The OIL Group of Companies

The OIL Group of Companies

www.oil.bm

www.ocil.bm

“Tools for Risk Transfer”Presentation to

University of HoustonApril 7, 2011

The Evolution of Energy Mutuals

2

TraditionalInsurance

Market

EIM1986

sEnergy2002-2011

AEGIS1975

OCIL1986

OIL1972

NEIL1980

TOPS1993-99

2University of Houston, April 7, 2011

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.


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.


…and again in 1993

TOPS (Total Loss Only Platform SStructures)

• 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.


…and once again in 2002!

• 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)


OIL INSURANCE LIMITED

A Case Study….


• 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. 8University of Houston, April 7, 2011

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. 9University of Houston, April 7, 2011

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.

10

University of Houston, April 7, 2011


“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”.

11


Corporate Governance

12

SHAREHOLDERS(Annual Meeting)

BOARD OF DIRECTORS(3 Meetings)

EXECUTIVECOMMITTEE

(Meetings as required)

OMSLMANAGEMENT

Elects Board Annually

ElectsExecutiveCommittee

AdministersOMSL

ApprovesShareholders

Agenda

ApprovesBoard

Agenda

PreparesRecommendations

SHAREHOLDERINITIATIVES

EXTERNAL INITIATIVES(Brokers, Consultants, Etc.)

STAFFINITIATIVES

SHAREHOLDER/POLICYHOLDERINITIATIVES

12


The OIL Group of Companies Operational Structure

OIL(49 Members)

Oil Investment Corp. Ltd.

(OICL)

Property Damage

Well Control, Pollution

sEnergy Asset Barbados Ltd.

OCIL(67 Members)

Oil CasualtyInvestment Corp. Ltd.

(OCICL)

Excess General Liability

Assumed Treaty Reinsurance (new)

Oil Management Services Ltd.

13


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.

14


OIL’s Policyholders/Shareholders

Historical Membership CountHistorical Membership Count

47

61

78

8784 82 83

60 56 56 54

49

0

10

20

30

40

50

60

70

80

90

OIL Shareholders by Headquarter LocationOIL Shareholders by Headquarter Location

15


Who are OIL’s 49 Members?

• Big Companies, such as:ConocoPhillipsTOTALChevron

• Small Companies, such as:

Tesoro Petroleum LOOP LLCMurphy 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

16


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.

17


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.

18


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.

19


OIL “Underwriting”

Gross Assets byBusiness

Sector

XSector

Weighting Factors

=Weighted

Gross Assets

Gross AssetsOffshore E&P = $ 30BPipelines = $ 10BTotal $ 40B

Sector Weight FactorsOffshore E&P = 1.50Pipelines = 0.25

Weighted Gross AssetsOffshore E&P = $ 45.0BPipelines = $ 2.5BTotal $47.5B

WeightedGross

Assets $47.5B

XPremium

Rate =Annual Premium


OIL’s History: 38 Years

MembershipShareholders’ EquityAssetsGross Assets Insured

12/31/2010 54$3.2 Billion$5.9 Billion$2.2 Trillion

1972 16$160 Thousand$160 Thousand$48 Billion

+$11.9 Billion

- $12.0 Billion

+$ 4.5 Billion

- $ .8 Billion

+$ .5 Billion

- $ .9 Billion

$ 3.2 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


2010 Underwriting Highlights as at December 31, 2010

Dec 31, 2009

Dec 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% 22University of Houston, April 7, 2011

Consolidated Balance Sheet

12/31/2010 12/31/2009($ in 000s) ($ in 000s)

AssetsCash and cash equivalents 247,788 561,607 Investments 5,298,109 5,153,224 Collateral held under securities loan agreements - 71,690 Investment sales pending settlement 122,906 24,564 Securities loaned under securitities loan agreements - 69,083 Accrued investment income 29,812 29,664 Accounts receivable 37,708 20,979 Amounts due from affiliates 87 84 Retrospective premiums receivable 154,603 134,724 Other assets 2,787 2,472 Total assets 5,893,800 6,068,091

