Insurance-Linked Securities Report 2008 - Aon
Insurance-Linked Securities Report 2008 - Aon
Insurance-Linked Securities Report 2008 - Aon
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<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong><br />
<strong>2008</strong><br />
Innovation and Investor Demand<br />
Set the Stage for Continued Growth
<strong>Aon</strong> Capital Markets provides insurance and reinsurance clients<br />
with a full suite of insurance-linked securities products, including<br />
catastrophe bonds, contingent capital, collateralized reinsurance,<br />
industry loss warranties and exposure swaps. In the past 12 months,<br />
<strong>Aon</strong> Capital Markets has advised clients on more than $6 billion of<br />
capital solutions.<br />
As the most experienced investment banking firm in this market, <strong>Aon</strong><br />
Capital Markets offers expert underwriting and placement of new<br />
issues, financial advisory services, as well as securities trading in<br />
the secondary market. <strong>Aon</strong> Capital Markets’ integration with <strong>Aon</strong><br />
Re Global expands its capabilities to provide analytics, modeling,<br />
rating agency and other consultative services.
Foreword<br />
I am pleased to present the first annual <strong>Aon</strong> Capital Markets review of the<br />
insurance-linked securities market. <strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong> offers<br />
a variety of insights to help you make intelligent, informed decisions about<br />
this dynamic sector.<br />
As an investment bank providing insurance and reinsurance clients with access<br />
to alternative forms of capital, <strong>Aon</strong> Capital Markets is uniquely positioned<br />
to share insights about trends and opportunities within this market. As a fully<br />
integrated advisory business of <strong>Aon</strong> Re Global, the world’s largest provider of<br />
reinsurance solutions, we are proud to provide this review as an element of our<br />
advisory activity.<br />
In this <strong>2008</strong> edition, we review:<br />
• <strong>Insurance</strong>-linked securities (ILS) market performance and growth<br />
• The surging popularity of indemnity structures<br />
• Investor demand for insurance-linked securities<br />
• The contingent capital market<br />
• The market’s latest innovations in futures and derivative tools<br />
With this review, <strong>Aon</strong> Capital Markets also unveils a new means of tracking<br />
the performance of the increasingly diverse ILS market. The <strong>Aon</strong> Cat Bond<br />
Indices provides market observers and participants with a quantitative measure<br />
of the returns generated by ILS on a sector-by-sector basis. We also compare<br />
performance to key benchmarks such as U.S. Treasury Bonds and U.S.<br />
BB-rated corporate bonds. <strong>Aon</strong> Cat Bond Indices will be updated quarterly,<br />
giving ILS participants ongoing insight into market trends.<br />
We look forward to providing the <strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> review to<br />
you each year. This inaugural and future editions will be available at<br />
www.aon.com. It’s important that our reviews offer real value—please<br />
share your thoughts and suggestions with me at paul_schultz@aon.com.<br />
President, <strong>Aon</strong> Capital Markets<br />
<strong>Aon</strong> Capital Markets<br />
3
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
4<br />
Contents<br />
5 | <strong>Aon</strong> Capital Markets Review of the Catastrophe Bond Market<br />
Issuance down from 2007 record, but remains strong<br />
11 | New Insight into ILS Market Returns<br />
<strong>Aon</strong> Capital Markets launches <strong>Aon</strong> Cat Bond Indices<br />
15 | Indemnity Triggers Reach New Heights<br />
Evolving triggers for U.S. perils offer advantages, disadvantages<br />
19 | The Buy Side<br />
A review of the ILS investor base<br />
22 | Contingent Capital: Poised for a Comeback<br />
Conditions favor the inclusion of this diversifying solution<br />
27 | Continued Innovation<br />
Options and futures evolve, but lack liquidity<br />
33 | Appendix I<br />
Catastrophe bond issuance statistics<br />
39 | Appendix II<br />
ILS market transaction summary
$ MM<br />
<strong>Aon</strong> Capital Markets Review of the<br />
Catastrophe Bond Market<br />
Issuance down from 2007 record, but remains strong<br />
During the 12-month period ending June 30, catastrophe bonds solidified their place<br />
as an important risk management tool, with strong issuance through June 30, <strong>2008</strong><br />
following record results in 2007.<br />
Lower reinsurance capacity, late declinations of coverage and high marginal costs<br />
heading into the 2007 North American hurricane season prompted more insurers<br />
and reinsurers to sponsor cat bonds. While still strong, issuance volume in the first<br />
half of <strong>2008</strong> lagged the results for the same period in 2007, a result that is not<br />
surprising given the absence of large-scale catastrophes in 2006 and 2007.<br />
The majority of new insurance-linked securities (ILS) issuance continues to close<br />
before the start of the North American hurricane season and in conjunction with<br />
the traditional reinsurance market’s June 1 renewal schedule. The mid-year pause<br />
in bond issuance suggests that June 30 is a natural conclusion to the cat bond year<br />
for statistical purposes.<br />
Strong <strong>2008</strong> Showing<br />
CATASTROPHE BOND ISSUANCE BY YEAR (Years ending June 30)<br />
8000<br />
7000<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
1000<br />
0<br />
1,558<br />
1,071 985 986 1,137<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
3,124<br />
2006<br />
7,003<br />
2007<br />
5,815<br />
<strong>2008</strong><br />
<strong>Aon</strong> Capital Markets<br />
CAT Bonds<br />
5
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
6<br />
$ MM<br />
New issuance declined by $1.2 billion—about 17 percent—in the 12 months ending<br />
June 30, <strong>2008</strong>. Greater reinsurance capacity and lower costs related to a calm<br />
catastrophe season contributed to the reduction, but the decrease says less about<br />
conditions in <strong>2008</strong> than it does about the extraordinary activity witnessed in 2007.<br />
In the 12-month period ending June 30, 2007, the market surged 124 percent to<br />
over $7 billion of issuance. Indeed, it would have surprised industry participants<br />
and observers if <strong>2008</strong> activity met or exceeded 2007’s record results.<br />
CATASTROPHE BOND ISSUANCE BY HALF-YEAR<br />
5000<br />
4500<br />
4000<br />
3500<br />
3000<br />
2500<br />
2000<br />
1500<br />
1000<br />
500<br />
0<br />
521<br />
1H 05<br />
977<br />
2H 05<br />
2,147<br />
1H 06<br />
2,547<br />
2H 06<br />
4,455<br />
1H 07<br />
3,405<br />
2H 07<br />
2,410<br />
1H 08<br />
Issuance trends can also be analyzed by reviewing volumes on a six-month basis.<br />
Catastrophe bonds covering U.S. hurricanes are typically brought to market in the<br />
first half of the calendar year, and the majority of 2007 issues came during this period.<br />
CATASTROPHE BOND ISSUANCE BY TRANCHE / DEAL / SPONSOR (Years ending June 30)<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
2002<br />
2003<br />
2004<br />
2005<br />
Tranches Issued Deals Issued<br />
2006<br />
2007<br />
<strong>2008</strong><br />
First Time Sponsors<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
CAT Bonds
While transaction volumes have fallen, the market remains strong. The total number<br />
of tranches issued increased in the year ending June 30, <strong>2008</strong>, totaling 49 versus 47<br />
in 2007. Interestingly, the number of deals declined in <strong>2008</strong> from 32 to 22, indicating<br />
that transactions are being subdivided to reach more classes of investors and more<br />
investors overall.<br />
CATASTROPHE BOND ISSUANCE BY YEAR AND PERIL (Years ending June 30)<br />
Notional Limit Issued by Peril<br />
8000<br />
7000<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
1000<br />
0<br />
420 441 301<br />
2001<br />
2002<br />
2003<br />
All told, there has been more than $15 billion in new risk transfer in the last three<br />
years. It is also interesting to note that the $5.8 billion volume in the 12 months<br />
ending June 30, <strong>2008</strong> was nearly double that of the same period ending two years<br />
earlier. The rapid growth in this market over the past two years is a clear indication<br />
that we can expect greater transaction volume than the $1.1 billion issued in 2005,<br />
regardless of the measurement method or date used.<br />
Hurricane North American Quake Euro Wind Japan Quake Asia Paci�c Other<br />
476<br />
2004<br />
Hurricane North American Quake Euro Wind Japan Quake Asia Pacific Other<br />
The market continues to focus on U.S. earthquake and wind risks, yet European<br />
wind and Japanese earthquake transactions maintain a steady presence. Indeed, the<br />
on-risk volumes for European wind and Japanese earthquake in <strong>2008</strong> exceed those<br />
of just a few years ago. It is also encouraging to note the increase in bond issuance<br />
covering other perils in <strong>2008</strong>, including tornado, hail, wildfire, and winter storm.<br />
As an aside, market participants periodically debate the relative merits of singleperil<br />
and multi-peril bonds. Comparing 2007 and <strong>2008</strong> to the years immediately<br />
preceding Hurricane Katrina, we find the percentage splits are the same. As such,<br />
the issue of single- or multi-peril has less relevance in <strong>2008</strong> than, for example, the<br />
rise of indemnity structures.<br />
646<br />
2005<br />
1,038<br />
2006<br />
2,328<br />
2007<br />
<strong>Aon</strong> Capital Markets<br />
1,669<br />
<strong>2008</strong><br />
7
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
8<br />
The U.S. Credit Crisis<br />
CATASTROPHE BOND RELATIVE SPREAD GROWTH<br />
300%<br />
250%<br />
200%<br />
150%<br />
100%<br />
50%<br />
0%<br />
-50%<br />
June 2007<br />
Although the U.S. credit crisis is discussed daily in a variety of markets, it has had a<br />
comparatively lesser effect on the ILS market than on other sectors. Investors and<br />
sponsors have long maintained that cat bond spreads have little to no correlation<br />
with those of the credit markets, even in times of market disruption. The results of<br />
the credit crisis have supported this view.<br />
ILS independence is clearly evidenced by comparing the percentage change in spreads<br />
of cat bonds (either U.S. wind or earthquake, which typically fall in the “BB” rating<br />
range) with similarly rated corporate issues. While the credit crisis sparked a significant<br />
widening of corporate bond spreads, cat bonds have not reacted as starkly. This<br />
demonstrates that, at least from a historical perspective, cat bonds have less systematic<br />
risk than similarly-rated corporate securities. It is possible, in fact, that the dislocation in<br />
BB-rated corporate securities may have driven capital toward the less volatile ILS sector.<br />
Growth Drivers<br />
3yr BB Corp (swapped to Floating)<br />
5yr BB Corp (swapped to Floating)<br />
<strong>Aon</strong> US Quake<br />
<strong>Aon</strong> US Wind<br />
July 2007<br />
Aug 2007<br />
Sept 2007<br />
Oct 2007<br />
Nov 2007<br />
Dec 2007<br />
Jan <strong>2008</strong><br />
Feb <strong>2008</strong><br />
March <strong>2008</strong><br />
April <strong>2008</strong><br />
May <strong>2008</strong><br />
June <strong>2008</strong><br />
It is not surprising that sponsors seeking alternative risk management solutions<br />
have continued to drive ILS growth by initiating transactions that meet their<br />
specific needs. As indemnity structures offer the purest mitigation of sponsors’ risk<br />
portfolios (with lower basis risk than index structures, for example), sponsors often<br />
prefer this structure, even at greater cost.
