[PPT] - BEYOND CONVERGENCE, TOWARDS INTEGRATION - The next steps for the PowerPoint Presentation

SLIDE 1

BEYOND CONVERGENCE, TOWARDS INTEGRATION

The next steps for the ILS Market

Morton Lane Ph.D. President , Lane Financial LLC Sept 22nd 2008 Sydney

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 1

SLIDE 2

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

Ri k d E i th I d P tf li

Risk and Exposures in the Index Portfolio
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

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 2

Other Applications

Concluding Remarks

SLIDE 3

175

ReturnIndices for

150

Return Indices for S&P 500 and Lane Financial Insurance Return Index

125 100 S&P500 ILS 50 75 LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 3 50 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08

SLIDE 4

8.00% 10.00%

Monthly Returns from the S&P 500 vs. i i l d

4.00% 6.00%

Lane Financial Insurance Return Index

ILS

0.00% 2.00%

vs. S&P 500 Correlation

‐4.00% ‐2.00%

Correlation 3% - 15%

‐8.00% ‐6.00% S&P 500 "ILS TOTAL RETURN LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 4 ‐10.00% S&P 500 ILS TOTAL RETURN

SLIDE 5

$7,451

$7,000 $8,000

Total ILS Iss ance

$5,605

$6,000 $7,000

Total ILS Issuance

Q1 to Q1 1998 to Q2/2008 Red: Cat Bonds; Stripe: Life ILS

* "Sidecar" transactions and certain Life securitizations not included here could add a further estimated

$3 277

$4,000 $5,000

included here, could add a further estimated $4 billion to the combined 2006 and 3/2007 totals.

$1,894 $1,803 $3,277

$2,000 $3,000

$886 $1,367 $1,219 $1,126 $827 $832

$0 $1,000

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$0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

SLIDE 6

175% 200% 350 400

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)

125% 150% 250 300

x plus he Prices

P t

75% 100% 150 200

ar Changes in Index ed Changes in blue Index of Catastroph

Post Andrew Post 9/11 Post Katrina

25% 50% 75% 50 100 150

% Year to Yea de-trende Paragon and LFC

0% 25% 50

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 6

25%
50

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Q1 2008

SLIDE 7

175.0 200.0 60%

Synthetic Price Index

125.0 150.0 45% es

Synthetic Price Index and Q/Q % Changes

Average of Cat ILS, ILWs and Constant EL *

(*i.e. ArborI/SIIA/SHDVI series)

75.0 100.0 30% ex of Prices Q/Q Change in Price 25.0 50.0 15% Inde Percentage Q

25.0

0.0 0% LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C.

50.0
15%

SLIDE 8

$180

Current (Q2, 2008)Total Value of $100 Index Investment in

$167.42 [CAGR

8.25%]

$160 nt

Cat Bonds commencing 1/1/02

Total Return - (Insurance Return + Floating

Return i.e. LIBOR or EURIBOR)

$136.94 [CAGR

4 96%]

$140 ue of Investmen

Insurance Return

4.96%]

$120 Dollar Val $100 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Total Return Insurance Return LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C.

$80 Time

High Total Return

SLIDE 9

2.0% 1.0% hly) 0.0% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 e Returns (Month

MonthlyAll CAT ILS

1.0%

Percentage

Monthly All CAT ILS Total Return Performance

2002 - Q2, 2007

T

tal Return Avg 0.664% Std Dev 0.553%

Insurance Return Avg 0.405% Std Dev 0.523%

Total Return Insurance Return

2.0%

Annual Equivalents Avg 7.972% Std Dev 1.916% Avg 4.862% Std Dev 1.811%

Floating i.e. LIBOR

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3.0%

High Sharpe Ratio

SLIDE 10

30.0% 40.0%

Annual Average Return on Equity for Selected Reinsurers, Ordered by Average ROAE, 2002 to 2007

