1. The OIL Group of Companies
“Tools for Risk Transfer”
Presentation to
University of Houston
April 7, 2011

2. The Evolution of Energy Mutuals
TOPS
sEnergy
OIL
1972
Traditional
Insurance
Market
AEGIS
1975
OCIL
1986
EIM
1986
NEIL
1980 2
University of Houston, April 7, 2011

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.
University of Houston, April 7, 2011

4. 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 – 67 Shareholders headquartered around the world with total gross assets in excess of $2.1 Trillion.
University of Houston, April 7, 2011

5. …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.
University of Houston, April 7, 2011

6. …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.
Closed down in 2011.
University of Houston, April 7, 2011

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 combined membership of 88. Shareholders/Policyholders who are world-class energy companies headquartered around the world.
Over $2.2 Trillion in Gross Assets Insured globally.
University of Houston, April 7, 2011

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.
University of Houston, April 7, 2011

10. 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.
University of Houston, April 7, 2011

11. 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”.
University of Houston, April 7, 2011

12. (Meetings as required) SHAREHOLDER/POLICYHOLDER
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 12
University of Houston, April 7, 2011

13. The OIL Group of Companies Operational Structure
Oil Management Services Ltd.
OIL
(49 Members)
OCIL
(67 Members)
Oil Casualty
Investment Corp. Ltd.
(OCICL)
Oil Investment
Corp. Ltd.
(OICL)
Assumed Reinsurance:--What is Correlation risk and why is is a concern for an energy mutual that is involved in assuming treaty reinsurance in the same industry.
sEnergy Asset Barbados Ltd.
Excess General Liability
Assumed Treaty Reinsurance (new)
Property Damage
Well Control, Pollution
University of Houston, April 7, 2011

14. 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.
University of Houston, April 7, 2011

15. OIL’s Policyholders/Shareholders
Historical Membership Count
OIL Shareholders by Headquarter Location
University of Houston, April 7, 2011 15

16. Who are OIL’s 49 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:
Electricity de France (EDF), DTE Energy
Other members of varying sizes and business focus
within the broadly-based Energy Industry
University of Houston, April 7, 2011

17. 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 = $750 Million.
Deductibles = $10 Million minimum, increasing in $5 million increments.
University of Houston, April 7, 2011

18. 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.
University of Houston, April 7, 2011

19. 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 --ANWS-Offshore
ANWS-Onshore
Refining & Marketing/Chemicals
Weighted Gross Assets are used to calculate individual Policyholders premiums.
University of Houston, April 7, 2011

20. OIL “Underwriting” = = X Premium Annual Rate Premium X 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
University of Houston, April 7, 2011

21. OIL’s History: 38 Years 1972 16 $160 Thousand $48 Billion 12/31/201054
$3.2 Billion
$5.9 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 ***
Preference Shares
Operating, Financing & Other Costs
* Includes IBNR/IBNE
** Net of Interest Expense
*** Excluding Preference Share dividends paid
+$11.9 Billion
- $12.0 Billion
+$ 4.5 Billion
- $ Billion
+$ Billion
$ Billion
$ Billion
University of Houston, April 7, 2011

22. 2010 Underwriting Highlights as at December 31, 2010
% Change
Written & Earned Premiums
$891M
$784M
(12%)
Incurred Losses – Current Underwriting Year
$737M
$269M
(64%)
Incurred Losses – Prior Underwriting Years
$(171)M
$173M
201%
IBNR adjustment
$(55)M
$(27)M
51%
Acquisition Costs & Loss Expenses
$22M
$7M
(68%)
Net Underwriting Income
$358M
$362M 1%
University of Houston, April 7, 2011 22

23. Consolidated Balance Sheet
University of Houston, April 7, 2011
Oil Insurance Limited 23

24. Consolidated Balance Sheet
University of Houston, April 7, 2011 24

25. Consolidated Income Statement
University of Houston, April 7, 2011 25

26. 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
University of Houston, April 7, 2011

27. Investment Management

28. OIL Financial Management
Membership comprised of the leading global energy companies.
Certainty of loss recovery from membership.
Strong financial ratings = A- (stable 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 Board Members are from:
Harty Gardner, Retired CFO Mobil Corp, Director and Chairman of the Audit Committee of Pioneer Energy.
Darrell Chessum, Retired Treasurer, Unocal Corp, now part of Chevron.
Paul Reinbolt, VP Finance and Treasurer, Marathon Oil Corp
Robert Wohleber, retired CFO or Kerr-McKee Corp, now part of Anadarko
Tron Vormeland, Vice President Corporate Banking, Statoil
Paul Agizi, Chif Investment Officers for Eastman Chemical
University of Houston, April 7, 2011

29. Current Asset Allocation as at December 31, 2010
Global Fixed Income
Fund of Hedge Funds
Global Equity
CashIncome (Pref)
Short Duration Fixed
University of Houston, April 7, 2011

