1 A CAPTIVE’S GUIDE TO THE RATING PROCESS June 15, 2016

2 Introductions Business Development Manager A.M. Best Rating Services Jim Fowler Assistant Vice President A.M. Best Rating Services Gary A. Davis Senior Financial Analyst A.M. Best Rating Services Fred Eslami COO Oil Casualty Insurance, Ltd. (OCIL) Jerry Rivers Vice President A.M. Best Rating Services Daniel J. Ryan

3 © AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling. 3 Disclaimer

4 A.M. Best Statistics A.M. Best’s ratings process & key components Peer case study Q&A BCAR Tutorial Learning Objectives

5 Captives Rated Globally by A.M. Best

6 Breakdown by Captive Type

7 Separation of Business Development and Ratings A.M. Best’s Business Development A.M. Best’s Ratings Personnel

8 A.M. Best Rating Process

9 A.M. Best rating is an independent opinion of an insurer’s financial strength and ability to meet its ongoing obligations to policyholders Ratings range from A++ to F What are Financial Strength Rating (FSR) and Issuer Credit Rating (ICR) ‘Outlook’ and ‘Under Review’ modifiers How are A.M. Best Ratings Defined?

10 Ratings are based on quantitative measure and qualitative information The rating process is interactive Captive ratings are a customized affair How are A.M. Best Ratings Derived?

11 What is the Process and Timeline? Set up meeting & Send Agenda Meeting Analysis & Review Rating Committee Rating Communicated & Issued Monitoring Rating

12 What to Expect from A.M. Best’s Rating Process Ratings Division – Internal Initial analytical discussion takes place Data submission Analytical team meets with management and prepares the recommendation Analytical team presents to a peer review committee (PRC) PRC votes to determine rating assignment Depending on circumstances, additional rating committees may be utilized

13 What to Expect from A.M. Best’s Rating Process Ratings Division – External Final rating determination is communicated to company –Initial rating: Acceptance or Rejection or Appeal –Existing rating: Acceptance or Appeal President’s letter, rating report, and press release draft sent to company for approval Rating is published in A.M. Best products and in the public domain (Business Wire)

14 What are the Data Requirements? Audited / unaudited financial statements – Annual/Quarterly Actuarial report Reinsurance and vendor contracts Documentation on loan-backs or LOC’s Face-to-face meeting encouraged Projections and business plan How manage natural catastrophes and terrorism Management bios Supplemental rating questionnaire All relevant information regarding the parent

15 What are some Captive Issues? Equity treatment of letters of credit –Stand-alone; irrevocable; evergreen –Funded; in favor of ART entity; Drawn on highly rated bank –Capital credit Capital preservation over operating performance –Consistent coverage at stable pricing Business retention over market profile –“Value added” services i.e. loss control & engineering Can a captive be rated higher than the parent?

16 What are the Key Rating Factors?

17 Is the BCAR the Only Rating Factor Used? BCAR by itself is insufficient as the sole basis for determining the final rating Risk-adjusted capital is one of many factors considered in assigning an A.M. Best rating The process also considers: Other factors that impact balance sheet strength Operating performance Business profile Enterprise risk management Parental support

18 What are the Component Rating Pieces? Operating Performance Balance Sheet Strength Business Profile Rating Enterprise Risk Management

19 What are the Component Rating Pieces? Operating Performance Balance Sheet Strength Business Profile Rating Enterprise Risk Management BCARAsset Quality Cash FlowAsset Liquidity Financial Lev/FlexALM Loss Reserve Model / LRD Actuarial Reports

20 What are the Component Rating Pieces? Operating Performance Balance Sheet Strength Business Profile Rating Enterprise Risk Management STAT/GAAP Statements AMB Projections SRQ QAR Company Forecasts

21 What are the Component Rating Pieces? Operating Performance Balance Sheet Strength Business Profile Rating Enterprise Risk Management Benchmarking MD&AManagement Team Lines of Business Growth Geographic Spread

