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Adapting to an Evolving Market
reDEFINING
Capital | Access | Advocacy | Innovation
Aon Benfield Securities, Inc. and Aon Benfield Securities Limited
(collectively, “Aon Benfield Securities”) provide insurance and
reinsurance clients with a full suite of insurance-linked securities
products, including catastrophe bonds, contingent capital,
collateralized reinsurance, industry loss warranties, sidecars and
derivative products.
As the most experienced investment banking firm in this
market, Aon Benfield Securities offers expert underwriting and
placement of new issues, financial advisory services, as well as
securities trading in the secondary market. Aon Benfield Securities’
integration with Aon Benfield’s reinsurance operation expands its
capability to provide analytics, modeling, rating agency, and other
consultative services.
Securities advice, products and services described within this report
are offered solely through Aon Benfield Securities, Inc. and/or
Aon Benfield Securities Limited.
Aon Benfield Securities
Foreword
I am pleased to present the second annual Aon Benfield Securities review
of the insurance-linked securities market. Insurance-Linked Securities
2009 offers a distinctive analysis of this dynamic sector and should prove
an indispensible resource for anyone with an interest in the market.
Like most financial markets, insurance-linked securities (ILS) have been
affected in many ways by the recent global economic disruption. This
publication addresses the impact of that disruption and reviews the
ILS market in that context. Over time, the ILS market has provided
much-needed capital to the insurance industry. Our analysis illuminates
the resilience of the ILS market and our expectation of its continued
importance to the insurance and reinsurance industry.
Our 2009 edition offers the following:
• Comprehensive review of the catastrophe bond market
• Review of Aon Benfield Cat Bond Indices performance, providing
insight into ILS returns compared to both previous periods and other
investment benchmarks
• Analysis of the ILS investor base
• Analysis of related ILS instruments, including industry loss warranties,
sidecars and collateralized reinsurance structures
• Analysis of diversification opportunities in the non-U.S. ILS market
• Thorough explanation of credit risk management and its application
to the insurance industry
Aon Benfield’s annual review of the Insurance-Linked Securities market
was launched in 2008, and rapidly emerged as the industry’s premier
analytical work. We are pleased by your response, and look forward
to continuing to offer this service for the advancement of our industry.
For convenient reference, you can find this and future editions at
www.aonbenfield.com. I welcome your thoughts and suggestions,
which you can share with an email to paul.schultz@aonbenfield.com.
Paul Schultz
President, Aon Benfield Securities
3
Insurance-Linked Securities 2009
Contents
5 | Aon Benfield Securities Annual Review
of the Catastrophe Bond Market
Market-driven adaptation positions industry for a bright future
15 | Aon Benfield Cat Bond Indices
Unparalleled insight into ILS market returns
18 | The Buy Side
A review of ILS investor activity
22 | Related Markets
Industry Loss Warranties, Sidecars
and Collateralized Reinsurance
28 | Diversification Opportunities Outside the United States
Moderating portfolio concentration in U.S.-based perils
32 | The Developing Frontier of Credit Risk Management
Credit Default Swaps explained
39 | Appendix I
Catastrophe bond issuance statistics
44 | Appendix II
ILS market transaction summary
4
Aon Benfield Securities
Aon Benfield Securities Annual Review
of the Catastrophe Bond Market
Market-driven adaptation positions industry
for a bright future
Unprecedented economic events have affected all financial markets, and the ILS
market has been no exception. In addition to the general dislocation of financial
markets, structural concerns and rising prices of ILS securities adversely affected
volumes. And yet, in an extraordinarily challenging environment, the ILS market
demonstrated a remarkable ability to adapt—something that will certainly continue
as the market continues to grow and evolve.
Issuance Review
The importance and resilience of the catastrophe bond market can be demonstrated
by the $25 billion of capital provided since its beginning. New issuance declined
over the last 12 months—from $5.8 billion to $1.7 billion—despite the maturity of
more than $4 billion in bonds. The combination of these effects resulted in a decline
in the total amount of bonds on risk to $11.4 billion. During the annual period to
June 30, 2009, some sponsors either delayed plans to issue bonds or cancelled them
altogether. Considering the economic environment and the resulting activity, the
ILS market continued to provide an important source of capital to the insurance
industry.
CATASTROPHE BOND VOlumE, 1997-2009 (Years ending June 30)
30,000
25,000
$ Millions
20,000
15,000
10,000
5,000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bonds On Risk Cumulative Issuance
Source: Aon Benfield Securities
5
Insurance-Linked Securities 2009
Capital constraints among investors, resulting primarily from impaired investment
portfolios, created a hurdle in the form of the higher risk premiums demanded. In
addition, since catastrophe bond market values did not decline as much as other
sectors, some funds adhering to a fixed percentage diversification strategy found
themselves overweight (particularly in the U.S. hurricane category) and were unable
to add more cat risk. Due to price sensitivities of sponsors, the majority of new
issuance in the first half of 2009 experienced attachment probabilities above 1.25%.
Still, looking back over the recent two-year decline, 12-month volumes remained
higher than in 2005.
CATASTROPHE BOND ISSuANCE BY YEAR (Years ending June 30)
8,000
7,003
7,000
5,815
6,000
$ Millions
5,000
4,000
3,124
3,000
2,000 1,558 1,705
1,071 985 986 1,137
1,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Aon Benfield Securities
In the second half of 2008, the bankruptcy of Lehman Brothers and Lehman Brothers
Special Financing left four notes (Carillon Ltd. Series 1 Class A, Ajax Re Limited Series
1 Class A, Willow Re Series 2007-1 Class B, and Newton Re Series 2008-1 Class A)
without a viable total return swap counterparty. While each transaction had been
thoroughly documented, none of them anticipated the sudden demise of a swap
counterparty coinciding with a market dislocation that impaired the underlying
collateral. Further, the prevailing documentation did not prescribe appropriate
remedies for investors or sponsors in the absence of a replacement swap counterparty.
Consequently, only two transactions were completed in the second half of 2008,
comprising a total issuance of just $320 million: Allianz sponsored another iteration
of the Blue Coast Ltd. transaction for $120 million in July (Allianz’s first transaction
in 2007 was named Blue Wings Ltd.), and Platinum Underwriters Bermuda Ltd.
sponsored $200 million under the Topiary Capital Limited transaction in August.
6
Aon Benfield Securities
After a six-month impasse, the market began a resurgence in February 2009,
with nine transactions successfully completed through June 30, 2009. The first
deal entering the market during this period was the $200 million Atlas V Capital
Limited. This represented the fifth offering sponsored by SCOR and contained three
tranches with U.S. hurricane and earthquake exposures. In response to collateral
management concerns following the Lehman bankruptcy, this transaction used a
total return swap with permitted investments limited to cash, government securities,
money market funds and FDIC-guaranteed bank debt. In stark contrast to previous
transactions that allowed investments with maturities of up to 45 years, new
transactions required far shorter maturities. The Atlas V Capital Limited transaction,
for example, capped collateral maturities at just five years.
CATASTROPHE BOND ISSuANCE BY HAlF-YEAR
8,000
7,000
6,000
$ Millions
5,000
4,455 2,410
4,000
3,000
2,000 2,147
3,405
2,547 1,385
1,000
977
320
0
2005/6 2006/7 2007/8 2008/9
Jan - Jun Jul - Dec
Source: Aon Benfield Securities
In the second quarter of 2009, the Allianz-sponsored Blue Fin Ltd. Series 2 Class A
Notes saw the emergence of a new form of collateral without the need for a swap
counterparty. The issue’s proceeds were invested in medium-term notes structured
specifically to match the transaction’s tenor. These notes were issued by KfW
(Kreditanstalt für Wiederaufbau), supported by the Federal Republic of Germany.
Investors welcomed the new form of collateral, and the deal was upsized from
$150 million to $180 million.
7
Insurance-Linked Securities 2009
CATASTROPHE ISSuANCE BY TR ANCHE / DEAl / SPONSOR (Years ending June 30)
50 12
10
40
8
30
6
20
4
10
2
0 0
2002 2003 2004 2005 2006 2007 2008 2009
Tranches Issued Deals Issued First time Sponsors
Source: Aon Benfield Securities
Two new sponsors entered the catastrophe bond market in the 12 months though
June 30, 2009: Platinum Underwriters Ltd. with Topiary Capital Limited, and
Assurant with the two-tranche $150 million Ibis Re Ltd. transaction. U.S. hurricane
and earthquake perils dominated the issuances completed during this period. Of
the eleven transactions issued in the 12-month period, three were exposed solely to
U.S. hurricane risk, while seven others covered both U.S. hurricane and earthquake
risk. Ianus Capital Ltd., sponsored by Munich Re, was the only Euro-denominated
catastrophe bond issued. This €50 million transaction covered exposure to European
windstorm and Turkish earthquake risk.
CATASTROPHE BOND ISSuANCE BY YEAR AND PERIl (Years ending June 30)
8,000
Notional Limit Issued by Peril ($ Millions)
7,003
7,000 U.S. Hurricane
U.S. Quake
6,000 5,815
Euro Wind
5,000 Japan Quake
Asia Pacific
4,000
Other
3,124
3,000
2,000 1,705
1,558
1,071 1,137
985 986
1,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Aon Benfield Securities
8
Aon Benfield Securities
Transaction Structure Resolution
As noted, credit-related concerns of investors, sponsors and rating agencies led to the
scrutiny and eventual resolution of three categories of structural issues.
C
• ollateral Management and Investment Structures
To ensure the integrity of collateral supporting the obligations of the
issuer, market participants recognized the need to narrow the definition
of permitted investments. Investors called for restrictions on the types of
permitted investments, frequency of their valuation and concentration
to single exposures. The primary market began implementing innovative
solutions to these issues during the first half of 2009. In cases where a
total return swap continued to be used, counterparties were expected
to meet minimum ratings criteria and to replace collateral that failed to
meet enhanced guidelines. The improved structures sought to minimize
counterparty credit risk, which resulted in a shift away from leveraged
financial institutions managing loosely defined collateral pools. Although
total return swaps had been standard for cat bond transactions, sponsors
and investors were encouraged to consider alternative structures,
including money market funds and notes backed by a government
entity. The following table details the collateral management solutions
employed this year:
CATASTROPHE BOND COllATER Al mANAGEmENT (Year ending June 30, 2009)
Collateral
Issue Structure Assets
Atlas V - 1 Total Return Swap TLGP, UST
Atlas V - 2
Atlas V - 3
Mystic Re II 2009 Total Return Swap TLGP, UST
East Lane Re III Total Return Swap TLGP, UST
Ibis Re A Total Return Swap TLGP, UST
Ibis Re B
Blue Fin 2 Medium-Term Notes KfW
Ianus Capital Medium-Term Notes KfW
Calabash Re III A Medium-Term Notes IBRD
Calabash Re III B
Successor II F-IV Money Market UST, Cash
Residential Re 2009 - 1 Money Market UST, Cash
Residential Re 2009 - 2
Residential Re 2009 - 4
Legend: TLGP: Temporary Liquidity Guaranty Program
UST: U.S. Treasury
KfW: Kreditanstalt für Wiederaufbau
IBRD: International Bank for Reconstruction and Development
Source: Aon Benfield Securities
9
Insurance-Linked Securities 2009
T
• ransparency, Documentation and Oversight
Regardless of the investment structure chosen, investors also demanded
greater transparency through more extensive reporting on collateral trust
investments. To reduce uncertainty and improve transparency, recent
transactions have disclosed both primary and subsequent transaction
documents. A new standard now exists for the indenture, reinsurance/
counterparty contract and collateral documents to be made available
via secure online portals, ensuring all investors have immediate access to
pertinent information as it becomes available.
Investors also demanded that documents clearly specify, in the event
service providers ceased to be available, how their replacements would
be engaged. Although some scenarios had not been contemplated in the
past, the replacement mechanics had always been clearly defined. As a
result, the documentation of this process has improved substantially.
Finally, outside agents must now validate collateral management,
reporting, compliance, performance, and reporting.
C
• redit Risk Management
Recent market events have given insurers and reinsurers a heightened
awareness of their credit exposures. While catastrophe bonds bear credit
risk through the investment portfolio, investors (and potentially sponsors)
also face the credit risk associated with service providers such as the swap
counterparty or collateral manager. These risks are generally managed
through structure and documentation. Other credit risk management
techniques—such as credit default swaps—are also available, but are not
widely used at present.
10
Aon Benfield Securities
Recovery Trigger Trend
The recovery trigger for catastrophe bonds is often categorized into four distinct
groups: parametric, industry loss, modeled loss, and indemnity. Of the four triggers,
indemnity often requires the greatest amount of risk premium (although price
variations exist among recovery triggers based on the line of business composition and
the geographic exposure concentration). While indemnity bonds offer sponsors the
purest mitigation of their risk portfolios and the least amount of basis risk, investors in
indemnity bonds face a higher degree of uncertainty. This includes uncertainty from
the ongoing management, underwriting and claims policies of the sponsor.
From 2006-2008, the ILS market witnessed a surge in the proportion of indemnity-
triggered catastrophe bonds issued. The height of this trend was reached in 2008,
when a record 47 percent of all catastrophe bonds issued during the year used an
indemnity trigger ($2.75 billion of the total $5.82 billion issued).
The financial market disruption reversed that trend. In fact, the percentage
of indemnity transactions issued in 2009 fell to 23 percent of the total ($400
million of $1.71 million in total annual issuance). The dramatic change reflected
investors’ unease with the complexity of indemnity transactions compared to more
quantifiable structures. Also at issue was a lack of knowledge of less-creditworthy or
less-recognized sponsors. In a new era marked by a demand for greater transparency,
the indemnity trigger proved less popular with investors.
