Moody's Investors Service, ("Moody's") has affirmed the A2 insurance financial strength (IFS) and Baa1(hyb) preference share ratings of Oil Insurance Limited ("OIL"). The outlook for the ratings is stable.
Moody's A2 IFS rating and Baa1(hyb) preference share rating on OIL reflect 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 petroleum and 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.
OIL maintains strong financial metrics across several key rating factors. In particular, OIL's risk-adjusted capital position is robust, a result of increased equity capital combined with a material reduction in risk exposure to potential losses arising from Atlantic Ocean hurricanes (primarily in the Gulf of Mexico). Effective, January 1, 2018, OIL will no longer offer offshore Gulf of Mexico windstorm coverage, which will further reduce the firm's hurricane risk exposure. 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. Nonetheless, 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 54 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 between large potential insurance claims on OIL and the deterioration of the credit profiles of loss-affected member companies paying future premiums, 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 greater than 83% 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.
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 base over a 12 month period without an associated reduction of underwriting and/or investment risk; 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 ratings have been affirmed with a stable outlook:
Oil Insurance Limited -- insurance financial strength at A2, preference shares at Baa1(hyb).
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. For the nine months ended September 30, 2017, OIL reported net income of $748 million, compared to $559 million in the prior year period. As of September 30, 2017, OIL had shareholders' equity of approximately $4.5 billion.
The principal methodology used in these ratings was Global Reinsurers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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