22 What are the Component Rating Pieces? Operating Performance Balance Sheet Strength Business Profile Rating Enterprise Risk Management Event RiskReins Program Risk Appetite, Tolerance, etc. Risk Impact Worksheet Lift/Drag from Parent

23 Balance Sheet Strength Operating Performance Business Profile Enterprise Risk Management What are the Component Rating Pieces ? BCAR Cash Flow Asset Quality Asset Liquidity Financial Lev/Flex Actuarial Reports ALM QAR STAT/GAAP Statements Company Forecasts MD&A Lines of Business Management Team Geographic Spread Growth Risk Impact Worksheet Event RiskReins Program Benchmarking SRQ Loss Reserve Model / LRD Lift/Drag from Parent Risk Appetite, Tolerance, etc. Rating AMB Projections

24 Is the Rating Static or Prospective?

25 Is the Rating Static or Prospective?

26 Rating Implications of Failure to Meet Projections? Realistic financial projections are important given the forward-looking nature of the rating process Your analyst may make changes to your projections for use in the analytical process, particularly if there isn’t a clear understanding of how they will be achieved General requirement is current year +1; Additional years may be requested based on circumstances

27 To what Extent does Size & Concentration Matter? Business profile, including product mix and geographic scope, is just one of the factors considered in the rating process Generally speaking, captives with more diverse operations generate more consistently favorable results True specialization in a niche may offset concern about concentration, where a captive has a demonstrated track record and leadership position in that niche

28 Validation of insurance operations Enhanced state, federal and country regulation Greater transparency Increasing involvement of brokers and regional expansion Benchmarking Facilitates capital raising Reinsurance negotiations Drive to improve corporate governance practices Drivers of Ratings

29 Peer Case Study Oil Casualty Insurance, Ltd. (OCIL)

30 OCIL Company Overview Oil Casualty Insurance, Ltd. founded in 1986 by large multinational energy companies Holds a Class 3B license under The Insurance Act 1978 of Bermuda and related regulations. Non-Assessable Mutual Conducts business as an insurance and reinsurance company. Ratings from A.M. Best and S&P Provides various forms of coverage for a broad array of industries with a focus on the energy industry Company DescriptionOrganizational Structure Direct property & liability insurance Assumed Reinsurance Management Liability Oil Casualty Investment Corp. Ltd. (OCICL) Oil Casualty Insurance, Ltd.

31 What does OCIL do? Property & Casualty insurance and reinsurance Insurance Operations –Direct & Facultative Property –Direct Excess Liability –Management Liability –Marine Liability Reinsurance and MGA supported operations –Cyber –Transactional Liability Where does OCIL source its business? –Bermuda –London –Direct

32 Why OCIL Sought an A.M. Best Rating Downgrade from S&P Diversification Broker market security evaluations Counter party transactions Strategic plan initiatives to reduce risk volatility Historical Combined Insured Count (Excess Liability & Property) Received first rating from A.M. Best

33 How the Process Worked OCIL initiate Credit Rating Process by completing an A.M. Best rating service agreement Compiled information required by A.M. Best during Credit Rating Process OCIL’s management held an initial Rating Management Meeting with A.M. Best OCIL submitted additional follow-up information requested by A.M. Best A.M. Best performed internal analysis and held a Rating Committee Meeting The rating decision was communicated to OCIL by A.M. Best and OCIL accepted the rating decision A.M. Best performs on-going monitoring of OCIL’s rating The credit rating process took approximately 3-4 months STEP 1 Rating Engagement and Contract STEP 2 Compiling Information STEP 3 Rating Management Meeting STEP 4 A.M. Best’s Analysis & Decision STEP 5 Rating Communication & Dissemination STEP 6 Monitoring Best’s Credit Rating

34 How Has OCIL Benefited From the Rating? Accelerated sales growth North American and international credibility Excellent resource for independent validations –ERM –Strategy –Capital Management Combined Premium (Direct & Assumed Reinsurance)