CATASTROPHE BOND ISSUANCE BY LOSS TRIGGER (Years ending June 30)<br />
Indemnity<br />
Index<br />
Modeled Loss<br />
Multiple<br />
Parametric<br />
Parametric Index<br />
Dual<br />
11%<br />
6%<br />
34%<br />
4%<br />
3%<br />
In the 12-month period ending June 30, <strong>2008</strong>, 47 percent of transactions were on<br />
an indemnity basis, compared to only 26 percent in 2007. At the same time,<br />
parametric index structures grew to represent 25 percent of transactions in <strong>2008</strong>,<br />
up from 17 percent the year before as the market shifted away from industry-based<br />
index structures.<br />
In addition to risk management benefits, ILS transactions also offer sponsors potential<br />
cost savings over alternatives such as traditional reinsurance. While sponsors have<br />
benefited from these advantages, there are many others who have yet to do so. Of the<br />
top 15 property and casualty insurers in the United States based on 1997 revenue, only<br />
eight sponsored at least one cat bond during the last 10 years. In addition, while there<br />
are over $15 billion of catastrophe bonds currently on-risk, this represents only a small<br />
fraction of total catastrophe protection purchased worldwide. As costs for competing<br />
risk management techniques fluctuate, expect increased issuance from both new and<br />
experienced sponsors. Clearly, the ILS market has enormous growth potential.<br />
Increasingly sophisticated analytics may also contribute to higher volumes. Advanced<br />
modeling techniques will help sponsors and intermediaries structure more transparent<br />
programs, reduce basis risk, or potentially both. Investors will benefit from a clearer<br />
understanding of the underlying risks. Some hedge fund managers are leading this<br />
trend by investing in the development of their own models, as well as applying vendor<br />
models using their own assumptions.<br />
Competition among the three leading catastrophe modeling companies—AIR<br />
Worldwide, EQECAT Inc., and Risk Management Solutions—will also drive innovation,<br />
advancing the level of analytical sophistication, potentially adding new perils to those<br />
securitized today and consequently creating new market opportunities. To the benefit<br />
of all companies, some investors and sponsors are employing multiple models and<br />
comparing results to provide additional data. Each of the three vendors has introduced<br />
new catastrophe bond models, allowing investors to gain multi-model perspective on<br />
new issues.<br />
26%<br />
17%<br />
14%<br />
4%<br />
4%<br />
25%<br />
4%<br />
2007 <strong>2008</strong><br />
<strong>Aon</strong> Capital Markets<br />
47%<br />
9<br />
Indemnity<br />
Index<br />
Modeled Loss<br />
Multiple<br />
Parametric<br />
Parametric Index
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
10<br />
A Bright Future<br />
As in any cyclical market, investors have had their turn at driving structural terms<br />
and pricing. The <strong>2008</strong> cat bonds featured sponsors’ preference for indemnity<br />
coverage and tighter risk premiums. Meteorological and seismic changes aside, new<br />
structures, perils and markets will drive growth. Capital market investors do not<br />
appear to have reached their capacity for investing in ILS. Aided by lower cat bond<br />
costs, enhanced analytics and a growing market appetite for risk management, the<br />
ILS market is poised for continued strength.
New Insight into Catastrophe Bond<br />
Market Returns<br />
<strong>Aon</strong> Capital Markets launches <strong>Aon</strong> Cat Bond Indices<br />
Whether the result of recent economic conditions, rising public interest in the capital<br />
markets or the growing volume of assets under management globally, investment<br />
returns face more scrutiny in all sectors of the capital markets. The ILS industry’s<br />
concentrated but increasingly active investor base is no exception to this general<br />
observation. To meet the needs of ILS investors and observers, <strong>Aon</strong> Capital Markets<br />
is pleased to introduce the <strong>Aon</strong> Cat Bond Indices, which provides valuable ILS<br />
performance data.<br />
The Indices represent, on a sector-by-sector basis, what an investor would have<br />
achieved by allocating a weighted amount of capital to each cat bond available in<br />
the market. We use the indicative bids published monthly by <strong>Aon</strong> Capital Markets<br />
to define the market and form the basis for the total return calculations. Indicative<br />
bids are derived through <strong>Aon</strong> Capital Markets’ trading experience, combined with<br />
the results of a proprietary model that presents market dynamics and seasonality<br />
on a category-by-category basis. <strong>Aon</strong> Cat Bond Indices’ sectors follow conventional<br />
market segments: Asia Pacific, Europe, Multi-peril, North American Earthquake, and<br />
North American Wind. We also segment the market between investment-grade and<br />
non-investment-grade given the disparity of returns for each of these markets.<br />
<strong>Aon</strong> Capital Markets calculates each group of indices by adding the following<br />
components:<br />
• Mark-to-market change for each cat bond<br />
• Coupon returns for each cat bond<br />
• LIBOR returns for the period<br />
<strong>Aon</strong> Capital Markets<br />
The Indices present the performance of all outstanding catastrophe bonds on a<br />
mark-to-market basis. Each security’s contribution to the total return for the sector<br />
is weighted by issue size and number of days on-risk. For example, an ILS that has<br />
been on-risk only half the quarter will not contribute the same weighted return as<br />
an identical issue that was on-risk for the entire quarter.<br />
11
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
12<br />
The Results<br />
AON CAT BOND INDICES (June 30, <strong>2008</strong>)<br />
Twelve Months Ended Six Months Ended<br />
CAT BOND SECTOR 6/30/<strong>2008</strong> 6/30/2007 6/30/<strong>2008</strong> 6/30/2007<br />
Asia Pacific 8.07% 10.51% 3.02% 5.64%<br />
Europe 9.09% 11.35% 3.87% 7.46%<br />
Multi-peril 9.91% 18.80% 3.07% 8.86%<br />
NA Earthquake 9.37% 11.01% 3.95% 6.28%<br />
NA Wind 11.87% 17.68% 3.20% 7.45%<br />
Investment Grade 3.85% 7.61% 0.08% 4.40%<br />
Non-Investment Grade 11.69% 15.33% 4.12% 7.64%<br />
ALL CAT BOND SECTORS 10.07% 14.51% 3.32% 7.29%<br />
BENCHMARKS<br />
3-5 Year US Treasury Notes 10.67% 5.39% 2.28% 1.54%<br />
3 Year US Corporate BB+ 6.46% 6.71% 3.96% 2.69%<br />
S&P 500 -14.04% 20.59% -11.91% 7.07%<br />
As a whole, catastrophe bonds provided a total return of 10.07 percent for the year<br />
ending June 30, <strong>2008</strong>, down from 14.51 percent in the previous year. The prior<br />
period represented the highest returns on record, thanks to a near tripling of cat<br />
bond issuance in 2006 at substantially wider spreads.<br />
Evaluating each sector individually, the Indices’ returns for the <strong>2008</strong> period were<br />
lower in all cases than those observed in the 2007 period. These lower returns can<br />
be attributed to a combination of factors:<br />
• A softening reinsurance market. The lower cost of transferring risk in the<br />
traditional market directly influences costs in the cat bond market.<br />
• More investor money flowing into the sector. This has driven down returns<br />
on new issues. <strong>Aon</strong> Capital Markets has experienced an increase in<br />
investors’ order sizes. This, combined with the opening of several new<br />
funds, has added capital to the market.<br />
• The absence of major catastrophes resulting in large insured losses. The<br />
12-month period ending June 30, <strong>2008</strong> represents the second consecutive<br />
year without a major loss to the reinsurance industry. Historically, the<br />
absence of these events has reduced both reinsurance costs and ILS returns.
