The OIL Group of Companies www.oil.bm www.ocil.bm Tools for Risk - - PowerPoint PPT Presentation

The OIL Group of Companies

www.oil.bm www.ocil.bm

“Tools for Risk Transfer”

Presentation to University of Houston April 5, 2012

The Evolution of Energy Mutuals

4/5/2012 2

Traditional Insurance Market

EIM 1986 sEnergy 2002-2011 AEGIS 1975 OCIL 1986 OIL 1972 NEIL 1980 TOPS 1993-99

2

Insurance Crisis # 1

Why was OIL Formed in 1971?

4/5/2012

• 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.

3

Insurance Crisis # 2 (1985-86)

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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.

4

…and again in 1993

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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.

5

…and once again in 2002!

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• 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.

sEnergy Insurance Limited (sEnergy)

6

OIL INSURANCE LIMITED

A Case Study….

The OIL Group of Companies

4/5/2012

• 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 121

different Shareholders/Policyholders who are world-class energy companies headquartered around the world.

8

Why Mutualize?

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• 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.

9

Why “Bermuda”?

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• 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.

10

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”.

4/5/2012 11

Corporate Governance

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SHAREHOLDERS (Annual Meeting) BOARD OF DIRECTORS (3-5) Meetings per year) OMSL MANAGEMENT

Compensation Committee Audit Committee Governance Committee Executive Committee

12

Elects Board Annually Chairman Nominates Committee members and Board Approves All Officers and Support STAFF reside in Management Company

The OIL Group of Companies Operational Structure

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OIL

(52 Members)

Oil Investment

• Corp. Ltd.

(OICL)

Property Damage Well Control, Pollution

sEnergy Asset Barbados Ltd. OCIL

(99 Members)*

Oil Casualty Investment Corp. Ltd. (OCICL)

Excess General Liability

Oil Management Services Ltd.

*99 Members at April 1, 2012.

13

OIL: An Alternative Insurance Solution

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• 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 11th.

• Any rate increase in OIL is due to increased losses by the

membership - not internal or external pressures - and hence is transparent.

14

Who are OIL’s 52 Members?

4/5/2012

• 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.

15

4/5/2012 16

Current OIL Members

Oil Insurance Limited –MEMBERS 2012

Apache Corporation Arkema* BASF SE* BG Group plc* BHP Billiton Petroleum (americas) Inc. Buckeye Partners, L.P. Canadian Natural Resources Ltd* CEPSA* Chevron Corporation Chevron Phillips Chemical Company LLC CITGO Petroleum Corporation* ConocoPhillips* DONG Energy A/S* Drummond Company Inc. DTE Energy Company EDF Group* El Paso* 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 Puerto Rico Electric Power Authority Repsol YPF, S.A.* Royal Vopak N.V.* Santos Ltd.* Sempra Energy Sinclair Companies (The) Southern Union Company Statoil ASA * Suncor Energy Inc. Sunoco, Inc. Talisman Energy Inc.* Tesoro Petroleum Corporation TOTAL* Valero Energy Corporation* Westlake Chemical Corporation Williams Companies, Inc. (The) Woodside Petroleum Limited.* Yara International ASA*

52 Shareholders

* Shareholder and/or Named Insured is a Captive or wholly owned subsidiary

4/5/2012

Membership “Count”*

17

61 78 87 84 82 83 60 56 56 54 52

10 20 30 40 50 60 70 80 90 100

* Year-end member count, net year on year change.

2012 Membership Count by Industry Segment

18

6%

2% 2%

4/5/2012

OIL Member Headquarter Location

Globally diversified membership with an increasing interest from non-US companies.

4/5/2012 19

OIL: Risks Insured

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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.

20

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.

4/5/2012 21

Eight Business Sector Coverages only

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.

