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Houston Marine Insurance Seminar September 18, 2006

Houston Marine Insurance Seminar September 18, 2006. Lessons learned from Katrina and Rita. The Evolution of Energy Mutuals. OIL 1972. sEnergy 2002-06. TOPS 1993-99. Traditional Insurance Market. OCIL 1986. AEGIS 1975. EIM 1986. NEIL 1980. OIL Energy Sectors. Why Mutualize?.

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Houston Marine Insurance Seminar September 18, 2006

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  1. Houston Marine Insurance SeminarSeptember 18, 2006 Lessons learned from Katrina and Rita

  2. The Evolution of Energy Mutuals OIL 1972 sEnergy 2002-06 TOPS 1993-99 Traditional Insurance Market OCIL 1986 AEGIS 1975 EIM 1986 NEIL 1980

  3. OILEnergy Sectors

  4. Why Mutualize? • Reasons typically given: • 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. • Generates long-term benefits for Shareholders. • Highly cost-effective catastrophe insurance facility.

  5. OIL’s History: 34 Years 1972 16 $160 Thousand $160 Thousand $48 Billion 2006 83 $1.7 Billion $6.2 Billion $2.2 Trillion Membership Shareholders’ Equity Assets Gross Assets Insured Inception To Date: Net Premiums Earned Net Losses & Loss Expense * Investment Income ** Dividends Paid * Not including IBNR/IBNE ** Net of Interest Expense $7.3 Billion $8.1 Billion $3.8 Billion $ .8 Billion 2006 Figures as at June 30, 2006

  6. Historical Hurricane “Tracks” Impacting OIL Rita $1,000M 135mph Andrew $108M 145mph Katrina $1,000M 150mph Lili $98M 110mph Ivan $583M 140mph

  7. Historical Hurricane Losses 2006 Figures as at July 31, 2006

  8. Summary of Events 2005 brought: • August 28 & 29 - Hurricane Katrina • August 31 – S&P CreditWatch with negative implications • September 21 - Hurricane Rita • September 23 - Premium call of $800 million • September 30 – S&P lowered rating two notches to A- • December 15 – Premium call of $900 million • December 21 –S&P CreditWatch removed; Outlook stable

  9. Historical Events for OIL • Aggregation Limit losses were the first in the history of OIL. • Premium calls were the first in the history of OIL.

  10. Hurricanes Past Payout Patterns

  11. 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

  12. Lessons Learned: Modeling and Forecasting (don’t bet the ranch) • Many models ignored: • Flooding altogether. • Two consecutive events. • Concentration of risks and values. • Commodity prices: steel, oil, and cement, and futue labor costs. • Hurricane forecasting and watching the weather channel has become a major past time of some in our various functions. • But: • Forecasts as late as this past July were for an exceptionally active seasons. • What happened?

  13. Lessons Learned: “Sahara dust inhibiting hurricane development” (September 12, 2006 front page headline—Insurance Day) • “Activity is 10% below historical average due to African Dry air and Sahara dust clouding the main hurricane development region.” • In July we were advised that we would see increased hurricane activity this season arising from: • Multidecadal Oscillation in the Atlantic water temperatures; and • Global warming.

  14. Lessons Learned: Scientists at the NOAA Climate Prediction Center reported that El Niño conditions have developed in the tropical Pacific and are likely to continue into early 2007. There is a potential for this event to strengthen into a moderate event by winter. The development of weak El Niño conditions helps explain why this Atlantic hurricane season has been less active than was previously expected.

  15. Lessons Learned: • Rating agencies: • Forever pessimists. • Communication is ever so important and as often as possible. • The Press: • With all due respect, they could not seem to get the story right and some did not even bother to check the facts. • Looking for headlines and something sensational. • Sometimes its just better to not respond. • Adjusters and Claims Management: • Need for adjuster was severely taxed after Katrina and Rita. • Need for more planning.

  16. OIL Shareholder Proposals • Shareholder decision on coverage changes postponed until October 5, 2006. • Reason: • Hurricane Florence! • Hurricane Gordon!

  17. View of the Market Market view: Best described by Ian Curtin in an article in the Alexander Forbes August Market Update. Energy Market: As previously described. An onshore market, and an GOM (onshore and offshore) market. Period of Adjustment: I believe we are going through a period of adjustment. Everyone is hoping that the current reaction won’t end up being a “knee jerk”. Ask me in 5 years whether all the changes were necessary or “knee jerk”.

  18. Thank You!

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