AON CAT BOND INDICES BY SECTOR (Years ending June 30)<br />
20.00%<br />
18.00%<br />
16.00%<br />
14.00%<br />
12.00%<br />
10.00%<br />
8.00%<br />
6.00%<br />
4.00%<br />
2.00%<br />
0.00%<br />
Asia Pacific<br />
Asia/Pacific<br />
2005<br />
NA Earthquake<br />
Europe<br />
2006<br />
Europe<br />
Multi-peril<br />
2007<br />
NA Earthquake NA Wind<br />
<strong>2008</strong><br />
Multi-peril<br />
NA Wind All ILS Sectors<br />
<strong>Aon</strong> Capital Markets<br />
In the recent period, <strong>Aon</strong> Cat Bond Indices were greatest for North American Wind<br />
structures, followed by Multi-peril, North American Earthquake, Europe and Asia<br />
Pacific respectively. The returns follow the relationship between expected losses<br />
and rates in the insurance industry as a whole—naturally, one demands greater<br />
compensation for assuming the risk of larger or more probable insured losses. In<br />
the latest 12-month period, the multi-peril issuances were impacted by an increased<br />
supply of multi-peril bonds, which led secondary market prices down.<br />
Interestingly, issuance in <strong>2008</strong> exhibited a weighted average expected loss of 1.50<br />
percent, as compared to 1.35 percent in 2007. Further, the number of tranches issued<br />
with expected loss less than 2 percent in the twelve months ended June 30, <strong>2008</strong><br />
declined to 57 percent from 69 percent in 2007. As the Indices demonstrate, returns<br />
declined between these two periods despite an increase in average expected loss.<br />
Although the reasons behind this unexpected result remain anecdotal, it seems the<br />
effects of a softening reinsurance market and more demand for cat bond investments<br />
outweighed investors’ need for greater return with increasing risk.<br />
Structural innovation can increase returns as investors require a premium to<br />
compensate for additional analysis and a perceived increase in risk. Investors<br />
reacted to cat bond innovation in the past year with discipline, which moderated<br />
the otherwise expected volatility.<br />
One such transaction—Newton Re <strong>2008</strong>—succeeded as investors were willing to<br />
accept the sponsor’s analysis in exchange for additional transparency throughout the<br />
process and ongoing validation by a modeling firm. Despite investors’ clear preference<br />
for the use of an independent modeling firm, innovation combined with market<br />
discipline in the form of transparency and structure can be expected to continue.<br />
13
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
14<br />
AON CAT BOND INDICES VERSUS MARKET RATES (Years ending June 30)<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
-5%<br />
-10%<br />
-15%<br />
2005<br />
ALL ILS SECTORS<br />
2006<br />
2007<br />
3-5 Year US Treasury Notes<br />
S&P 500 3 Year US Corporate BB+<br />
<strong>2008</strong><br />
Over the past few years, cat bond performance compares favorably to other financial<br />
benchmarks. The recent 12-month period has also exemplified the uncorrelated<br />
nature of cat bond risks, as they provided solid growth in contrast to the credit-driven<br />
correction experienced by the equity markets. The <strong>Aon</strong> Cat Bond Indices’ returns<br />
have also generally exceeded those offered by corporate and Treasury bonds.<br />
Investors can anticipate a combination of variables to affect the <strong>Aon</strong> Cat Bond<br />
Indices. Prevailing reinsurance rates will play a key role, as sponsors consider the<br />
economics of reinsurance compared to cat bond issuance. <strong>Aon</strong> Re Global expects<br />
U.S. personal property reinsurance rates to decrease between 5 and 20 percent<br />
in the next year, assuming light meteorological and seismic activity. Outside the<br />
United States, <strong>Aon</strong> Re Global expects year-over-year decreases of up to 15 percent.<br />
Of course, a significant loss event would moderate that decline, or potentially<br />
increase rates for January 1, 2009 renewals.<br />
<strong>Aon</strong> Capital Markets publishes its <strong>Aon</strong> Cat Bond Indices on a quarterly basis. For<br />
updates, please visit www.aon.com.
Indemnity Triggers Reach New Heights<br />
Evolving triggers for U.S. perils offer advantages<br />
Market Trends<br />
Prior to 2005, one could characterize the cat bond market as primarily opportunistic<br />
for both sponsors and investors. During difficult markets when traditional reinsurance<br />
capacity was tight and rates high, sponsors utilized the ILS market for competing<br />
coverage while investors eagerly put capital to work at attractive returns. However,<br />
when reinsurance markets softened and rates declined, so did investors’ appetite for<br />
insurance risk. During the last 18 months, however, the capital markets have become<br />
a more stable source of capacity for risk transfer throughout the reinsurance cycle.<br />
Rise Of Indemnity<br />
CATASTROPHE BOND ISSUANCE VERSUS PERCENT INDEMNITY (Years ending June 30)<br />
8,000<br />
7,000<br />
6,000<br />
5,000<br />
4,000<br />
3,000<br />
2,000<br />
1,000<br />
0<br />
1,071 985 986<br />
2001<br />
2002<br />
2003<br />
Cat Bonds<br />
1,558<br />
2004<br />
1,137<br />
2005<br />
3,124<br />
2006<br />
7,003<br />
2007<br />
% Indemnity Issued<br />
5,815<br />
<strong>2008</strong><br />
<strong>Aon</strong> Capital Markets<br />
Since the beginning of 2006, indemnity issuance has risen considerably. Indemnity<br />
issuance totaled $1.79 billion during the 12-month period ending June 30, 2007, and<br />
$2.75 billion during the following 12 months. By comparison, indemnity triggers<br />
represented just 25 percent of issuance from 1996 to 2006. While overall indemnity<br />
issuance has grown, transaction sizes have increased as well. In 2007, <strong>Aon</strong> Capital<br />
Markets completed a $1.18 billion for Merna Reinsurance Ltd., representing the<br />
largest-ever indemnity transaction. Finally, the breadth of issuance has also increased<br />
to include new perils such as winter storm and wildfire.<br />
50%<br />
45%<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
15
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
16<br />
While sponsor demand for the structure has always been strong, investors previously<br />
tempered the use of indemnity through higher risk premiums. However, investors have<br />
gained valuable experience in this market and many have expanded their modeling<br />
and analytic capabilities, increasing their acceptance of indemnity triggers. Many<br />
investors have developed internal modeling teams and currently license one or more<br />
catastrophe models. Additionally, modeling firms have released specific catastrophe<br />
trading models that investors are beginning to implement. Finally, many investors<br />
are evaluating new transactions using a multi-model approach, similar to traditional<br />
reinsurance markets.<br />
This increased acceptance, combined with the emergence of sophisticated sponsors<br />
willing to make significant disclosures regarding their claims payment practices,<br />
has improved the pricing and capacity gap between indemnity and non-indemnity<br />
transactions and sparked significant growth in indemnity securitizations.<br />
It is also important to note that investors showed a preference for transactions which<br />
featured quality underwriting, independent third-party modeling, and straightforward<br />
structures. Some recent transactions tested the market’s acceptance of different<br />
modeling approaches. One transaction, which relied on a proprietary internal model,<br />
was cancelled due to a lack of investor interest.<br />
Pros And Cons Of Indemnity Triggers<br />
Similar to other forms of securitization and reinsurance, indemnity triggers have<br />
a number of advantages and disadvantages. A complete understanding is vital to<br />
determining if it is the proper trigger for each sponsor.<br />
The primary benefit of an indemnity trigger is simple: payments are based on a<br />
sponsor’s actual losses, consequently reducing basis risk for the sponsor as compared<br />
to a non-indemnity structure (such as parametric or index structures). Additionally,<br />
as a risk transfer solution, indemnity cat bonds receive reinsurance accounting<br />
treatment with losses and recoveries accounted for as part of underwriting results.<br />
That said, indemnity triggers do have some drawbacks compared to non-indemnity<br />
triggers:<br />
• Higher risk premium. Due to additional uncertainties such as the ongoing<br />
management and underwriting policies of the sponsor, investors typically<br />
require a higher risk premium from indemnity bonds.<br />
• Complexity. Indemnity transactions are typically more complex to<br />
structure, which results in higher fractional costs, greater demand on<br />
sponsor resources, and an increased time to market.<br />
• More disclosure. Indemnity triggers also require increased sponsor<br />
disclosure, including current and historical policy and exposure<br />
information, underwriting and claims practices, risk management<br />
strategies, and relevant loss history.
• Longer recovery. Since indemnity recoveries are based on actual sponsor<br />
losses, their recovery time depends on loss development, which lengthens<br />
recovery time relative to non-indemnity transactions. This not only delays<br />
sponsor recovery, but can also lead to longer extension periods for the<br />
bonds supporting the recovery.<br />
• Residual basis risk. Indemnity solutions (capital markets or traditional<br />
reinsurance) can never fully eliminate basis risk. Some elements of loss,<br />
such as loss adjustment expense, are typically included as a nominal<br />
adjustment factor. In similar fashion, sponsors use nominal adjustment<br />
factors to cover some exposures that are difficult to model or are not<br />
included in the catastrophe models (such as auto physical damage,<br />
demolition and debris removal, etc). While sponsors typically select<br />
adjustment factors that mimic their historical loss experience, a small<br />
amount of basis risk remains in the structure due to the estimation of the<br />
factors themselves.<br />
Impact Of Principal Loss<br />
Market experts acknowledge that the insured losses associated with Hurricane<br />
Katrina will cause a further principal loss for investors of KAMP RE 2005 Ltd. bonds.<br />
While this will substantiate the effectiveness of the indemnity recovery mechanism<br />
for the sponsor, it has also spurred investor concerns over potential loss of capital.<br />
This loss and difficult market conditions in 2006 contributed to a decrease in<br />
indemnity issuance to just 8 percent of annual issuance.<br />
Following this loss, investors now demand more transparency from each<br />
transaction. Fund managers, institutions, and reinsurers devote more time and<br />
resources to reviewing model accuracy, data quality, underwriting, claims practices,<br />
risk management strategies, and relevant loss history. While this has increased the<br />
time and resources required of investors and sponsors, it has also created a more<br />
transparent and efficient market. The increase in indemnity issuance during 2007<br />
and the first half of <strong>2008</strong> can be attributed to both the softer reinsurance market<br />
and this increased transparency.<br />
Role Of Rating Agencies<br />
<strong>Aon</strong> Capital Markets<br />
S&P, Moody’s, Fitch, and A.M. Best have all been involved in rating indemnity<br />
and non-indemnity transactions. The criteria used to rate an indemnity bond<br />
differs from that of non-indemnity and, therefore, rating agencies also must<br />
spend additional time and resources in understanding and rating an indemnity<br />
transaction. While a single rating agency is typically sufficient to complete most<br />
indemnity transactions, some investors require multiple ratings. Consequently,<br />
some of the larger indemnity transactions have engaged multiple rating agencies<br />
to increase the potential investor base.<br />
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<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
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Long-term Outlook<br />
While there are some initiatives underway to standardize catastrophe risk and<br />
ultimately make it tradeable, the intricacies and unique requirements of catastrophe<br />
risk combined with regulatory statutes will continue to support sponsor demand for<br />
indemnity triggers.<br />
Several recent indemnity sponsors have issued bonds via shelf programs that would<br />
facilitate subsequent new issuance. Use of these programs will fuel the growth on a<br />
year-over-year basis.<br />
Further, many of the recent trends should continue to grow in importance. As<br />
investors gain more experience, insight, and knowledge, they will evaluate each<br />
transaction with greater sophistication. As new sponsors and structures come<br />
to market, investors will continue to rely on existing models for accurate risk<br />
assessment. As these sponsors become more diverse and structures become more<br />
complex, investors will increase their use of multiple models. Finally, as the range<br />
of perils and geographies increase, investors will pay more attention to event and<br />
peril correlations. For sponsors, all of these trends suggest that investor demand<br />
for straightforward transactions with quality underwriting and established thirdparty<br />
modeling will continue to be strong, ultimately leading to an increase in<br />
available capacity.
