2010 Orion GOM CAT Program

Orion Investment Management Ltd.

Hedging CAT- Based Insurance Loss Exposure in the Gulf of

Mexico

04/11/23Orion Investment Management Ltd. 2

Background – Creating a Box

The Gulf is home to some of the largest concentrations energy risks in the world and can be defined as a latitude and longitude boxThe Standard Box is known as an“86-26” box and is shown below.

A Cat in the Box (CITB) occurs whena hurricane enters this box, regardless of path.


Background to DiscussionThe Katrina-Rita-Wilma set of events reinforced our focus around hurricane related effects on capacity and distribution of natural gas assets.

A CITB event is the catalyst for return generation in Orion’s hedge program, which can be used to reduce the impact of CAT insured loss on net retained exposure.

Understanding the behavior of natural gas prices around disruptive and potentially disruptive events allowed us to design a mechanism that exploits CAT induced effects.

Orion’s systematic program transfers some well-defined reinsurance risks to capital markets in a cost effective manner. By utilizing exchange traded instruments, liquidity and transparency are enhanced, and counterparty credit risk is minimized.

The program’s strong performance during loss events forms the basis for a sound CAT - loss offsetting strategy.


CAT Risk Offset Program

MethodologyPerformanceStructureRisk Mitigation


Methodology – General DescriptionNYMEX Natural Gas futures (NG) are purely US-based and deliverable. We observe that the occurrence of a hurricane in the Box (CAT >= 1) often results in NG trading opportunities.

Orion has developed a proprietary trading strategy that triggers an entry only after a hurricane touches the Box. Model 1 gets triggered on all hurricane categories and Model 2 gets triggered on all hurricane categories >= 3.

It is important to note that while a hurricane is an obvious natural trigger, the timing of the strategy entry and exit points are NOT obvious. This is determined by our proprietary models.

The strategy exits on a natural signal (Model generated) or on a time signal (end of December of the year where the event occurred).

The strategy allows for multiple consecutive entries if several events occur (e.g. in 2005).

Adding NG Options can insure a hard loss limit to the strategies performance.


Methodology - Checking Causality Assumptions

We assume that a CITB event is the catalyst for return generation in Orion’s program. To validate this assumption, we activated the same trading strategy from June 1st to Dec 31st of each year in which no CITB events (CITB = CAT 0) occurred. If CITB events had no impact on Strategy returns, returns would be similar regardless of occurrence.

The Comparative Performance on the following page confirms;a very clear and significant relationship between CITB and strategy returns. that CAT 0 periods fail to generate any return or skew in the win loss rate.

We conclude that. the strategy has a strong negative correlation to CITB events (CAT > 0). Standard deviation of returns reinforces this conclusion, as outsized positive returns occurred in 1995, 2004, and 2005.

The strategy has a positive expected return of ~20% in years when CAT events in the gulf produce insurance losses. During the Katrina Season it returned 50%.


Performance - Statistics

The statistics are for cumulative returns per year including transaction costs and 30% absolute loss limit insurance , but no fees nor interest.

Statistical Overview (numbers based on notional $100 million)

Comparative Performance

Model 1 (CAT 1 and Above)

Model 2 (CAT 3 and above) CAT = 0 No Event

Average Net Return+17% +21% 0.2%

Standard Deviation26 % 27 % 18 %

% of winning years 77% 83% 50%

Return Distribution During Hurricane YearsModel 1, Model 2

0

1

2

3

4

Buckets, Percent Return

Number of Occurences Hurricane Years Only

Mod1_During Hurricane YearsMod2_During Hurricane Years

YearMODEL 1

(Cat 1 and above)MODEL 2

(Cat 3 and above)

