPhillips* DONG Energy A/S* Drummond Company Inc. DTE Energy Company EDF Group* Energy Transfer Partners, L.P. ENI S.p.a.* Galp Energia S.A.* Hess Corporation* Hovensa LLC Husky Energy Inc. LOOP LLC. Lyondell Chemical Company* Marathon Oil Company Marathon Petroleum Corporation MOL Hungarian Oil and Gas Company* Murphy Oil Corporation Nexen Inc.* Noble Energy, Inc. Nova Chemicals Corporation* Occidental Petroleum Corporation* OMV Aktiengesellschaft* Paramount Resources Phillips 66 Company Puerto Rico Electric Power Authority Repsol YPF, S.A.* Royal Vopak N.V.* Santos Ltd.* Sempra Energy Sinclair Companies (The) Statoil ASA * Suncor Energy Inc. Talisman Energy Inc.* Tesoro Petroleum Corporation TOTAL* Valero Energy Corporation* Westlake Chemical Corporation Williams Companies, Inc. (The) Woodside Petroleum Limited.* Yara International ASA* Current OIL Members

20 Membership “Count”* * Year-end member count, net year on year change.

21 Membership Changes Members 1/1/ New Members2 Merger/Acquisitions(1) Departures 12/31/2012(1) Members 1/1/201352

22 2013 Membership by Industry Segment

23 OIL Shareholders by Headquarter Location Globally diversified membership with an increasing interest from non-US companies.

24 OIL: Risks Insured Eight Business Sector Coverages 1.Physical damage to first party property. 2.Well Control, including Restoration and Redrilling. 3.Third party Pollution Liability, (non-gradual). 4.Limits = $300 million per occurrence, no annual aggregate. 5.Single Event Limit = $900 Million. 6.Deductibles = $10 Million minimum, increasing in $5 million increments. Winstorm Coverages: Onshore and offshore (ANWS only)  Coverage Grants same as 1, 2, and 3 above.  Limits= $150 Million p/o $250 million per occurrence  Single Event Limit = $750 Million.  Coverage is automatic for exposed assets, but member can effectively opt out of the coverage.

25 Automatic coverage for: Worldwide Coverage for an Energy Company and its Consolidated Subsidiaries / Affiliates A member’s interest in a JV or other non-consolidated affiliate (if interest equates to less than 1% of Gross Assets) Coverage for non-owned assets where a member has a contractual obligation to repair / replace What’s Covered?

26 Membership is exclusive to energy companies Members are all shareholders / policyholders and have vested interests “Mutualized” sharing of losses Easy annual renewal. Premiums are formula and performance based i.e. no underwriting One policy form for all members per the OIL Shareholders’ Agreement OIL uses gross assets from audited balance sheets while the market uses insured values OIL vs. Commercial Market

27 No Annual Aggregate. Joint Ventures – full Limits available. Limits do not scale for working interest but deductibles scale for interest. Aggregation Limit – maximum payout of $900 Million (non-windstorm) on multiple shareholder claims arising out of one occurrence. Reduced limits are available (minimum limit is $100M) subject to a warranty as respects the absence of other insurances (warranty does not apply to windstorm). Limits can apply as primary, excess, quota share, ventilated and different limits may be elected by sector. Oil Limits – 8 Business Sectors

28 For windstorm coverage outside of the ANWS zone (i.e. South China Sea, North Sea, Australia etc.), the windstorm limit is $300M (not $150M part of $250M) and the Aggregation Limit is $900M. ROW coverage, by geographic region, will be restricted only after incurring a Loss Trigger Event: –A single loss event of $750M –Cumulative losses of $1B over a 5 year rolling basis After a threshold trigger is met, windstorm coverage and pricing will automatically change in the next policy year unless the Board of Directors determines otherwise Rest of the World (RoW)

29 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. Eight Business Sector Coverages only

30 Net Incurred Losses Since 1972* By Geographic Region of Physical Loss As at December 31, 2012 Expressed in billions of U.S. dollars * untrended

31 Repayment Schedule for Losses Incurred

32 Sector Weighting for Risk 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 –ANWS-Onshore –ANWS-Offshore Weighted Gross Assets are used to calculate individual Policyholders premiums.