The Buy Side<br />
A review of the ILS investor base<br />
Growth in the ILS market reflects the efforts of both transaction sponsors and<br />
investors. Sponsors are insurers and reinsurers seeking to transfer a predefined risk to<br />
the capital markets. The investors on the other side of the transaction who assume<br />
that risk, however, are not as easily classified. They are a diverse group and are often<br />
motivated by differing objectives.<br />
Catastrophe bonds are the most prevalent insurance-linked security and offer the<br />
most complete picture of the diversity of ILS investors.<br />
Segmenting The Cat Bond Investor Market<br />
INVESTOR BY TYPE<br />
Cat Fund<br />
Institutional Investor<br />
Reinsurer<br />
Hedge Fund<br />
Mutual Fund<br />
21%<br />
33%<br />
7% 3%<br />
The largest players in this market are the cat funds, a type of investment fund<br />
(including those belonging to corporations) that specializes in collateralized insurance<br />
coverage. Cat funds, which make up 36 percent of the market, have grown steadily<br />
since the advent of catastrophe bonds, and have become increasingly sophisticated. In<br />
conjunction with using established statistical models, many cat fund managers develop<br />
and invest in proprietary models, quantifying their risk as accurately as possible. Cat<br />
funds are driven by returns as well as portfolio diversification. Given this, they seek<br />
investments with a variety of risk characteristics, diversifying as much as possible in a<br />
market with a limited number of perils.<br />
Institutional investors currently comprise 33 percent of the market. They have<br />
robust risk management processes that seek diversification across their portfolio of<br />
cat bond investments. However, because they have substantial capital invested in all<br />
parts of the fixed income market, institutional investors systematically analyze and<br />
monitor portfolio concentrations, managing diversification among cat bonds as well<br />
as the overall correlation among each class of investments. Catastrophe bonds’ lack<br />
of correlation with respect to credit risk and interest rate risk generally makes them<br />
attractive to institutional investors. As discussed earlier, this lack of correlation with<br />
ILS performance is notable during the recent U.S. credit crisis.<br />
36%<br />
<strong>Aon</strong> Capital Markets<br />
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<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
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Reinsurers comprise 21 percent of the investor community today, and play an<br />
interesting role in the market. In addition to sponsoring transactions, some reinsurers<br />
also manage funds that invest in securities originated by themselves or by other<br />
sponsors. They may also accept risks either through reinsurance or investing in the<br />
ILS market. As an expert participant in the risk management and trading markets,<br />
reinsurers constantly strive to balance their risk portfolio. At the same time, they use<br />
their expertise in the market to maximize returns by buying and selling risk.<br />
Hedge funds and mutual funds, at 7 and 3 percent of the market, respectively, are<br />
similar to cat funds in specifically dedicating capital to catastrophe risk investments.<br />
Of course, hedge funds and mutual funds also participate in other markets,<br />
including equity and debt instruments. Although focused on managing risk and<br />
achieving diversification, these funds are primarily interested in meeting a high<br />
return threshold. In the current market, this causes some hedge funds to reserve<br />
capital for the future when returns may be higher.<br />
Despite the relatively few categories of catastrophe bond investors, no single<br />
group exerts disproportionate influence over the price or success of a particular<br />
transaction. At current volume levels, the market has proven efficient, at least<br />
from a theoretical perspective. This efficiency can be attributed to sponsors having<br />
alternative structures with which to manage risk and access capital, and investors<br />
having alternative uses of capital that offer different risk/return profiles. These<br />
alternatives can include traditional reinsurance and industry loss warranties (ILWs).<br />
A Geographic Overview<br />
INVESTOR BY COUNTRY<br />
US<br />
Bermuda<br />
UK<br />
Switzerland<br />
France<br />
Canada<br />
Australia<br />
Germany<br />
Italy<br />
12%<br />
12%<br />
2%<br />
4%<br />
19%<br />
1%<br />
1%<br />
The ILS Market: Beyond Cat Bonds<br />
Aside from catastrophe bonds, the ILS market includes other instruments that<br />
appeal to specific investors. ILWs and private collateralized reinsurance layers, for<br />
example, appeal to hedge funds, cat funds and reinsurers. These investors use ILWs<br />
on a smaller scale—typically $10 billion to $25 billion—both purchasing coverage<br />
and selling positions for risk management purposes. These instruments offer returns<br />
that are driven by typical market forces and can diversify an existing portfolio.<br />
Sidecars and other newly formed reinsurance companies are of interest to private<br />
equity investors as well as hedge funds, offering them the opportunity to participate<br />
in the insurance and risk-transfer markets. Naturally, they are most popular when the<br />
cost of risk (i.e., insurance) is highest.<br />
Finally, a relatively new method of participating in the ILS market has evolved from<br />
the derivatives market. In swap, option, and futures forms, synthetic risk-transfer<br />
instruments are evolving to use standardized documentation and, in some cases, can<br />
be traded among market participants. Participants to date include hedge funds as<br />
well as reinsurers that buy and sell derivatives as part of a risk management strategy.<br />
Speculators with an interest in taking certain risk positions for a potential return also<br />
participate in this market. The use of derivatives in the ILS market will increase as<br />
participants gain knowledge and comfort with the structures. The resulting increase<br />
in liquidity should accelerate derivatives’ growth as well.<br />
Correlation And Credit Markets<br />
As they build portfolios to achieve the greatest return for a given level of risk,<br />
investors seek assets with low correlation to other investments. As discussed in<br />
the first section of this report, it is important to emphasize the lack of correlation<br />
between insurance-linked securities and other fixed income investments. The benefit<br />
of this low correlation has been underscored during the recent credit crisis.<br />
If You Don’t Like The Weather…<br />
<strong>Aon</strong> Capital Markets<br />
The impressive growth of the ILS market has relied in part on the sophisticated<br />
analysis that illuminates risk and rewards for market participants. ILS investors and<br />
sponsors have benefited from increasingly sophisticated analytics, using them to<br />
develop structures, gain understanding, and make well-reasoned investment and<br />
risk management decisions.<br />
That said, as the traditional insurance market has demonstrated, demand for risk<br />
transfer tends to have a direct relationship with the frequency of perils that define<br />
each instrument. The market’s response to future catastrophes will continue to<br />
influence ILS supply and demand.<br />
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22<br />
Contingent Capital: Poised for a Comeback<br />
Conditions favor the inclusion of this diversifying solution<br />
As enterprise risk management becomes more prominent, insurers are actively managing<br />
the accumulation of correlated exposures while maintaining financial flexibility and the<br />
ability to withstand multiple catastrophes in a single period. However, given the relatively<br />
benign wind seasons in the United States since 2006, coupled with the fact that many<br />
recent catastrophes have resulted in little insured loss, many companies find themselves<br />
in a strong capital position. These companies may find this an ideal time to implement a<br />
contingent capital program.<br />
External forces are also pointing to an increased use of contingent capital, as regulators<br />
and rating agencies focus on risk mitigation and capital adequacy at much more remote<br />
return periods. This, combined with the changes made to the catastrophe models<br />
since Hurricane Katrina, has resulted in greater capital requirements and a need for<br />
more comprehensive capital solutions. These trends have sparked greater interest in<br />
insurance-linked capital market solutions.<br />
Structural changes to the form and source of contingent capital, including the expansion<br />
of trigger options, may make this solution more attractive to all counterparties.<br />
The Capital Conundrum: A Balancing Act<br />
Capital preservation is fundamental to protecting policyholders and providing adequate<br />
returns to shareholders. Management teams grapple with how best to maintain a<br />
strong balance sheet and provide adequate returns to shareholders while retaining<br />
financial flexibility.<br />
In a favorable balance sheet environment, corporate boards often consider returning excess<br />
capital to shareholders by repurchasing stock. Today’s low price-to-book multiples heighten<br />
the attractiveness of this option. Repurchases, however, ultimately weaken the balance sheet<br />
and expose the company to distress after a large event, when recapitalization may be more<br />
costly and difficult.<br />
Post-event flexibility is paramount; it is the time when companies take advantage<br />
of a hardening market to recoup losses and refortify the balance sheet. Risk transfer<br />
solutions, such as traditional reinsurance, provide protection from extreme losses and<br />
aim to prevent surplus erosion, but do not explicitly provide post-event flexibility.