CATASTROPHE BOND ISSuANCE VERSuS PERCENT INDEmNITY (Years ending June 30)
Percent of New Issuance with Indemnity Loss Trigger
8,000 50%
7,003
7,000 45%
Risk Transfer ($ Millions)
5,815 40%
6,000
35%
5,000
30%
4,000 25%
3,124
3,000 20%
1,705 15%
2,000 1,558
1,071 985 986 1,137 10%
1,000
5%
0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009
Cat Bonds % Indemnity Issued
Source: Aon Benfield Securities
11
Insurance-Linked Securities 2009
CATASTROPHE BOND ISSuANCE BY lOSS TRIGGER (Years ending June 30)
4%
Index
14% 16%
Indemnity
25% 41%
Multiple
Modeled Loss 19%
Parametric Index 4% 47%
5%
Parametric 23%
2008 2009
Source: Aon Benfield Securities
In contrast, the 12-month period ending June 30, 2009 has seen heightened
interest in industry loss index-triggered transactions. In this period, 41 percent of
transactions were on an industry loss-based index, compared to only 14 percent in
the same period in 2008. At the same time, there were no transactions with exclusive
parametric or parametric index structures, as the market experienced an increase
in the percentage of multiple trigger bonds issued (a number of which included
components of the parametric or parametric-index structures).
12
Aon Benfield Securities
Securitized life Risk
While catastrophe bonds have grown substantially since the mid-1990s, the market
for securitized life risks continues to develop. Representative life-based security
transactions over the past decade have included XXX regulation, extreme mortality
and embedded value. More recently, we have seen a number of longevity risk
transactions come to the market.
Improvements in life expectancy have had a negative impact on entities bearing
longevity risk. Longevity risk reflects the uncertainty in future life expectancy and,
specifically, the risk that an individual or group of individuals lives longer than
expected. Entities with economic exposure to longevity risk include pension funds,
annuity writers and life settlement investors, as well as the U.S. Social Security Trust
Fund and comparable institutions worldwide. All of these entities increasingly face
larger liabilities than previously anticipated, as pensioners and annuitants outlive and
outlast the assets previously set aside for them.
The recent market change has further underscored pension woes. Before 2007, high
equity investment returns helped mask the challenge presented by increasing life
expectancy. Recently, however, poor equity returns and low interest rates have left
pension plans significantly underfunded as liabilities soar while pension assets erode.
In recent years, pension funds have increasingly sought mechanisms to hedge their
longevity risk. One new development in this area is the emergence of capital markets
solutions using longevity swap structures. Since January 2008, there have been four
capital markets transactions involving longevity swaps or derivatives:
RECENT lONGEVITY SWAP DEAlS
Sponsor Issuance Year Value ($ mm)*
Canada Life 2008 990
Lucida 2008 195
Norwich Union 2009 689
Babcock 2009 755
Total 2,629
* Transactions in non-US Dollar currencies were converted to US Dollars based on prevailing rates at time of issuance.
Source: Aon Benfield Securities
Longevity swaps involve the exchange of agreed-upon cash streams between the
sponsor (the entity with the existing pension liability) and a counterparty. The
sponsor pays the counterparty a fixed rate (“fixed leg”) with monetary payment tied
to estimated projections of future payments. These payments are based on agreed-
upon mortality risks in the underlying portfolio. To make the transaction worthwhile
to the counterparty, the sponsor pays an additional risk premium in excess of the
fixed rate. In return, the counterparty makes periodic payments on a floating basis
(“floating leg”) dependent on actual mortality rates experienced by the underlying
portfolio. In essence, the sponsor transfers the longevity risk to the counterparty
who effectively assumes responsibility for the actual payment stream associated with
the sponsor’s pension liabilities.
13
Insurance-Linked Securities 2009
STRuCTuR Al PREmISE OF lONGEVITY SWAP
Actual
Pensioners Annuity
Payments Cedent
in Reference
(Sponsor)
Portfolio
Actual Est. Annuity
Annuity Payments + Risk
Payments* Premium +
Costs/Fees
Counterparty
* Subject to a cap and floor
Source: Aon Benfield Securities
All four transactions to date have focused on the U.K. pension market, where
legislative changes have amplified the need to seek longevity risk transfer solutions
and where the legal and regulatory landscapes made transactions more feasible. In
an effort to drive greater transparency, the United Kingdom has implemented new
accounting rules over the past several years that require sponsors to disclose pension
plan deficits. In addition, regulators have begun forcing pension fund managers to
take a more active stance regarding longevity risk.
While the market for longevity swaps is still emerging, many observers and
participants agree it is poised to grow, with anticipated U.K. market growth in
the range of £5 – £10 billion over the next several years. These projections are
supported by studies suggesting that pension liabilities for private companies within
the United Kingdom exceed £1 trillion. Companies are more actively seeking ways
to transfer longevity risk and reduce the volatility of their balance sheets caused
by the financial market disruption and increased regulatory scrutiny. Following
the completion of the first-ever longevity swap involving a U.K. pension fund (by
Babcock in the spring of 2009), interest in this market continues to grow, and—for
now—pricing is aggressive given the current level of capacity.
14
Aon Benfield Securities
Aon Benfield Cat Bond Indices
Unparalleled insight into ILS market returns
In an extraordinarily challenging investment environment, the ILS sector
outperformed most asset-backed securities and provided positive returns over the
past year, inclusive of the mark-to-market losses resulting from the effects of Lehman
swaps. Performance lagged the previous year, however, due to the effects of the
global economic crisis.
The Aon Benfield Cat Bond Indices offer investors the best means of tracking ILS
market performance. These indices represent the return an investor would have
achieved by allocating a weighted amount of capital to each cat bond available in
the market on a sector-by-sector basis. To define the market and form the basis for
our total return calculations, we use the monthly indicative bids tabulated by Aon
Benfield Securities. Indicative bids are derived from Aon Benfield Securities’ trading
experience, combined with the results of a proprietary model that analyzes market
dynamics and seasonality on a category-by-category basis. Aon Benfield Cat Bond
Indices sectors follow conventional market segments: Asia/Pacific, Europe, Multi-
peril, North American Earthquake, and North American Wind. We also segment the
market between investment-grade and non-investment-grade, given the disparity of
returns for each of these markets.
Aon Benfield Securities calculates each group of indices by considering the following
components:
• Mark-to-market change for each ILS
• Coupon returns for each ILS
• LIBOR returns for the period
Individual securities contribute to the total return for the sector on a weighted basis
by issue size and days on risk. For example, an ILS that has been on risk only half
the quarter will not contribute as much as an identical issue that was on risk for the
entire quarter.
Aon Benfield Cat Bond Indices
As a market, insurance-linked securities provided a total return of 3.89 percent
for the year ending June 30, 2009, down from 10.12 percent the previous year.
Individual sector returns for the 2009 period were lower in all cases than those
observed in the 2008 period. These lower returns can be primarily attributed to
mark-to-market losses across all perils. The mark-to-market principal losses were
more than offset by interest income.
15
Insurance-Linked Securities 2009
AON BENFIElD CAT BOND INDICES (June 30, 2009)
Twelve months Ended Six months Ended
IlS SECTOR 6/30/2009 6/30/2008 6/30/2009 6/30/2008
Asia/Pacific 4.13% 8.96% 5.68% 3.87%
Europe 6.12% 6.99% 6.24% 3.92%
Multi-peril 4.47% 9.96% 2.91% 3.56%
N.A. Earthquake 1.95% 10.28% 6.71% 4.73%
N.A. Wind 2.29% 12.53% 2.64% 3.76%
Investment Grade ILS 2.66% 4.69% 0.55% 0.60%
Non-investment Grade ILS 4.15% 11.38% 4.23% 4.59%
ALL ILS SECTORS 3.89% 10.12% 3.59% 3.84%
BENCHmARKS
3 - 5 Year US Treasury Notes 7.14% 10.67% (2.34%) 2.28%
3 Year US Corporate BB+ 6.85% 6.46% 10.04% 3.96%
S&P 500 (26.21%) (14.04%) 3.16% (11.91%)
ABS 3 - 5 Yrs, Fixed Rate (2.54%) (5.91%) 11.52% (6.34%)
CMBS Fixed Rate 3 - 5 Yrs (0.59%) 5.56% 11.87% 0.28%
Source: Aon Benfield Securities
AON BENFIElD CAT BOND INDICES BY SECTOR (Years ending June 30)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
6/30/2005 6/30/2006 6/30/2007 6/30/2008 6/30/2009
Asia Pacific Europe Multi-peril
North American Quake North American Wind
Source: Aon Benfield Securities
16
Aon Benfield Securities
In the recent period, European bonds posted the strongest performance, followed
by Multi-peril, Asia/Pacific bonds, North American Wind and North American
Earthquake. These returns generally followed the relationship between expected
losses and reinsurance rates as a whole, in which the Multi-peril sector offered the
highest returns. Performance was also influenced by mark-to-market losses in each
sector. For instance, bonds in the European Wind and Asia/Pacific sectors performed
relatively well because none of the bonds in these sectors were impacted by the
Lehman bankruptcy. In contrast, the North American Earthquake sector posted the
lowest returns due to mark-to-market losses experienced by investors in the Ajax
bond which represented a substantial six percent of the total U.S. earthquake market.
In an investment climate where many asset classes provided little if any
diversification benefit, ILS performance clearly demonstrated the uncorrelated
nature of ILS risks, as insurance-linked securities provided solid growth in contrast to
the severe credit-driven correction experienced by the equity markets.
What will the next year offer? As in the past, investors can anticipate a combination
of variables to affect the Aon Benfield Cat Bond Indices. Prevailing reinsurance rates
will play a key role as sponsors consider the economics of reinsurance compared to
ILS issuance. We expect strong returns as the cat bond market softens and existing
issues benefit from mark-to-market gains—a trend that seems to have already begun
as the first half of 2009 ended.
17
Insurance-Linked Securities 2009
The Buy Side
A review of ILS investor activity
In the third quarter of 2008, investor appetite for catastrophe bonds remained
strong, facilitating the successful placement of both the $120 million Blue Coast
Ltd. transaction and the $200 million Topiary Capital Ltd. transaction. Investors
expected a very active primary market in the fourth quarter, with up to $1 billion of
European windstorm bonds combined with the annual Redwood renewal, replacing
approximately $500 million of the expiring Redwood X bonds.
Due to the financial dislocation in the broader markets, however, none of the
expected issues materialized. Instead, both sponsors and investors withdrew from
the market. As credit markets dried up, leverage that was once available for the
purchase of cat bonds was withdrawn, in part due to the collapse of storied Wall
Street investment banks like Bear Stearns and Lehman Brothers.
The reduction in leverage required investors to fund the entire notional value of
their positions. Many investors did not have capital to support their positions and
were forced to reduce exposure. This deleveraging, coupled with fund redemptions,
sparked widespread secondary selling across the cat bond market. Aon Benfield
Securities’ secondary trading desk experienced record trading volume throughout
the financial crisis and worked with investors to find available liquidity. Cat bond
prices declined to sustained levels of the mid 90s, but maintained better pricing
levels than nearly all other sectors. Most heavy selling came from multi-strategy
hedge funds, although several market participants were well-positioned to capitalize
on the distressed prices and purchased cat bonds at substantial discounts. Despite
the disruption, the secondary market for cat bonds remained relatively liquid
throughout this period.
Lehman’s bankruptcy also left investors directly exposed to the market value of the
principal, a prospect that further dampened investor interest through year-end.
Primary market effects were further compounded by fund redemptions across the
investor spectrum.
In the first quarter of 2009, buyers remained hesitant to purchase secondary
bonds and required thorough due diligence on collateral accounts and transaction
documents. In addition, investors demanded compensation for the credit risk of
the swap counterparty. Secondary trading, driven primarily by selling, remained
at historically elevated levels until the middle of the first quarter when the final
overhang of excess bonds finally cleared the market. Coincidently around this time,
the primary market began to open up and investors shifted their focus to new issues.
All eyes were on the SCOR-sponsored Atlas V Capital Limited issuance in February,
the first bond to market after a six-month hiatus. Investors focused on the bond’s
structure and, in the end, the transaction enjoyed broad market support as investors
came together to make the transaction a success.
18
Aon Benfield Securities
Atlas V Capital Limited was followed by seven straight transactions covering U.S.
hurricane exposure. The drawback of multiple U.S. hurricane-exposed cat bonds
was that some investors exceeded their targeted allocation to this specific risk. While
investors welcomed the Ianus Capital Ltd. transaction, which offered exposure to
European Windstorm and Turkey Earthquake, tight pricing tamed interest in the
bond and the proposed €100 million transaction stalled and was subsequently
downsized to €50 million. Overall, eight of the nine recent issues were sponsored
by seasoned issuers who regularly tap the capital markets as an important source of
reinsurance capacity.
Segmenting the Cat Bond Investor market
INVESTOR BY TYPE (% OF NEW TR ANSACTIONS)
PRE – CREDIT CRISIS POST– CREDIT CRISIS
4%
Cat Funds
13%
Hedge Funds 20%
36%
40%
Institutional 18%
Reinsurers
Mutual Funds 33%
7% 29%
2007 & 2008 2009
Source: Aon Benfield Securities
A review of investors in transactions managed by Aon Benfield Securities reveals
that much has changed. The most drastic and startling change for the annual
period ending June 30, 2009 is that hedge fund participation has quadrupled,
taking market share from both reinsurers and institutional investors. In this period,
hedge funds comprised 29 percent of the investor base, compared to just 7 percent
one year earlier. Although one might assume hedge fund selling in the secondary
market would translate into decreased participation in the primary market, quite the
opposite has occurred. Despite the exit of some hedge funds from the catastrophe
bond market, rising risk premiums have caused other hedge funds to enter the
market in a manner not seen since the months following Hurricane Katrina.
Although reinsurer participation fell from 20 percent to 13 percent for Aon Benfield
Securities transactions, the average number of reinsurers investing in cat bonds
remained relatively unchanged. Reinsurers will continue to find opportunities to
invest in the ILS space, which is evidenced by the number of reinsurers that have
established or plan to establish dedicated cat bond funds.
19
Insurance-Linked Securities 2009
Institutional investor participation in Aon Benfield Securities transactions declined
from 33 percent to 18 percent, while mutual fund participation vanished altogether
after representing four percent of the investor base last year. Investors in both
categories have deployed substantial capital across all sectors of the fixed income
and broader markets, and systematically analyze and monitor their portfolio
concentrations. This process has led both groups of investors to two conclusions.