Ren Re

10.0% 20.0%

Average CMRe Arch

‐10.0% 0.0% 2006 2007 2003 2002 2004 2005

Ren Re

‐30.0% ‐20.0% Average IPC RNR PRE EVEREST ACE XL ARCH

XL

‐50.0% ‐40.0% ASPEN AWAC AXIS ENDURANCE LANCASHIRE MAX RE MONTPELIER PLATINUM WHT MTN CMRe

IPC Montpelier

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 10 ‐60.0%

Leveraged vs. Unleveraged Historical Profiles

SLIDE 11

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

Ri k d E i th I d P tf li

Risk and Exposures in the Index Portfolio
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

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 11

Other Applications

Concluding Remarks

SLIDE 12

Issue Mangrove Class B Valais Re Class C Residential Re Class 2 Sponsor Homewise Insurance

Glacier, Swiss

Flagstone USAA

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

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Coverages

(All are occurrence based)

Florida Hurricane

N. American

Hurricane, EQ Jap Wind, EQ Gulf, E. Coast HW Hurricane US EQ

SLIDE 13

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?

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SLIDE 14

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

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SLIDE 15

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SLIDE 16

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SLIDE 17

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SLIDE 18

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 51 0% 51 0% 51 0% Probability of First Insurance $ Loss 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%

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SLIDE 19

Peril Share of Expected Loss Portfolio Exp Loss 1.59%

US EQ 17% JPN EQ 6% JPN Wind 5% Other 4% US Wind 42% EUR EQ 3% EUR Wind 23%

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C.

SLIDE 20

12.0%

Portfolio Diversification ‐ Where Losses Come From

8.0% 10.0%

Where Losses Come From

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.

6.0%

Losses from Combined Events Other JPN Wind JPN EQ

4.0%

EUR Wind EUR EQ US EQ US Wind

0 0% 2.0% LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 0.0% 5% Loss Level 10% Loss Level 15% Loss Level 20% Loss Level 25% Loss Level 50% Loss Level

SLIDE 21

Selected Sample Transactions Re-Modeled By AIR.

DEAL AJAX Redwood X Class B Akibare A Foundation Re D Residential Re 2007 Class 3 Residential Re 2007 Class 5 US Wind US US Wind US US Wind US Principal Perils US Quake US Quake Japan Wind US Wind US Quake US Wind US Quake US Wind US Quake Original OC Modeler EqeCat EqeCat RMS RMS AIR AIR Q1 Secondary Mkt Yield 5.48% 3.18% 2.62% 3.55% 10.75% 6.47% Re-Modeled EL 1.96% 0.65% 3.59% 2.44% 2.49% 1.03% Stand Alone Risk Statistics Std Dev 13.69% 7.67% 18.43% 14.85% 14.02% 9.76% VaR 99 100 00% 0 00% 99 56% 100 00% 100 00% 55 22% VaR 99 100.00% 0.00% 99.56% 100.00% 100.00% 55.22% TVaR 99 100.00% 64.50% 99.56% 100.00% 100.00% 96.53%

Data Courtesy of AIR, from Early AIR Model Versions.

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Other Benefits – More Risk Measures

SLIDE 22

Some surprises (perhaps)

R

d l d EL’ d t l l i i l PPM EL’

Re-modeled EL’s do not always equal original PPM EL’s
Not all ILS appear to be re-model-able based on PPM data

pp

Notwithstanding, it is extremely valuable to have all ILS on

the same basis the same basis

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 22

SLIDE 23

Selected Sample Transactions Re Modeled By AIR Selected Sample Transactions Re-Modeled By AIR.

DEAL AJAX Redwood X Class B Akibare A Foundation Re D Residential Re 2007 Class 3 Residential Re 2007 Class 5 Principal Perils US Quake US Quake Japan Wind US Wind US Q k US Wind US Q k US Wind US Q k Principal Perils US Quake US Quake Japan Wind Quake Quake Quake Original OC Modeler EqeCat EqeCat RMS RMS AIR AIR Issue Spread 6.25% 3.60% 2.95% 7.25% 12.25% 7.75% Q1 S d Mk Yi ld 48% 3 18% 2 62% 3 % 10 % 6 4 % Q1 Secondary Mkt Yield 5.48% 3.18% 2.62% 3.55% 10.75% 6.47% OC EL 1.94% 0.68% 1.04% 1.21% 2.74% 0.77% Re-Modeled EL 1.96% 0.65% 3.59% 2.44% 2.49% 1.03% AIR Conservatism bps 2 3 255 123 25 26

Data Courtesy of AIR, from Early AIR Model Versions.

