BEYOND CONVERGENCE, TOWARDS INTEGRATION - The next steps for the ILS Market Morton Lane Ph.D. President , Lane Financial LLC Sept 22nd 2008 Sydney 1 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
OUTLINE Beyond Convergence, towards Integration � Observations on the ILS Market - Motivation and Growth, - Price Trends, and Historic Returns � Investor Information on ILS - Remodeling and Scenarios/Event Sets - Risk and Exposures in the Index Portfolio Ri k d E i th I d P tf li - Benefits, and Problems, with Progress � � Optimizing with the Scenario Sets Optimizing with the Scenario Sets - ILS Portfolio Management subject to a Risk Profile - Adding OLWs or Traditional Treaties to the Portfolio - Other Applications Other Applications � 2 Concluding Remarks LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
175 ReturnIndices for Return Indices for S&P 500 150 and Lane Financial Insurance Return Index 125 100 S&P500 ILS 75 50 50 Jan ‐ 02 Jan ‐ 03 Jan ‐ 04 Jan ‐ 05 Jan ‐ 06 Jan ‐ 07 Jan ‐ 08 3 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
10.00% Monthly Returns from the S&P 500 vs. 8.00% Lane Financial Insurance Return Index i i l d 6.00% ILS 4.00% vs. 2.00% S&P 500 0.00% Correlation Correlation ‐ 2.00% 3% - 15% ‐ 4.00% ‐ 6.00% ‐ 8.00% S&P 500 S&P 500 "ILS TOTAL RETURN ILS TOTAL RETURN ‐ 10.00% 4 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
$8,000 $7,451 $7,000 $7,000 Total ILS Iss ance Total ILS Issuance Q1 to Q1 1998 to Q2/2008 $6,000 Red: Cat Bonds; Stripe: Life ILS $5,605 * "Sidecar" transactions and certain Life securitizations not included here, could add a further estimated included here could add a further estimated $5,000 $4 billion to the combined 2006 and 3/2007 totals. $4,000 $3,277 $3 277 $3,000 $1,894 $2,000 $1,803 $1,367 $1,219 $1,126 $886 $827 $1,000 $832 $0 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 5 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
400 200% U.S. CATASTROPHE REINSURANCE PRICE INDICES (Source 1984-2001: PARAGON, a former subsidiary of the Benfield Group Source 2001-2007 Q1 : LFC averages based on Secondary Cat Bond prices and ILW Prices) 350 175% 300 150% he Prices x plus 250 125% Index of Catastroph ar Changes in Index ed Changes in blue 200 100% 150 150 75% 75% P Post t de-trende Paragon and LFC % Year to Yea Andrew Post Katrina 100 50% Post 9/11 50 50 25% 25% 0 0% -50 -25% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 6 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
60% 200.0 175.0 Synthetic Price Index Synthetic Price Index and Q/Q % Changes 45% 150.0 Average of Cat ILS, ILWs and Constant EL * 125.0 (*i.e. ArborI/SIIA/SHDVI series) es Q/Q Change in Price 30% 100.0 ex of Prices 75.0 Percentage Q Inde 15% 50.0 25.0 0% 0.0 -25.0 -15% -50.0 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
$180 Current (Q2, 2008)Total Value of $100 Index Investment in Cat Bonds commencing 1/1/02 $167.42 $160 [CAGR 8.25 %] nt ue of Investmen Total Return - $140 ( Insurance Return + Floating Return i.e. LIBOR or EURIBOR ) $136.94 [CAGR 4 96 %] 4.96 %] Dollar Val $120 Insurance Return $100 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Total Return Insurance Return Time $80 High Total Return LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
2.0% 1.0% hly) e Returns (Month 0.0% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Monthly All CAT ILS MonthlyAll CAT ILS Percentage Total Return -1.0% Total Return Performance 2002 - Q2, 2007 T otal Return Avg 0.664% Std Dev 0.553% Insurance Return Avg 0.405% Std Dev 0.523% Insurance Return Annual Equivalents -2.0% Avg 7.972% Std Dev 1.916% Avg 4.862% Std Dev 1.811% Floating i.e. LIBOR -3.0% High Sharpe Ratio LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