33 Utilizes sector and deductible weightings. Gross Assets are adjusted for operational risk (sector weighting) and coverage profile (limit/deductible weighting) to generate Weighted Gross Assets which is used to determine pool % and calculate individual premiums. 8 Business Sector Pricing (Non-Windstorm) ELECTRIC UTILITY PIPELINES* MINING OTHER*

34 8 Business Sector Gross Assets Unmodified Gross Assets by Industry Segment ($2,214 Bn)* Weighted Gross Assets by Industry Segment ($1,166 Bn)* ($1,166 Bn)* Business Sectors  E&P Offshore  E&P Onshore  R&M / Chemicals  Pharmaceuticals  Mining  Utilities  Pipelines  Other * as of December 31, 2011

35 Premium Calculator Example - 8 Business Sector GROSS ASSETS BY BUSINESS SECTOR GROSS ASSETS BY BUSINESS SECTOR SECTOR / DEDUCTIBLE / LIMIT WEIGHTING FACTORS WEIGHTED GROSS ASSETS (WGA) WEIGHTED GROSS ASSETS (WGA) WGA = 38.75B / $1,046B (GROUP WGA) = 3.7% WGA = 38.75B / $1,046B (GROUP WGA) = 3.7% MEMBERSHIP ANNUAL LOSSES (20%) MEMBERSHIP ANNUAL LOSSES (20%) ANNUAL PREMIUM ANNUAL PREMIUM Gross Assets Offshore E&P = $25B Pipelines = $5B Total = $30B Weighting Factors Offshore E&P = 1.50 Pipelines = 0.25 Weighted Gross Factors Offshore E&P = $37.50B Pipelines = $1.25B Total = $38.75B X X = X

36 OIL’s History: 40 Years Membership Shareholders’ Equity Assets Gross Assets Insured 12/31/ $3.6 Billion $5.5 Billion $2.3 Trillion $160 Thousand $48 Billion +$13.5 Billion - $13.8 Billion +$ 5.2 Billion - $.8 Billion +$.4 Billion - $.9 Billion $ 3.6 Billion Inception To Date: Net Premiums Earned Net Losses & Loss Expense * Investment Income ** Dividends Paid *** Preference Shares Operating, Financing & Other Costs * Includes IBNR/IBNE ** Net of Interest Expense *** Excluding Preference Share dividends paid

37 Consolidated Balance Sheet

38

39 Consolidated Income Statement

40 The OIL Group: Efficiency & Control Why we are different from the Commercial Market… Commercial Market ~30-40% Expense Ratio PREMIUM LOSS PAYMENT Member PREMIUM LOSS PAYMENT OWNERSHIP CONTROL RETURN ON CAPITAL “OIL Group” ~ 5% Expense Ratio Insured (Buyer)

41 Marketing Broker Consulting Agreements –OIL has signed global service agreements with 4 key brokers to assist OIL in its efforts to attract “Quality” new members. –The services include: oProspect Identification & Qualification. oMarket Intelligence/Research oProduct Development oMember opportunities/issues oTraining –These agreements do not include any contingent compensation arrangements.

42 Marketing In 3 rd year of a global marketing plan –Building global broker network capabilities oOil has been “on the road” globally engaging brokers –Delivering new global marketing materials oWeb site oBrochures oTools –Launching the OTA (Oil Technical Accreditation) oLaunched in December 2012

43 New On-Line Tutorial & Official Accreditation “OTA” Oil Technical Accreditation

44 Investment Management

45 Investment Objectives Investment objectives are to provide adequate liquidity to meet OIL’s future obligations, and endeavor to both preserve and enhance value over a market cycle. The Investment Board reviews the investment objectives, investment policy, and asset allocation strategy at least annually.

46 Current Asset Allocation as at December 31, 2012 Update: as approved by the Investment Board, 25% of Global Bonds (benchmark and portfolio) were shifted to short duration on October 1, This shift was made to reduce interest rate risk, locking in gains following a period of declining interest rates and protecting against potential losses from future interest rate rises.

47 Investment Portfolio Returns as at December 31, 2012

48 Current Events: Natural Catastrophes

49 Historical Hurricane “Tracks” Impacting OIL Katrina $1,000M m ph Ivan $581M mph Rita $1,000M mph Ike $750M mph Gustav mph

50 Hurricanes – Past Payout Patterns As of 31 Dec 2012 Years Hurricane Lili (2002) Hurricane Ivan (2004) Hurricane Katrina (2005)* Hurricane Rita (2005)* Hurricane Ike (2008)* < 1 Year0%9%5%2% < 2 Years81%78%42%20%27% < 3 Years97%79%56%35%57% Current100%99%100% 74% Total Reserve $96M$558M$1,000M $750M Members