Just-in-Case Capital<br />
As a prearranged facility, contingent capital allows companies to obtain a capital<br />
infusion at a time when it is most needed and potentially hardest to come by. Unlike<br />
reinsurance, contingent capital is not a risk transfer product—it is a balance sheet<br />
recovery mechanism. A comprehensive capital management program comprised<br />
of various forms of protection best positions companies to take advantage of<br />
post-event market dislocation. Given the possibility of default caused by industry<br />
wide catastrophic events, contingent capital can also diversify or eliminate credit<br />
risk through collateralization.<br />
The capital can take several forms:<br />
• Contingent surplus notes. Surplus notes have historically been used as a<br />
source of balance sheet enhancement since, under U.S statutory accounting,<br />
they serve to increase capital and assets without adding liabilities.<br />
• Subordinated debt. Contingent debt is a financing arrangement in which<br />
a bank or other lender agrees to provide a loan to a company after a predefined<br />
trigger event.<br />
• Catastrophe Equity Put (CatEPut ® ). CatEPut ® is a contingent capital solution<br />
introduced by <strong>Aon</strong> Capital Markets in 1994. It allows a company to increase<br />
capital by issuing common or preferred equity after a catastrophe. The<br />
structure can guarantee the equity issuance price, allowing the company<br />
to know exactly how much capital can be raised. This eliminates pricing<br />
risk, as stock prices typically decline after a large loss, making a reactionary<br />
secondary issuance more difficult.<br />
Historical Issuance: A Look Back Points The Way Forward<br />
<strong>Aon</strong> Capital Markets<br />
Contingent capital enjoyed a strong 11-year run from 1994 to 2004. <strong>Aon</strong> Capital<br />
Markets brought the first industry CatEPut ® solution to market in 1994: $500<br />
million on behalf of the Hawaii Hurricane Relief Fund. Including this breakthrough<br />
transaction, over 40 contingent capital transactions have been structured, providing<br />
over $11 billion in standby capital.<br />
In the wake of September 11, 2001, the industry began seeking new, less expensive<br />
risk mitigation alternatives and contingent capital issuance waned. The need for<br />
hard capital, as opposed to the standby variety, steered this shift. The industry<br />
recapitalization post-September 11 (approximately $8.3 billion) was predominantly in<br />
the form of new start-up companies, the majority of which were based in Bermuda.<br />
Following the devastating storm seasons of 2004 and 2005, reinsurance sidecars<br />
emerged as a recapitalization response of choice. These vehicles allow investors to<br />
take on the risks (and share in the returns) of a book of business written by an insurer<br />
or reinsurer. They add capacity when most needed and take advantage of a postevent<br />
hardening market.<br />
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<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
24<br />
Structural Considerations For Future Issuance<br />
A company’s decision to issue contingent capital depends on its ability to support<br />
additional leverage, generate liquidity for repayment and issue new equity. The<br />
differing tax treatment of debt and equity is also a consideration.<br />
Historically, contingent capital structures contained accounting-type triggers.<br />
Taking the lead from catastrophe bonds, it is reasonable to expect that various<br />
triggers or trigger combinations will be used to structure future contingent capital<br />
transactions. Given the opportunities that traditionally accompany post-event<br />
market dislocation, companies with access to capital following an event stand to<br />
benefit more than their capital-constrained peers.<br />
As the use of non-indemnity triggers becomes more commonplace in the cat bond<br />
market, investors are becoming more comfortable with their use and execution.<br />
Non-indemnity transactions usually get to market much faster than indemnity<br />
transactions, and the associated costs and disclosure requirements are much lower.<br />
The same can be said for a contingent capital deal, which could be structured like<br />
a cat bond/line of credit/ILW hybrid. The introduction of new trigger mechanisms<br />
into the contingent capital market would open the doors to new investors seeking<br />
diversification while creating price benefits for sponsors.<br />
For a company electing a contingent equity structure (such as a CatEPut ® ), certain<br />
structural innovations should be considered to improve investor demand and make<br />
the product more efficient for sponsors.<br />
• Legal form of pass-through trust. CatEPut ® arrangements use a special<br />
purpose entity established under Bermuda or Cayman Islands law to<br />
maximize tax efficiency.<br />
• Preferred versus common stock. The issuance of common shares dilutes<br />
voting rights, while the use of preferred shares maintains voting rights<br />
and provides a more attractive dividend to the investor. Preferred<br />
shares could be convertible to common at a predetermined ratio after a<br />
requisite holding period of three to four years. By structuring a CatEPut ®<br />
using convertible preferred equity, dilution can be delayed, giving a<br />
company time to recover from the catastrophe loss by seizing post-event<br />
market opportunities. This allows the company to plan for the preferred<br />
conversion in an orderly fashion, or indeed avoid conversion (and the<br />
resulting dilution) altogether through a repurchase of the preferred<br />
shares (see “Repurchase Agreement” below). Dividends on preferred<br />
shares issued through a CatEPut ® will be dictated by the market and will<br />
reflect the rate paid by similar hybrid instruments.<br />
• Speed of execution. Speed of post-event recapitalization is vital to<br />
maintaining business continuity and exploiting market conditions.<br />
Unfortunately, providing subscription rights to current shareholders bogs<br />
down the recapitalization process. By excluding preemptive subscription<br />
rights via shareholder resolution (coupled with a pre-subscription<br />
agreement with new investors), a contingent capital agreement can be<br />
executed quickly.
<strong>Aon</strong> Capital Markets<br />
• Repurchase agreement. In the market that typically follows a large<br />
industry event, a company may see its balance sheet reconstituted<br />
quickly and, therefore, desire to buy back the preferred shares issued<br />
through the CatEPut ® arrangement. In these instances, the repurchase<br />
price can be tied to the company’s common stock price on a formula<br />
and limited to a percentage of registered share capital.<br />
• Registration of securities. In order for the investor to have an ultimate<br />
“exit strategy,” the company generally must grant the investor certain<br />
opportunities to demand registration and listing of the contingent<br />
capital securities.<br />
Increased Capital Requirements Compel Changes To Capital Solutions<br />
Pressure on financial strength ratings and increased attention by regulators has resulted<br />
in changes to capital models as well as risk mitigation programs that underscore the<br />
benefits of contingent capital programs. As regulators and rating agencies struggle to<br />
keep pace with the changing global landscape, their views on what comprises sound<br />
risk management and adequate capitalization continue to evolve.<br />
After Hurricane Katrina, A.M. Best made many changes to its Best’s Capital<br />
Adequacy Ratio (BCAR) model to require more capital under their two-event<br />
scenario. More significantly, A.M. Best explicitly stated that post-event financial<br />
flexibility concerned them. In March <strong>2008</strong>, A.M. Best announced plans to include<br />
a terrorism Probable Maximum Loss (PML) in the calculation of stressed BCAR, as<br />
opposed to performing a separate test as in prior years.<br />
In November 2006, Standard & Poor’s overhauled their capital adequacy model<br />
and released the final details of their new Enhanced Capital Model in May 2007.<br />
The changes to their capital requirements contemplated the historical volatility in<br />
the industry, resulting in a $45 billion decline in the industry’s capital adequacy.<br />
Rating agency capital models have their roots in the National Association of<br />
<strong>Insurance</strong> Commissioner’s (NAIC) Risk Based Capital (RBC) model. Historically,<br />
this model has not included an explicit charge for catastrophe risk. However, in<br />
March <strong>2008</strong>, the NAIC released a draft proposal for a new RBC charge for property<br />
catastrophe risk. The NAIC specifically created the charge to address its increasing<br />
concern over post-event capital levels and, while still in its comment period, the<br />
change contemplates the inclusion of a 1-in-250 year PML for both hurricane and<br />
earthquake risks.<br />
The losses incurred for the 2004 and 2005 hurricane events in the United States<br />
were underestimated by the major vendor firms’ models available at that time.<br />
Since then, the modeling firms made significant investments to refine model<br />
performance and provide more precise estimates of future losses. However,<br />
even with these substantial changes, regulators and rating agencies continue to<br />
encourage companies to use more than modeled PMLs to assess exposures. In their<br />
view, a thorough assessment of exposures and the design of a comprehensive risk<br />
management plan employs not only the models per se, but also the models used<br />
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<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
26<br />
in conjunction with other analyses and metrics. To that end, Tail Value at Risk, or<br />
TVaR, has emerged as a complementary metric to assess exposures. TVaR, which<br />
considers all possible extreme events, is a function of the slope of the exceedance<br />
probability curve, fostering a more conservative approach that would increase<br />
capital requirements.<br />
Contingent Capital Reemerges<br />
The major rating agencies (A.M. Best, Standard & Poor’s, Moody’s and Fitch) and<br />
the key insurance regulatory bodies (NAIC in the United States, BMA in Bermuda<br />
and FSA in the United Kingdom) have diverse criteria, with some underlying<br />
commonalities, for the treatment of contingent capital solutions. The amount of<br />
explicit equity credit granted in their respective capital adequacy models fluctuates<br />
and, in some cases, may be capped. Qualitative ratings credit is generally afforded,<br />
as contingent capital is characteristically regarded as a solid risk management tool.<br />
Catastrophe risk management programs are best structured with an optimized<br />
balance of risk transfer products and capital solutions. This diversity can mitigate<br />
a company’s credit risk while providing the greatest comprehensive protection<br />
from extreme loss. In addition, increased capital requirements from regulators and<br />
rating agencies compel management to seek additional sources of capital. However,<br />
favorable treatment of contingent solutions by regulators and rating agencies can<br />
serve to offset these additional capital requirements.<br />
Given current market conditions, we believe that insurers now have an opportunity to<br />
secure contingent capital at favorable terms. As they do, they may find their results are<br />
enhanced by the incorporation of a qualified triggering insurance loss which would<br />
further improve pricing for the sponsor and lower the risk of loss to the investor. They<br />
can also benefit from the addition of new trigger mechanisms and other structural<br />
innovations, which could spur an increase in capacity that creates price benefits for<br />
sponsors. Finally, global marketing to institutional investors through a sophisticated<br />
distribution partner will help elicit the most favorable terms and conditions.