40.0% Ren Re Annual Average Return on Equity for Selected Reinsurers, Ordered 30.0% by Average ROAE, 2002 to 2007 Average 20.0% CMRe Arch 10.0% 0.0% 2006 2007 2003 2002 2004 2005 ‐ 10.0% Ren Re ‐ 20.0% XL Average IPC RNR PRE ‐ 30.0% EVEREST ACE XL ARCH ASPEN AWAC ‐ 40.0% IPC AXIS ENDURANCE LANCASHIRE MAX RE MONTPELIER PLATINUM ‐ 50.0% WHT MTN CMRe Montpelier ‐ 60.0% 10 Leveraged vs. Unleveraged Historical Profiles LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
OUTLINE Beyond Convergence, towards Integration � Observations on the ILS Market - Motivation and Growth, - Price Trends, and Historic Returns � Investor Information on ILS - Remodeling and Scenarios/Event Sets - Risk and Exposures in the Index Portfolio Ri k d E i th I d P tf li - Benefits, and Problems, with Progress � � Optimizing with the Scenario Sets Optimizing with the Scenario Sets - ILS Portfolio Management subject to a Risk Profile - Adding OLWs or Traditional Treaties to the Portfolio - Other Applications Other Applications � 11 Concluding Remarks LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
Mangrove Valais Re Residential Issue Class B Class C Re Class 2 Homewise Sponsor Flagstone USAA Insurance Glacier, Swiss Modeler AIR RMS AIR PFL(%) 6.62 / 7.62 4.50 4.32 / 5.08 EL(%) 3.70 / 4.30 3.52 2.85 / 3.32 PLL(%) 2.44 / 2.81 2.50 1.84 / 2.17 Spread (%) L+ 13.25 L+14.50 L+11.50 EL Multiple 3.1 4.1 3.5 N. American Gulf, E. Coast Coverages Florida Hurricane, EQ HW Hurricane (All are occurrence Hurricane 12 based ) Jap Wind, EQ US EQ LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
Questions � All are indemnity ILS, are all issuers equally good underwriters? Are all equally well aligned with investor interest? � Is 2% by RMS the exact equivalent of 2% by AIR? (Or EQECAT). Ditto PFL, PLL? � � Would a repeat of Andrew (92) exhaust or attach all of the Would a repeat of Andrew (92) exhaust or attach all of the deals to the same extent? � � How do various scenarios accumulate? Amongst each other How do various scenarios accumulate? Amongst each other, and with traditional treaties and ILWs? � What if all deals were evaluated on the same basis? 13 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
Re-Modeled Scenario Sets � AIR, RMS and EQECAT all are now offering versions of scenario sets � In what follows, AIR has provided 10,000 annual scenarios, based on a 35,000+ event set An Example of Scenario Set Benefits p � A Prospective View of the Market Index Portfolio 14 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
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ILS Portfolio Annual Risk and Return Statistics "Insurance" Only LIBOR at 3.25% LIBOR at 5.00% Portfolio Weighted average Coupon Spread 6.0% Portfoilo Expected Loss 1.6% Expected Returns 4.4% 7.7% 9.4% Standard Deviation 4.1% Sharpe Ratio 1.08 Probability of First Insurance $ Loss Probability of First Insurance $ Loss 51 0% 51.0% 51 0% 51.0% 51 0% 51.0% Probability of Exceeding Expected Return 76.6% Probability of Positive Total Return 91.7% 95.1% 95.9% "Insurance" Returns VAR Level 90.00% 95.00% 99.00% 99.60% VaR 0.88% -3.12% -16.67% -20.14% TVaR -11.64% -16.60% -27.23% -32.09% 18 LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
Peril Share of Expected Loss Portfolio Exp Loss 1.59% Other JPN Wind JPN EQ US EQ 4% 5% 6% 17% EUR Wind EUR EQ US Wind 23% 3% 42% LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
12.0% Portfolio Diversification ‐ Where Losses Come From Where Losses Come From 10.0% The chance of Principal losses exceeding 5% is over 10%, see bar. The peril source of losses at that level is shown as the bar breakdown . 8.0% Losses from Combined Events Other JPN Wind 6.0% JPN EQ EUR Wind EUR EQ US EQ 4.0% US Wind 2.0% 0 0% 0.0% 5% Loss Level 10% Loss Level 15% Loss Level 20% Loss Level 25% Loss Level 50% Loss Level LANE LANE FINANCI FINANCI FINANCIAL FINANCIAL L L.L.C. L L.L.C. L.L.C. L.L.C.
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