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 23

SLIDE 24

Showing Increasing Capital Requirements for Incremental Amounts of Different Peril ILWs

CMRe 08Q1 Cal Quake $20 Billion ILW Premium 6.50% Total Limit or Face Value of ILS Securities $12,132,404,584 + $250,000,000 Original Portfolio Expected Loss 2.18% 2.13% Re-modeled Portfolio Expected Loss 2.33% 2.33% Standard Deviation $599,481,642 2.92% Portfolio TVaR99 $3,708,564,018 1.21% ILW Expected Loss 2.41% Expected Return on Capital Standards, Including Premium in the Capital Portfolio TVaR99 17.90% 18.07% Limit 4.29% 4.28%

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Note, all ILWs are added individually in exposure amounts of $250,000,000. All ILWs have an EL of 2.5% + or - 0.5%

Comparative Statics

SLIDE 25

Showing Increasing Capital Requirements for Incremental Amounts of Different Peril ILWs

CMRe 08Q1 US All Natural Perils $70 Billion ILW Premium 8.50% Total Limit or Face Value of ILS Securities $12 132 404 584 + $250 000 000 Total Limit or Face Value of ILS Securities $12,132,404,584 + $250,000,000 Original Portfolio Expected Loss 2.18% 2.13% Re-modeled Portfolio Expected Loss 2.33% 2.33% Standard Deviation $599,481,642 4.29% Portfolio TVaR99 $3,708,564,018 5.93% ILW Expected Loss 2.32% Expected Return on Capital Standards, Including Premium in the Capital Portfolio TVaR99 17.90% 17.25% Limit 4.29% 4.33%

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Note, all ILWs are added individually in exposure amounts of $250,000,000. All ILWs have an EL of 2.5% + or - 0.5%

Comparative Statics

SLIDE 26

Showing Increasing Capital Requirements for Incremental Amounts of Different Peril ILWs

CMRe 08Q1 Japan Quake $12.5 Billion ILW Premium 6.50% Total Limit or Face Value of ILS Securities $12 132 404 584 + $250 000 000 Total Limit or Face Value of ILS Securities $12,132,404,584 + $250,000,000 Original Portfolio Expected Loss 2.18% 2.13% Re-modeled Portfolio Expected Loss 2.33% 2.33% Standard Deviation $599,481,642 1.15% , , Portfolio TVaR99 $3,708,564,018 0.20% ILW Expected Loss 2.37% Expected Return on Capital Standards, Including Premium in the Capital Portfolio TVaR99 17.90% 18.31% Limit 4.29% 4.28%

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 26

Note, all ILWs are added individually in exposure amounts of $250,000,000. All ILWs have an EL of 2.5% + or - 0.5%

Comparative Statics

SLIDE 27

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

Ri k d E i th I d P tf li

Risk and Exposures in the Index Portfolio
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

LANE FINANCI FINANCIAL L L.L.C. L.L.C. LANE FINANCI FINANCIAL L L.L.C. L.L.C. 27

Other Applications

Concluding Remarks

SLIDE 28

ReA/L RisKontroller™

Combining ReA/L RisKontroller and the AIR Worldwide

Catastrophe Scenario Set to Optimize ILS Portfolios ReAL1 RisKontroller Optimizer – joint venture of ReAL RisKontroller Optimizer joint venture of Lane Financial LLC and RisKontroll Group GhmB

Maximize expected return of 10,000 year scenario set

Choose among all outstanding ILS Allow writing or ceding of OLWs g g Scenario set available for ILS and OLWs or Traditional Treaties Construct a portfolio such that it satisfies a multi layered

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Construct a portfolio such that it satisfies a multi-layered set of CVaR (a.k.a. TVaR) or VaR constraints

1 ReAL is Re-insurance Asset Liability Optimizer

SLIDE 29

Comment – AIR Worldwide or any re-modeler may have less

information on those ILS that it did not originally model (Ditto RMS or Eqecat).