Continued Innovation<br />
Options and futures evolve, but lack liquidity<br />
Innovation in the financial markets has characterized the growth of economies for<br />
a very long time, and its impact on the banking, investing, and insurance industries<br />
is well documented. Indeed, in just the past several years we have witnessed the<br />
development of various forms of options and futures, new methods of risk transfer,<br />
and customized forms of capital. The demand for further customization, combined<br />
with the competitive forces encouraging intermediaries to meet it, have propelled<br />
market players in the United States, Europe, and Asia to foster new ideas. Thanks<br />
to an improved computational resources and increasing analytical sophistication,<br />
innovation in insurance finance continues to be a work in process. The use of options<br />
and futures contracts in the insurance industry is a prime example.<br />
Historic Perspective<br />
<strong>Aon</strong> Capital Markets<br />
In 1992, the Chicago Board of Trade (CBOT) introduced the first insurance derivative<br />
contracts, which were based on the experience of 22 insurers. The futures and<br />
options contracts initially focused on various regions of the United States, offering a<br />
new method to manage catastrophic risk. Due to a lack of historical reference data on<br />
these initial contracts, however, risk-takers avoided them. In response, contract terms<br />
were changed to include well-known metrics such as those compiled by the Property<br />
Claims Service (PCS). Concurrent with this change, contracts became available<br />
based on nine regional U.S. indices (National, Eastern, Northeastern, Southeastern,<br />
Midwestern, Western, California, Florida and Texas).<br />
Rising to a high of over nine million contracts in 1997, volume declined to negligible<br />
levels in subsequent years and the CBOT eventually discontinued trading. These<br />
standardized contracts, available in various combinations, offered more trading<br />
flexibility than ever before, but were unable to sustain ongoing popularity.<br />
Three exchange-traded derivative platforms have been created in the past year, and<br />
deserve review. They are the <strong>Insurance</strong> Futures Exchange, Carvill Hurricane Index,<br />
and Re-Ex.<br />
• The <strong>Insurance</strong> Futures Exchange (IFEX).<br />
Continuing the evolution of insurance derivatives, IFEX launched Event<br />
<strong>Linked</strong> Futures (ELF) last year. IFEX created ELFs as contracts for difference<br />
with full payment triggered once losses exceed pre-specified amounts, unlike<br />
reinsurance policies. ELFs more closely resemble industry loss warranties<br />
(ILW) than options. Unlike ILWs, buyers of ELFs do not have to suffer direct<br />
losses to receive a payment once the industry loss strike amount has been<br />
reached. These industry losses are determined by PCS, which is commonly<br />
used to estimate catastrophe losses in support of index cat bonds.<br />
IFEX currently offers <strong>2008</strong> and 2009 ELF US Tropical Wind First and Second<br />
Event contracts. Trigger levels are at $10 billion, $20 billion, $30 billion, $40<br />
billion and $50 billion of industry losses over a calendar-year risk period.<br />
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<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
28<br />
There is presently a lack of liquidity across this array of contracts. To date,<br />
trading has been limited to the $10 billion and $20 billion contracts and,<br />
even for those contracts, volume has been light. Only 1,104 of the $10<br />
billion <strong>2008</strong> contracts changed hands from its inception in September<br />
through December 2007. From January through June 30, <strong>2008</strong>, only 354<br />
contracts changed hands. IFEX plans to offer other geographies including<br />
Europe and Japan, as well as U.S. catastrophe sub-zones. In fact, contracts<br />
dealing with Florida tropical wind and Gulf Coast tropical wind are currently<br />
under review by the Commodities Futures Trading Commission (CFTC).<br />
IFEX has also created an infrastructure for trading the contracts. All contracts<br />
trade and clear through the Chicago Climate Futures Exchange (CCFE) with<br />
variable margin requirements set by the exchange based on an estimated<br />
daily risk of loss as determined by an outside consultant. The CCFE is<br />
regulated by the CFTC and the National Futures Association.<br />
A simple way to review the economics of these instruments is to compare<br />
prices for ILWs to those of the comparable IFEX contracts. The differences in<br />
indicative prices as of June 30, <strong>2008</strong> demonstrate a potential for arbitrage<br />
between the exchange-traded contracts and the negotiated ILW market.<br />
The accompanying table compares these prices as percentage rates-on-line.<br />
COMPARATIVE PRICING FOR NORTH AMERICAN RISKS (as of June 30, <strong>2008</strong>)<br />
Trigger ILW 1st <strong>2008</strong> Event IFEX 1st 2009 Event IFEX<br />
$10 B N/A 36.85% 37.20%<br />
$20 B 27.50% 26.00% 23.80%<br />
$30 B 18.50% 16.80% 15.55%<br />
$40 B 14.00% 12.90% 11.90%<br />
$50 B 12.00% 10.30% 8.90%<br />
Pricing differences between ILW and IFEX contracts can be attributed to<br />
structural differences between the instruments, the bespoke nature of<br />
ILWs, collateralization, transaction costs, currently low liquidity, and the<br />
comparatively short operating history of IFEX itself. A trader’s view of<br />
these risks would determine the potential profit from an arbitrage trade.<br />
Similarly, an insurer seeking to hedge a particular exposure would need<br />
to weigh the relative risks (including basis risk) with the lower cost of IFEX<br />
futures to determine its applicability and attractiveness.<br />
• Carvill Hurricane Index (CHI).<br />
In addition to ELFs, the market has witnessed the development of CHI,<br />
a numerical measure of the potential for damage from a hurricane and<br />
is based on Carvill’s Hurricane Damage Potential Index. In addition<br />
to incorporating the Saffi-Simpson Hurricane Scale, CHI incorporates<br />
additional factors such as sustained wind speed and the radius of hurricane<br />
force winds. It is a continuous measurement, rather than a discrete scale,<br />
starting from zero and having no maximum value.
<strong>Aon</strong> Capital Markets<br />
CME Group developed three types on contracts for hurricane futures and<br />
options in six defined U.S. areas: Gulf Coast, Florida, Southern Atlantic<br />
Coast, Northern Atlantic Coast, Eastern U.S., and Galveston-Mobile. The<br />
contracts are also listed in terms of numbered events (e.g., first hurricane<br />
of the season to make landfall, second hurricane, etc.). The value of each<br />
future will be 1,000 times the value of the CHI. The contracts trade on the<br />
CME Globex ® system.<br />
According to Carvill, the nominal value of derivatives traded since its<br />
inception has reached nearly $60 million, making the CME derivatives as<br />
successful as IFEX ELFs. With the multiple defined areas available as a basis<br />
for the futures and options, theoretical basis risk is reduced versus ELFs.<br />
• Re-Ex Index.<br />
Gallagher Re, now a part of <strong>Aon</strong> Re Global, launched the Re-Ex Index in<br />
2007. The Re-Ex Index was created by taking Property Claim Services (PCS)<br />
loss damage estimates and dividing by $10 million. For example, if the PCS<br />
estimate totaled $25 billion, the Re-Ex Index would be $2,500. <strong>Aon</strong> adjusts<br />
the underlying PCS data only to eliminate losses related to earthquake and<br />
terrorism. Three indices are offered, including Nationwide, Texas to Maine<br />
(excluding Florida) and Florida itself. The Re-ex index includes losses up to<br />
the end of a calendar year, plus a three-month development period. Thus,<br />
the settlement date for the index is March 31 of each year. Note that the<br />
Re-Ex Index is cumulative over the course of the annual period.<br />
NYMEX offers Cat Risk Index Contracts based on the Re-Ex Index. The<br />
contracts are standardized futures and options with some commercial<br />
terms modeled on ISDA terms. They are financially settled against the<br />
Re-Ex Index by taking the Index value and multiplying by a contract value<br />
of 10. In the example above, if the Re-Ex Index was $2,500 on a settlement<br />
date, contracts would be settled at $25,000. The variety offered by Re-Ex’s<br />
three indices creates the ability to trade contracts specific to one of the<br />
three geographies, or a combination.<br />
The contracts are executed off-exchange in the OTC market, and cleared<br />
through NYMEX’s ClearPort ® system. Unfortunately, volumes to date<br />
have been low and the resulting activity level has not provided sufficient<br />
price information for an analysis of the contracts’ economics. However,<br />
market participants should be encouraged by the development of<br />
the index and associated contracts, as they offer another method for<br />
hedging catastrophe risk. The contracts’ association with well-established<br />
stakeholders such as PCS, NYMEX, and <strong>Aon</strong> also provides them strength<br />
and market acceptability.<br />
NYMEX contracts offer a theoretically lower level of basis risk vis-à-vis<br />
IFEX contracts by virtue of the three specialized geographic indices. The<br />
proposed creation of additional IFEX contracts will temporarily minimize<br />
this advantage until additional specialized contracts can be created by<br />
either player, based on demand.<br />
29
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
30<br />
The Nemesis: Basis Risk<br />
The risk that an insurer or investor would recover less from a hedging product than<br />
their actual event loss has beleaguered insurance derivatives since their inception.<br />
Although traders can be satisfied with less-than-perfect hedges, many insurance and<br />
reinsurance risk managers desire more precise coverage. While a set of nine regional<br />
index contracts is more appealing than a single national index, the diversity does<br />
not go far enough to reduce basis risk for many insurers.<br />
The effectiveness of more specific derivatives has been studied and substantiated<br />
on a state-specific basis. In a recent analysis, Harrington and Hipp compared<br />
individual insurers’ annual loss ratios to state-specific catastrophe loss ratios using<br />
PCS data. They found that “state-specific catastrophe derivatives could be used<br />
effectively to hedge insurers’ aggregate underwriting results across lines and<br />
states.” In these contracts, coverage is afforded to perils in specific states or groups<br />
of states. However, such disaggregation has not yet been developed in derivative<br />
form due to difficulties in developing interest and liquidity.<br />
While the ILS derivatives market has the potential to increase—indeed, create—<br />
efficiencies among those wishing to trade U.S. hurricane risk, the existing contracts<br />
still do not sufficiently address the persistent problem of basis risk. In the case of<br />
IFEX, for example, geography-specific contracts for sub-zones such as Florida and<br />
the Gulf Coast will narrow the gap between an insurer’s risk and its management<br />
needs. For insurers with diverse businesses, a combination of derivatives (including<br />
the new regional contracts) would have to be statistically evaluated to determine if<br />
it presents a risk management alternative to traditional reinsurance or ILWs.<br />
Use Of Derivative Platforms<br />
Market participants, including insurers, investors, and speculators, will respond<br />
positively to derivatives that provide efficient risk transfer. However, efficiency in the<br />
catastrophe derivatives market requires a certain level of liquidity that does not yet<br />
exist. As a complement (and/or competitor) to ILWs, the derivatives market does not<br />
offer sufficient volumes. Consider that one would need to purchase 500 ELF contracts<br />
at $10,000 each to replace one $5 million ILW. This would represent an unwieldy<br />
transaction in today’s market. Until the derivatives market becomes more liquid and<br />
experienced, participants will continue to make use of existing options like traditional<br />
reinsurance, catastrophe bonds and ILWs. These options are more readily available<br />
and proven versus the existing set of derivatives, particularly in a market where<br />
reinsurance exists at an equivalent or near-equivalent cost to newer instruments.
