Orion Investment Management Ltd.

Hedging CAT- Based Insurance

Loss Exposure in the Gulf of
Mexico
 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 box
The Standard Box is known as an“86-26” box and is
shown below.

A Cat in the Box (CITB) occurs when

a hurricane enters this box, regardless
of path.

Orion Investment Management Ltd. 07/23/10 2

Background to Discussion
The 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.

Orion Investment Management Ltd. 07/23/10 3

 CAT Risk Offset
Program
Methodology
Performance
Structure
Risk Mitigation

Orion Investment Management Ltd. 07/23/10 4

Methodology – General Description
NYMEX 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.

Orion Investment Management Ltd. 07/23/10 5

 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%.

Orion Investment Management Ltd. 07/23/10 6

Performance - Statistics
Year MODEL 1 MODEL 2 ReturnDistributionDuringHurricaneYears
Model 1, Model 2
(Cat 1 and above) (Cat 3 and above)
Mod1_DuringHurricaneYears
Num ber of Occurences
HurricaneYearsOnly Mod2_DuringHurricaneYears
4
1990 0% 0%

1991 0% 0% 3

1992 12% 12%

2

1993 0% 0%

1994 0% 0% 1

1995 47% 43%

0

1996 0% 0% 0
)
5
)
0
)
5
)
0 5 0 5 0 5 0 5 0 5 0 5
.2 .1 .1 .0 .0 .0 .1 .1 .2 .2 .3 .3 .4 .4 .5 .5
(0 (0 (0 (0 0 0 0 0 0 0 0 0 0 0 0 0

1997 22% 0% Buckets, Percent Return

1998 -19.5% 0%
Statistical Overview (numbers based on notional $100 Comparative
1999 -19% -19%
million) Performance
2000 0% 0%

2001 0% 0%
Model 1 Model 2
(CAT 1 and Above) (CAT 3 and above) CAT = 0 No Event
2002 12% 12%

2003 10% 0%

2004 50.5% 50.5%

Average Net Return +17% +21% 0.2%

2005 50% 50%

2006 0% 0% Standard Deviation

2007 0% 0%
26 % 27 % 18 %

2008 0% 0%
% of winning years 77% 83% 50%
2009 0% 0%

Cum. Return 165% 149%

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

Orion Investment Management Ltd. 07/23/10 7

 Performance - Expected Return
65% Fixed Fee of $150,000 per
No annum
Hurricane
= 15 bps
MODEL 2
Cat 3 Event 22.6% Expected Return
and 30% OTM Cash Mgmt net of transaction costs
35% Insurance Capital -Margin
above
Hurricane and
Model Active Model 2
= or 21% with 30% absolute
loss limit insured.
Margin Capital

47% Fixed Fee of $150,000 per

No annum
Hurricane
= 15 bps
MODEL 1
Cat 1
Event
and 30% OTM Cash Mgmt
above 18.4% Expected Return
Insurance Capital -Margin
53% net of transaction costs
Hurricane and
Model Active Model 1 =
Margin Capital or 17% with 30% absolute
loss limit insured.

Orion Investment Management Ltd. 07/23/10 8

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.

Orion Investment Management Ltd. 07/23/10 9

 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.

Orion Investment Management Ltd. 07/23/10 10

About Orion
Orion 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. 07/23/10 11

For further information please contact
us:
Telephone: +1 (441) 295
5600 ext. 110
Facsimile: +1 (441) 295 5622
Email: info@orion.bm
Website: 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.

Orion Investment Management Ltd.

32 Parliament Street  Hamilton HM12  Bermuda