OIL increases limits, adds coverage sectors

HAMILTON, Bermuda—Changes to Oil Insurance Ltd.'s structure--including a hike in aggregate limits to $750 million--could help stabilize the embattled energy insurance mutual, but whether it will retain its membership remains to be seen.

Shareholder members of OIL--the largest of three mutual insurers collectively known as the OIL Group of Cos.--approved two new initiatives at its annual general meeting in Bermuda last month.

The first amends OIL's rating and premium plan to include two additional business sectors, onshore and offshore Atlantic Named Windstorms, effective June 1. Existing sectors include non-ANWS onshore and offshore risks, chemical, mining, utilities and others.

The second initiative will allow OIL to incorporate a "top up pool" mechanism for extra aggregation limits for ANWS events that exceed OIL's aggregation limit per event, which could either mutualize the risk among members or, possibly, purchase additional limits from the reinsurance market.

OIL's board of directors also voted to increase the mutual's aggregation limit for all risks to $750 million from $500 million effective June 1.

The moves came as part of an ongoing process undertaken by OIL to review how it will cover Gulf of Mexico windstorm risks in the wake of heavy storm losses sustained in 2005. As of January, OIL shareholders reported total losses of $2.09 billion from Hurricane Katrina and $1.47 billion from Hurricane Rita.

A previous aggregation limit of $1 billion was halved in 2006 to protect OIL's solvency margin, but the combination of a quiet 2006 storm season and a $600 million preference-share issue last year have helped the insurer get back to "a pretty good spot," said George Hutchings, senior vp and chief operating officer at OIL.

Robert Stauffer, OIL's president and chief executive officer, noted he was "very pleased with the outcome of the meeting" this year. The results of the shareholder vote are "a clear indication that the membership supports further differentiation of Atlantic Named Windstorm risk within the mutual pool," he said in a statement.

Still, it remains uncertain whether initiatives taken by the mutual's management are enough to retain all 74 current members, some energy insurance experts say.

Pushing limits back up to $750 million "is something that will help them retain those (members) in the Gulf...but most of the people that have been talking about leaving are those that don't have a substantial number of risks in the Gulf of Mexico," said an energy market source who did not wish to be named.

OIL's membership dropped to 74 shareholders following the departure of nine members that elected not to renew their policies last year (see box, page 3).

A spokeswoman at ex-member American Electric Power confirmed the Columbus, Ohio, company left the OIL structure in 2006, and its coverage was "replaced with purchases in the commercial market."

Another OIL member that left is Praxair Inc., a Danbury, Conn.-based, maker of specialty gases. "Praxair did leave that group in December, and since then we have replaced that capacity with traditional insurance," said a spokesman for Praxair.

Former member Duke Energy Corp. replaced its OIL coverage with a quota share arrangement with several other insurers led by AEGIS Insurance Services.

"We went that route because that coverage better fit our current lower risk business portfolio" said a spokesman for Charlotte, N.C.-based Duke. "Probably the major reason is the spin-off we did of Spectra Energy Corp. So we no longer have high-risk assets located in the Gulf," he said.

Of the nine shareholders that exited the OIL structure effective Jan. 1, those that also belonged to Oil Casualty Insurance Ltd.--Duke, Atmos Energy Corp., Koch Industries Inc. and NiSource Inc.--continue to be OCIL members.

Current OIL shareholders have until April 16 to give notice of withdrawal from the mutual, which would be effective May 31.

"I think it's too early to postulate about how many people will leave and how many will stay," OIL's Mr. Hutchings said.

In a December 2006 energy market review, Willis Group Holdings Ltd. said "Perhaps the most obvious and enduring benefit of OIL membership over the years has been the sense of community and the networking opportunities that membership undeniably provides, and it might be this very factor which prevented more of an exodus of OIL during 2006."

However, Willis said, "as the commercial market begins to soften, there is no doubt that other members will now also be considering their long-term position by the time of the next renewal season in June/July 2007."

Some companies may look to the London and Bermuda markets to replace the capacity obtained through OIL, but "it can be difficult to withstand the commercial market cycle," said Brian C. Schneider, an analyst with Chicago-based Fitch Ratings.

"In the long term, I think AEGIS will benefit the most" from OIL's loss of members, Mr. Schneider predicted.