30. Portfolio Returns by Asset Class Period ended December 31, 2010
University of Houston, April 7, 2011

31. Investment Portfolio Returns as at December 31, 2009
University of Houston, April 7, 2011

32. What about OCIL:
University of Houston, April 7, 2011

33. The Evolution of Energy Mutuals
TOPS
sEnergy
2002
(in runoff)
OIL
1972
Traditional
Insurance
Market
AEGIS
1975
OCIL
1986
EIM
1986
NEIL
1980
University of Houston, April 7, 2011

34. 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
University of Houston, April 7, 2011

35. Major Differences: OCIL vs. OIL
Organization
Member owned
Mutual
Premium calculation
Flexible; Underwriting discretion
Formula driven
Mutualization of losses No
Yes
Avoided Premium
Surcharge & Theoretical Withdrawal Premium
Aggregation limit
Follow Form capability
Ability to Assess Membership
University of Houston, April 7, 2011

36. Financial Ratings OIL OCIL Financial Strength A- A2
Financial Strength BBB A-(new)
Standard & Poor’s
Moody’s
A.M.Best
University of Houston, April 7, 2011

37. Consolidated Balance Sheet
University of Houston, April 7, 2011

38. Consolidated Balance Sheet
University of Houston, April 7, 2011

39. Consolidated Balance Sheet
University of Houston, April 7, 2011

40. Consolidated Income Statement
University of Houston, April 7, 2011

41. OCICL Asset Allocation as at November 30, 2010
University of Houston, April 7, 2011

42. Portfolio Returns By Asset Class Fiscal Year Ended November 30, 2010
University of Houston, April 7, 2011

43. Investment Portfolio Returns Fiscal Year Ended November 30, 2010
University of Houston, April 7, 2011

44. 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.
Now closed and repaid less claims payments.
University of Houston, April 7, 2011

45. Current Events: Natural Catastrophes
In 2010,/11 the issues were:
Natural Catastrophes
Earthquakes: Chile, New Zealand (2)
Australia: Super Typhon Ashai
Japan: Earthquake/Tsunami/Nuclear Disaster
Macaondo Catastrophic Well Control/pollution
In 2009, the issues were:
Financial Market Losses Loss History Tax Haven and Bank Secrecy Issues
In 2008, the issues were:
U.S. & Canadian Tax Issues.
Avalon Re Cat Bonds

46. Historical Hurricane “Tracks” Impacting OIL
Ivan $581M
mph
Gustav
mph
Ike
$750M
mph
Rita $1,000M
mph
Katrina $1,000M
mph
University of Houston, April 7, 2011

47. Historical Hurricane Losses
as at December 31, 2010
Claims Advised
Claims Filed
Gross For Interest
Net to OIL
Net to OIL Scaled
Andrew
(1992) 3
$127M
$108M
Lili
(2002) 7 6
$147M
$96M
Ivan
(2004) 10 8
$789M
$559M
Katrina
(2005) 25 18
$2,686M
$1,992M
$1,000M
Rita 27 20
$1,948M
$1,343M
Ike
(2008) 14 13
$2,150M
$1,286M
$750M
Total: 86 68
$7,847M
$5,384M
$3,513M
University of Houston, April 7, 2011 47

48. Hurricanes - Past Payout Patterns As of December 31, 2010
Years
(since
Date of Loss)
Hurricane Lili
(2002)
Hurricane Ivan (2004)
Hurricane Katrina (2005)*
Hurricane Rita (2005)*
Hurricane Ike (2008)*
< 1 Year
13% 9% 5% 2%
< 2 Years
65%
55%
42%
14%
35%
< 3 Years
79%
82%
58%
34%
46%
< 4 Years
91%
88%
87%
61%
>4 Years
100%
98%
Total
$96M
$559M
$1,000M
$750M
Members 6 8 18 20 13
Katrina and Rita now closed.
Last year at this time, Katrina was either closed or just in the final stages of being close.
RITA still had open:
20 claims submitted
4 claims remaining to be settled - $100MM
2 are borderline limit losses i.e. large/complex
2 have substantial offshore works to complete
Ike Claims
Balance of Aggregation Limit to pay is $223.6M of which $121.2M is the result of the application of the Interim Payment Scaling Factor.
*Payments Scaled for Aggregation Limit
University of Houston, April 7, 2011 48 48

49. Net Incurred Losses since 1972* by Geographic Region of Physical Loss
As at December 31, 2010
Expressed in millions of U.S. dollars
* untrended
University of Houston, April 7, 2011 49

50. Net Incurred Losses by Industry 1972-2010 (38 yrs)
Aggregate Value = $11.3Bn (untrended)
University of Houston, April 7, 2011 50

51. Conclusions

52. 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?
University of Houston, April 7, 2011

53. Thank you!
University of Houston, April 7, 2011