4/5/2012 22

OIL “Underwriting” Example – 8 Business sectors

Gross Assets by Business Sector

X

Sector/Deductible/ Limit Weighting Factors

=

Weighted Gross Assets (WGA)

Gross Assets

Offshore E&P = $ 25B Pipelines = $ 5B T

• tal

$ 30B

Sector/Deductible /Weight Factors

Offshore E&P = 1.50 Pipelines = 0.25

Weighted Gross Assets

Offshore E&P = $37.50B Pipelines = $ 1.25B T

• tal

$38.75B

WGA = $38.75B/ Group WGA $1,046Bn = 3.7% of Pool

X

Membership Annual Losses (20%)

=

Annual Premium

Annual Premium Calculator

4/5/2012 23

4/5/2012 24

8 Business Sector Gross Assets

Unmodified Gross Assets by Industry Segment ($2,214 Bn)* Weighted Gross Assets by Industry Segment ($1,166 Bn)*

Business Sectors

• E&P Offshore
• E&P Onshore
• R&M / Chemicals
• Pharmaceuticals
• Mining
• Utilities
• Pipelines
• Other

R&M Chemical s 26%

Other 2% Utilities 7% Mining 2% Pipelines 3% E&P Onshore 9% E&P Offshore 51%

* as of December 31, 2011

OIL’s History: 39 Years

Membership Shareholders’ Equity Assets Gross Assets Insured 12/31/2011 52 $3.0 Billion $5.5 Billion $1.9 Trillion 1972 16 $160 Thousand $160 Thousand $48 Billion +$13.0 Billion

• $13.0 Billion

+$ 4.3 Billion

• $

.8 Billion +$ .4 Billion

• $

.9 Billion $ 3.0 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

4/5/2012 25

4/5/2012 26

2011 Underwriting Highlights as at December 31, 2011

Dec 31, 2010 Dec 31, 2011 % Change

Written & Earned Premiums $784M $543M (31%) Incurred Losses – Current Underwriting Year $269M $375M 39% Incurred Losses – Prior Underwriting Years $173M $120M (31%) IBNR adjustment $(27)M $91M 437% Acquisition Costs & Loss Expenses $7M $13M 86% Net Underwriting Income $362M $(56)M (115%)

Consolidated Balance Sheet

12/31/2011 12/31/2010 ($ in 000s) ($ in 000s) Assets Cash and cash equivalents 282,441 249,580 Investments 5,255,944 5,296,317 Investment sales pending settlement 82,853 122,906 Accrued investment income 30,220 29,812 Accounts receivable 22 37,708 Amounts due from affiliates 59 87 Retrospective premiums receivable 91,741 154,603 Other assets 2,725 2,787 Total assets 5,746,005 5,893,800

4/5/2012 27

Consolidated Balance Sheet

12/31/2011 12/31/2010 ($ in 000s) ($ in 000s) Liabilities Outstanding losses and loss expenses 2,280,278 2,309,945 Unearned premium reserve

• Retrospective premiums payable

1,313 5,538 Premiums received in advance 22,666 63,386 Securities sold short 116,433 111,623 Investment purchases pending settlement 285,023 196,479 Accounts payable 5,622 5,142 Amounts due to affiliates 1,523 1,052 Total liabilities 2,712,858 2,693,165 Shareholders' equity Preferred shares 402,458 443,835 Common shares 520 540 Retained earnings 2,630,169 2,756,260 Total shareholders' equity 3,033,147 3,200,635 Total liabilities and shareholders' equity (US GAAP) 5,746,005 5,893,800 Other Capital Information Statutory capital and surplus 4,221,387 4,338,593

4/5/2012 28

Consolidated Income Statement

Year Ended 12/31/2011 Year Ended 12/31/2010 ($ in 000s) ($ in 000s) Net premiums written 543,425 783,687 Unearned premium

• Premiums earned

543,425 783,687 Losses and loss expenses incurred (599,109) (422,732) Acquisition costs (323)

• Underwriting income

(56,007) 360,955 Interest income 103,667 107,130 Dividend income 31,807 23,463 Investment gains (losses) [realized and unrealized] (143,904) 329,355 Investment advisory and custodian fees (22,619) (24,031) Discount earned on retrospective premiums receivable 1,062 802 Net Investment Income (29,987) 436,719 General and administrative expenses (17,855) (15,678) Interest and debt expenses (787) (216) Net income (104,636) 781,780 Other Changes in Shareholders' Equity: Preferred share dividend (24,515) (34,542) Gain on preferred share repurchase 3,060 2,323

4/5/2012 29

The OIL Group: Efficiency & Control

4/5/2012

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)

30

Marketing

4/5/2012 31

• 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:

• Prospect Identification & Qualification.
• Market Intelligence/Research
• Product Development
• Member opportunities/issues
• Training

– These agreements do not include any contingent compensation arrangements.