Re-modelers therefore tend to be more conservative in their

loss estimates on remodeled deals (i e higher than PPM loss estimates on remodeled deals (i.e. higher than PPM provided expected losses) but not always so.

ReA/L RisKontroller can be used with scenario sets from

RMS E i h d i d bi i f RMS or Eqecat, or with a custom designed or combination of scenario sets.

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SLIDE 30

Sample Problem

Maximize Expected Return on Capital (over the 10,000 year scenario set) Subject to, a) for the worst 4% of scenarios (400), the expected loss should not exceed 10% ) ( ), p (i.e. 96% TVAR <= 10% Loss) b) for the worst 1% of scenarios (100), the expected loss should not exceed 20% (i.e. 99% TVaR <= 20% loss) c) for the worst 0.1% of scenarios (10), the expected loss should not exceed 40% (i.e. 99.9% TVaR <= 40% loss) d) Limits on purchasing and selling activity of ILS, writing or retroceding of ILWs e) Financing restrictions if any. . . . . .

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SLIDE 31

Th The Opportunity Set

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SLIDE 32

20% 0% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% R e t u E d P b bilit ‐10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% r n

n

Exceedence Probability

Portfolio Improvement Strategies

with/without ILWs and Shorting Possibilities

‐30% ‐20% C a p i t

with/without ILWs and Shorting Possibilities

‐40% a l Initial Portfolio

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‐50% (Note, some optimization restrictions are lifted for graphical effect)

SLIDE 33

20% 0% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% R e t u E d P b bilit ‐10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% r n

n

Exceedence Probability

Portfolio Improvement Strategies

with/without ILWs and Shorting Possibilities

‐30% ‐20% C a p i t

with/without ILWs and Shorting Possibilities

‐40% a l Initial Portfolio ILS Only

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‐50% y (Note, some optimization restrictions are lifted for graphical effect)

SLIDE 34

20% 0% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% R e t u E d P b bilit ‐10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% r n

n

Exceedence Probability

Portfolio Improvement Strategies

with/without ILWs and Shorting Possibilities

(Note, some optimization restrictions are lifted for graphical effect) ‐30% ‐20% C a p i t

with/without ILWs and Shorting Possibilities

Initial Portfolio Rearranging ILS ILS and ILW Buy & Sell Write/Cede ILWs Expected Profit 5.93% 10.16% 12.03% Marginal Return 5 81% 4 56%

‐40% a l Initial Portfolio ILS Only ILW Long/Short

n Capital

5.81% 4.56% 90.00% 2.77% 3.16% 5.78% 99.50%

2.20%
2.79%
0.54%

99.00%

24.23%
12.14%
13.05%

99.60%

29.23%
22.50%
19.59%

Max

43.23%
37.60%
45.25%

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‐50% y g/ (Some optimization restrictions are lifted for graphical effect)

SLIDE 35

A Specific Example

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SLIDE 36

1% of every ILS Double Initial H ldi d/ ll Double Initial H ldi d/ Sh t Double initial H ldi d/ h t BASE CASE CASE II CASE III CASE IV

Comparison of Four O ti i i S l ti Expected Ending Income Statement (Millions $US)

I Holdings and/or sell initial Holdings Holdings and/or Short 1% Holdings and/or short 1%, and/or Write ILWs

Optimizing Solutions

Income Written Premium $4.62 $6.48 $7.13 $8.96 Ceded Premium $0.00 $0.00

$0.75
$0.86

Net written Premium $4.62 $6.48 $6.38 $8.09 Investment Income $0.00 $0.00 $0.00 $0.00 $4 62 $6 48 $6 38 $8 09 $4.62 $6.48 $6.38 $8.09 Expenses Expected Losses