First, distressed debt opportunities were perceived to be so attractive during the
past year that, on a relative value basis, investors view catastrophe bonds as less
desirable than other opportunities even after considering the diversification benefits
of insurance-linked securities. Second, since catastrophe bond market values
did not decline as much as other sectors, funds adhering to a fixed percentage
diversification strategy found themselves overweight and unable to add more
cat risk. Despite these temporary setbacks, catastrophe bonds continue to be an
important asset class for institutional investors. Aon Benfield Securities expects their
participation to return to pre-disruption levels as the broader market recovers.
Dedicated funds continue to be a force in the market, rising to 40 percent of the
investor base for Aon Benfield Securities transactions in the period. By definition,
these investors have all of their capital dedicated to the ILS space; being overweight
in this asset class is not a concern. Nor would they pare back ILS investments to
pursue distressed debt or other opportunities. Instead, dedicated funds increased
their participation in primary and secondary offerings, expecting the market to
soften and, consequently, benefit from mark-to-market gains. Considering the
number of start-up funds currently attempting to raise capital, Aon Benfield
Securities expects participation from dedicated investors to grow. An increase in the
number of new funds will present a good barometer of the continued importance of
this asset class in the broader market.
A Geographic Overview
INVESTOR BY COuNTRY (Years ending June 30)
PRE – CREDIT CRISIS POST– CREDIT CRISIS
9% 5%
U.S. 6%
Bermuda 12%
14%
Switzerland 45% 56%
13%
UK
19%
Other* 21%
2007 & 2008 2009
* Other includes Germany, Canada, Norway, Italy, France and Australia.
Source: Aon Benfield Securities
20
Aon Benfield Securities
The geographic distribution of investors in Aon Benfield Securities transactions has
not experienced drastic change since last year. Over the year ended June 30, 2009,
U.S. investors still held the greatest share of new cat bonds issues at 56 percent,
versus 45 percent the prior year. Bermuda, Switzerland and the United Kingdom
follow next with 19, 14 and 6 percent, respectively.
As we observed in last year’s ILS review, few Asia Pacific investors have yet to enter
the cat bond market in a meaningful way. Nonetheless, this market continues to
interest investors and sponsors, and Aon Benfield Securities is in the process of
establishing an office in the region to develop this market’s potential.
Outlook: Capital Inflow
Aon Benfield Securities sees many positive signs in the market. Although
redemptions became a regular occurrence in the fourth quarter of 2008 and the
first quarter of 2009, these requests were largely satisfied. In the second quarter
of 2009, investors began to find success in raising capital, and indicated they
were experiencing net inflows. In May, the Aon Benfield Securities trading desk
experienced more buyers than sellers—a welcome reprieve from the heavy selling
activity of the prior six months. Demand is high for 2009 vintage bonds containing
improved collateral structures and increased transparency; investors began to bid
over par for certain bonds during June 2009.
Leverage has started to return to the market as some banks are now extending
credit for cat bonds, albeit at a comparatively high price. Several new investors
have entered the space, including traditional fund of fund players and family offices
investing directly in bonds. Taken together, these signs seem to indicate the tide has
turned. Assuming a loss-free year, Aon Benfield Securities expects catastrophe bond
risk premium will decrease 10 to 15 percent by the 2010 renewals.
21
Insurance-Linked Securities 2009
Related Markets
Industry Loss Warranties, Sidecars
and Collateralized Reinsurance
In times of crisis, it is often said that one should “go back to basics”—that is, to
concentrate efforts on those elements of business which are best understood.
Largely, that maxim has been reflected in investor appetites and behaviors since
October 2008. The liquidity provided by the secondary market in catastrophe bonds
allowed investors the opportunity to exit positions or, alternately, to take advantage
of attractive prices to acquire catastrophe bonds. Also during this time, new issuance
favored non-indemnity triggers. Similar trends were evident in the related insurance
and reinsurance markets of index-based trading, sidecars and collateralized
reinsurance, with capital favoring simpler structures, well-defined underlying risks
and higher returns.
IlW & Industry loss Index-Based Trading
Of all the ways investors can access direct exposure to catastrophe risk, contracts
based on industry loss estimates offer low barriers to entry in terms of transparency,
required expertise, market knowledge and structural complexity. Buyers value the
speed of execution and lack of required portfolio disclosure, while heightened basis
risk presents the primary hurdle. The majority of these transactions are structured as
Industry Loss Warranty contracts (ILWs) in the traditional reinsurance space.
They are often structured between two reinsurers, but can use a transformation
or collateralization approach when capital is provided by a hedge fund
or other investor.
In May 2009, the International Swaps and Derivatives Association (ISDA), which
maintains standard language for institutional derivatives contracts, released a
standard form for a U.S. hurricane catastrophe swap. This ISDA initiative aims to
standardize catastrophe swaps to facilitate increased volume and liquidity. Where
insurers and reinsurers have historically preferred to effect index-linked transactions
in reinsurance form, several have executed swap transactions directly with
counterparties from outside the insurance arena. This structure holds some appeal
for those who wish to acquire significant limits discretely.
Catastrophe swaps are accounted for as derivatives. Because today’s catastrophe
swap markets are relatively illiquid, parties apply U.S. GAAP for insurance liabilities
when booking these transactions. However, if swap markets deepen and become
more liquid in the future, reference prices may become more readily available and
reliable, bringing mark-to-market variation to cat swap transactions.
22
Aon Benfield Securities
Time Evolution of IFEX 2008 10B and 20B Event-linked
Future Contract Pricing
IFEX ElF QuOTED ClOSING PRICE
100
EQE Sep 19, updated estimate onshore loss 8-12bn5
PCS 3rd estimate
$ price per $100 closing price
Feb 3 USD 11.5bn9
80
PCS Preliminary Estimate
Sept 30 USD 8.1bn6 PCS 2nd estimate
Dec 5 USD 10.655bn8
60
RMS Sep 17, updated estimated RMS Oct 24, updated estimated onshore
onshore and offshore loss USD, and offshore loss USD 13-21bn7
7-12bn4
40
RMS Sep 14, estimated onshore
and offshore loss USD 6-16bn3
20
Hurricane Ike Landfall Sept 13; AIR Sep 13, estimated onshore loss 8-12bn2
EQE Sep 13, estimated onshore loss
USD 8-18bn1
0
June-08 July-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09
Dec08 1E10B Dec08 1E20B Estimate Dates
Source: Prices (Chicago Climate Futures Exchange Estimates (Various))
1
E
“ QECAT Initial Post-Landfall Estimates of Insured Onshore Losses from Hurricane Ike,” EQECAT press release,
Sept. 13, 2008. http://www.eqecat.com/news/2008/Ike_9-13_08.htm
2
“
AIR Worldwide Estimates Insured Losses to Onshore U.S. Properties from Hurricane IKE at between USD 8 Billion
and USD 12 Billion,” AIR Worldwide press release, Sept. 13, 2008.
http://www.air-worldwide.com/newsandeventsitem.aspx?id=12598
3
“
Hurricane Ike Could Cause $6 Billion to $16 Billion of Insured Damage According to Initial RMS Estimates,” RMS
press release, Sept. 14, 2008. http://www.rms.com/NewsPress/PR_091308_Ike_Industry_Loss.asp
4
“
Hurricane Ike Insured Losses Estimated at $7 Billion to $12 Billion,” RMS press release, Sept. 17, 2008. http://
www.rms.com/NewsPress/PR_091708_Ike_Industry_Loss.asp
5
“
EQECAT Narrows Range of Estimated Onshore Insured Losses from Hurricane Ike Based Upon Reconnaissance-
Team Reports, Review of Storm’s Characteristics,” EQECAT press release, Sept. 19, 2008. http://www.eqecat.com/
news/2008/Ike_9-19_08_refinedloss.htm
6
Property Claims Services Inc Catastrophe Insured Property Damage Estimates,
http://www.ccfe.com/about_ccfe/products/ifex/PCS_Catastrophe_Estimates.xls
7
“
RMS Revised Hurricane Ike Industry Loss Estimate to $13 to 21 Billion,” RMS press release, Oct. 24, 2008. http://
www.rms.com/NewsPress/PR_102408_Revised_Ike.asp
8
Property Claims Services Inc Catastrophe Insured Property Damage Estimates,
http://www.ccfe.com/about_ccfe/products/ifex/PCS_Catastrophe_Estimates.xls
9
Ibid.
23
Insurance-Linked Securities 2009
The potential for such variation may be illustrated using data from exchange-traded
catastrophe futures contracts. The chart on the previous page shows how the
prices of the IFEX $10 and $20 billion 2008 U.S. Tropical Wind event-linked futures
contracts varied from before Hurricane Ike’s landfall in September 2008 through
February 2009. During this time, PCS and catastrophe modeling companies
produced various estimates of the actual losses that would eventually be calculated
by PCS. These actual losses are the values upon which these contracts settle, and the
estimates play an important role in shaping market expectations. As the magnitude
of the loss from Ike became clear, pricing on the $10 billion contract rose quickly
from the high 30s to the mid 80s. The pricing on the $20 billion contract fell from
the high 20s to the high teens, until traders realized the loss was unlikely to reach
the $20 billion level—at that point, the contract’s pricing began a decline to zero.
Pricing on the $10 billion contract experienced some volatility in the initial phase of
loss estimation and then tracked upwards, trading at a slight discount by the end of
the period shown.
Exchange-traded cat futures and options platforms have seen limited growth since
our last update, while the platforms themselves and their supporters have seen
several changes. The CME and NYMEX platforms merged in August 2008, bringing
together their respective Gallagher Re-Ex and Carvill Hurricane Index (CHI) products.
Subsequently, Aon Corporation acquired Gallagher Re, and the CME Group bought
the CHI index from Carvill, renaming it the CME hurricane index and selecting
EQECAT as the calculation agent. All platforms have experienced limited market
depth and volume, with the vast majority of industry index-based transactions
continuing to be placed on an over the counter (OTC) or brokered basis. It remains
to be seen whether the role of event-linked futures and options in the reinsurance
space will progress beyond its current niche position. Several potential applications
provide some potential, including the ability to hedge or speculate on pricing.
Although the ILW product arguably enjoys the greatest degree of standardization
among all catastrophe reinsurance products, investors and reinsurers without
financial strength ratings still generally need to agree upon collateral release
conditions and execute trust agreements (or other suitable mechanisms such as
letters of credit) with their cedents. This leads to great variation in the precise
mechanics of each individual market transaction. This variation worked to the
detriment of unrated providers in early June 2009, as rated reinsurers who had
excess capacity after the June 1 renewal season entered the market as sellers of ILW
capacity on a reinsurance basis—providing a product with greater ease of execution
to the marginal buyer of ILW capacity. The additional capacity provided by rated
entities contributed to a recent reduction in the pricing of U.S. ILW products relative
to the capital-constrained start of 2009.
24
Aon Benfield Securities
Sidecars
Historically speaking, the sidecar market has provided almost $11 billion of capital to
the market. The effects of Hurricanes Gustav and Ike last year, combined with asset
write-downs resulting from the financial markets’ dislocation, led to an overall drain
on reinsurers’ balance sheets estimated at the equivalent of 18 percent of pre-crisis
shareholders’ funds10. This erosion of capital sparked a contemporary increase in
sponsors’ demand for sidecars and sidecar-like structures.
TYPICAl SIDECAR STRuCTuRE
Sponsor
Reinsurance Ceded
Contract Premiums
Sidecar Interest
Reinsurance Debt
Trust Investors
Accounts Bank Loan
Proceeds
Equity Dividends Security
Proceeds Interest
in Shares
Equity
Proceeds
Equity Sidecar
Investors Holdings
Dividends
Source: Aon Benfield Securities
Typical Sidecar Structure with leverage
A typical sidecar structure is shown in the figure above. The attractiveness of the
structure for the three principal participants—equity investors, debt investors and
the sponsor—depends on the returns available to each. Many investors concluded
volatility in the financial markets had created the potential for returns greater than
the mid 20s level typical of sidecars created in 2007 and 2008. Equity investors
increased their required returns on sidecar-like structures to more than 30 percent
on an internal rate of return basis. With the increased cost of debt leverage in the
bank loan markets, and lower expectations for growth in reinsurance rates-on-line,
10
“
The Aon Benfield Aggregate,” June 2009.
http://www.aon.com/attachments/200906_ab_research_abaggregate_1q.pdf
25
Insurance-Linked Securities 2009
sidecar capacity became scarce—and sometimes non-existent—during the recent
twelve months. This generally reduces the attractiveness of a transaction to the
sponsor. Together, these factors made it more difficult than in the recent past to
create a structure that satisfied the parties’ required returns, and severely limited
the classes of business that would be amenable to supporting such a structure
moving into 2009 hurricane season.
During the year ending June 30, 2009, several sidecar “renewals” were rumored
to have been pursued before ultimately being withdrawn. Renaissance Re’s $60
million Timicuan Reinsurance II Ltd, a sidecar primarily covering Florida hurricane
risks for the Bermuda company’s customers, was one of a small number of successful
issuances for the 2009 hurricane season. Hannover Re and Swiss Re placed the latest
iterations of their “K” (K6 at €129 million) and “Sector” (Sector Re III) transactions,
respectively, and the MAP, Hiscox, Ark and Amlin Lloyds syndicates raised a total of
£160 million external capital to fund Special Purposes Syndicates (effectively sidecars
within Lloyds) to support their ongoing business.
Potential sidecar sponsors also turned to the traditional reinsurance markets looking
for quota share retrocession, but generally found a similar lack of available capacity.
As a result, many reinsurers planned to reduce net lines as we entered the peak
hazard season on June 1, 2009.
Collateralized Reinsurance
The convergence of the reinsurance and capital markets continues to be reflected
by greater emphasis on collateralized reinsurance in cedents’ traditional reinsurance
programs. The collateralized reinsurance market gained new capacity from Juniperus
Capital, Alphacat Re, Cartesian Iris Re, additional funds raised by Pentelia Capital
Management and Steamboat Re. It also benefited from the continued support of
Aeolus Re, DE Shaw Re and Nephila, among others.