51 Net Incurred Losses since 1972* by Geographic Region of Physical Loss As at December 31, 2011 Expressed in millions of U.S. dollars * untrended

52 Net Incurred Losses by Industry (39 yrs) *Aggregate Value = $11.8Bn (untrended) * Pure Loss—Excludes loss expense

53 Net Incurred Losses By Industry Sector – 2012 only Aggregate Value = $599M* *$294M – North Sea Blowout Loss

54 OIL Capital Structure Summary

55 OIL Capital Structure In June 2006, OIL issued 600,000 Series A perpetual preferred shares (“Series A preference shares”) and received proceeds from the issuance, net of direct issuance costs, of approximately $586,842,000. Upon dissolution of OIL, the holders of the Series A preference shares are entitled to receive a liquidation preference of $1,000 per share, plus accrued unpaid dividends. Dividends on the Series A preference shares from the date of original issuance through June 30, 2011 are payable semi-annually in arrears in cash, when and if declared by the Board of Directors, out of funds legally available for the payment of dividends under Bermuda law. Such dividends are payable on June 30 and December 30 of each year, at the annual rate of 7.558% per $1,000 liquidation preference until June 30, After June 30, 2011 if the shares are not called, dividends will accrue at an annual rate of 3-month LIBOR plus a margin equal to basis points per $1,000 liquidation preference, payable quarterly in arrears. The Company may redeem the Series A preference shares on or after June 20, 2011, at a redemption price of $1,000 per share. During 2012, the Company repurchased and retired 59,100 of the Series A preference shares. As of December 31, 2012, OIL had 352,382 Series A shares outstanding.

56 Theoretical Withdrawal Premium (TWP) Both Standard & Poor’s and the Bermuda Monetary Authority now give OIL capital credit for TWP Credit is calculated as follows: ─ Remove all sub-investment grade TWP amounts for individual members from the aggregate TWP amount ─ Discount future premium flows by 5% for 3 years ─ Discount each member’s TWP amount by their credit default risk factor (S&P Capital Model)

57 What about OCIL:

58 The Evolution of Energy Mutuals Traditional Insurance Market EIM 1986 sEnergy 2002 (in runoff) AEGIS 1975 OCIL 1986 OIL 1972 NEIL 1980 TOPS

59 OCIL’s Historical Mission and Value Proposition OCIL = historically significant –Founded at a time when capacity was scarce –Hedge against commercial market “knee-Jerk” reactions, irrational underwriting and erratic pricing –Owned and controlled by Shareholders OCIL’s original mission –To provide its policyholders with Directors & Officers Liability coverage on policy forms that were comparable to or broader than coverage available in the commercial market –To offer substantial limits at reasonable prices, which are reliable over the long-term in lines (Excess General Liability and D&O) that are often volatile or restrictive by commercial markets –To maintain capacity, pay claims that arise, and ensure fair treatment of members

60 OCILOIL Organization Member ownedMutual Premium calculation Flexible; Underwriting discretion Formula driven Mutualization of losses NoYes Avoided Premium Surcharge & Theoretical Withdrawal Premium NoYes Aggregation limit NoYes Follow Form capability YesNo Ability to Assess Membership NoYes Major Differences: OCIL vs. OIL

61 OIL Financial Strength A- A2 OCIL Financial Strength BBB+ A- Stable Moody’s Financial Ratings Standard & Poor’s A.M. Best

62 Consolidated Balance Sheet

63

64 Consolidated Income Statement

65 OCIL Asset Allocation as at November 30, 2011

66 Portfolio Returns By Asset Class Fiscal Year Ended November 30 Update: 3 Months ended February 29, 2012 Global Equity Benchmark 11.6% Hedge Fund Benchmark 2.8% Global Bond Benchmark 3.2%

67 Investment Portfolio Returns Fiscal Year Ended November 30

68 Cat Bond Definition Cat Bond is short for Catastrophe Bond: –A corporate bond with special language that requires the bondholders to forgive or defer some or all payments of interest or principal if actual Catastrophe losses surpass a specified amount, or trigger. Cat Bonds were originally developed by insurance companies in the early to mid 1990’s who were looking for additional capacity to reinsure natural Catastrophes, ie: earthquakes, wind storms, hurricanes. Historically, Cat bonds have provided risk securitization for purely Catastrophic events – Avalon Re, Ltd. was the FIRST (and probably last) company to issue a Casualty Catastrophe Bond

69 Conclusions

70 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 allocate premium for them in a mutual setting?

71 Thank you!


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