$1.18
$1.50
$1.65
$2.19

Expected Recoveries $0.00 $0.00 $0.64 $0.67 Expected Net Losses

$1.18
$1.50
$1.01
$1.52

Expected Net Losses $1.18 $1.50 $1.01 $1.52 Brokerage & Acquisition expense $0.00 $0.00 $0.00 $0.00 General & Administrative $0.00 $0.00 $0.00 $0.00 Expected Profit $3.44 $4.98 $5.37 $6.58

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Expected Rate on Equity 3.44% 4.98% 5.37% 6.58%

SLIDE 37

1% of every ILS Double Initial Double Initial Double initial BASE CASE CASE II CASE III CASE IV

Comparison of Four

Exposure Report Total Net Exposure 48 23 40 44 45 26 51 90 Holdings and/or sell initial Holdings Holdings and/or Short 1% Holdings and/or short 1%, and/or Write ILWs

Optimizing Solutions

Total Net Exposure Net Premium to Net Cover Leverage: Exposure/Capital Underwriting Report Premiums Written 40.44% 48.23 13.22% 40.44 11.42% 4.62 45.26 14.32% 45.26% 6.48 48.23% 7.13 51.90 15.59% 51.90% 8.96 Premiums Ceded Expected Losses Expected Recoveries Expected Underwriting Profit 0.00

1.18

0.00 0.00

1.50

5.37 0.00 3.44 4.98

0.86
2.19

0.67

0.75
1.65

0.64 6.58 Portfolio Loss Ratios Net Written Premiums Expected Net Losses Expected Net Loss Ratio 4.62 1.18 25.59% 6.48 1.50 23.21% 18.74% 6.38 1.01 15.81% 8.09 1.52

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SLIDE 38

Double Initial Holdings and/or Short 1% Double Initial Holdings and/or short 1%, and/or Write ILWs

Details of Solutions in Four Optimization

Base Case 1% of every ILS Double Initial Holdings and/or sell Initial Holdings Written Premium (Mil) Ceded Premium (Mil) Written Premium (Mil) Ceded Premium (Mil) Written Premium (Mil) Ceded Premium (Mil) Written Premium (Mil) Ceded Premium (Mil) Aiolos $0.0886 $0.0886 $0.0886 $0.0886 AJAX $0.0548 $0.0234

Four Optimization Runs

Akibare A $0.0235 $0.0235 Akibare B $0.0082 $0.0082 Australis $0.0294 $0.0588 $0.0588 $0.0588 Blue Fin Ltd A $0.1176 $0.1176 Blue Fin Ltd B $0.0295 $0.0295 Calabash A-1 $0.0590 $0.0571 Calabash Re II A 1 $0 0681 $0 1362 $0 1362 $0 1362 Calabash Re II A-1 $0.0681 $0.1362 $0.1362 $0.1362 Calabash Re II D-1 $0.0279 $0.0557 $0.0557 $0.0557 Calabash Re II E-1 $0.0881 $0.0000 $0.1762 $0.1012 Carillon 1 A-1 $0.0464 $0.0928 $0.0928 $0.0928 Carillon 2 $0.2052 $0.4104 $0.4104 $0.4104 Cascadia $0.0876 $0.1510 $0.1752 $0.1752 Cascadia II $0.0918 $0.1836 $0.1836 $0.1836 CAT-Mex A $0.0510 $0.1020 $0.1020 $0.1020 CAT-Mex B $0.0032 $0.0063 $0.0063 $0.0063 Champlain A $0.0769 $0.0163 $0.0641 Champlain B $0.0203 $0.0405 $0.0405 $0.0405 East Lane Re A $0.0740 $0.0901 $0.1480 $0.1480 East Lane Re B $0.0731 $0.1462 $0.1462 $0.1462 East Lane II A $0 0467 $0 0240 $0 0933