Oil Insurance Limited 23University of Houston, April 7, 2011

Consolidated Balance Sheet12/31/2010 12/31/2009($ in 000s) ($ in 000s)

LiabilitiesOutstanding losses and loss expenses 2,309,945 3,331,281 Retrospective premiums payable 5,538 36,372 Premiums received in advance 63,386 - Securities sold short 111,623 89,371 Investment purchases pending settlement 196,479 51,315 Amounts payable under securities loan agreements - 71,690 Accounts payable 5,142 5,292 Amounts due to affiliates 1,052 886 Total liabilities 2,693,165 3,586,207

Shareholders' equityPreferred shares 443,835 474,625 Common shares 540 560 Retained earnings 2,756,260 2,006,699 Total shareholders' equity 3,200,635 2,481,884

Total liabilities and shareholders' equity (US GAAP) 5,893,800 6,068,091

Other Capital InformationStatutory capital and surplus 4,338,593 3,545,010


Consolidated Income Statement

Year Ended 12/31/2010

Year Ended 12/31/2009

($ in 000s) ($ in 000s)Net premiums w ritten $783,688 $891,115

Premiums earned 783,688 891,115 Losses and loss expenses incurred (422,732) (518,734)Acquisition costs - (14,636)Underwriting income (loss) 360,956 357,745

Interest income 107,130 111,904Dividend income 23,463 23,763Investment gains (losses) [realized and unrealized] 329,355 641,204Investment advisory and custodian fees (24,031) (18,571)Discount earned on retrospective premiums 802 741Net Investment Income 436,719 759,041

General and administrative expenses (15,680) (16,196) Interest and debt expenses (215) (320)Net income (loss) $781,780 $1,100,270

Other Changes in Shareholders' Equity:Preferred share dividend (34,542) (37,233)Gain on preferred share repurchase 2,323 59,669


The OIL Group: Efficiency & Control

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”OIL Group”

~ 5%~ 5%Expense RatioExpense Ratio

Insured(Buyer)

University of Houston, April 7, 2011 26

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.

28


Current Asset Allocation as at December 31, 2010

9%

33%

2%

47%

9%


Global Fixed Income

Fund of Hedge Funds

Global Equity

CashIncome (Pref)

Short Duration Fixed

Portfolio Returns by Asset Class Period ended December 31, 2010

13

6

11

6

14

-17

7

10

5

8

-19

5

20

-24

9

1210

8

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

2010 2009 2008 2007 2006 2005

% R

etu

rn

OICL Benchmark OICL Portfolio OIL Total (incl cash)


Investment Portfolio Returns as at December 31, 2009

-19

11

6

9

17

-6-4

-17

7

10

5

9

-4

13

6

18

10

-24

9

12

5

2018

14

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

2009 2008 2007 2006 2005 2004 2003 2002

% R

eturn

OICL Benchmark OICL Portfolio OIL Total


What about OCIL:

32


The Evolution of Energy Mutuals

TraditionalInsurance

Market

EIM1986

sEnergy2002

(in runoff)

AEGIS1975

OCIL1986

OIL1972

NEIL1980

TOPS1993-99

33


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

34


OCIL OIL

Organization Member owned Mutual

Premium calculationFlexible; Underwriting

discretionFormula driven

Mutualization of losses No Yes

Avoided PremiumSurcharge & 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

35


OILFinancial Strength A- A2

OCILFinancial Strength BBB+ A-(new)

Standard & Standard & Poor’sPoor’s Moody’sMoody’s

Financial Ratings

A.M.BestA.M.Best

36



30-Nov-09($ in 000s)

AssetsCash and Cash Equivalents 34,991 54,570 Investments 694,288 677,599 Assets pledged under Insurance Trust 25,019 - Collateral held under securities loan agreements - 11,631 Investment sales pending settlement 4,660 2,991 Securities loaned under securities loan agreements - 11,286 Accrued investment income 6,934 7,408 Losses recoverable from reinsurers 165,730 281,300 Prepaid reinsurance premiums 14,190 12,852 Other assets 14,516 5,510 Total assets 960,328 1,065,147

