CASACT Conference Current Developments in the Catastrophe Bond / ILS Space ILS Space October 4, 2012
Introduction Capital Markets-Based Risk Transfer Protection vs. (Re)insurance Insurance and Reinsurance Transactions Capital Markets Premium Premium Insurance Reinsurance Company Company Policy backed by Contract backed by y financial strength fi i l t th financial strength Interest Interest Dedicated D di d Payment* Premium Premium Reinsurer or ROL Capital Insurance or Markets Company Fronting g Investors Investors Cash C h Reinsurer Contract Policy backed by fully financial strength backed by collateral * Based on Premium payment (plus investment earnings on collateral) 1
Introduction Summary of Solutions Supporting Catastrophe Risk Source: Eskatos Capital Management
Introduction State of the P&C Catastrophe Bond Market $15,000 14,024.5 $14,000 14,024.2 12,508.8 $13,000 $13,000 s) U.S.$, Millions 12 185 0 12,185.0 $12,000 12,139.1 12,043.6 $11,000 Risk Capital Issued $10,000 tal Amount (U Risk Capital Outstanding at Year End $9,000 8,541.6 $8,000 6,996.3 $7,000 $6 000 $6,000 Risk Capi 4,693.4 4,600.3 $5,000 4,904.2 4,108.8 3,966.6 4,040.4 $4,000 3,391.7 2,729.2 $3,000 1 991 1 1,991.1 1 729 8 1,729.8 $2,000 1,219.5 984.8 1,139.0 966.9 1,142.8 846.1 633.0 $1,000 $0 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 YTD Source: GC Securities Proprietary Database, as of Oct 4, 2012 3 (1) Excludes private transactions (2) 4Q11 includes $200M of two Mariah tranches that fully paid out as a result of loss events
Introduction Typical Cat Bond Features Typical Cat Bond Features • – Qualified Institutional Investors (Rule 144A or Private Placements) – Annual expected losses between 0.2% and 8% (EL around 1-2% is most frequent) – Notional limits between $50 million and $1 billion – 1- to 5-year tenor – Quantifiable and observable risk (modeled) – Most efficient for peak perils – Separation of roles: Risk analysis and rating completed by third parties S Sponsor Motivations M ti ti I Investor Motivations t M ti ti • • – Full collateralization – Source of diversification in an investment – Multi-year fixed pricing portfolio – Diversification of risk capital source Diversification of risk capital source – Potentially attractive investment returns Potentially attractive investment returns - Limit risks of capacity constraints and – Ability to further diversify within sector price volatility in the traditional reinsurance – Depending on type of execution, market independent third party risk analysis may – Leverage reinsurance market by available available demonstrating access to alternative capacity demonstrating access to alternati e capacit source
Introduction General Structural Schematic (Catastrophe Bond) Sponsor Spo so Reinsurance Risk Premium Agreement or Financial Contract Return at the Redemption Date of Dedicated Outstanding Principal Amount Proceeds Reinsurer (SPV) Interest: Permitted Highly Rated Investments Yield + Capital Markets Capital Markets Permitted Permitted Interest Spread Interest Spread Investors Investments Permitted Collateral Proceeds Investments Yield Account
Introduction Major Cat Bond Trigger Types • Indemnity – Triggered by actual loss of sponsor • Index – Triggered by insured damaged for entire industry • Parametric – Triggered by event parameters P t i T i d b t t • Modeled Loss – Triggered by modeled results of sponsor portfolio Parametric ency Transpare Modeled Loss Index Indemnity Basis Risk
Introduction Estimated Composition of Property Catastrophe Limits Outstanding Traditional Reinsurance, $223B, 84% Alternative M Markets, k t $42B, 16% 7 Source: GC Securities Proprietary Database (estimates only), Swiss Re sigma and Standard & Poor’s, Business Insurance.