As buyers of collateralized protection have become more familiar with this
mechanism, events in the broader financial markets have driven greater appreciation
for the benefits of collateralized coverage and a preference for safer assets in the
trusts used to secure the reinsurance obligations.
New York Regulation 114
Permitted assets in a Reg. 114 compliant trust are specifically limited to the following asset classes:
• Cash (USD)
• CDs issued by U.S. bank
• U.S. Federal or State obligations
• U.S. corporate debt obligations which are either i) secured by collateral, ii) rated A or better, iii) insured by an
Aaa-rated insurer, or iv) carry highest possible rating by the NAIC SVO
• Preferred shares of U.S. firms if all of their debt obligations are rated A or better
• Common stock of U.S. firms, if all of its obligations are eligible as investments under Section 1404 of the New
York Insurance Law and it is registered under the Securities Exchange Act of 1934
• Investment companies which invest 90% or more of their assets in the asset classes described above
26
Aon Benfield Securities
In the past, New York Regulation 114 was the industry standard for permitted trust
assets. However, the general approach today is to accept only cash, Treasuries
and other government guaranteed assets. Restrictions on the degree of portfolio
concentration in a single asset class or single issuer are also frequently imposed. In
addition, letters of credit may still be used, although cedents are closely monitoring
the aggregation of financial institution counterparty credit risk in the wake of the
Lehman bankruptcy.
Hurricane Ike also provided a valuable test of collateralization agreements for several
cedents. While incurred losses alone may not have been enough to pierce layers of
protection, the collateral release language typically provided for the assets to be
maintained in the trust beyond the expiration of the risk period in the event of a loss
large enough to impact the layer after further development. Generally, these clauses
appear to have provided acceptable security to cedents, although the market still
supports a wide variety of different forms and mechanisms for this process.
Notable among the departures from the collateralized reinsurance market was CIG
Re, sponsored by Citadel Investment Group, the well-known Chicago-based hedge
fund. In November 2008, Citadel announced the intention to close CIG Re, citing a
high cost of capital and difficulty in competing with rated entities. (New Castle Re,
CIG Re’s A.M. Best-rated sister entity, remained open, but renewal rights were sold
to Torus Insurance Holdings in December 2008.) The highly visible difficulties of
Citadel’s main investment funds—related to the financial market dislocation following
October 2008—were partially responsible for reducing the firm’s appetite for the
asset class. In an April 2009 presentation at the Federal Reserve Bank of Chicago,
Citadel COO Gerald Beeson made specific reference to the “effectively closed”
securitization market, naming it as a contributing cause of this high cost of capital.11
Summary
Despite the disruption of the capital markets in October, the catastrophe risk
securitization and related markets have taken several positive steps that paved the
way for the return of capital to the cat bond space. This capital has been used to
provide collateralized reinsurance coverage, support sector-specific hedge funds and
fund index trades as well as less complex securitization structures. As the broader
financial world returns to equilibrium, we expect these markets will continue to
expand their robust contribution to the reinsurance industry.
11
“Future of Financial Innovation,” Citadel presentation to Financial Institutions Risk Management
Conference, April 14, 2008.
www.chicagofed.org/news_and_conferences/conferences_and_events/files/2009_sr_beeson.ppt
27
Insurance-Linked Securities 2009
Diversification Opportunities Outside
the United States
Moderating portfolio concentration in
U.S.-based perils
U.S. wind is the largest global peril in the reinsurance industry, and is also the best
understood and most extensively modeled. Property catastrophe insurers tend to
be highly exposed to this risk, creating a high demand for reinsurance. Since bonds
covering this risk far outnumber those covering other perils, many ILS investors have
found themselves “overweight” in this category.
u.S. VERSuS DIVERSIFYING PERIlS
Diversifying
Diversifying Perils
Diversifying Perils $2,385 MM
Perils $3,389 MM 21%
$4,380 MM 28%
31% U.S. Perils
$9,695 MM U.S. Perils
U.S. Perils
69% $8,801 MM
$8,738 MM
72%
79%
6/30/08 12/31/08 6/30/09
Source: Aon Benfield Securities
For investors who focus on absolute returns and use other asset classes to achieve
their portfolio diversification objectives, this concentration of risk may not be a
significant concern. For dedicated ILS funds, however, diversification by peril and
geography are key aspects of a disciplined investment strategy.
Despite the attraction of the multi-year protection available from most cat bonds
and the enhanced security from collateralized cover, the pricing differential with
traditional reinsurance and the basis risk inherent in non-indemnity cat bond
structures are the two primary reasons why sponsors are reluctant to access the
capital markets for non-U.S. perils. Because of these sponsor concerns, the supply of
European catastrophe bonds has not risen to meet investor demand.
28
Aon Benfield Securities
Pricing Differential
As noted, the insurance sector has not been immune to the crisis in the financial
markets, with many companies suffering impairment on the asset side of their
balance sheet. These impairments have reduced the capital strength of the sector
and reduced the “surplus” capital carried by most reinsurers by 18 percent since
mid-20081. Add to this the increased cost and scarcity of equity capital, in addition
to the effective suspension of the subordinated debt markets in a relatively low
catastrophe loss year, and one would expect the price and perceived cost of
reinsurance capital to increase.
This has not been the case in the key non-U.S. property catastrophe markets
that have previously used the capital markets as a source of alternative capacity.
Traditional reinsurance capacity in Europe and Japan is in plentiful supply, with
most programs renewing comfortably despite heightened concerns about the
counterparty credit risk of some names in the sector, and a dramatic increase
in foreign exchange volatility. For example, January 2009 renewals produced
only marginal increases in average rates on line in the major European countries
(Germany, France and U.K.) with zero to five percent increases for European
Windstorm excess of loss treaties. For April 2009 renewals in the Japan market,
average rates on line for typhoon windstorm and earthquake excess of loss
treaties increased by five to 12 percent.
In comparison, the risk premium of non–U.S. peril catastrophe bonds trading in the
secondary market increased by over 30 percent during the last 12 months. As in
the United States, this price widening reflected the distressed selling that occurred
in the second half of 2008 by investors reducing allocations to, or exiting from, the
ILS sector. In addition, pricing was driven by an increased sensitivity to counterparty
credit/investment risk in total return swap structures driven by the default of Lehman.
The contrast is even starker in the Japanese market. A hurricane excess of loss risk
with an expected loss of two percent would likely be placed at approximately 3 to
3.5 percent in the reinsurance market, while a comparable cat bond would typically
come to market with price guidance of approximately 6.5 to 7.5 percent over LIBOR.
For many insurers, these cost differentials are too high to justify the use of
catastrophe bonds, despite their advantages in offering diversified and secure
multi-year capacity.
1
The Aon Benfield Aggregate,” June 2009,
http://www.aon.com/attachments/200906_ab_research_abaggregate_1q.pdf
29
Insurance-Linked Securities 2009
Basis Risk
ILS investors have a strong preference for single-event, non-indemnity, occurrence-
based transactions. This requires sponsors to calculate and assume the basis risk
between the relevant trigger structure for the cat bond, and to find an alternative
solution for a second event cover.
Unlike the U.S. market, there is no generally accepted independent loss reporting
agency in Europe or Japan that produces reliable post-event industry loss estimates
which can be used to structure an industry loss index. Swiss Re’s Sigma2 and
Munich Re’s NatCatSERVICE3 have been used in the ILW market, but each has
struggled to gain wide acceptance as a source of independent loss reporting for the
cat bond market.
In Europe, two initiatives are focused on addressing this gap in the ILS market and
providing sponsors with more acceptable structuring options.
P
• aradex. This industry exposure- and vulnerability-weighted parametric
index developed by RMS provides a proxy for insured industry losses due
to European windstorms, covering 12 European countries. The ability to
tailor the index to CRESTA zone level and by line of business assists in the
mitigation of basis risk. The Paradex index is calculated no more than 40
business days after an event, facilitating prompt payout for the sponsor.
This index was used in the Topiary Capital transaction, sponsored
by Platinum in August 2008. Topiary was a $200 million second and
subsequent event global multi-peril bond, whose European windstorm
component contributed 52 percent of the initial annualized expected loss
of the transaction. The European windstorm index value was calibrated
by CRESTA zone and line of business, including agricultural, commercial,
industrial and residential.
P
• ERILS AG. This independent company was created by seven major
European insurance-related4 players to provide industry-wide catastrophe
insurance data covering nine European countries. PERILS seek to cover at
least 40 percent of the market as a basis for estimating loss data at the
market level, and will produce industry loss estimates by risk type and
CRESTA zone following major catastrophe events.
Although not due to be operational until January 2010, PERILS issued its first loss
estimate in May 2009—€1.55 billion for the property insurance loss for the January
2009 Windstorm Klaus—to illustrate its methodology and let market participants
evaluate the potential benefits of PERILS.
2
Sigma is the brand name used by Swiss Re’s Economic Research and Consulting unit to disseminate information
and analysis about economic, financial and insurance issues in the global markets.
3
N
atCatSERVICE is a database for natural catastrophes launched by Munich Re in 1974
4
PERILS AG founder members include Allianz, Axa, Groupama, Guy Carpenter, Munich Re,
Partner Re, Swiss Re and Zurich
30
Aon Benfield Securities
While it remains to be seen whether PERILS can gain the same level of market
acceptance as Property Claims Services (PCS) in the United States, or whether
Paradex will become the parametric index of choice for sponsors, we believe each
initiative represents an enhancement for the ILS market that will be featured in
future European peril cat bonds.
The level of basis risk in a transaction will vary according to the quality of the
underlying exposure data, modeling and calibration of the index—the higher the
quality of underwriting data, the lower the potential basis risk. Optimizing the index
against historic events and simulated likely future events will increase a sponsor’s
comfort with the expected payout following a major loss event and the resultant
basis risk. Various adjustment factors can be incorporated in the index calculation
to mitigate concerns regarding un-modeled exposures, loss adjustment expenses,
currency mismatch and expected changes to the underlying portfolio.
Prompt payout following a loss event and acceptance of a parametric index amongst
investors are strengths of this structuring option.
Summary
A strong market of global investment opportunities, diversified by peril, geography,
risk attachment level and sponsor, are important ingredients for a successful
and vibrant ILS market.
Potential sponsors of non-U.S. peril transactions are understandably cautious given
the current pricing differential and basis risk issues. At the same time, the strategic
imperative to achieve a more balanced, diverse and secure source of reinsurance
capacity has never been more apparent and could drive a stronger pipeline of
issuance over the coming year.
Aon Benfield expects the investor community’s demand for new issuance of non-US
peril transactions will continue to grow and, as the financial markets begin to settle,
new capital will be attracted to this asset class, leading to tightening in cat bond
pricing and a more compelling alternative source of capacity for sponsors.
31
Insurance-Linked Securities 2009
The Developing Frontier of Credit
Risk Management
Credit Default Swaps explained
The field of credit risk management has grown substantially over the past few years,
particularly since the beginning of the financial crisis in 2008. Although banks have
decades of experience evaluating credit, many other firms—including insurance
companies—are placing unprecedented scrutiny on their direct and indirect credit
exposures. To illustrate, the International Association of Credit Portfolio Managers
(IACPM) was formed in 2001 as an industrial organization dedicated to advancing
credit management. Today, the IACPM includes 80 members in more than 14
countries including several insurance industry participants.
Credit risk for insurance companies arises from many sources. Reinsurance
recoverables present a significant credit risk: should a reinsurer not satisfy its claim
payment obligations, the reinsurance buyer would be left with an unexpected
liability. In addition, large surety arrangements may involve several providers under
a single bond on a joint and several structure. This presents a contingent liability,
which arises from the possibility that one of the co-surety partners fails to perform
and the remaining partners are left to satisfy a claim pro-rata. Catastrophe bonds
also entail credit risk of the investment portfolio or investment manager, although
this risk has been mitigated through more conservative structures introduced in
2009. In general, any type of receivable can present credit risk.
Aside from public and private capital markets transactions, one of the most
discussed forms of credit management is the credit default swap (CDS). A CDS
is similar to buying insurance protecting against an adverse credit event, and
represents a viable form of credit risk management for insurers and reinsurers. Until
recently, CDS trading operated generally as an over-the-counter (OTC) market
between financial institutions that managed the supply and demand of contracts.
Many changes have taken place over the past few months because of market
demands and as new regulatory requirements.
Credit Default Swaps Demystified
In a CDS, the buyer of protection typically makes an up-front payment to enter into
the contract, and subsequently makes periodic payments to the CDS seller over
the life of the contract. In exchange, the seller agrees to compensate the buyer if a
pre-defined credit event occurs with respect to a reference security. The reference
security is a bond or some other publicly-traded liability of the entity for which
protection is desired, and has sufficient market size and liquidity to support trading
of the liability and the associated CDS. The credit event is typically tied to the default
of the reference security (usually bankruptcy of the issuer, or the general inability
to make an interest or principal payment). Unlike some insurance products (such
as a catastrophe bond with an indemnity trigger), actual loss experienced by the
protection buyer is not a prerequisite for compensation under the contract.
32
Aon Benfield Securities
Until recently, CDS prices were quoted in terms of basis points (“bps”), a unit equal
to 1/100th of a percentage point. For example, if a CDS were trading at 300 bps,
the purchaser of protection would pay 3.00% per annum for the life of the contract
(in addition to any up-front costs). A higher CDS price generally implies the market’s
perception of greater risk for a reference security (and its issuer), as compared to
another security with a lower CDS price. New standards have been implemented,
however, that change the way most credit default swaps are priced and executed.
Going forward, most CDS contracts will typically be priced with a premium or
discount to value (similar to a corporate bond), and the periodic spread will be fixed
at some standardized level. Swaps can continue to be quoted in spreads, however,
for comparison purposes.
CDS contracts can be used for hedging, speculation and arbitrage. As such,
contracts are traded in the OTC market and profit or loss can be realized by price
movement prior to expiration.
