S&P Affirms Oil Insurance Ltd. ‘A+’ Ratings; Outlook Negative

October 15, 2003

Standard & Poor’s has affirmed its ‘A+’ long-term counterparty credit and financial strength ratings and its ‘A-‘ subordinated debt rating on Oil Insurance Ltd. (OIL) following the announcement that Catalyst Capital Ltd. will issue $500 million in floating-rate notes that provide a contingent capital facility for OIL. Standard & Poor’s also said that the outlook on OIL is negative.

At the same time, Standard & Poor’s affirmed its ‘A-1’ short-term counterparty credit and commercial paper ratings on OIL, Oil Investment Corp Ltd., and Oil Investment (Barbados) Ltd.

Standard & Poor’s has evaluated the notes and the impact of the note issuance on OIL. The issue is expected to enhance OIL’s liquidity following a large loss event. 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.

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. 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.

Standard & Poor’s has determined that at the time of closing, the contingent capital facility will be a net positive to OIL’s liquidity, which could delay the likelihood or timing of regulatory intervention. “Standard & Poor’s 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,” noted Standard & Poor’s credit analyst Karole Dill Barkley.

The ratings agency has further determined that OIL has subordinated its policyholder obligations to those of its senior creditors under resolutions of its board of directors. Management has stated that the level of senior debt to total consolidated assets will not be greater than 20 percent.

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 percent 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.

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 return 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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