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BP can tap captive for $700M in loss of rig

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ST. PETER PORT, Guernsey—BP P.L.C. can look to its captive insurer, Jupiter Insurance Ltd., for up to $700 million in coverage of losses from the sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico.

The London-based energy company holds the operating license for the rig owned by Swiss company Transocean Ltd. Eleven workers were killed in an April 20 explosion on the rig, which sank two days later.

BP has taken responsibility for the cleanup of hundreds of thousands of gallons of oil that has gushed from an underwater well and caused a massive slick that threatened to foul the Gulf Coast, affecting fisheries and other wildlife in the region as well as a variety of commerce.

BP's Guernsey-based captive funds the oil giant's property damage and business interruption exposures on a per-event basis, confirmed Timothy Prince, an analyst with rating agency A.M. Best Co. Inc. in London, which provides ratings on the captive.

About 75% of the premiums paid to Jupiter are for those exposures, while the rest fund various other nonlife risks, according to Best.

The captive does not have reinsurance protection, Mr. Prince said, but it does have a significant capital base, which was about $6 billion at the end of 2009.

In a January ratings statement, Best affirmed Jupiter's financial strength rating of A+, but also said the nature of the insurer's risks and its lack of reinsurance left it “exposed to a great deal of potential earnings volatility. Despite efforts to improve safety, risk management and loss prevention within the BP group, natural catastrophe risks remain ever present. Potential large losses cannot be disregarded, and Jupiter's risk retention per occurrence is significant at $700 million,” Best said.

Jupiter wrote $1.05 billion in 2009 gross premiums, according to Best. The captive insurer was very profitable over the past two years with a loss ratio below 20% and about $500 million in profit in 2009, the rating agency said.

In a separate report, though, Best noted that Jupiter's lack of reinsurance means that “one catastrophic event could potentially devastate underwriting profits.”

—By Michael Bradford