Because credit default swaps were initially created as a hedge for actual reference
securities (and not for speculation or arbitrage), the settlement of a CDS in cases
when the reference security has defaulted depends on the value of the reference
security at the time of default. Consider, for example, a bond priced at $100 and a
one-year CDS priced at 500 bps. The investor wishing to hedge his $100 investment
would purchase $100 (“notional” amount) of the referenced CDS and pay a $5
premium (500 bps times $100) over the course of the one-year contract. Assume the
bond defaults and is now deemed to be worth $20 (a 20 percent “recovery”). The
investor would receive $80 from the seller of the CDS ($100 minus the $20 recovery)
and sell the bond for $20, thus recouping his original investment of $100 ($80 plus
recovery of $20). If the CDS was purchased as a hedge without owning the reference
security, the buyer would simply receive $80 from the CDS seller. The buyer would
then attempt to recover the remaining $20 or consider it “retention” or expense.
In today’s market, most CDS buyers do not own the reference security, but rather
speculate on the issuer’s credit risk. In the example above, a speculative CDS buyer
would receive the $80 benefit from the purchase of the $100 CDS.
CDS Pricing
Many factors affect the price of credit default swaps for a reference security of an
insurance company. The most important factor is market participants’ assessment
of an insurance company’s financial health, which reflects the company’s earnings
history, asset quality, management strength, and strategic and financial outlook.
Other considerations include a company’s geographic reach, diversification of
insurance lines and investment portfolio risk. In addition, characteristics of the CDS
market itself have a pricing impact. An imbalance between supply and demand
for a specific CDS contract will drive pricing, just as it does in the capital markets
generally. Some critics of the CDS market charge that the operational nature of the
OTC market and lack of transparency have generally allowed dealers to overprice
contracts. There is no empirical evidence of this practice and it would be difficult to
substantiate given the number of participating dealers.
33
Insurance-Linked Securities 2009
CDS SPREADS — u.S.
1,000
800
Basis Points
600
400
200
0
8
8
8
8
9
9
7
7
7
-0
r-0
-0
r-0
-0
-0
r-0
r-0
-0
ne
ch
ch
ne
ne
be
be
be
be
ar
Ju
ar
Ju
Ju
em
em
em
em
M
M
pt
ec
ec
pt
Se
D
Se
D
XL Berkshire Liberty ACE Chubb
Source: Aon Benfield Securities, Bloomberg
CDS SPREADS — EuROPE
1,000
900
800
700
Basis Points
600
500
400
300
200
100
0
8
8
8
8
9
9
7
7
7
-0
-0
r-0
-0
-0
-0
r-0
r-0
0
e-
r
ne
ch
ne
ch
be
be
be
be
n
ar
Ju
ar
Ju
Ju
em
em
em
m
M
M
e
pt
ec
ec
pt
Se
D
Se
D
Swiss Zurich SCOR Allianz Hannover Munich
Source: Aon Benfield Securities, Bloomberg
34
Aon Benfield Securities
From the mid-1990s through January 2008, CDS pricing for insurance companies
changed little, generally remaining below 150 bps with little variation between
companies. After January 2008, however, spreads for some companies widened
greatly while differences between companies grew substantially. This departure
from the previous pattern can be attributed to the broad financial crisis as well as
individual companies’ anticipated losses from Hurricane Ike. In the United States, for
example, AIG spreads widened to as much as 2,500 bps and the Hartford traded in
a range around 1,000 bps in the fall of 2008. In contrast, ACE and Chubb traded at
less than 300 bps.
The variation and magnitude of CDS spreads for insurance companies—both
U.S. and non-U.S.—dropped significantly in May and June of 2009. With some
exceptions (AIG, for example), spreads now range between 100 and 500 bps. While
still in excess of spreads from September 2008, these new levels are consistent with
similarly-rated companies in other industries and seem less driven by the lack of
supply or the increased demand of credit risk management.
AIG: What Went Wrong
The collapse of AIG and the subsequent blame assigned to credit default swaps has
tarnished the instrument’s reputation. The sequence of events at AIG added fuel to
global economic distress, and the subsequent difficulty in liquidating the company’s
CDS positions made a bad situation worse.
Through a structured investment arm, AIG sold CDS contracts through the OTC
market. AIG realized the economic benefit of these sales, believing that claims
against the contracts they sold were highly improbable. Many of the swaps were
sold against asset-backed securities and other structured credit. AIG placed these
derivatives without owning the instruments, leaving the company substantially
exposed in the event resulting claims were greater than expected.
The events that followed are documented well in the world press. When some of the
reference securities underlying AIG’s CDS began to default, other bonds followed.
Unlike traditional insurance where one event is unlikely to affect another, the
reference securities (particularly those created in the structured credit markets) were
systemically correlated. AIG found itself on the wrong side of more than $440 billion
of bad trades.5
AIG’s situation left those global financial institutions acting as counterparties in AIG’s
CDS transactions without the credit protection they relied on. These institutions were
forced to seek replacement credit protection with other forms of hedging which
proved quite expensive. This led the U.S. government to intervene to support both
AIG and the broader financial markets.
5
R
euters. “How AIG fell apart.” Sept 18, 2008.
35
Insurance-Linked Securities 2009
Exchange-Traded Credit
The global CDS market continues to change rapidly with increasing regulation,
particularly in how the contracts are traded. Until recently, broker-dealers set
their bid/ask spreads based on their own analysis of the market and also agreed
among themselves what the market-clearing recovery rate should be in the event
of a default. This market has been, and continues to be, less transparent than U.S.
legislators would like. While there are a sufficient number of dealers to impose
at least a modest market effect, many have suggested changes to increase the
efficiency of the market. Government officials seek more regulation because of
the perceived role CDS played in the recent impairment of AIG and other financial
institutions. While these bills and pronouncements have done little to add substance
to the OTC market to this point, it is clear the market will be subject to a new
regulatory landscape.6
Market participants have been working to adapt the market to more transparent
exchange-traded contracts. These new derivatives would be traded over a
licensed and regulated exchange with centralized clearing, full transparency and
price discovery. Perhaps most significantly, the exchange would establish capital
requirements for its members and serve as the counterparty to each transaction.
This would lead to a virtual elimination of counterparty risk that, in hindsight, was
a significant problem for the market in the demise of the AIG and Lehman Brothers
structured finance operations. The U.S. government views the prospect of central
clearing as the key to removing systemic risks posed by the failure of a large
counterparty such as AIG and Lehman.7 Up to this point, dealers have shown a
reluctance to send CDS trades through a central clearinghouse, fearing a reduction
in the margins they enjoy through the OTC market.8 Despite dealer resistance,
additional regulation seems likely.
In the United States, both the Intercontinental Exchange (ICE) and the CME Group
have launched efforts to participate in the exchange-traded CDS market, and both
have received approval from the SEC and Federal Reserve to proceed. ICE benefits
from the support of a group of large dealers that own a stake in the company. These
dealers include Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman
Sachs, JPMorgan, Morgan Stanley, and UBS.9 Some non-bank market participants
have expressed concerns about ICE’s emerging role, citing both the correlation of
counterparty risk among the institutional owners as well as the potential market
inefficiencies introduced by the relationship among formerly competitive institutions.
Owner-dealers are expected to transact most if not all of their CDS transactions
through ICE, potentially erecting a barrier of entry to other exchanges including
CME Group. For its CDS offering, CME Group is partnered with hedge fund Citadel
Investment Group.
6
M
ayer-Brown. “OTC Derivatives – In the Crosshairs of U.S. Regulatory Change.” May 19, 2009
7
R
euters. “NY Fed meets with large CDS dealers on clearing.” April 1, 2009.
8
W
all Street Journal. “ICE Clears Major Hurdle for CDS.” March 18, 2009.
9
Ibid.
36
Aon Benfield Securities
ICE has enjoyed a first-mover advantage, launching its CDS clearing capability for
credit indices on March 9. The main indices, known as Markit CDX, each cover
multiple sectors such as investment grade, North American high yield and North
America emerging markets. Clearing volumes on the ICE have been light but
growing. As of the date of this publication, CME Group has not announced a launch
date for its own clearinghouse activities. ICE has indicated that, upon growth of CDS
index trading, it will introduce the ability to trade single-name credit default swaps
across the exchange. It is unclear how long this will take, or if ICE has the systems in
place to support such a strategy.
In Europe, Liffe (a London-based clearing house) and LCH.Clearnet Group Ltd. (an
Anglo-French clearinghouse) have launched a service similar to that of ICE. The
system has yet to process any swap trades. Eurex, the derivatives business co-owned
by Deutsche Börse AG and SWX Swiss Exchange AG hopes to strike a deal with
dealers similar to ICE’s arrangement.10 Liffe, Eurex and LCH.Clearnet deal exclusively
with contracts linked to European indexes, known as Markit iTraxx CDS Indices. Like
their U.S. cousins, they represent the most liquid names in the European markets.11
The “Big Bang” Structure
With substantial progress underway, ISDA has issued new procedures and
standards for the CDS market, addressing many of the concerns voiced by
industry participants and government leaders. ISDA sets industry standards for
documentation, procedures and trading. It derives its authority from the trading
community at large, including broker-dealers and investors, through their near-
universal adherence. The new standards provided by ISDA, dubbed the “Big Bang,”
specify more detailed procedures including the creation of a multi-stakeholder
committee to determine recovery rates for specific transactions. Previously, recovery
rates were determined in a closed-door process by a small group of dealers. The
changes add transparency and broader participation by the industry at large, which
is expected to lead to greater consistency and confidence in the market. As a
whole, ISDA’s new standards are viewed as another step toward the facilitation of
exchange-traded credit default swaps.12
10
Ibid.
11
Markit CDX. 2009. Markit Financial Information Services. http://www.markit.com.
12
S
hannon D. Harrington. “Credit-Default Swaps’ ‘Big Bang’ Loosens Banks’ Grip.” Bloomberg. April 8, 2009.
37
Insurance-Linked Securities 2009
Outlook
Many insurance company risk managers view the current cost of credit default
swaps to be excessive relative to other options (including, in some cases, traditional
reinsurance). Should the current trend of declining CDS spreads continue, CDS-based
credit protection would become more economically attractive for risk managers
seeking ways to hedge their credit exposure. We do expect these trends to continue
as a result of further stabilization of the credit markets, greater OTC pricing
transparency, and the movement toward exchange trading.
The inevitability of greater transparency in CDS contracts is undisputed, thanks in
large part to the blossoming interest of central governments. Their interest reflects
their citizens’ understandable demands for greater financial responsibility in the
wake of a financial crisis that continues to weigh on economies around the globe.
Credit default swaps have gained an increasingly unfavorable reputation over
the past year due to the role they played in the demise of many certain financial
institutions. The recent changes in CDS standardization, and the movement toward
exchange trading should help to improve their reputation. The concept of managing
credit risk through hedging has merit. In the advent of derivatives many years ago,
treasurers and risk managers were distrustful of the interest rate swap. This type of
contract has become routine and is considered by many senior financial managers
to be an integral part of their capital management. Optimistically speaking, and
assuming the details can be resolved through thoughtful market evolution, CDS
derivatives should have the opportunity to instill the same level of acceptance.
