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S&P downgrades energy mutual over business model concerns

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HAMILTON, Bermuda—Oil Casualty Insurance Ltd.'s downgrade out of the A range by Standard & Poor's Corp. doesn't spell immediate disaster for the mutual insurer, but it might pose problems down the road, energy brokers say.

New York-based S&P last week lowered its financial strength rating of OCIL to BBB+ from A-, citing concerns over the company's business model, which "relies highly on reinsurance and focuses on a single line of business within a relatively narrow industry sector," Laline Carvalho, a credit analyst and director at S&P, said in a statement.

Ms. Carvalho in the statement also pointed to OCIL's policy limits as being "relatively high in view of its relatively small net premium base and annual earnings power," and noted that "the high excess nature of the policies it offers inherently exposes OCIL to significant volatility in its balance sheet and income statement."

In an interview, Ms. Carvalho said that there was "not one specific factor that has been a trigger point; it's a situation in which we were looking at several different factors," and in the course of a full review of OCIL, "we felt that the downgrade was warranted."

"We're disappointed in their announcement and their decision," said Jerry Rivers, OCIL's senior vp and chief operating officer. "The items that they mentioned as a concern would not seem to overweigh the positive attributes of strong capital, strong reinsurance and a loyal membership base."

Mr. Rivers noted that OCIL has not "received any formal notices from the shareholders that they will be exiting the company." Under the mutual's rules, members may elect to leave the mutual at any time, he noted.

He also said that following the downgrade, the company received written confirmation from two of the top three global brokerage firms that OCIL still meets their requirements and is expecting to receive confirmation from the third, though he declined to elaborate.

Hamilton, Bermuda-based OCIL is one of three mutual insurance firms-along with Oil Insurance Ltd. and sEnergy Insurance Ltd.-that are collectively known as the OIL Group of Cos. OCIL was founded in 1986 to provide excess liability insurance to energy companies and reinsurance to energy captives. As of Nov. 1, the company had 76 shareholder members.

While many companies traditionally see a departure of clients upon losing their A level rating, OCIL will be helped by its status as a mutual, with support from its shareholder members, brokers say. But, ultimately, members may start exploring their options.

Mark Oakley, a managing director at Aon Corp.'s natural resources group in Houston, said he does not anticipate "any major shift in how our clients view OCIL."

"We're still going to continue to use them, and any of the contact I've had with our clients (regarding OCIL's downgrade) has been pretty positive," said Mr. Oakley. "BBB+ still meets our financial guide and that of Aon clients."

"OCIL is, for all intents and purposes, not a major carrier...they are a niche player," said Michael D. Fisher, managing principal and office leader of Integro Ltd.'s Hamilton, Bermuda-based operations. "I don't think you're going to see a run on the bank with people looking to replace OCIL."

"There are going to be certain members or mutual policyholders that have an allegiance to OCIL or any of the member-owned companies (of the OIL Group) that would help them get around any rating issues," said John A. Rathmell Jr., president of Lockton Marine & Energy in Houston. "Compared to just a stock, publicly traded company...they are going to benefit from allegiance, but I can't tell you how far that's going to go," he said.

"OCIL definitely does have a loyalty base that a lot of the other companies don't have; however, risk managers do have to answer to other people, and the loyalty may no longer be there," said a Bermuda-based broker who did not want to be identified.

"Downgrades are serious; whether or not it's a mutual company is not completely irrelevant, but somewhat irrelevant," the source said. "I don't think people would look to immediately replace them, but I think they would look to replace them at the next renewal."

"There are options out there" for companies that are looking, Mr. Rathmell said. "Unfortunately for OCIL, which is a proud organization and has done a good job, the competitive forces could be a problem."

"For the vast majority of people, there is enough capacity out there that if they wanted to, they can find a replacement," said Integro's Mr. Fisher. "What some of them may do is to reduce OCIL's participation somewhat; for instance, if people were buying $100 million, they may buy $50 million," or possibly move OCIL "to a higher attachment point" within their insurance program.