Investment Management

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.

4/5/2012 33

Current Asset Allocation

as at December 31, 2011

8% 48% 3% 10% 31%

Global Fixed Income Fund of Hedge Funds Global Equity Cash Short Duration Fixed Income (Pref

4/5/2012 34

Portfolio Returns by Asset Class

Period ended December 31, 2011

• 4

6 14

• 18

12 9 33 11

• 40

12 18

• 9

5 8 17

• 6

5 6

• 50
• 40
• 30
• 20
• 10

10 20 30 40 2011 2010 2009 2008 2007 2006

% Return

Global Equity Fund of Hedge Funds Global Bond

Update: 2 Months ended February 29, 2012 Global Equity Benchmark 11.6% Hedge Fund Benchmark 3.2% Global Bond Benchmark 1.7%

4/5/2012 35

Investment Portfolio Returns

as at December 31, 2011

8

• 19

6 11 8 14

• 17

7 10 13 12 10 20

• 24

9

• 1
• 1
• 30
• 25
• 20
• 15
• 10
• 5

5 10 15 20 25 2011 2010 2009 2008 2007 2006

% Return

OICL Benchmark OICL Portfolio OIL Total (incl cash)

4/5/2012 36

Current Events:

Natural Catastrophes

Historical Hurricane “Tracks” Impacting OIL

Katrina $1,000M 127- 161mph Ivan $581M 121- 132mph Rita $1,000M 121-138mph Ike $750M 104- 109mph Gustav 109- 115mph

4/5/2012 38

Historical Hurricane Losses as at December 31, 2011

4/5/2012 39

Claims Advised Claims Filed Gross For Interest Net to OIL Net to OIL Scaled

Andrew

(1992)

3 3 $127M $108M $108M Lili

(2002)

7 6 $147M $96M $96M Ivan

(2004)

10 8 $789M $559M $559M Katrina

(2005)

25 18 $2,686M $1,992M $1,000M Rita

(2005)

27 20 $1,948M $1,343M $1,000M Ike

(2008)

14 13 $2,007M $1,144M $750M Total: 86 68 $7,704M $5,242M $3,513M

4/5/2012 40

Current Scaling Factors

Un-scaled Net Loss As of 31-Dec-11

• Calc. Factor

As of 31-Dec-11 Interim Payment Scaling Factor Katrina $1,992M 50.2% 50.2% Rita $1,343M 74.5% 74.5% Ike $1,144M 65.6% 50%

Hurricanes - Past Payout Patterns

As of December 31, 2011, Payments Scaled for Aggregation Limit

4/5/2012 41

Years Hurricane Lili (2002) Hurricane Ivan (2004) Hurricane Katrina (2005)* Hurricane Rita (2005)* Hurricane Ike (2008)* < 1 Year

0% 9% 5% 2% 2%

< 2 Years

81% 78% 42% 20% 27%

< 3 Years

97% 79% 56% 35% 57%

> 3 Years

100% 98% 100% 100% 61%

Total $96M $559M $1,000M $1,000M $750M Members

6 8 19 20 13

Net Incurred Losses since 1972* by Geographic Region of Physical Loss

As at December 31, 2011 Expressed in millions of U.S. dollars

* untrended

4/5/2012 42

Net Incurred Losses by Industry 1972-2011 (39 yrs)

*AggregateValue = $11.8Bn (untrended)

4/5/2012

* Pure Loss—Excludes loss expense

43

Offshore E&P 48% Refining & Marketing 27% Petrochemicals 9% Onshore E&P 7% Pipelines 4% Other 2% Mining 2% Electric Utilities 1%

4/5/2012

What about OCIL:

44

4/5/2012

The Evolution of Energy Mutuals

Traditional Insurance Market

EIM 1986 sEnergy 2002

(in runoff)

AEGIS 1975 OCIL 1986 OIL 1972 NEIL 1980 TOPS 1993-99

45

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

• ften volatile or restrictive by

commercial markets – To maintain capacity, pay claims that arise, and ensure fair treatment of members