<strong>Aon</strong> Capital Markets<br />
Despite some growing pains, all three derivative platforms have immediate application<br />
for hedging purposes by fund managers investing in catastrophe-related securities or<br />
equities of companies exposed to hurricane risk. They may also have limited use by<br />
insurers who wish to supplement their risk management practices by decreasing their<br />
exposure to U.S. tropical wind through the purchase of derivatives. As noted, basis risk<br />
must be considered and evaluated in these cases. Considering contemporary pricing<br />
indications, the lower cost of options and futures may induce insurers to implement<br />
some derivatives hedging as part of their risk management strategy. Finally, as with<br />
most derivatives, there is certainly potential for investors to take a speculative position<br />
on wind risk.<br />
It is safe to say that the development of derivatives in the insurance sector will<br />
continue, particularly as analytical methods evolve in tandem with the financial<br />
markets. The further development of cost-effective methods that adequately<br />
address basis risk will hasten this evolution. In addition, the occurrence of a<br />
natural event resulting in major loss to the reinsurance industry can be expected<br />
to accelerate the acceptance of such products. Solutions that closely resemble<br />
existing—and accepted—risk management tools will be more rapidly adopted and<br />
incorporated into stakeholders’ risk management strategies.<br />
31
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
32
Appendix I<br />
Catastrophe bond issuance statistics<br />
As of June 30, <strong>2008</strong><br />
<strong>Aon</strong> Capital Markets<br />
33
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
CATASTROPHE BONDS ON-RISK BY YEAR (Years ending June 30)<br />
$MM<br />
16000<br />
14000<br />
12000<br />
10000<br />
8000<br />
6000<br />
4000<br />
2000<br />
0<br />
CATASTROPHE BONDS ON-RISK BY YEAR AND PERIL (Years ending June 30)<br />
Risk capital in each tranche allocated equally to all perils that expose the tranche to any loss of principal<br />
34<br />
2001<br />
2002<br />
2003<br />
2004<br />
2005<br />
2006<br />
2007<br />
<strong>2008</strong><br />
CAT Bonds
CATASTROPHE BOND ISSUANCE BY YEAR (Years ending June 30)<br />
$ MM<br />
8000<br />
7000<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
1000<br />
CATASTROPHE BOND ISSUANCE BY HALF-YEAR<br />
$ MM<br />
0<br />
5000<br />
4500<br />
4000<br />
3500<br />
3000<br />
2500<br />
2000<br />
1500<br />
1000<br />
500<br />
0<br />
1,558<br />
1,071 985 986 1,137<br />
2001<br />
521<br />
1H 05<br />
2002<br />
977<br />
2H 05<br />
2003<br />
2,147<br />
1H 06<br />
2004<br />
2,547<br />
2H 06<br />
2005<br />
4,455<br />
3,124<br />
2006<br />
1H 07<br />
7,003<br />
2007<br />
3,405<br />
2H 07<br />
<strong>Aon</strong> Capital Markets<br />
5,815<br />
<strong>2008</strong><br />
2,410<br />
1H 08<br />
35<br />
CAT Bonds<br />
CAT Bonds
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
CATASTROPHE BOND ISSUANCE BY TRANCHE / DEAL / SPONSOR (Years ending June 30)<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
2002<br />
2003<br />
2004<br />
2005<br />
Tranches Issued Deals Issued<br />
CATASTROPHE BOND ISSUANCE BY YEAR AND PERIL (Years ending June 30)<br />
Risk capital in each tranche allocated equally to all perils that expose the tranche to any loss of principal<br />
36<br />
Notional Limit Issued by Peril<br />
8000<br />
7000<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
1000<br />
0<br />
420 441 301<br />
2001<br />
2002<br />
2003<br />
476<br />
2004<br />
2005<br />
2006<br />
2006<br />
2007<br />
<strong>2008</strong><br />
First Time Sponsors<br />
Hurricane North American Quake Euro Wind Japan Quake Asia Pacific Other<br />
646<br />
1,038<br />
2,328<br />
2007<br />
1,669<br />
<strong>2008</strong><br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0
CATASTROPHE BOND ISSUANCE BY TRIGGER (Years ending June 30)<br />
8,000<br />
7,000<br />
6,000<br />
5,000<br />
4,000<br />
3,000<br />
2,000<br />
1,000<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0<br />
0%<br />
CATASTROPHE BOND ISSUANCE VERSUS PERCENT INDEMNITY (Years ending June 30)<br />
1,071 985 986<br />
2001<br />
2002<br />
2003<br />
Cat Bonds<br />
1,558<br />
2004<br />
1,137<br />
2005<br />
3,124<br />
2006<br />
7,003<br />
2007<br />
% Indemnity Issued<br />
<strong>Aon</strong> Capital Markets<br />
5,815<br />
<strong>2008</strong><br />
50%<br />
45%<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
37
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
CATASTROPHE BOND ISSUANCE BY LOSS TRIGGER (Years ending June 30)<br />
Indemnity<br />
Index<br />
Modeled Loss<br />
Multiple<br />
Parametric<br />
Parametric Index<br />
Dual<br />
11%<br />
6%<br />
34%<br />
4%<br />
3%<br />
26%<br />
17%<br />
4%<br />
4%<br />
25%<br />
4%<br />
2007 <strong>2008</strong><br />
CATASTROPHE BOND ISSUANCE BY ExPECTED LOSS PERCENTAGE (Years ending June 30)<br />
38<br />
>5%<br />
4% to 5%<br />
3% to 4%<br />
2% to 3%<br />
1% to 2%<br />
.5% to 1%<br />
0% to .5%<br />
4%<br />
6%<br />
7%<br />
15%<br />
24%<br />
26%<br />
19%<br />
14%<br />
19%<br />
5%<br />
10%<br />
10%<br />
2007 <strong>2008</strong><br />
19%<br />
14%<br />
47%<br />
24%<br />
Indemnity<br />
Index<br />
Modeled Loss<br />
Multiple<br />
Parametric<br />
Parametric Inde
Appendix II<br />
ILS market transaction summary<br />
As of June 30, <strong>2008</strong><br />
<strong>Aon</strong> Capital Markets<br />
39
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
40<br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
16-Jun-97 USAA Residential Reinsurance I Class A-1 US Gulf/East Coast Wind Indemnity $86,814 Aaa AAA<br />
Class A-2 US Gulf/East Coast Wind Indemnity $313,180 Ba2 BB BB<br />
16-Oct-97 Swiss Re SR Earthquake Fund, Ltd. Class A-1 California EQ Index $25,200 Baa3 BBB-<br />
19-Nov-97<br />
Tokio Marine &<br />
Nichido Fire<br />
Class A-2 California EQ Index $12,000 Baa3 BBB-<br />
Class B California EQ Index $60,300 Ba1 BB<br />
Class C California EQ Index $14,700 Ba3 B<br />
Parametric Re Ltd. Japan EQ Parametric $80,000 Ba2<br />
3-Mar-98 Zurich Group Trinity Re Ltd. Class A-1 Florida Wind Indemnity $10,467 Aaa AAA<br />
Class A-2 Florida Wind Indemnity $61,533 Ba3 BB<br />
16-Jun-98 USAA Residential Reinsurance II US Gulf/East Coast Wind Indemnity $450,000 Ba2 BB BB<br />
16-Jun-98 Yasuda Pacific Re, Ltd. Japan Wind Indemnity $80,000 Ba3 BB-<br />
17-Jul-98 USF&G Mosaic Re Ltd. Class A US (Wind, EQ, ST) Indemnity $15,000<br />
Class B US (Wind, EQ, ST) Indemnity $21,000<br />
21-Dec-98 Centre Solutions Trinity Re 1999, Ltd. Class A-1 Florida Wind Indemnity $2,385 Aaa AAA<br />
Class A-2 Florida Wind Indemnity $51,615 Ba3 BB<br />
2-Feb-99 USF&G Mosaic Re II, Ltd. Class A US (Wind, EQ, ST) Indemnity $25,000<br />
Class B US (Wind, EQ, ST) Indemnity $20,000<br />
25-Mar-99 Kemper Domestic, Inc. New Madrid EQ Indemnity $80,000 Ba2 BB+<br />
15-Apr-99 Sorema SA Halyard Re B.V. (Yr 1) EU/JP Wind, JP EQ Indemnity $17,000<br />
12-May-99 Oriental Land Concentric, Ltd. Japan EQ Parametric $100,000 Ba1 BB+<br />
1-Jun-99 USAA Residential Reinsurance III US Gulf/East Coast Wind Indemnity $200,000 Ba2 BB<br />
24-Jun-99 Gerling Juno Re, Ltd. US Wind Indemnity $80,000 BB BB+<br />
23-Nov-99 American Re Gold Eagle Capital Limited Class A US Wind, US EQ Modeled Loss $50,000 Baa3 BBB-<br />
Class B US Wind, US EQ Modeled Loss $126,600 Ba2 BB<br />
23-Nov-99 Gerling Namazu Re, Ltd. Japan EQ Modeled Loss $100,000 BB<br />
3-Mar-00 Lehman Re Seismic Limited California EQ Index $145,500 Ba2 BB+<br />
10-Mar-00 SCOR Atlas Reinsurance p.l.c. Class A Europe Wind. CA/JP EQ Indemnity $70,000 BBB+ BBB+<br />
Class B Europe Wind. CA/JP EQ Indemnity $30,000 BBB- BBB-<br />
Class C Europe Wind. CA/JP EQ Indemnity $100,000 B- B-<br />
1-Apr-00 Sorema SA Halyard Re B.V. (Yr 2) EU/JP Wind, JP EQ Indemnity $17,000<br />
23-May-00 State Farm Alpha Wind 2000-A Ltd. Florida Wind Indemnity $52,500 BB+<br />
26-May-00 USAA<br />
Residential Reinsurance<br />
2000 Limited<br />
US Gulf/East Coast Wind Indemnity $200,000 Ba2 BB+<br />
12-Jun-00 Vesta Fire Ins NeHi, Inc. Northeast/Hawaii Wind Modeled Loss $41,500 Ba3 BB<br />
19-Nov-00 AGF Mediterranean Re p.l.c. Class A France Wind, Monaco EQ Modeled Loss $41,000 Baa3 BBB+ BBB<br />
