The OIL Group of Companies “Tools for Risk Transfer” Presentation to University of Houston February 23, 2006

U. of Houston - February 23, The OIL Group of Companies Three 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 three companies have combined membership of 110. Shareholders/Policyholders who are world-class energy companies headquartered around the world. $2.2 Trillion in Gross Assets Insured globally.

U. of Houston - February 23, 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.

U. of Houston - February 23, 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. In 2004, the top 23 insurance companies (including OIL) had Capital & Surplus and Total Assets of $43 Billion ($2.7B from mutuals) and $183 Billion ($11.3B from mutuals) respectively, and generated $38 Billion of Premium Income ($1.3B from mutuals). * 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. * Bermuda Business—April/May 2005

U. of Houston - February 23, 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 and sEnergy, no “Underwriting” per se - each Policyholder treated equitably; premiums are formula-based.

U. of Houston - February 23, Corporate Governance SHAREHOLDERS (Annual Meeting) BOARD OF DIRECTORS (3 Meetings) EXECUTIVE COMMITTEE (Meetings as required) OMSL MANAGEMENT Elects Board Annually Elects Executive Committee Administers OMSL Approves Shareholders Agenda Approves Board Agenda Prepares Recommendations SHAREHOLDER INITIATIVES EXTERNAL INITIATIVES (Brokers, Consultants, Etc.) STAFF INITIATIVES SHAREHOLDER/POLICYHOLDER INITIATIVES

U. of Houston - February 23, The OIL Group of Companies Operational Structure OIL (82 Members) Oil Investment Corp. Ltd. (OICL) Property Damage Well Control, Pollution sEnergy Insurance Ltd. (14 Members) sEnergy Asset Management Ltd. sEnergy Asset Barbados Ltd. Business Interruption Excess Physical Damage OCIL (77 Members) Oil Casualty Investment Corp. Ltd. (OCICL) Excess General Liability Total Membership = 110OIL/OCIL Common Members = 49 Oil Management Services Ltd.

OIL INSURANCE LIMITED A Case Study….

U. of Houston - February 23, 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.

U. of Houston - February 23, 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 now one of the largest net line currently available. 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.

U. of Houston - February 23, Who are OIL’s 82 Members? Big Companies, such as: Royal Dutch ShellConocoPhillips TOTALChevron Small Companies, such as: Tesoro PetroleumLOOP LLC Murphy OilLyondell Chemical Electric Utility/Power Generation Companies, such as: Duke EnergyTXU Corp. Other members of varying sizes and business focus within the broadly-based Energy Industry

U. of Houston - February 23, OIL Membership by Headquarter Location Number of February 1, 2006 = 82

U. of Houston - February 23, Membership “Count” by Industry Segment Number of 01-Feb-06 = 82

U. of Houston - February 23, 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 = $1 Billion.  Deductibles = $5 Million minimum, increasing in $5 million increments.

U. of Houston - February 23, 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.

U. of Houston - February 23, 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 Weighted Gross Assets are used to calculate individual Policyholders premiums.

U. of Houston - February 23, OIL “Underwriting” Gross Assets by Business Sector X Weighting Factors = Weighted Gross Assets 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 X Premium Rate = Annual Premium

U. of Houston - February 23, Membership Shareholders’ Equity Assets Gross Assets Insured OIL’s History: 33 Years Inception To Date: Net Premiums Earned Net Losses & Loss Expense Investment Income Dividends Paid $0.7 Billion $4.4 Billion $2.2 Trillion $160 Thousand $ 48 Billion $6.1 Billion $7.8 Billion $3.6 Billion $0.8 Billion

U. of Houston - February 23, Insurance Crisis # 2 ( ) 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 - 77 Shareholders headquartered around the world with total gross assets in excess of $2.1 Trillion.

U. of Houston - February 23, …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.

U. of Houston - February 23, …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 operates with an “OIL-like” Rating & Premium Plan.

U. of Houston - February 23, The Evolution of Energy Mutuals Traditional Insurance Market EIM 1986 sEnergy 2002 AEGIS 1975 OCIL 1986 OIL 1972 NEIL 1980 Commercial Market Premium Lost Since 1972 Estimated at excess of $10 billion TOPS

U. of Houston - February 23, 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) The OIL Group: Efficiency & Control

Investment Management

U. of Houston - February 23, OIL Financial Management Membership comprised of the leading global energy companies. Certainty of loss recovery from membership. Strong financial ratings = A- stable (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.

U. of Houston - February 23, Investment Allocations OIL vs. Commercial Insurers Typical Commercial Insurer Asset Allocation OIL Asset Allocation

U. of Houston - February 23, 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.

Current Events Natural Catastrophes: Gulf Hurricane Activity Earthquakes

U. of Houston - February 23, Earthquakes

U. of Houston - February 23, Historical Hurricane “Tracks” Impacting OIL Lili $98M 110mph Andrew $144M 145mph Katrina $1,000M 150mph Ivan $561M 140mph Rita $1,000M 135mph

U. of Houston - February 23, Hurricanes Katrina and Rita Hurricane Katrina as of January 31, 2006: Total of 25 notices received 15 Active, 1 Monitor, 8 Precautionary, 1 closed Total gross losses $4,506M Gross OIL reserves $1,907M, net $1,000M Hurricane Rita as of January 31, 2006: Total of 26 notices received 19 Active, 7 Precautionary Total gross losses $2,443M Gross OIL reserves $1,005M, net $1,000M

U. of Houston - February 23, Hurricane Reserves As at January 31, 2006 ($Millions) GrossNetScaled Ivan Katrina Rita Total7,8503,4932,581

U. of Houston - February 23, Hurricanes Past Payout Patterns

U. of Houston - February 23, GULF HURRICANE ACTIVITY: WHAT DOES THE FUTURE HOLD? Professor Mark A. Saunders Lead Scientist Tropical Storm Risk Benfield Hazard Research Centre University College London, UK While we are in a period of heightened hurricane activity, the incidence of seven US landfalling intense hurricanes in just two years is extremely unusual. The probability of four or more intense hurricane landfalls affecting the Gulf offshore sector over a two-year period is only 1 in 200. Therefore, a knee-jerk reaction to the losses of 2004/5 should be avoided. There is a 79 percent probability of an above-normal Atlantic hurricane season in There is an 82 percent probability of above-normal US landfalling hurricane activity in For the 2006 season, Tropical Storm Risk forecasts 15 tropical storms with eight being hurricanes and four of those being intense hurricanes. Tropical Storm Risk predicts that in 2006 there will be five tropical storm strikes on the US of which two will be hurricanes. Current enhanced hurricane activity will continue to at least 2010.

U. of Houston - February 23, GULF HURRICANE ACTIVITY: WHAT DOES THE FUTURE HOLD?

U. of Houston - February 23, GULF HURRICANE ACTIVITY: WHAT DOES THE FUTURE HOLD? Risk Management Tools Cat Modeling: Forecasting: Event Timing Path/Location Strength Exposure identification: People Property Concentration Value

Conclusion

U. of Houston - February 23, 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?

U. of Houston - February 23, Thank you!