Houston Marine Insurance Seminar

September 18, 2006

Lessons learned fromKatrina and Rita

2

The Evolution of Energy Mutuals

TraditionalInsurance

Market

EIM1986

sEnergy2002-06

AEGIS1975

OCIL1986

OIL1972

NEIL1980

TOPS1993-99

3

OILEnergy Sectors

E&P Offshore

E&P Onshore

Electrical Utilities

Mining

Other

Pipelines

R&M/Chemicals

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

MembershipShareholders’ EquityAssetsGross Assets Insured

OIL’s History: 34 Years

Inception To Date:

Net Premiums Earned

Net Losses & Loss Expense *

Investment Income **

Dividends Paid * Not including IBNR/IBNE ** Net of Interest Expense

200683

$1.7 Billion$6.2 Billion$2.2 Trillion

1972 16

$160 Thousand$160 Thousand$48 Billion

$7.3

Billion

$8.1

Billion

$3.8

Billion

$ .8

Billion

2006 Figures as at June 30, 2006

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Historical Hurricane “Tracks” Impacting OIL

Lili $98M110mph

Andrew $108M

145mphKatrina

$1,000M150mphIvan $583M

140mph

Rita $1,000M135mph

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Historical Hurricane Losses

Claims Advised

Claims Filed

Gross For

Interest

Net Losses to OIL

Net Losses to OIL Scaled

Andrew(1992)

3 3 $127M $108M $108M

Lili(2002)

7 6 $149M $98M $98M

Ivan(2004)

10 9 $806M $583M $583M

Katrina(2005)

25 18 $3,664M $2,046M $1,000M

Rita(2005)

27 20 $2,006M $1,265M $1,000M

Total: 72 56 $6,752M $4,101M $2,790M

2006 Figures as at July 31, 2006

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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

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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.

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Hurricanes Past Payout Patterns

  Years Andre

w (1992)

Lili (2002)

Ivan (2004)

Katrina (2005)

Rita (2005)

< 1 Year 18% 0% 9% 5% 2%

< 2 Years

79% 81% 53%

< 3 Years

100% 89%

Total Claims

$108M $98M $583M $1,000M $1,000M

Members

3 6 9 25 27

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GULF HURRICANE ACTIVITY:GULF HURRICANE ACTIVITY:WHAT DOES THE FUTURE WHAT DOES THE FUTURE HOLD?HOLD?

Risk Management ToolsCat Modeling:

Forecasting:EventTiming

Path/LocationStrength

Exposure identification:People

PropertyConcentration

Value

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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?

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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.

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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.

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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.

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OIL Shareholder Proposals

Shareholder decision on coverage changes postponed until October 5, 2006.

Reason: •Hurricane Florence!•Hurricane Gordon!

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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”.

Thank You!