38
Aon Benfield Securities
Appendix I
Catastrophe bond issuance statistics
As of June 30, 2009
Source: Aon Benfield Securities
39
Insurance-Linked Securities 2009
CATASTROPHE BOND VOlumE, 1997-2009 (Years ending June 30)
30,000
25,000
$ Millions 20,000
15,000
10,000
5,000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bonds On Risk Cumulative Issuance
CATASTROPHE BOND ISSuANCE BY YEAR (Years ending June 30)
8,000
7,003
7,000
5,815
6,000
$ Millions
5,000
4,000
3,124
3,000
2,000 1,558 1,705
1,071 985 986 1,137
1,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
40
Aon Benfield Securities
CATASTROPHE BOND ISSuANCE BY HAlF-YEAR
8,000
7,000
6,000
$ Millions
5,000
4,455 2,410
4,000
3,000
2,000 2,147
3,405
2,547 1,385
1,000
977
320
0
2005/6 2006/7 2007/8 2008/9
Jan - Jun Jul - Dec
CATASTROPHE ISSuANCE BY TR ANCHE / DEAl / SPONSOR (Years ending June 30)
50 12
10
40
8
30
6
20
4
10
2
0 0
2002 2003 2004 2005 2006 2007 2008 2009
Tranches Issued Deals Issued First time Sponsors
41
Insurance-Linked Securities 2009
CATASTROPHE BOND ISSuANCE BY YEAR AND PERIl (Years ending June 30)
8,000
Notional Limit Issued by Peril ($ Millions)
7,003
7,000 U.S. Hurricane
U.S. Quake
6,000 5,815
Euro Wind
5,000 Japan Quake
Asia Pacific
4,000
Other
3,124
3,000
2,000 1,705
1,558
1,071 1,137
985 986
1,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
CATASTROPHE BOND ISSuANCE VERSuS PERCENT INDEmNITY (Years ending June 30)
Percent of New Issuance with Indemnity Loss Trigger
8,000 50%
7,003
7,000 45%
Risk Transfer ($ Millions)
5,815 40%
6,000
35%
5,000
30%
4,000 25%
3,124
3,000 20%
1,705 15%
2,000 1,558
1,071 985 986 1,137 10%
1,000
5%
0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009
Cat Bonds % Indemnity Issued
42
Aon Benfield Securities
CATASTROPHE BOND ISSuANCE BY lOSS TRIGGER (Years ending June 30)
4%
Index
14% 16%
Indemnity
25% 41%
Multiple
Modeled Loss 19%
Parametric Index 4% 47%
5%
Parametric 23%
2008 2009
u.S. VERSuS DIVERSIFYING PERIlS
Diversifying
Diversifying Perils
Diversifying Perils $2,385 MM
Perils $3,389 MM 21%
$4,380 MM 28%
31% U.S. Perils
$9,695 MM U.S. Perils
U.S. Perils
69% $8,801 MM
$8,738 MM
72%
79%
6/30/08 12/31/08 6/30/09
43
Insurance-Linked Securities 2009
Appendix II
ILS market transaction summary
As of June 30, 2009
Source: Aon Benfield Securities
44
Aon Benfield Securities
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
US Gulf/East Coast
6/16/1997 USAA Residential Reinsurance I Class A-1 Indemnity $86,814 Aaa AAA
Wind
US Gulf/East Coast
Class A-2 Indemnity $313,180 Ba2 BB BB
Wind
10/16/1997 Swiss Re SR Earthquake Fund, Ltd. Class A-1 California EQ Index $25,200 Baa3 BBB-
Class A-2 California EQ Index $12,000 Baa3 BBB-
Class B California EQ Index $60,300 Ba1 BB
Class C California EQ Index $14,700 Ba3 B
Tokio Marine &
11/19/1997 Parametric Re Ltd. Japan EQ Parametric $80,000 Ba2
Nichido Fire
3/3/1998 Zurich Group Trinity Re Ltd. Class A-1 Florida Wind Indemnity $10,467 Aaa AAA
Class A-2 Florida Wind Indemnity $61,533 Ba3 BB
US Gulf/East Coast
6/16/1998 USAA Residential Reinsurance II Indemnity $450,000 Ba2 BB BB
Wind
6/16/1998 Yasuda Pacific Re, Ltd. Japan Wind Indemnity $80,000 Ba3 BB-
7/17/1998 USF&G Mosaic Re Ltd. Class A US (Wind, EQ, ST) Indemnity $15,000
7/17/1998 USF&G Mosaic Re Ltd. Class B US (Wind, EQ, ST) Indemnity $21,000
12/21/1998 Centre Solutions Trinity Re 1999, Ltd. Class A-1 Florida Wind Indemnity $2,385 Aaa AAA
Class A-2 Florida Wind Indemnity $51,615 Ba3 BB
2/2/1999 USF&G Mosaic Re II, Ltd. Class A US (Wind, EQ, ST) Indemnity $25,000
Class B US (Wind, EQ, ST) Indemnity $20,000
3/25/1999 Kemper Domestic, Inc. New Madrid EQ Indemnity $80,000 Ba2 BB+
4/15/1999 Sorema SA Halyard Re B.V. (Yr 1) EU/JP Wind, JP EQ Indemnity $17,000
5/12/1999 Oriental Land Concentric, Ltd. Japan EQ Parametric $100,000 Ba1 BB+
US Gulf/East Coast
6/1/1999 USAA Residential Reinsurance III Indemnity $200,000 Ba2 BB
Wind
6/24/1999 Gerling Juno Re, Ltd. US Wind Indemnity $80,000 BB BB+
Gold Eagle Capital
11/23/1999 American Re Class A US Wind, US EQ Modeled Loss $50,000 Baa3 BBB-
Limited
Class B US Wind, US EQ Modeled Loss $126,600 Ba2 BB
11/23/1999 Gerling Namazu Re, Ltd. Japan EQ Modeled Loss $100,000 BB
3/3/2000 Lehman Re Seismic Limited California EQ Index $145,500 Ba2 BB+
3/10/2000 SCOR Atlas Reinsurance p.l.c. Class A Europe Wind. CA/JP EQ Indemnity $70,000 BBB+ BBB+
Class B Europe Wind. CA/JP EQ Indemnity $30,000 BBB- BBB-
Class C Europe Wind. CA/JP EQ Indemnity $100,000 B- B-
4/1/2000 Sorema SA Halyard Re B.V. (Yr 2) EU/JP Wind, JP EQ Indemnity $17,000
5/23/2000 State Farm Alpha Wind 2000-A Ltd. Florida Wind Indemnity $52,500 BB+
Residential Reinsurance US Gulf/East Coast
5/26/2000 USAA Indemnity $200,000 Ba2 BB+
2000 Limited Wind
6/12/2000 Vesta Fire Ins NeHi, Inc. Northeast/Hawaii Wind Modeled Loss $41,500 Ba3 BB
France Wind, Monaco
11/19/2000 AGF Mediterranean Re p.l.c. Class A Modeled Loss $41,000 Baa3 BBB+ BBB
EQ
France Wind, Monaco
11/19/2000 AGF Mediterranean Re p.l.c. Class B Modeled Loss $88,000 Ba3 BB+ BB+
EQ
Prime Capital CalQuake Califorina EQ/ Europe Parametric
12/28/2000 Munich Re $129,000 Ba3 BB+ BB
& EuroWind Ltd. Wind Index
Prime Capital Hurricane Parametric
12/28/2000 Munich Re US Wind $159,000 Ba3 BB+ BB
Ltd. Index
2/8/2001 Swiss Re Western Capital Limited US EQ Index $97,000 Ba2 BB+
Gold Eagle Capital
3/22/2001 American Re US Wind, US EQ Modeled Loss $116,400 Ba2 BB+
2001 Limited
3/30/2001 Sorema SA Halyard Re B.V. (Yr 3) EU/JP Wind, JP EQ Indemnity $17,000
Parametric
5/9/2001 Swiss Re SR Wind Ltd. Class A-1 US/France Wind $58,200 BB+ BB+
Index
Parametric
Class A-2 US/France Wind $58,200 BB+ BB+
Index
Residential Reinsurance US Gulf/East Coast
6/1/2001 USAA Indemnity $150,000 Ba2 BB+
2001 Limited Wind
6/15/2001 Zurich Re Trinom Ltd. Class A-1 US/EU Wind, US EQ Modeled Loss $60,000 Ba2 BB BB-
Class A-2 US/EU Wind, US EQ Modeled Loss $97,000 Ba1 BB+ BB
45
Insurance-Linked Securities 2009
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
12/27/2001 CEA Redwood Capital I, Ltd Califorina EQ Industry Index $160,050 Ba2 BB+
Parametric
12/28/2001 SCOR Atlas Reinsurance II p.l.c. Class A Europe Wind. CA/JP EQ $50,000 A3 A
Index
Parametric
Class B Europe Wind. CA/JP EQ $100,000 Ba2 BB+
Index
3/28/2002 CEA Redwood Capital II, Ltd California EQ Industry Index $194,000 Baa3 BBB-
California/New Madrid
4/8/2002 Hiscox St. Agatha Re Ltd. Modeled Loss $33,000 BB+
EQ
5/22/2002 Nissay Dowa Fujiyama Ltd. Japan EQ Parametric $67,900 BB+
Residential Reinsurance US Gulf/East Coast
5/31/2002 USAA Indemnity $125,000 Ba3 BB+
2002 Limited Wind
Parametric
6/26/2002 Swiss Re Pioneer 2002 Ltd. A-02-1 US Wind $85,000 Ba3 BB+
Index
Parametric
B-02-1 Europe Wind $50,000 Ba3 BB+
Index
Parametric
C-02-1 California EQ $30,000 Ba3 BB+
Index
D-02-1 Central US EQ Parametric $40,000 Baa3 BBB-
Parametric
E-02-1 Japan EQ $25,000 Ba3 BB+
Index
Parametric
F-02-1 US/EU Wind, US/JP EQ $25,000 Ba3 BB+
Index
Parametric
9/16/2002 Swiss Re Pioneer 2002 Ltd. B-02-2 Europe Wind $5,000 Ba3 BB+
Index
Parametric
C-02-2 California EQ $20,500 Ba3 BB+
Index
D-02-2 Central US EQ Parametric $1,750 Baa3 BBB-
Parametric
12/16/2002 Swiss Re Pioneer 2002 Ltd. A-02-3 US Wind $8,500 Ba3 BB+
Index
Parametric
B-02-3 Europe Wind $21,000 Ba3 BB+
Index
Parametric
C-02-3 California EQ $15,700 Ba3 BB+
Index
D-02-3 Central US EQ Parametric $25,500 Baa3 BBB-
Parametric
E-02-3 Japan EQ $30,550 Ba3 BB+
Index
Parametric
F-02-3 US/EU Wind, US/JP EQ $3,000 Ba3 BB+
Index
Parametric
12/30/2002 Vivendi Studio Re Ltd. California EQ $150,000 Ba2 BB+
Index
Parametric
3/17/2003 Swiss Re Pioneer 2002 Ltd. A-03-1 US Wind $6,500 Ba3 BB+
Index
Parametric
B-03-1 Europe Wind $8,000 Ba3 BB+
Index
Parametric
C-03-1 California EQ $6,500 Ba3 BB+
Index
D-03-1 Central US EQ Parametric $5,500 Baa3 BBB-
Parametric
E-03-1 Japan EQ $8,000 Ba3 BB+
Index
Parametric
F-03-1 US/EU Wind, US/JP EQ $8,140 Ba3 BB+
Index
Residential Reinsurance
5/30/2003 USAA US Wind, US EQ Indemnity $160,000 Ba2 BB+
2003 Limited
Parametric
6/17/2003 Swiss Re Pioneer 2002 Ltd. A-03-2 US Wind $9,750 Ba3 BB+
Index
Parametric
B-03-2 Europe Wind $12,250 Ba3 BB+
Index
Parametric
C-03-2 California EQ $7,250 Ba3 BB+
Index
D-03-2 Central US EQ Parametric $2,600 Baa3 BBB-
46
Aon Benfield Securities
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
Parametric
6/25/2003 Zenkyoren Phoenix Quake Wind Ltd. Japan Wind, Japan EQ $192,500 Baa3 BBB+
Index
Parametric
6/25/2003 Zenkyoren Phoenix Quake Ltd. Japan EQ $192,500 Baa3 BBB+
Index
Phoenix Quake Wind Parametric
6/25/2003 Zenkyoren Japan Wind, Japan EQ $85,000 Ba1 BBB-
II Ltd. Index
Parametric
7/24/2003 Swiss Re Palm Capital Ltd. Series 1 US Wind $22,350 Ba3 BB+
Index
Parametric
7/24/2003 Swiss Re Oak Capital Ltd. Series 1 Europe Wind $23,600 Ba3 BB+
Index
Parametric
7/24/2003 Swiss Re Sequoia Capital Ltd. Series 1 US EQ $22,500 Ba3 BB+
Index
Parametric
7/24/2003 Swiss Re Sakura Capital Ltd. Series 1 Japan EQ $14,700 Ba3 BB+
Index
Parametric
7/24/2003 Swiss Re Arbor I Ltd. Series 1 US/EU Wind, CA/JP EQ $95,000 B
Index
Parametric
7/24/2003 Swiss Re Arbor II Ltd. Series 1 US/EU Wind, CA/JP EQ $26,500 A1 A+
Index
8/25/2003 TREIP Formosa Re Ltd. Taiwan EQ Indemnity $100,000 NR
Parametric
9/15/2003 Swiss Re Arbor I Ltd. Series 2 US/EU Wind, CA/JP EQ $60,000 B
Index
12/15/2003 Swiss Re Pioneer 2002 Ltd. D-03-3 Central US EQ Parametric $51,000 Baa3 BBB-
Parametric
12/15/2003 Swiss Re Palm Capital Ltd. Series 2 US Wind $19,000 Ba3 BB+
Index
Parametric
12/15/2003 Swiss Re Arbor I Ltd. Series 3 US/EU Wind, CA/JP EQ $8,850 B
Index
Parametric
12/18/2003 EDF Pylon Ltd. Class A France Wind $70,000 A2 BBB+
Index
Parametric
Class B France Wind $120,000 Ba1 BB+
Index
12/31/2003 CEA Redwood Capital III, Ltd. California EQ Industry Index $150,000 Ba1 BB+
12/31/2003 CEA Redwood Capital IV, Ltd. California EQ Industry Index $200,000 Baa3 BBB-
Parametric
3/15/2004 Swiss Re Oak Capital Ltd. Series 2 Europe Wind $24,000 Ba3 BB+
Index
Parametric
3/15/2004 Swiss Re Sequoia Capital Ltd. Series 2 US EQ $11,500 Ba3 BB+
Index
Parametric
3/15/2004 Swiss Re Arbor I Ltd. Series 4 US/EU Wind, CA/JP EQ $21,000 B
Index
Residential Reinsurance
5/21/2004 USAA Class A US Wind, US EQ Indemnity $127,500 BB
2004 Limited
Class B US Wind, US EQ Indemnity $100,000 B
6/10/2004 Converium Helix 04 Limited US/EU Wind, US/JP EQ Modeled Loss $100,000 BB+
Parametric
6/15/2004 Swiss Re Arbor I Ltd. Series 5 US/EU Wind, CA/JP EQ $18,000 B
Index
Parametric
6/30/2004 Swiss Re Gi Capital Ltd. Japan EQ $125,000 BB+
Index
Parametric
9/15/2004 Swiss Re Oak Capital Ltd. Series 3 Europe Wind $10,500 Ba3 BB+
Index
Parametric
9/15/2004 Swiss Re Sequoia Capital Ltd. Series 3 US EQ $11,000 Ba3 BB+
Index
Parametric
9/28/2004 Swiss Re Arbor I Ltd. Series 6 US/EU Wind, CA/JP EQ $31,800 B
Index
Foundation Re Ltd. Series
11/17/2004 Hartford Fire Ins Class A US Wind Industry Index $180,000 BB+
2004-I
Class B US Wind, US EQ Industry Index $67,500 BBB+
Parametric
12/15/2004 Swiss Re Arbor I Ltd. Series 7 US/EU Wind, CA/JP EQ $15,000 B
Index
12/31/2004 CEA Redwood Capital V, Ltd. California EQ Industry Index $150,000 Ba2 BB+
12/31/2004 CEA Redwood Capital VI, Ltd. California EQ Industry Index $150,000 Ba2 BB+
Parametric
3/15/2005 Swiss Re Arbor I Ltd. Series 8 US/EU Wind, CA/JP EQ $20,000 B
Index
47
Insurance-Linked Securities 2009
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
Residential Reinsurance
5/31/2005 USAA Class A US Wind, US EQ Indemnity $91,000 BB
2005 Limited
Class B US Wind, US EQ Indemnity $85,000 B
Factory Mutual
6/7/2005 Cascadia Limited Pacific Northwest EQ Parametric $300,000 BB+ BB
Ins Co
Parametric
6/15/2005 Swiss Re Arbor I Ltd. Series 9 US/EU Wind, CA/JP EQ $25,000 B
Index
7/28/2005 Zurich KAMP Re 2005 Ltd. US Wind, Central US EQ Indemnity $190,000 BB+
Atlantic & Western
11/8/2005 PXRE Class A US/EU Wind Modeled Loss $100,000 BB+ BB
Re Limited
Class B US/EU Wind, US HU Modeled Loss $200,000 B+ B
Parametric
11/15/2005 Munich Re Aiolos Ltd. Europe Wind $110,000 BB+
Index
Parametric
12/15/2005 Swiss Re Arbor I Ltd. Series 10 US/EU Wind, CA/JP EQ $18,000 B
Index
Atlantic & Western
12/21/2005 PXRE Class A US/EU Wind, US EQ Modeled Loss $125,000 BB+
Re II Limited
Class B US/EU Wind, US EQ Modeled Loss $125,000 BB+
12/22/2005 Montpelier Re Champlain Limited Class A US/JP EQ Modeled Loss $75,000 B B-
Class B US Wind, US EQ Modeled Loss $15,000 B+ B-
Parametric
1/26/2006 Swiss Re Australis Ltd. Series 1 Australia EQ/HU $100,000 BB
Index
2/9/2006 CEA Redwood Capital VII, Ltd. California EQ Industry Index $160,000 BB+
Redwood Capital VIII,
2/9/2006 CEA California EQ Industry Index $65,000 BB+
Ltd.
