1. Avalon Re A Casualty Cat Bond

2. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.2 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 company to issue a Casualty Catastrophe Bond

3. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.3 Is it Similar to a Corporate Bond? How is it different from any other type of Corporate Bond? –When a Corporate Bond matures, the investor receives the principal amount at maturity…a Cat Bond investor may not: oThe principal is repaid only IF the Cat Bond has not been ‘triggered’ oThe investor receives back only that portion of principal that has not been ‘triggered’, and the relevant interest –If the Cat Bonds have been ‘triggered; the reinsurer (ie. Avalon Re, Ltd.) that issued the bond can pay claims with the funds that would otherwise have gone back to the bondholders

4. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.4 Key Benefits of New Capital Protection Program Repositioning Commercial Reinsurance –This will be evident in the case of a Paid Loss, as Cat Bond “drops down” –Increased bargaining power over next three years –Reinsurance Costs should decrease further in future Increased Protection At least maintain S&P rating of A-/Stable outlook, if not increase the rating Fixed Costs on three layers of protection

5. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.5 Why did OCIL pursue the Capital Markets? Capital Management Objectives lead the path: –Reduce the reliance on commercial reinsurance –Introduce a securitized reinsurance program to further diversify the capital sources and lower the capital costs overall –Design a capital structure around the six loss scenario.

6. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.6 Integration with Traditional Reinsurance $900M Commercial Reinsurance 6th Loss 8th Loss $750M Avalon Re, Ltd. 5th Loss $600M Avalon Re, Ltd. 4th Loss $450M Avalon Re, Ltd. 3rd Loss $300M Commercial Reinsurance 2nd Loss $150M Commercial Reinsurance 1st Loss = OCIL Retention

7. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.7 Example of the ‘Drop Down’ = OCIL Retention $900M Commercial Reinsurance $750M Avalon Re, Ltd. $600M Avalon Re, Ltd. $450M Avalon Re, Ltd. $300M Commercial Reinsurance $150M Commercial Reinsurance $900M Commercial Reinsurance $750M Commercial Reinsurance $600M Commercial Reinsurance $450M Avalon Re, Ltd. $300M Avalon Re, Ltd. $150M Avalon Re, Ltd. Current Reinsurance Program: Potential Reinsurance Program after Two Full Limit Losses:

8. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.8 Securitized ReinsuranceTraditional Reinsurance Term3 Year Aggregate1 Year Term, renewed annually CostPremium consists of fixed spread paid on principal in SPV on a quarterly basis Entire premium paid at the beginning of term. Reinstatement paid in Layers “x” in case of loss Credit Worthiness Fully collateralized with high quality securities Based on reinsurers’ ratings CoverageDetermined in reinsurance treaty with SPV (to be aligned with traditional reinsurance) Determined in reinsurance treaty with reinsurer(s) Summary of Differences in the Two Types of Reinsurance

9. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.9 What/Who is Avalon Re, Ltd.? Investors Reinsurance Contract Premium OIL Casualty Insurance, Ltd Securities Cash Avalon Re, Ltd. Special Purpose Vehicle “SPV”

10. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.10 Who are the Investors? Investor Type Banks Cat Funds Insurers Hedge Funds Mutual Funds Reinsurers

11. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.11 Why do they Invest? Various types of investors, however, for the most part, the Hedge Funds and Mutual Funds are the largest investors The high interest rates, which reflect the higher risk they are assuming have made Cat Bonds attractive to the multi strategy hedge funds in particular. The Cat Bonds have added diversification, due to their non-correlated risk, to the various Mutual and Hedge Funds that have invested in them

12. University of Houston, 2-8-07Oil Causalty Insurance, Ltd.12 Actuarial Model MembershipAssetsLimits Attachments New Expected Losses New Interest Rates The interest rate on a given tranche will be reset annually to reflect changes in underlying risk and expected loss: Cat Bond: Annual Reset

13. Thank you!