S&P Affirms Oil Insurance ‘A+’ Ratings

October 16, 2003

Standard & Poor’s Ratings Services announced that it has affirmed its ‘A+’ long-term counterparty credit and financial strength ratings and its ‘A-‘ subordinated debt rating on Oil Insurance Ltd. with a “negative” outlook.

S&P also affirmed its ‘A-1’ short-term counterparty credit and commercial paper ratings on OIL, Oil Investment Corp Ltd., and Oil Investment (Barbados) Ltd.

The rating agency indicated that “the affirmations follow the announcement that Catalyst Capital Ltd. will be issuing $500 million in floating-rate notes, which provide a contingent capital facility for OIL.” S&P said it had “evaluated the notes and the impact of the note issuance on OIL,” and expects that they will “enhance OIL’s liquidity following a large loss event.”

S&P explained that “The notes are secured by the assignment of a pro rata portion of OIL premium revenues to a trust for the benefit of the noteholders and other obligors of OIL. Funds under the notes will provide liquidity on a senior-secured basis in the event of very high indemnity losses ($1.0 billion at the time of closing, which may include up to $200 million of net investment losses). At the closing of the notes, a pro rata portion of the premium payments owed to OIL will be assigned to the noteholders.”

The bulletin indicated that the notes were contingent, and that “until OIL draws and uses the funds, Standard & Poor’s will exclude the proceeds under the notes from debt for purposes of consolidated debt leverage calculations for OIL. Borrowings will be treated as senior secured debt obligations at the time of drawdown, with policyholder loss payments expected to be structurally subordinated. The remaining portion of premium revenues allocated to OIL will be available to service the obligations due to its senior creditors, other obligors, and OIL policyholders.”

S&P said it believes “the contingent capital facility will be a net positive to OIL’s liquidity, which could delay the likelihood or timing of regulatory intervention.” It added, however that it “expects all of its ratings on OIL, Oil Investment Ltd., and Oil Investment (Barbados) to be under stress at the level of losses triggering a drawdown under this facility.”

S&P “has further determined that OIL has subordinated its policyholder obligations to those of its senior creditors under resolutions of its board of directors,” the announcement continued. “Management has stated that the level of senior debt to total consolidated assets will not be greater than 20%. As long as this condition holds, Standard & Poor’s will keep the financial strength rating at the same level as the counterparty credit and senior debt ratings. If OIL’s debt leverage rises above the 20% threshold, Standard & Poor’s expects to lower the financial strength rating to one notch lower than the counterparty credit rating. For purposes of this debt-to-total-assets calculation, the amount of undrawn notes will not be included in either the numerator or the denominator.”

Concerning the negative out look S&P stated: “With the significant growth in membership and insured assets under management, OIL remains highly exposed to continued high indemnity losses in the short term. Financial market conditions also remain volatile, and the capital base remains exposed to continued investment losses, though year-to-date total investment performance has been strong. Management expects outstanding short-term debt to be $250 million-$300 million. Over the medium term, Standard & Poor’s expects premium growth to restore capital adequacy to the rating range.”

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