Foundation Re Ltd.
2/17/2006 Hartford Fire Ins Class D US Wind, US EQ Industry Index $105,000 BB
Series 2006-I
5/11/2006 FONDEN CAT-Mex Ltd. Class A Mexico EQ Parametric $150,000 BB+
Class B Mexico EQ Parametric $10,000 BB+
Calabash Re Ltd. Series
5/24/2006 ACE INA Class A-1 US Wind Industry Index $100,000 BB
2006-I
Residential Reinsurance
5/31/2006 USAA Class A US Wind, US EQ Indemnity $47,500 B
2006 Limited
Class C US Wind, US EQ Indemnity $75,000 BB+
Successor Cal Quake Parametric
6/6/2006 Swiss Re A-I US EQ $47,500 BB
Parametric Ltd. Index
Parametric
6/6/2006 Swiss Re Successor Euro Wind Ltd. A-I Europe Wind $97,130 BB
Index
Parametric
A-II Europe Wind $3,000 BB
Index
Parametric
B-I Europe Wind $18,500 BB-
Index
Parametric
C-I Europe Wind $110,750 B
Index
Parametric
C-II Europe Wind $3,000 B
Index
Successor Hurricane
6/6/2006 Swiss Re B-I US Wind Industry Index $14,000 BB-
Industry Ltd.
C-I US Wind Industry Index $7,250 B
D-I US Wind Industry Index $34,250 B
D-II US Wind Industry Index $10,250 B
E-I US Wind Industry Index $5,000 NR
E-II US Wind Industry Index $35,000 NR
F-I US Wind Industry Index $54,000 B
Successor Hurricane
6/6/2006 Swiss Re B-I US Wind Modeled Loss $42,250 BB-
Modeled Ltd.
6/6/2006 Swiss Re Successor II Ltd. A-I US/EU Wind, US/JP EQ Multiple $73,200 B
E-I US/EU Wind, US/JP EQ Multiple $154,250 NR
6/6/2006 Swiss Re Successor III Ltd. A-I US/EU Wind, JP EQ Multiple $7,200 NR
6/6/2006 Swiss Re Successor IV Ltd. A-I US/EU Wind, US/JP EQ Multiple $30,000 B
48
Aon Benfield Securities
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
Successor Japan
6/6/2006 Swiss Re A-I Japan EQ Modeled Loss $103,470 BB
Quake Ltd.
B-I Japan EQ Modeled Loss $26,250 BB-
C-I Japan EQ Modeled Loss $70,750 B
C-II Japan EQ Modeled Loss $3,000 B
6/19/2006 Munich Re Carillon Ltd. Series 1 Class A1 US Wind Industry Index $51,000 B+
Class A2 US Wind Industry Index $23,500 B+
Class B US Wind Industry Index $10,000 B
6/21/2006 Balboa Ins Group VASCO Re 2006 Ltd. US Wind Indemnity $50,000 BB+
Liberty Mutual Mystic Re Ltd.
6/21/2006 Class A US Wind Industry Index $200,000 BB+
Ins Co Series 2006-1
Dominion Parametric
6/30/2006 Drewcat Capital Ltd. Class A US Wind $50,000 NR
Resources Index
Parametric
7/28/2006 Hannover Re Eurus Ltd. Europe Wind $150,000 BB
Index
Endurance
8/3/2006 Shackleton Re Limited Class A US EQ Industry Index $125,000 Bz3 BB
Specialty Ins Co
Class B US Wind Industry Index $60,000 Ba3 BB
Class C US Wind, US EQ Industry Index $50,000 Ba2 BB+
Tokio Marine & Parametric
8/3/2006 Fhu-Jin Ltd. Series 1 Class B Japan Wind $200,000 BB+
Nichido Fire Index
Successor Hurricane
8/4/2006 Swiss Re E-III US Wind Industry Index $50,000 NR
Industry Ltd.
Factory Mutual
8/25/2006 Cascadia II Limited US EQ Parametric $300,000 BB+ BB+
Ins Co
11/17/2006 Catlin Ins Co Ltd. Bay Haven Limited Class A US/EU/JP W, US/JP Q Multiple $133,500 AA
Class B US/EU/JP W, US/JP Q Multiple $66,750 BBB-
11/17/2006 Hartford Fire Ins Foundation Re II Ltd. Class A US Wind Industry Index $180,000 BB+
Class G US (HU, EQ, ST) Industry Index $67,500 B
Liberty Mutual Mystic Re Ltd. Series
11/30/2006 Class A US Wind Industry Index $200,000 BB+
Ins Co 2006-2
Class B US Wind Industry Index $125,000 BB
Parametric
12/8/2006 Swiss Re Successor Euro Wind Ltd. C-III Europe Wind $15,000 B3 B
Index
Successor Hurricane Parametric
12/8/2006 Swiss Re A-III Europe Wind $118,000 Ba3 BB
Industry Ltd. Index
E-IV US Wind Industry Index $4,000 NR
E-V US Wind Industry Index $26,000 NR
12/8/2006 Swiss Re Successor I Ltd. B-I NA/EU W, CA/JP Q Multiple $4,000 NR
B-II NA/EU W, CA/JP Q Multiple $24,500 NR
12/20/2006 Zurich Re Lakeside Re Ltd. US EQ Dual $190,000 BB+
12/21/2006 SCOR Atlas Reinsurance III p.l.c. Japan EQ, Euro Wind Modeled Loss $120,000 BB+
Redwood Capital IX, Parametric
12/29/2006 CEA Class A California EQ $125,000 Ba2 BB+
Ltd. Series 1 Index
Parametric
Class B California EQ $125,000 Ba2 BB+
Index
Parametric
Class C California EQ $18,000 Baa3 BBB-
Index
Parametric
Class D California EQ $20,000 Ba3 BB
Index
Parametric
Class E California EQ $12,000 B3 B
Index
Calabash Re II Ltd.
1/8/2007 ACE INA Class A-1 US Wind Modeled Loss $100,000 BB
Series 2006-I
Class D-1 US EQ Modeled Loss $50,000 B+
Class E-1 US Wind, US EQ Modeled Loss $100,000 BB
US/Europe/JP/Aus/NZ/
3/1/2007 Hannover Re Kepler Re Ltd. Indemnity $200,000 Ba2
Canada Wind,EQ
Parametric
3/14/2007 Swiss Re Australis Ltd Series 2 Australia EQ/HU $50,000 BB
Index
49
Insurance-Linked Securities 2009
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
4/3/2007 Allianz SE Blue Wings Ltd. Series 1 Class A US EQ, UK Flood Multiple $150,000 BB+
Aspen Insurance
4/13/2007 Ajax Re Limited Series 1 Class A California EQ Industry Index $100,000 BB
Limited
East Lane Re Ltd.
4/30/2007 Chubb Group Class A US - Northeast Wind Indemnity $135,000 BB+
Series 2007-I
Class B US - Northeast Wind Indemnity $115,000 BB+
5/8/2007 Munich Re Carillon Ltd. Series 2 Class E US Wind Industry Index $150,000 B
Travelers Longpoint Re Ltd.
5/8/2007 Class A US - Northeast Wind Industry Index $500,000 BB+
Indemnity Co Series 2007-I
5/10/2007 Swiss Re Successor II Ltd. Class A-2 NA/EU W, CA/JP Q Multiple $100,000 B
Mitusui Parametric
5/14/2007 AKIBARE Ltd. Series 1 Class A JP Wind $90,000 BB+
Sumitomo Ins Co Index
Parametric
Class B JP Wind $30,000 BB+
Index
Gamut Reinsurance
5/29/2007 Nephila Class A US/EU/JP W, US/JP Q Indemnity $60,000 Aa3 A-
Limited
Class B US/EU/JP W, US/JP Q Indemnity $120,000 Baa3 BBB-
Class C US/EU/JP W, US/JP Q Indemnity $60,000 Ba3 BB-
Liberty Mutual Mystic Re II Ltd.
5/31/2007 FL/Northeast Wind Industry Index $150,000 B+
Ins Co Series 2007-1
Turkey/Greece/Israel/ Parametric
5/31/2007 Swiss Re MedQuake Ltd. Class A $50,000 BB-
Portugal/Cyprus EQ Index
Turkey/Greece/Israel/ Parametric
Class B $50,000 B
Portugal/Cyprus EQ Index
Residential Reinsurance
5/31/2007 USAA Class 1 US Wind, US EQ Indemnity $145,000 BB
2007 Limited
Class 2 US Wind, US EQ Indemnity $125,000 B
Class 3 US Wind, US EQ Indemnity $75,000 B
Class 4 US Wind, US EQ Indemnity $155,000 BB+
Class 5 US Wind, US EQ Indemnity $100,000 BB+
Glacier Nelson Re Ltd. Series
6/11/2007 Class A US/EU W, US Q Multiple $75,000 B
Reinsurance AG 2007-I
Willow Re Ltd. Series
6/14/2007 Allstate Ins Co Class B US - Northeast Wind Industry Index $250,000 BB+
2007-1
Spinnaker Capital Ltd.
6/15/2007 Swiss Re US Wind Industry Index $200,000 B1
Series 1
CIG Reinsurance
Ltd, New Castle NA/EU/UK/JP/Aus/NZ
6/20/2007 Emerson Reinsurance Ltd. Class A Indemnity $185,000 A2
Reinsurance All Natural Perils
Co Ltd
NA/EU/UK/JP/Aus/NZ
Class B Indemnity $140,000 Baa3
All Natural Perils
NA/EU/UK/JP/Aus/NZ
Class C Indemnity $130,000 Ba2
All Natural Perils
NA/EU/UK/JP/Aus/NZ
Class D Indemnity $45,000 Ba3
All Natural Perils
Fremantle Limited
6/21/2007 Brit Ins Limited Class A US/EU/JP W, US/JP Q Multiple $60,000 Aa1 AAA
Series 2007-I
Class B US/EU/JP W, US/JP Q Multiple $60,000 A3 BBB+
Class C US/EU/JP W, US/JP Q Multiple $80,000 Ba2 BB-
Spinnaker Capital Ltd.
6/22/2007 Swiss Re FL Wind Industry Index $130,200 Ba2
Series 2
Swiss Re/Kyoei
Parametric
6/25/2007 Fire and Marine Fusion 2007 Ltd. Class A JP Wind, Mexico EQ $30,000 B
Index
Ins Co
Parametric
Class B JP Wind, Mexico EQ $80,000 B
Index
Parametric
Class C Mexico EQ $30,000 BB+
Index
50
Aon Benfield Securities
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
State Farm
Mutual US/Canada (Wind, EQ,
7/5/2007 Merna Reinsurance Ltd. Class A Indemnity $256,000 Aa2 AAA
Automobile ST, WS, WF)
Ins Co
Class A US/Canada (Wind, EQ,
Indemnity $94,000 Aa2 AAA
(loan) ST, WS, WF)
US/Canada (Wind, EQ,
Class B Indemnity $647,600 A2 AA+
ST, WS, WF)
Class B US/Canada (Wind, EQ,
Indemnity $19,000 A2 AA+
(loan) ST, WS, WF)
US/Canada (Wind, EQ,
Class C Indemnity $155,000 Baa2 A-
ST, WS, WF)
Class C US/Canada (Wind, EQ,
Indemnity $9,000 Baa2 A-
(loan) ST, WS, WF)
Arrow Capital
7/18/2007 Reinsurance Javelin Re Ltd. Class A Worldwide All Perils Indemnity $94,500 A-
Co, Ltd
Class B Worldwide All Perils Indemnity $30,750 BBB-
Spinnaker Capital Ltd.
7/20/2007 Swiss Re US Wind Industry Index $50,000 NR
Series 3
Japan Railway
10/15/2007 MIDORI Ltd. Class A JP EQ Parametric $260,000 BB+
East
Parametric
11/7/2007 Allianz SE Blue Fin Ltd. Series 1 Class A EU Wind $155,000 BB+
Index
Parametric
Class B EU Wind $65,000 BB+
Index
Newton Re Limited;
11/17/2007 Catlin Class A US EQ Industry Index $87,500 BB+
Series 2007-1
Class B US Wind Industry Index $137,500 BB+
Atlas Reinsurance IV
11/29/2007 SCOR Class A EU Wind, JP EQ Modeled Loss $160,000 B
Limited
12/21/2007 Swiss Re GlobeCat Ltd. Series USW Class A-1 US Wind Industry Index $40,000 B3e
Class A-1 US EQ Industry Index $20,000 B1e
Class A-1 Latin America EQ Modeled Loss $25,000 Ba3e
Parametric
12/27/2007 Groupama SA Green Valley Ltd. Series 1 Class A France Wind $200,000 BB+
Index
Successor Hurr Industry
12/28/2007 Swiss Re C-VI US Wind Industry Index $30,000 B2 B
Ltd.
