S&P Puts OIL’s ‘A+’ Ratings on Credit/Watch-Negative

September 1, 2005

Standard & Poor’s Ratings Services has registered a quick reaction to the ravages of Hurricane Katrina on the petroleum industry. S&P announced that it has placed its “A+” counterparty credit and financial strength ratings on Oil Insurance Ltd. (OIL) on CreditWatch with Negative implications. S&P also placed its “A-1” short-term and “A-” subordinated debt ratings on OIL on CreditWatch with negative implications.

“This action reflects Standard & Poor’s concern with OIL’s potential exposure to Hurricane Katrina, which is believed to have caused substantial damage to oil, gas, and energy operations in the areas affected by the hurricane, particularly in Louisiana and Mississippi,” explained S&P credit analyst Laline Carvalho.

She also noted: “These potential losses follow one of OIL’s worse operating years in 2004, in which a combination of $397 million in losses from Hurricane Ivan, a total limit-loss of $250 million due to an explosion of a large gas platform in the Mediterranean Sea, and loss reserve increases related to prior year claims led the company to report a net loss of $548 million for the year.”

S&P said that “as a consequence of the unfavorable results in 2004,” OIL’s year-end 2004 capital adequacy has fallen below its “long-term expectations for the company, reflecting a decline in OIL’s GAAP shareholders’ equity base to $994 million, compared with $1.5 billion at year-end 2003.”

S&P indicated that, although OIL’s members are contractually obligated to pay for OIL’s incurred losses over a five-year period through a unique retrospective rating plan, it “believes a potential large loss from Hurricane Katrina in the context of OIL’s weaker capital position since year-end 2004 is likely to place further strain on the company’s capital adequacy and weaken its liquidity position.”

Although it’s still too early to accurately assess the mutual insurer’s actual losses from Katrina, “OIL’s contractual provisions cap the company’s total aggregation limit for any one occurrence at $1 billion,” said S&P.

The rating agency also indicated it would be meeting with OIL’s senior management in the next two to four weeks to “discuss the company’s estimated losses from Hurricane Katrina, as well as the group’s projected capital adequacy position, earnings expectations, and schedule of premium repayments by its policyholders (as per the provisions of the retrospective rating plan) over the short and medium term.”

S&P added that it expects to resolve the CreditWatch in the next four to six weeks, after it has considered all these factors. “At this stage, Standard & Poor’s believes that OIL’s ratings are unlikely to be lowered by more than one category,” the bulletin concluded.

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