35 THANK YOU! Any Questions?

36 BCAR Tutorial BCRM & Best’s New Capital Adequacy Model - BCAR Daniel Ryan, Vice President, A.M. Best Company

37 BCRM – “building block approach” New stochastic based BCAR Goals & objectives Highlights Illustrations & exhibits Expectations and rating implications BCRM & BCAR timeline Questions Agenda

38 BCRM Best’s Credit Rating Methodology

39 BCRM What is BCRM? BCRM is Best’s Credit Rating Methodology and is the process by which all ratings are derived. What’s changing? BCRM is moving to a “building block approach”, but the fundamental rating drivers remain the same Balance sheet strength (BCAR) Operating performance Business profile Enterprise risk management

40 BCRM How is this new updated BCRM “building block approach” different? Provides clients and users with greater transparency and consistency An easy to follow linear approach which begins with a baseline assessment of Balance Sheet Strength combined with assessments in each of the core rating areas Identifies strengths and weaknesses in each of the various rating components *BCRM is being updated but the fundamental rating drivers remain the same

41 The BCRM “Building Block Approach” Country Risk Balance Sheet Strength (Baseline) Balance Sheet Strength (Baseline) Operating Performance Business Profile Business Profile Enterprise Risk Management Comprehensive Adjustment Rating Enhancement Published Issuer Credit Rating Published Issuer Credit Rating The New A.M. Best’s Rating Process

42 BCAR Best’s Capital Adequacy Ratio

43 BCAR What is BCAR? Best’s Capital Adequacy Ratio (BCAR) is a comprehensive quantitative tool that evaluates many of the risks to the balance sheet simultaneously and generates an overall estimate of required capital to support those risks which is then compared with available capital BCAR is a key tool in the assessment of balance sheet strength BUT Is not the sole determinant of Balance Sheet Strength Is not the sole determinant of the rating

44 New Stochastic based BCAR How does new BCAR differ from today’s BCAR? More sophisticated and faster –Stochastic simulations / probability curves –Correlation matrices / diversification –Insurer impairment / default probabilities –Economic scenario generators (ESGs) A computer model that randomly simulates thousands of possible values for a variety of economic and financial variables over a series of selected timeframes An ESG does not predict a path the economy will follow but instead produces a collection of possible paths including some that have not yet been observed Based on more company-specific detail

45 Goals & Objectives What are the inherent goals & objectives of the new BCAR? Changes are NOT intended to: Change the underlying view of the risks Change the main risk categories in the current model Goals are to: –Generate risk factors using stochastic simulations from probability curves & ESG –Incorporate more company specific data - SRQ & financial statements

46 Highlights What are some of the highlights to the new model? Adoption of VaR (Value at Risk) – a metric that uses a probability distribution of possible outcomes to calculate the amount of risk over selected time horizons and confidence intervals Example: Management is trying to determine the amount of capital required to cover 95% of all potential u/w outcomes in any given year.

47 VaR Illustration New Metric – VaR (Value at Risk) VaR 95 = 23% of NPW What’s in the “tail” is reflected by VaR’s in excess of 95% VaR 99 = 30% VaR 99.5 = 36% VaR 99.0 VaR 99.5

48 …More Highlights More Highlights BCAR Calculation change – expressed as a ratio to Available Capital (AC) versus Net Required Capital (NRC) –Better aligns with company risk appetites / risk tolerance statements –Ratio: Available Capital less Required Capital, as a ratio to Available Capital BCAR Formula change – new B8 risk added –Potential Catastrophe Loss (B8) shifted to NRC Potential Cat Losses will vary at each confidence interval Shift from APHS to NRC allows Available Capital to remain constant at the various confidence intervals Required capital for net catastrophe losses is not included in covariance adjustment