1990 0% 0%

1991 0% 0%

1992 12% 12%

1993 0% 0%

1994 0% 0%

1995 47% 43%

1996 0% 0%

1997 22% 0%

1998 -19.5% 0%

1999 -19% -19%

2000 0% 0%

2001 0% 0%

2002 12% 12%

2003 10% 0%

2004 50.5% 50.5%

2005 50% 50%

2006 0% 0%

2007 0% 0%

2008 0% 0%

2009 0% 0%

Cum. Return 165% 149%


Performance - Expected Return

30% OTM Insurance

Cash Mgmt

Capital -Margin

Model 2

Margin Capital

Fixed Fee of $150,000 per annum= 15 bps

No Hurricane

Hurricane andModel Active

No Hurricane

Event

Fixed Fee of $150,000 per annum= 15 bps

MODEL 2 Cat 3 and above

MODEL 1Cat 1 and above

22.6% Expected Return net of transaction costs

or 21% with 30% absolute loss limit insured.

18.4% Expected Return net of transaction costs

or 17% with 30% absolute loss limit insured.

Event

=

=

65%

47%

35%

53% 30% OTM Insurance

Cash Mgmt

Capital -Margin

Model 1

Margin Capital

Hurricane andModel Active


Program Risk Mitigation

The hedging strategy is available with hard loss limits. This is achieved by pairing all notional exposure with out of the money options.

All long positions are hedged by long put options to insure maximum downside per year. This downside hard limit can be adjusted for client needs.

Average costs* associated with loss caps are as follows:•20% loss limit cost 3-6% insurance premium•30% loss limit cost 1-3% insurance premium•40% loss limit cost 0.5-1.5% insurance premium

*Insurance premiums are based upon historic exchange traded options prices. Prices may vary with volatility, interest rates, and time to expiry.


Program Structure

A fixed annual subscription fee is charged ($150,000) and 20% of profits (net of subscription fee).

The client chooses the total notional exposure needed and can adjust at any time with 1 day notice.

Typical cash requirements are 20% of desired notional exposure.

The structure can be run as a Managed account or a SAC fund structure.

If an SAC is employed, the client will be charged any administrative fees associated with the formation and maintenance of the structure.


About OrionOrion Investment Management Ltd., based in Hamilton Bermuda, specializes in money management and risk mitigation products for institutional clients. Orion combines technical expertise with many years of market experience to deliver products that enhance yield and reduce risk. The principals have over 60 years of combined investment and risk management experience, working for Goldman Sachs, Salomon Brothers, Credit Suisse, Merrill Lynch, Lehman Brothers, Fuji International Finance, Mizuho Bank ,West End Capital, Ross Capital, BTG-Pactual and Foundation Capital Strategies.

Mr. Eric S. Hirschberg (CEO) is responsible for business development, alternative risk structuring and marketing. He holds a B.A. (Cognitive Sciences) from the University of Delaware and MSc. (Statistics & Operations Research) from New York University's Stern School of Business.

Mr. Andrew M. Marsh (CIO) is responsible for trading and operations. He holds a B.Sc. (Economics) from George Mason University.

Dr. Niklas G. Traub (CTO) is responsible for research and risk management. He holds a B.Sc. with honors from the California Institute of Technology and a PhD. (Computer Science) from Edinburgh University.

Dr. Eugene A. Durenard (CRO) is responsible for strategy oversight and risk management. He holds a DEA (Mathematics) from Ecole Normale Superieure in Paris and a PhD. (Mathematics) from Harvard University.

Orion Investment Management Ltd.32 Parliament Street Hamilton HM12 Bermuda

For further information please contact us:

Telephone: +1 (441) 295 5600 ext. 110Facsimile: +1 (441) 295 5622Email: [email protected]: www.orion.bm

Disclaimer

This description is for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any securities. All information contained in this document is subject to updating, completion, modification and amendment. No information herein should be relied upon when making an investment decision. Offers will only be made by means of a formal private offering memorandum, and only in jurisdictions where permitted by law. The information herein is provided at your request and is solely for informational purposes. This information may not be reproduced or distributed in whole or in part nor may its content be disclosed to any other person under any circumstances. Past performance is not necessarily indicative of future results.

2010 Orion GOM CAT Program

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