30-Nov-10($ in 000s)

37



30-Nov-09($ in 000s)

AssetsCash and Cash Equivalents 34,991 54,570 Investments 694,288 677,599 Assets pledged under Insurance Trust 25,019 - Collateral held under securities loan agreements - 11,631 Investment sales pending settlement 4,660 2,991 Securities loaned under securities loan agreements - 11,286 Accrued investment income 6,934 7,408 Losses recoverable from reinsurers 165,730 281,300 Prepaid reinsurance premiums 14,190 12,852 Other assets 14,516 5,510 Total assets 960,328 1,065,147

30-Nov-10($ in 000s)

38



30-Nov-09($ in 000s)

LiabilitiesOutstanding losses and loss expenses 312,979 343,000 Unearned premiums 27,141 20,123 Securities sold short 4,170 4,046 Investment purchases pending settlement 16,281 12,730 Loan payable 150,334 200,000 Amounts due under securities loan agreements - 11,631 Reinsurance premium payable 13,696 18,009 Amounts due to affiliates 724 418 Accounts payable 3,500 4,405 Total liabilities 528,825 614,362

Shareholders' equityCommon shares 305 300 Retained earnings 431,198 450,485 Total shareholders' equity 431,503 450,785

Total liabilities and shareholders' equity 960,328 1,065,147

Statutory capital and surplus 577,893 645,735

30-Nov-10($ in 000s)

39


Consolidated Income Statement

30-Nov-10 30-Nov-09($ in 000s) ($ in 000s)

UGL premium written 45,111 46,421Assumed reinsurance premium 11,597 2,607Premiums written 56,708 49,028

Premiums earned 49,690 45,073Premiums ceded (23,742) (29,198)Net premiums earned 25,948 15,875

Losses and loss expenses incurred* (79,300) 2,707Commission and brokerage fees, net (745) (621)Underwriting income (loss) (54,097) 17,961

Interest income 22,762 24,081Dividend income 1,007 1,400Investment gains (losses) [realized and unrealized] 37,123 110,252Interest and debt expenses (13,135) (16,922)Investment advisory and custodian fees (3,063) (2,434)Net Investment Income 44,694 116,377

General and administrative expenses (9,884) (9,722)Net income (loss) (19,287) 124,616

40


OCICL Asset Allocation as at November 30, 2010

74%

12%

10%4%

Global Fixed Income

Fund of Hedge Funds

Global Equity

Cash

41


Portfolio Returns By Asset Class Fiscal Year Ended November 30, 2010

42


Investment Portfolio Returns Fiscal Year Ended November 30, 2010

8

2

6 55

0

4 4

02468

10

1 Year 3 Years 5 Years 10 Years

Rate

of R

etur

n (%

)

OCICL Strategic Portfolio Composite Benchmark

43


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. 44


Current Events:Natural Catastrophes

Historical Hurricane “Tracks” Impacting OIL

Katrina $1,000M

127-161mph

Ivan $581M121-

132mph

Rita $1,000M

121-138mph

Ike$750M104-

109mph

Gustav109-

115mph

46


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 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 $2,150M $1,286M $750M

Total: 86 68 $7,847M $5,384M $3,513M


Hurricanes - Past Payout PatternsAs 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% 5%< 2 Years 65% 55% 42% 14% 35%

< 3 Years 79% 82% 58% 34% 46%

< 4 Years 91% 88% 87% 61%

>4 Years 100% 98% 100% 100%

Total $96M $559M$1,000

M$1,000

M$750M

Members 6 8 18 20 13

*Payments Scaled for Aggregation Limit


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

$0

$1,000

$2,000

$3,000

$4,000

As at December 31, 2010Expressed in millions of U.S.

dollars* untrended


Net Incurred Lossesby Industry 1972-2010 (38 yrs)

Offshore E&P49%

Refining & Marketing25%

Petrochemicals9%

Onshore E&P7%

Pipelines4%

Other3%

Mining2%

Electric Utilities1%

Aggregate Value = $11.3Bn

(untrended)


Conclusions

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?


Thank you!


Documents

The OIL Group of Companies