Introduction Traditional Global Non-Traditional Property Catastrophe Limits Reinsurance, $223B, 84% Alternative Markets, $42B, 16% $60 $50 $ 8.0 $40 $ 6.0 $ 11.0 USD $B $ 9.0 $30 U $ 15.0 $ 12.0 $20 $10 $ 17.0 $ 14.5 $0 $0 Sep-12 2015 (Projected) Catastrophe Bonds Collateralized Reinsurance Retrocession Industry Loss Warranties Source: GC Securities Proprietary Database and Guy Carpenter & Company LLC. Estimates only. 8
Introduction General Structure Schematic (Collateralized Reinsurance) Derivative Reinsurance Collateral Option #1 – Contract Contract Trust Account Licensed Premium Premium Reinsurer Reinsurer’s obligation is Investor(s) Protection secured by permitted Buyer assets that are held in a Coverage g Coverage g collateral account whose collateral account whose release is governed by a Trust account trust agreement Security interest Pledge collateral Collateral Collateral Option #2 Collateral Option #2 – Derivative Reinsurance Letter of Credit Contract Contract Licensed Reinsurer Reinsurer’s obligation is Premium Premium secured by a Letter of Investor(s) Protection Credit issued by a financial Buyer institution mutually agreed Coverage Coverage upon by protection buyer upon by protection buyer Financial and the investor. Institution Beneficiary status / Issued by a financial Right to institution on behalf of LOC draw on LOC Investor Structural Option #3 – Highly Rated Derivative Reinsurance Reinsurer Contract Contract Highly Rated Premium Premium Protection buyer faces a Fronting Protection highly rated reinsurer. Reinsurer Investor(s) esto (s) Buyer Buyer Reinsurer’s obligation is Reinsurer s obligation is Covergae Covergae Coverage secured by its credit rating, Collateral not by an LOC or collateral Funding account. 9
Introduction Risk Adjusted Returns vs. Liquidity and Transparency High g Retrocession rns usted Retu Collateralized C ll t li d Reinsurance Industry Industry Risk Adj Loss Warranties Cat Bonds / ILS ILS Low High Low Liquidity, Data Quality, Transparency 10
Introduction Growth of Non Traditional Reinsurance Supported by market trends… Product Innovation Diversification Regulatory Developments Counterparty Risk Catastrophe Models Balance Sheet Management What about pricing? 11
Introduction 2010-2012 YTD Catastrophe Bond Pricing (Multiple vs. EL) 11.0x Blue Danube ‐ A (4/12) 10.0x s) ate / Expected Los 9.0x Mythen Ltd E (5/12) 8.0x over Reference Ra Long Point Re III (6/12) 7.0x Mythen Ltd A (5/12) Kibou (2/12) Embarcadero Re 2012 ‐ 2 (7/12) Everglades Re (4/12) Blue Danube ‐ B (4/12) 6.0x Mystic Re III ‐ A (2/12) East Lane Re V ‐ A (3/12) Residential Re 2012 ‐ I Class 3 Multiple (Spread o (5/12) Ibis Re II Series 2012 ‐ 1 A (1/12) Mystic Re III ‐ B (2/12) 5.0x East Lane Re V ‐ B (3/12) Mythen Ltd H (5/12) Queen Street V Re Ltd. (2/12) 4.0x Successor X 2012 ‐ 1 Class V ‐ D3 Pelican Re (4/12) (1/12) Akibare II (4/12) M Queen Street VI Re Ltd (7/12) Q ( / ) Ibis Re II Series 2012 ‐ 1 B (1/12) Embarcadero Re 2012 (2/12) 3.0x Eurus III (9/12) 2.0x 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 Expected Loss 2012 Initial Issuance 2012 Initial Issuance 2011 Initial Issuance 2010 Initial Issuance Sep 21 Secondary Source: GC Securities Proprietary Database, 2012; Secondary market data 12
Introduction Market Risk / Return Levels (1997 through 2012 YTD) 11.00 9.00x 10.29 10.43 10.00 8.00x 7.97x ad) 7.46x 7 46x eighted Avergae Sprea 9.00 8.87 7.00x 8.48 8.00 and Spread) 6.12x 7.37 6.00x 5.91x 7.00 5.49x 5.64x 6 82 6.82 ains to Expected Loss a ge Expected Loss / We 5.16x 5.00x 6.00 5.87 5.87 4.81x 4.60x 5.61 5.35 5.34 4.30x 5.19 4.16x 5.00 4.07x 4.01x 4.00x 3.95x 4.76 4.66 3.75x Percent (Perta 4 42 4.42 iple (Weighted Averag 3 79 3.79x 4 36 4.36 4.00 3.00x 3.00 2.00x 2.37 2.17 2.17 2 08 2.08 2 00 2.00 Mult 1.94 1.58 1.87 1.49 1.33 1.35 1.00x 1.03 1.00 0.86 0.79 1.04 0.71 0.67 0.70 0.00 0.00x 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD Weighted Average Expected Loss Weighted Average Spread Multiple (1) Source: GC Securities Proprietary Database, 2012 13
Introduction 2011 – 2012 YTD Issuance Statistics Sponsor Type (by risk principal) 2011 2012 YTD 5% 19% 19% U.S. Insurer U.S. Insurer European Insurer European Insurer 36% 11% 52% Reinsurer Reinsurer Other Insurer Other Insurer 64% 6% Reinsurer Corporate 7% Bond Tenor (by risk principal) 2011 2012 YTD 0% 5% 6% 15% 19% 22% 2 year 2 year 3 year 3 year 4 year 4 year 5 year 5 year 67% 66% 14 Source: GC Securities Proprietary Database, 2012
Introduction 2011 – 2012 YTD Issuance Statistics Trigger Type (by risk principal) 2011 2012 YTD 14% Indemnity Indemnity Indemnity I d it 3% 30% 30% Parametric Parametric 3% PCS (Index) PCS (Index) PERILS (Index) PERILS (Index) 11% Modeled Modeled Modeled M d l d 61% 6% 5% Various Various 8% 9% 20% Peril Type (by risk principal) 2011 2012 YTD 1% 0% 0% 2% 0% 6% 17% 26% 11% U.S. Earthquake U.S. Earthquake 39% U.S. Hurricane U.S. Hurricane European Wind European Wind Japan Earthquake Japan Earthquake Japan Earthquake Japan Earthquake Japan Typhoon Japan Typhoon Other Other 43% 55% 15 Source: GC Securities Proprietary Database, 2012
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