49 New Risk Component (B8) BCAR Ratio = (Available Capital – Net Required Capital) / Available Capital Available Capital (AC) Reported Capital (PHS) Equity Adjustments: Unearned Premiums (DAC) Equalization/Contingency Reserves Loss Reserves Assets Debt Adjustments: Surplus Notes Debt Service Requirements Other Adjustments: Future Operating Losses Potential Loss Future Dividends Goodwill & Other Intangible Assets Minority Interests, etc. Net Required Capital Gross Required Capital (GRC): (B1) Fixed Income Securities (B2) Equity Securities (B3) Interest Rate (B4) Credit (B5) Loss and LAE Reserves (B6) Net Premiums Written (B7) Business Risk (B8) Potential Catastrophe Loss Covariance Adjustment Net Required Capital (NRC)* *NRC= SQRT [ (B1)²+(B2)²+(B3)²+(0.5*B4)² +[(0.5*B4)+(B5)]²+(B6)² ] + B7 + B8

50 Current vs. New BCAR Calculation Current BCAR (ratio to NRC) APHS (ex Potential Cat Losses) = $150M Potential Cat Losses = $30M NRC (ex Potential Cat Losses) = $80M BCAR = (150 – 30 ) / 80 = 120/80 = New BCAR (ratio to Available Capital) Available Capital (ex Potential Cat Losses) = $150M Potential cat Losses = $30M NRC (ex Potential Cat Losses) = $80M NRC (incl Potential Cat Losses) = $110M BCAR = (150 – 110 ) / 150 = 40/150 = 26.7

51 Current vs. New BCAR scores Current BCAR (ratio to NRC) Potential Scores: Low of 0.0 to Max of Target BCAR > New BCAR (ratio to Available Capital) Potential Scores: Low of to Max of Target BCAR > 0.0 at various confidence intervals

52 Expectations and Rating Implications So what should I expect as a result of these BCAR changes? First, need to realize that, while BCAR is important, it is only a tool and is not the sole basis of your company’s rating Should be taken in context with our updated BCRM and other rating drivers Since VaR (Value at Risk) looks out in the “tail”, may expect more discussion on “tail” risks from a capital and risk management perspective Underlying view of the risks remain the same; however risk charges may change due to greater modelling sophistication Could see substantially higher investment risk charges if heavily invested in common equities, alternative securities and non-investment grade bonds Changes to BCAR are NOT a means to change ratings although some ratings may change

53 Expectations and Rating Implications So what should I expect as a result of these BCAR changes? Generally speaking, level of required capital will likely be higher simply due to the inclusion of catastrophe risk (B8) SRQ is increasingly important for BCAR purposes New BCAR calculation targets ratios > than 0 at various confidence levels versus an Old BCAR > 100 All rated companies will receive a copy of their new BCAR as soon as models are completed. The international version of AMB’s BCAR is expected to be available by year end. Analyst will communicate any potential rating issues as they become apparent during comment period Ratings impacted will be placed under review at end of comment period & will need to be resolved within 6 months after under review

54 Timeline Draft BCRM & PC BCAR criteria is released for comment Comment period will include public updates as specific issues raised Comment period will be extended to coincide with release of all BCAR models Comment period ends Comments incorporated as necessary into BCRM and all BCAR criteria BCRM and BCAR criteria is published and becomes effective 03/10/16 Remainder of /31/

55 Comment Feedback Comment period ends June 30, 2016 Looking for additional market feedback on both stochastic BCAR and BCRM

56 Comment Feedback Please comments directly to methodology in-box if it is a comment on the criteria Questions specifically about BCAR/BCRM impact to your company should be directed to your analyst All comments will be published unless confidentiality requested Aggregation of comments in process Just because you haven’t gotten a response yet does not mean it has been lost! AGAIN, comment period ends June 30, 2016

57 Questions comments to: –

58 Questions Thank You!

59 © AM Best Company, Inc. (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. AMB does not audit or otherwise independently verify the accuracy or reliability of information received or otherwise used and therefore all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. AMB is not an investment advisor and does not offer consulting or advisory services, nor does the company or its rating analysts offer any form of structuring or financial advice. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.