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Rating Action:

Moody’s affirms Oil Insurance Limited’s A2 IFS rating; outlook stable

27 January 2021


New York , January 27, 2021 – Moody's Investors Service, ("Moody's") has affirmed the A2 insurance financial strength (IFS) rating of Oil Insurance Limited ("OIL"). The outlook for the rating remains stable.

RATINGS RATIONALE

According to Moody's, OIL's A2 IFS rating reflects the mutual insurance company's unique structural features which include a retrospective loss recovery funding mechanism and strong membership support from many of the world's leading energy companies, as well as the firm's strong capital base, good geographic diversification, efficient operations and strong internal liquidity profile. Tempering these strengths are the insurer's significant exposure to large claims associated with man-made and natural catastrophes, its moderate product and client diversification relative to other specialty insurers, as well as the potential volatility associated with its investment portfolio, which has a high weighting of common equities and alternative investments relative to most other traditional property/casualty insurers and reinsurers.

Moody's notes that OIL's broad policy form and high limits, combined with its higher risk investment strategy, can lead to meaningful volatility in net income and equity capitalization. For the nine months ended September 30, 2020, OIL reported net income of $5 million (9M2019: $707 million), reflecting a modest underwriting profit and investment income that offset year-to-date unrealized losses on investments. Despite this volatility, we view OIL's contractual per occurrence and aggregate limits to be manageable within the context of the firm's capital resources.

OIL's membership currently consists of 60 energy companies located in the United States, Canada, Europe, Australia, Latin America and Asia. OIL's retrospective rating and premium plan mutualizes policy losses and requires that all losses experienced by the company be fully repaid by its members over a five-year period based on each member's allocable portion. While some correlation exists among the credit profiles of OIL's member companies, OIL's credit exposure is well diversified and of good quality, with the weighted average rating of the membership pool in the Baa1 range, with approximately 85% rated investment grade on a weighted basis. Additionally, OIL's credit profile is enhanced by the ability of the company's board of directors to allocate any unpaid obligations from defaulting members to the remaining members. As a result, the mutualization of losses on an effectively "joint and several-like" basis reduces the likelihood of a credit loss to OIL on contractually due premium payments.

In Moody's opinion, OIL's structural features also substantially mitigate the firm's exposure to competitive pressures and volatile pricing trends in the commercial insurance market, as well as uncertainty associated with the loss reserving process, as all losses (including adverse loss reserve development) are contractually recovered through premiums in future years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Given the current rating of OIL and its business and financial profile, Moody's believes that there is limited potential for upward rating movement. However, Moody's would view a material reduction in the firm's high risk assets (equities/alternatives and speculative grade bonds) as a percentage of shareholders' equity as an enhancement to the firm's overall credit profile.

The following factors could result in negative rating pressure or a downgrade: 1) a 20% reduction in the firm's equity capital over a 12 month period (exclusive of underwriting losses); 2) any breakdown in the company's post-loss premium recovery mechanism; and 3) a significant reduction in the number of OIL members or their weighted average credit rating.

The following rating has been affirmed with a stable outlook:

Oil Insurance Limited – insurance financial strength at A2.

OIL is a Bermuda-based mutual insurance company established to serve certain insurance needs of its members (or their insurance affiliates), all of whom are engaged in energy operations. The company writes property, well control, non-gradual pollution liability, windstorm, terrorism, cyber terrorism, construction and cargo insurance. As of September 30, 2020, OIL had shareholders' equity of approximately $3.5 billion.

The principal methodology used in this rating was Reinsurers Methodology published in November 2019 and available at https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1187551 . Alternatively, please see Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Eck
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Marc R. Pinto, CFA
MD-Financial Institutions
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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