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East Lane II A $0.0467 $0.0240 $0.0933 East Lane II B $0.0505 $0.1011 $0.1011 $0.1011 East Lane II C $0.0795 $0.0795 $0.0795 Eurus $0.0592 $0.1184 $0.1184 $0.1184 Fhu-Jin B $0.0595 $0.1190 $0.1190 $0.1190 Foundation Re A $0.1291 $0.0477 $0.1291

SLIDE 39

Double Initial Holdings and/or Short 1% Double Initial Holdings and/or short 1%, and/or Write ILWs

Details of Solutions in

Base Case 1% of every ILS Double Initial Holdings and/or sell Initial Holdings Successor Japan Quake Class A- $0.0309 $0.0619 $0.0619 $0.0619 Successor Japan Quake Class B- $0.0105 $0.0209 $0.0209 $0.0209 Successor Japan Quake Class C- $0.0498 $0.0996 $0.0996 $0.0996 Written Premium (Mil) Ceded Premium (Mil) Written Premium (Mil) Ceded Premium (Mil) Written Premium (Mil) Ceded Premium (Mil) Written Premium (Mil) Ceded Premium (Mil) Write ILWs

Four Optimization Runs

Successor Japan Quake Class C $0.0498 $0.0996 $0.0996 $0.0996 Successor Euro Wind Class A-I $0.0175 $0.0010 $0.0350 $0.0350 Successor Euro Wind Class A-III $0.0308 $0.0616 $0.0616 $0.0616 Successor Euro Wind Class C-III $0.0080 $0.0160 $0.0160 $0.0160 Successor I Class B-II $0.0708 $0.1416 $0.1416 $0.1416 Successor II Class C-III $0.0249 Successor II Class E-III $0.1248 $0.2497 $0.2497 $0.2497 Willow Re $0.1035 $0.0682 $0.0363 ILW California Quake 10B $0 1100 ILW California Quake 10B $0.1100 ILW California Quake 12.5B $0.9500 ILW California Quake 15B ILW California Quake 20B ILW California Quake 25B ILW California Quake 30B ILW California Quake 40B ILW California Quake 50B $0.0350 $ ILW California Quake 5B $0.1575 ILW California Quake 60B $0.0300 ILW California Quake 70B $0.0275 ILW Florida Wind 10B $0.2275 ILW Florida Wind 12.5B $0.1950 ILW Florida Wind 15B $0.1750 ILW Florida Wind 20B $0.1450 ILW Florida Wind 25B $0.1275

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$ ILW Florida Wind 30B ILW Florida Wind 40B ILW Florida Wind 50B ILW Florida Wind 60B ILW Florida Wind 70B

SLIDE 40

The Optimal Solution Reports,

a) The ILS in the optimal portfolio b) The set of buy sell transactions to effect the optimum c) The rank ordering of the deals to buy (B-T-W) and deals to sell d) Marginal prices at which non-optimal deals can be bought or sold e) Sets of Risk-adjusted prices e) Sets of Risk adjusted prices f) Reports showing risk profile, marginal return on capital ) I li d P b bili i g) Implied Probabilities h) Problematic scenario ranking

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i) Expected Balance sheets, Income Statements j) Expected Underwriting and leverage reports

SLIDE 41

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

Ri k d E i th I d P tf li

Risk and Exposures in the Index Portfolio
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

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Other Applications

Concluding Remarks

SLIDE 42

Implied Probabilities – Worst 2% of scenarios

I li it b bilit i hti f li it f i t Implicit probability weighting of explicit preference requirements

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SLIDE 43

Other Applications of Optimization

Portfolio Selection

Traditional Reinsurers’ Portfolio (including ILS, ILWs)
Simultaneously Ceding and Pricing Retrocessional cover

Replication strategies

Best ILWs to represent particular ILS
Mi i

i i b i i k

Minimizing basis risk

Capital Structure

Optimal capital structure for Insurance CDO’s

p p

Capital allocation Rules

Insurance

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Insurance

Insurance company allocation of sales efforts

SLIDE 44

END

Contact mlane@LaneFinancialLLC.com rbeckwith@LaneFinancialLLC.com Web site

www.LaneFinancialLLC.com

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