4/5/2012 46

4/5/2012

OCIL OIL Organization Member owned Mutual Premium calculation Flexible; Underwriting discretion Formula driven Mutualization of losses No Yes Avoided Premium Surcharge & Theoretical Withdrawal Premium No Yes Aggregation limit No Yes Follow Form capability Yes No Ability to Assess Membership No Yes

Major Differences: OCIL vs. OIL

47

4/5/2012

OIL

Financial Strength A- A2

OCIL

Financial Strength BBB+ A- Stable

Moody’s

Financial Ratings

48

Standard & Poor’s A.M. Best

Consolidated Balance Sheet

4/5/2012 49

30-Nov-11 30-Nov-10 ($ in 000s) ($ in 000s) Assets Cash and Cash Equivalents 52,934 36,670 Investments 740,982 692,609 Assets pledged under Insurance Trust

• 25,019

Investment sales pending settlement 43,475 4,660 Accrued investment income 6,621 6,934 Losses recoverable from reinsurers 187,179 165,730 Prepaid reinsurance premiums 13,684 14,190 Other assets 37,388 14,516 Total assets 1,082,263 960,328

Consolidated Balance Sheet

4/5/2012 50

30-Nov-11 30-Nov-10 ($ in 000s) ($ in 000s) Liabilities Outstanding losses and loss expenses 307,448 312,979 Unearned premiums 44,327 27,141 Securities sold short 5,383 4,170 Investment purchases pending settlement 86,573 16,281 Loan payable 150,334 150,334 Reinsurance premium payable 21,537 13,696 Amounts due to affiliates 544 724 Accounts payable 5,000 3,500 Total liabilities 621,146 528,825 Shareholders' equity Common shares 305 305 Retained earnings 460,812 431,198 Total shareholders' equity 461,117 431,503 Total liabilities and shareholders' equity 1,082,263 960,328 Statutory capital and surplus 606,306 577,893

Consolidated Income Statement

4/5/2012 51

Year Ended 11/30/2011 Year Ended 11/30/2010 ($ in 000s) ($ in 000s) UGL premium written 53,345 45,111 Assumed reinsurance premium 28,760 11,597 Premiums written 82,105 56,708 Premiums earned 64,919 49,690 Premiums ceded (27,588) (23,742) Net premiums earned 37,331 25,948 Losses and loss expenses incurred (193) (79,300) Commission and brokerage fees, net (1,296) (745) Underwriting income (loss) 35,842 (54,097) Interest income 22,114 22,762 Dividend income 1,435 1,007 Investment gains (losses) [realized and unrealized] (4,665) 37,123 Interest and debt expenses (12,482) (13,135) Investment advisory and custodian fees (2,834) (3,063) Net Investment Income 3,568 44,694 General and administrative expenses (9,796) (9,884) Net income (loss) 29,614 (19,287)

OCIL Asset Allocation

as at November 30, 2011

4/5/2012 52

75% 11% 10% 4%

Global Fixed Income Fund of Hedge Funds Global Equity Cash

Portfolio Returns By Asset Class

Fiscal Year Ended November 30

4/5/2012 53

4 8 25

• 9

5

• 1

6 9

• 16

13

• 2

6 34

• 41

15 2 8 22

• 19

10 2 5 9

• 12

8

• 60
• 40
• 20

20 40

2011 2010 2009 2008 2007

% R e t u r n

Global Bond Fund of Hedge Funds Global Equity OCICL Portfolio OCICL Benchmark

Update: 3 Months ended February 29, 2012 Global Equity Benchmark 11.6% Hedge Fund Benchmark 2.8% Global Bond Benchmark 3.2%

Investment Portfolio Returns

Fiscal Year Ended November 30

4/5/2012 54

2 6 6

• 10

7 2 9 18

• 16

9 2 9 17

• 16

8

• 20
• 10

10 20

2011 2010 2009 2008 2007 % Return OCICL Benchmark OCICL Portfolio OCIL Total

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

• r 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

4/5/2012 55

Conclusions

OIL Business Model

4/5/2012

• 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?

57

Thank you!

4/5/2012 58