D-VI US Wind Industry Index $30,000 B
12/28/2007 Swiss Re Successor II Ltd.; Series 3 C-III US/EU Wind, US/JP EQ Multiple $50,000
12/28/2007 Swiss Re Successor II Ltd.; Series 3 E-III US/EU Wind, US/JP EQ Multiple $50,000
Redwood Capital X Ltd. Parametric
12/31/2007 CEA Class A US EQ $25,000 Baa3
Series 1 Index
Parametric
Class B US EQ $227,700 Ba2
Index
Parametric
Class C US EQ $50,200 Ba3
Index
Redwood Capital X Ltd.
12/31/2007 CEA Class D US EQ Industry Index $130,500 Ba3
Series 2
Class E US EQ Industry Index $45,200 B2
Class F US EQ Industry Index $20,000 NR
Newton Re Ltd. US/EU/JP Wind, US/
2/21/2008 Catlin Class A Indemnity $150,000 BB
Series 2008 - 1 JP EQ
Queen Street Ltd. Parametric
3/14/2008 Munich Re Class A EU Wind €70,000 BB+
Series 1 Index
Parametric
Class B EU Wind €100,000 B
Index
East Lane Re II Ltd. Northeast US All
3/31/2008 Chubb Group Class A Indemnity $75,000 BB
Series 2008-I Natural Perils
Northeast US All
Class B Indemnity $70,000 BB
Natural Perils
US/Canada All Natural
Class C Indemnity $55,000 B-
Perils
51
Insurance-Linked Securities 2009
SummARY OF CATASTROPHE BONDS - 1997 THROuGH JuNE 30, 2009
Date Sponsor Issuer Class Perils Trigger Size (000) mIS S&P Fitch
Parametric
5/14/2008 Zenkyoren Muteki Ltd. Series 2008-1 Top JP EQ $300,000 Ba2
Index
Valais Re Ltd. Series US/EU/JP Wind, US/
5/30/2008 Flagstone Class A Indemnity $64,000 Ba2
2008-1 JP EQ
US/EU/JP Wind, US/
Class C Indemnity $40,000 B3
JP EQ
Glacier Nelson Re Ltd.
5/30/2008 Class G US Wind, US EQ Indemnity $67,500 B3
Reinsurance AG Series 2008-I
Class H EU Wind Indemnity $45,000 B3
Class I EU Wind Indemnity $67,500 B1
Mangrove Re Ltd.
5/30/2008 Homewise Class A FL HU Indemnity $150,000 Ba2
Series 2008-1
Class B FL HU Indemnity $60,000 B1
Residential Reinsurance
5/30/2008 USAA Class 1 US Wind, US EQ Indemnity $125,000 BB
2008 Limited
Class 2 US Wind, US EQ Indemnity $125,000 B
US (HU, EQ, ST, WS,
Class 4 Indemnity $100,000 BB+
WF)
Willow Re Limited
6/17/2008 Allstate Ins Co Class D Texas Wind Industry Index $250,000 BB+
Series 2008-1
Nationwide Caelus Re Limited
6/25/2008 Class A US Wind, US EQ Indemnity $250,000 BB+
Mutual Ins Co Series 2008-1
Vega Capital Ltd. US/EU/JP Wind, US/
6/27/2008 Swiss Re Class A Multiple $21,000 A3 A-
Series 2008-I JP EQ
US/EU/JP Wind, US/
Class B Multiple $22,500 Baa2 BBB
JP EQ
US/EU/JP Wind, US/
Class C Multiple $63,900 Ba3
JP EQ
US/EU/JP Wind, US/
Class D Multiple $42,600
JP EQ
Blue Coast Ltd. Series
7/28/2008 Allianz SE Class A US Wind Industry Index $70,000 BB-
2008-1
Class B US Wind Industry Index $30,000 B+
Class C US Wind Industry Index $20,000 B-
Topiary Capital Limited Parametric
8/1/2008 Platinum Class A US/EU Wind, JP EQ $200,000 BB+
Series 2008-1 Index
2/13/2009 SCOR Atlas V Capital Limited Series 1 US Wind, US EQ Industry Index $50,000 B+
Series 2 US Wind, US EQ Industry Index $100,000 B+
Series 3 US Wind, US EQ Industry Index $50,000 B
East Lane Re III Ltd.
3/4/2009 Chubb Group Class A FL Wind Indemnity $150,000 BB
Series 2009-1
Liberty Mutual Mystic Re II Ltd.
3/10/2009 US Wind, US EQ Industry Index $225,000 BB
Ins Co Series 2009-1
4/16/2009 Allianz SE Blue Fin Ltd. Series 2 Class A US Wind, US EQ Modeled Loss $180,000 BB-
4/28/2009 Swiss Re Successor II Ltd. Series 4 Class F Northeast US, CA EQ Multiple $60,000
5/5/2009 Assurant Inc. Ibis Re Ltd. Class A US EQ Modeled Loss $75,000 BB
Class B US EQ Modeled Loss $75,000 BB-
Residential Reinsurance
5/28/2009 USAA Class 1 US Wind, US EQ Indemnity $70,000 BB-
2009 Limited
Class 2 US Wind, US EQ Indemnity $60,000 B-
Class 4 US Wind, US EQ Indemnity $120,000 BB-
Calabash Re III Ltd.
6/10/2009 Swiss Re Class A US Wind, US EQ Modeled Loss $86,000 BB-
Series 2009-I
Class B US EQ Modeled Loss $14,000 BB+
6/9/2009 Munich Re Ianus Capital Ltd. EU Wind, Turkey EQ Multiple €50,000 B2
52
Aon Benfield Securities
SummARY OF SIDECAR ISSuANCE
Initial
Coverage Size
SideCar Coverage Principal Sponsor Inception maturity Years Rating line of Business ($mm)
Top Layer Re Side By Side Renaissance Re, SF Dec-99 Jul-09 2000-on AA High Excess US property Cat 100.0
Property Cat, property risk, retro,
Olympus Re Quota Share White Mountains Re Dec-01 Jun-05 2002-2005 NR 500.0
and marine
Renaissance Re, SF,
DaVinci Re Side By Side Dec-01 Jul-09 2002-on A Property Cat reinsurance 600.0
Max Re
Rockridge Re Quota Share Montpelier Re Jun-05 Jun-06 2005 NR High excess cat retrocessional 90.9
Blue Ocean
Quota Share Montpelier Re Dec-05 Dec-07 2006-2007 NR Property cat retrocessional 300.0
Re
Property cat reinsurance and
Cyrus Re Quota Share XL Capital Dec-05 Nov-06 2006-2007 NR 525.0
retrocessional
Flatiron Re Quota Share Arch Re Dec-05 Dec-07 2006-2007 BBB- Property and marine reinsurance 900.0
Helicon Re Quota Share White Mountains Re Dec-05 Dec-07 2006-2007 NR Short-tailed property and marine 146.0
Property cat, property risk, aviation
Kaith/K5 Quota Share Hannover Re Dec-05 Jan-07 2006-2009 370.0
and marine
Property cat, property risk, retro
Olympus Re II Quota Share White Mountains Re Jan-06 Jan-06 NR 156.0
and marine
Marine and offshore energy
Petrel Re Quota Share Validus May-06 May-07 2006-2007 NR 125.0
reinsurance contracts
A+/BBB-/
Starbound Re Quota Share Renaissance Re May-06 May-07 2006-2007 Short-tailed property and marine 310.5
BB+
US property, marine, retro, and
Bay Point Re Quota Share Harbor Point Jun-06 Jun-07 2006-2007 BB 150.0
workers’ comp
Marine and offshore energy
Sirocco Re Quota Share Lancashire Jun-06 Jun-07 2006-2007 NR 75.0
insurance contracts
Timicuan Re Side by Side Renaissance Re Jul-06 Dec-06 Reinstatement Premium Protection 70.0
Castlepoint
Tower Group Jul-06 Jul-07 265.0
Re
Lexington Insurance
Concord Re Quota Share Aug-06 Aug-12 2006-2012 BB+ US commercial property 730.0
Co
Mont Fort Re Quota Share Flagstone Re Aug-06 Dec-07 NR Peak zone and ILW 60.0
Property cat reinsurance and
Cyrus Re Quota Share XL Capital Nov-06 Dec-07 2007 NR 635.0
retrocessional
BBB+/
Panther Re Quota Share Hiscox Dec-06 Dec-07 2007 Property cat reinsurance 360.0
BB+
Lloyd’s #4242
Syncro Ltd. Quota Share Dec-06 Property cat reinsurance 100.0
(Chaucer)
Norton Re Side by Side Brit Insurance Dec-06 Dec-07 2007 NR Property cat retrocessional 107.7
Stoneheath
XL Capital Dec-06 Dec-07 2007-? bbb+ 350.0
Re
New Point Re Side by Side Harbor Point Dec-06 Dec-06 2007-2008 NR Property cat retrocessional 250.0
Triomphe Re Quota Share Paris Re Dec-06 Dec-08 2007-2008 Property cat retrocessional 185.0
Maxwell Re ACE Dec-06 Dec-07 175.0
Property cat, property risk, aviation
K5 Quota Share Hannover Re Jan-07 Dec-08 520.0
and marine
New Point Re Side by Side Harbor Point Jan-07 Dec-08 2007-2008 NR Property cat retrocessional 100.0
Sector Re Quota Share Swiss Re Jan-07 Dec-07 2007 Property cat, aviation 220.0
MaRI Ltd. Side by Side ACE Jan-07 Apr-08 NR Property cat reinsurance 400.0
Syndicate
Quota Share Ark Underwriting Jan-07 Dec-07 2007-2008 Property cat reinsurance 40.0
6105
53
Insurance-Linked Securities 2009
SummARY OF SIDECAR ISSuANCE
Initial
Coverage Size
SideCar Coverage Principal Sponsor Inception maturity Years Rating line of Business ($mm)
Syndicate
Quota Share Hiscox Jan-07 Dec-07 2007-2008 Property cat reinsurance 69.0
6104
Syndicate
Quota Share MAP Jan-07 Dec-07 2007-2008 Property cat reinsurance 86.2
6103
Puma Capital Quota Share Bridge Re Apr-07 Apr-08 2007 Property cat, aviation 182.5
Starbound BBB+/
Quota Share Ren Re Jun-07 Jun-08 2007-2008 Property cat reinsurance 341.5
Re II BBB-/BB
Mont Gele Re XOL Flagstone Re Jul-07 Jul-09 2007-2009 NR Property cat reinsurance 60.0
Norton Re II Side by Side Brit Insurance Dec-07 Dec-08 2008 NR Property cat retrocessional 118.2
Syndicate
Quota Share Ark Underwriting Jan-08 Dec-08 2008 Property cat reinsurance 40.0
6105
Syndicate
Quota Share Hiscox Jan-08 Dec-08 2008 Property cat reinsurance 67.9
6104
Syndicate
Quota Share MAP Jan-08 Dec-08 2008 Property cat reinsurance 79.9
6103
Property cat reinsurance and
Cyrus Re II Quota Share XL Capital Jan-08 Dec-08 2008 136.0
retrocessional
Sector Re II Quota Share Swiss Re Apr-08 Apr-09 2008-2009 Property cat, aviation 150.0
Baa3/
Globe Re Quota Share Hannover Re May-08 May-09 2008-2009 Property cat retrocessional 133.0
Ba3/B2
Syndicate
Quota Share Amlin Jan-09 Dec-09 2009 Property cat reinsurance 72.5
6106
Syndicate
Quota Share Ark Underwriting Jan-09 Dec-09 2009 Property cat reinsurance 40.6
6105
Syndicate
Quota Share Hiscox Jan-09 Dec-09 2009 Property cat reinsurance 62.4
6104
Syndicate
Quota Share MAP Jan-09 Dec-09 2009 Property cat reinsurance 57.3
6103
Property cat, property risk, aviation
Kaith/K6 Quota Share Hannover Re Mar-09 Mar-10 2009-2010 180.0
and marine
Property cat retrocessional,
Timicuan Re II Quota Share Renaissance Re Jun-09 Dec-09 2009 NR 60.4
primarily Florida
TOTAL 10,853.4
C
* yrus Re - November 29, 2006 - Conditions to the effectiveness of an amendment were satisfied. The amendment allows the issuance of debt and
calls for additional capital
54
Aon Benfield Securities is providing this Insurance-Linked Securities 2009 (ILS 2009) for informational purposes only. ILS 2009 is
not intended as advice with respect to any specific situation, and should new be relied upon as such. In addition, readers should
not place undue reliance on any forward-looking statements. Aon Benfield Scurrilities undertakes no obligation to review or update
any such statements based on changes, new developments or otherwise.
ILS 2009 is intended only for designated recipients, and it is not to be considered (1) an offer to sell any security, loan, or other
financial product, (2) a solicitation or basis for any contract for purchase of any securities, loan, or other financial product, (3) an
official confirmation, or (4) a statement of Aon Benfield Securities or its affiliates. With respect to indicative values, no representation
is made that any transaction can be effected at the values provided and the values provided are not necessarily the value carried
on Aon Benfield Securities’ books and records.
Discussions of tax, accounting, legal or actuarial matters are intended as general observations only based on Aon Benfield
Securities’ experience, and should not be relied upon as tax, accounting, legal or actuarial advice. Readers should consult their
own professional advisors on these matters as Aon Benfield Securities does not provide such advice.
Aon Benfield Securities makes no representation or warranty, whether express or implied, that the products or services described
in ILS 2009 are suitable or appropriate for any issuer, investor or participant, or in any location or jurisdiction. The products and
services described in ILS 2009 are complex and speculative, and are intended for sophisticated issuers, investors, or participants
capable of assessing the significant risks involved.
Except as otherwise noted, the information in the ILS 2009 was compiled by Aon Benfield Securities from sources it believes to be
reliable. However, Aon Benfield Securities makes no representation or warranty as to the accuracy, reliability or completeness of
such information, and the information should not be relied upon in making business, investment or other decisions.
Aon Benfield Securities and/or its affiliates may have independent business relationships with, and may have been or in the future
will be compensated for services provided to, companies mentioned in the ILS 2009.
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