28-Dec-00 Munich Re<br />
Prime Capital CalQuake &<br />
EuroWind Ltd.<br />
Class B France Wind, Monaco EQ Modeled Loss $88,000 Ba3 BB+ BB+<br />
Califorina EQ/ Europe<br />
Wind<br />
Parametric Index $129,000 Ba3 BB+ BB<br />
28-Dec-00 Munich Re Prime Capital Hurricane Ltd. US Wind Parametric Index $159,000 Ba3 BB+ BB<br />
8-Feb-01 Swiss Re Western Capital Limited US EQ Index $97,000 Ba2 BB+<br />
22-Mar-01 American Re<br />
Gold Eagle Capital 2001<br />
Limited<br />
US Wind, US EQ Modeled Loss $116,400 Ba2 BB+<br />
30-Mar-01 Sorema SA Halyard Re B.V. (Yr 3) EU/JP Wind, JP EQ Indemnity $17,000
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
9-May-01 Swiss Re SR Wind Ltd. Class A-1 US/France Wind Parametric Index $58,200 BB+ BB+<br />
1-Jun-01 USAA<br />
Residential Reinsurance<br />
2001 Limited<br />
Class A-2 US/France Wind Parametric Index $58,200 BB+ BB+<br />
US Gulf/East Coast Wind Indemnity $150,000 Ba2 BB+<br />
15-Jun-01 Zurich Re Trinom Ltd. Class A-1 US/EU Wind, US EQ Modeled Loss $60,000 Ba2 BB BB-<br />
Class A-2 US/EU Wind, US EQ Modeled Loss $97,000 Ba1 BB+ BB<br />
27-Dec-01 CEA Redwood Capital I, Ltd Califorina EQ Industry Index $160,050 Ba2 BB+<br />
28-Dec-01 SCOR Atlas Reinsurance II p.l.c. Class A Europe Wind. CA/JP EQ Parametric Index $50,000 A3 A<br />
Class B Europe Wind. CA/JP EQ Parametric Index 100,000 Ba2 BB+<br />
28-Mar-02 CEA Redwood Capital II, Ltd California EQ Industry Index $194,000 Baa3 BBB-<br />
8-Apr-02 Hiscox St. Agatha Re Ltd. California/New Madrid EQ Modeled Loss $33,000 BB+<br />
22-May-02 Nissay Dowa Fujiyama Ltd. Japan EQ Parametric $67,900 BB+<br />
31-May-02 USAA<br />
Residential Reinsurance<br />
2002 Limited<br />
US Gulf/East Coast Wind Indemnity $125,000 Ba3 BB+<br />
26-Jun-02 Swiss Re Pioneer 2002 Ltd. A-02-1 US Wind Parametric Index $85,000 Ba3 BB+<br />
B-02-1 Europe Wind Parametric Index $50,000 Ba3 BB+<br />
C-02-1 California EQ Parametric Index $30,000 Ba3 BB+<br />
D-02-1 Central US EQ Parametric $40,000 Baa3 BBB-<br />
E-02-1 Japan EQ Parametric Index $25,000 Ba3 BB+<br />
F-02-1 US/EU Wind, US/JP EQ Parametric Index $25,000 Ba3 BB+<br />
16-Sep-02 Swiss Re Pioneer 2002 Ltd. B-02-2 Europe Wind Parametric Index $5,000 Ba3 BB+<br />
C-02-2 California EQ Parametric Index $20,500 Ba3 BB+<br />
D-02-2 Central US EQ Parametric $1,750 Baa3 BBB-<br />
16-Dec-02 Swiss Re Pioneer 2002 Ltd. A-02-3 US Wind Parametric Index $8,500 Ba3 BB+<br />
B-02-3 Europe Wind Parametric Index $21,000 Ba3 BB+<br />
C-02-3 California EQ Parametric Index $15,700 Ba3 BB+<br />
D-02-3 Central US EQ Parametric $25,500 Baa3 BBB-<br />
E-02-3 Japan EQ Parametric Index $30,550 Ba3 BB+<br />
F-02-3 US/EU Wind, US/JP EQ Parametric Index $3,000 Ba3 BB+<br />
30-Dec-02 Vivendi Studio Re Ltd. California EQ Parametric Index $150,000 Ba2 BB+<br />
17-Mar-03 Swiss Re Pioneer 2002 Ltd. A-03-1 US Wind Parametric Index $6,500 Ba3 BB+<br />
30-May-03 USAA<br />
Residential Reinsurance<br />
2003 Limited<br />
B-03-1 Europe Wind Parametric Index $8,000 Ba3 BB+<br />
C-03-1 California EQ Parametric Index $6,500 Ba3 BB+<br />
D-03-1 Central US EQ Parametric $5,500 Baa3 BBB-<br />
E-03-1 Japan EQ Parametric Index $8,000 Ba3 BB+<br />
F-03-1 US/EU Wind, US/JP EQ Parametric Index $8,140 Ba3 BB+<br />
US Wind, US EQ Indemnity $160,000 Ba2 BB+<br />
17-Jun-03 Swiss Re Pioneer 2002 Ltd. A-03-2 US Wind Parametric Index $9,750 Ba3 BB+<br />
B-03-2 Europe Wind Parametric Index $12,250 Ba3 BB+<br />
C-03-2 California EQ Parametric Index $7,250 Ba3 BB+<br />
D-03-2 Central US EQ Parametric $2,600 Baa3 BBB-<br />
25-Jun-03 Zenkyoren Phoenix Quake Wind Ltd. Japan Wind, Japan EQ Parametric Index $192,500 Baa3 BBB+<br />
25-Jun-03 Zenkyoren Phoenix Quake Ltd. Japan EQ Parametric Index $192,500 Baa3 BBB+<br />
25-Jun-03 Zenkyoren Phoenix Quake Wind II Ltd. Japan Wind, Japan EQ Parametric Index $85,000 Ba1 BBB-<br />
<strong>Aon</strong> Capital Markets<br />
41
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
42<br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
24-Jul-03 Swiss Re Palm Capital Ltd. Series 1 US Wind Parametric Index $22,350 Ba3 BB+<br />
24-Jul-03 Swiss Re Oak Capital Ltd. Series 1 Europe Wind Parametric Index $23,600 Ba3 BB+<br />
24-Jul-03 Swiss Re Sequoia Capital Ltd. Series 1 US EQ Parametric Index $22,500 Ba3 BB+<br />
24-Jul-03 Swiss Re Sakura Capital Ltd. Series 1 Japan EQ Parametric Index $14,700 Ba3 BB+<br />
24-Jul-03 Swiss Re Arbor I Ltd. Series 1 US/EU Wind, CA/JP EQ Parametric Index $95,000 B<br />
24-Jul-03 Swiss Re Arbor II Ltd. Series 1 US/EU Wind, CA/JP EQ Parametric Index $26,500 A1 A+<br />
25-Aug-03 TREIP Formosa Re Ltd. Taiwan EQ Indemnity $100,000 NR<br />
15-Sep-03 Swiss Re Arbor I Ltd. Series 2 US/EU Wind, CA/JP EQ Parametric Index $60,000 B<br />
15-Dec-03 Swiss Re Pioneer 2002 Ltd. D-03-3 Central US EQ Parametric $51,000 Baa3 BBB-<br />
15-Dec-03 Swiss Re Palm Capital Ltd. Series 2 US Wind Parametric Index $19,000 Ba3 BB+<br />
15-Dec-03 Swiss Re Arbor I Ltd. Series 3 US/EU Wind, CA/JP EQ Parametric Index $8,850 B<br />
18-Dec-03 EDF Pylon Ltd. Class A France Wind Parametric Index € 70,000 A2 BBB+<br />
Class B France Wind Parametric Index € 120,000 Ba1 BB+<br />
31-Dec-03 CEA Redwood Capital III, Ltd. California EQ Industry Index $150,000 Ba1 BB+<br />
31-Dec-03 CEA Redwood Capital IV, Ltd. California EQ Industry Index $200,000 Baa3 BBB-<br />
15-Mar-04 Swiss Re Oak Capital Ltd. Series 2 Europe Wind Parametric Index $24,000 Ba3 BB+<br />
15-Mar-04 Swiss Re Sequoia Capital Ltd. Series 2 US EQ Parametric Index $11,500 Ba3 BB+<br />
15-Mar-04 Swiss Re Arbor I Ltd. Series 4 US/EU Wind, CA/JP EQ Parametric Index $21,000 B<br />
21-May-04 USAA<br />
Residential Reinsurance<br />
2004 Limited<br />
Class A US Wind, US EQ Indemnity $127,500 BB<br />
Class B US Wind, US EQ Indemnity $100,000 B<br />
10-Jun-04 Converium Helix 04 Limited US/EU Wind, US/JP EQ Modeled Loss $100,000 BB+<br />
15-Jun-04 Swiss Re Arbor I Ltd. Series 5 US/EU Wind, CA/JP EQ Parametric Index $18,000 B<br />
30-Jun-04 Swiss Re Gi Capital Ltd. Japan EQ Parametric Index $125,000 BB+<br />
15-Sep-04 Swiss Re Oak Capital Ltd. Series 3 Europe Wind Parametric Index $10,500 Ba3 BB+<br />
15-Sep-04 Swiss Re Sequoia Capital Ltd. Series 3 US EQ Parametric Index $11,000 Ba3 BB+<br />
28-Sep-04 Swiss Re Arbor I Ltd. Series 6 US/EU Wind, CA/JP EQ Parametric Index $31,800 B<br />
17-Nov-04 Hartford Fire Ins<br />
Foundation Re Ltd. Series<br />
2004-I<br />
Class A US Wind Industry Index $180,000 BB+<br />
Class B US Wind, US EQ Industry Index $67,500 BBB+<br />
15-Dec-04 Swiss Re Arbor I Ltd. Series 7 US/EU Wind, CA/JP EQ Parametric Index $15,000 B<br />
31-Dec-04 CEA Redwood Capital V, Ltd. California EQ Industry Index $150,000 Ba2 BB+<br />
31-Dec-04 CEA Redwood Capital VI, Ltd. California EQ Industry Index $150,000 Ba2 BB+<br />
15-Mar-05 Swiss Re Arbor I Ltd. Series 8 US/EU Wind, CA/JP EQ Parametric Index $20,000 B<br />
31-May-05 USAA<br />
7-Jun-05<br />
Factory Mutual<br />
Ins Co<br />
Residential Reinsurance<br />
2005 Limited<br />
Class A US Wind, US EQ Indemnity $91,000 BB<br />
Class B US Wind, US EQ Indemnity $85,000 B<br />
Cascadia Limited Pacific Northwest EQ Parametric $300,000 BB+ BB<br />
15-Jun-05 Swiss Re Arbor I Ltd. Series 9 US/EU Wind, CA/JP EQ Parametric Index $25,000 B<br />
28-Jul-05 Zurich KAMP Re 2005 Ltd. US Wind, Central US EQ Indemnity $190,000 BB+<br />
8-Nov-05 PXRE<br />
Atlantic & Western Re<br />
Limited<br />
Class A US/EU Wind Modeled Loss $100,000 BB+ BB<br />
Class B US/EU Wind Modeled Loss $200,000 B+ B<br />
15-Nov-05 Munich Re Aiolos Ltd. Europe Wind Parametric Index € 110,000 BB+<br />
15-Dec-05 Swiss Re Arbor I Ltd. Series 10 US/EU Wind, CA/JP EQ Parametric Index $18,000 B
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
21-Dec-05 PXRE<br />
Atlantic & Western Re II<br />
Limited<br />
Class A US/EU Wind, US EQ Modeled Loss $125,000 BB+<br />
Class B US/EU Wind, US EQ Modeled Loss $125,000 BB+<br />
22-Dec-05 Montpelier Re Champlain Limited Class A US/JP EQ Modeled Loss $75,000 B B-<br />
Class B US Wind, US EQ Modeled Loss $15,000 B+ B-<br />
26-Jan-06 Swiss Re Australis Ltd. Series 1 Australia EQ/Wind Parametric Index $100,000 BB<br />
9-Feb-06 CEA Redwood Capital VII, Ltd. California EQ Industry Index $160,000 BB+<br />
9-Feb-06 CEA Redwood Capital VIII, Ltd. California EQ Industry Index $65,000 BB+<br />
17-Feb-06 Hartford Fire Ins<br />
Foundation Re Ltd. Series<br />
2006-I<br />
Class D US Wind, US EQ Industry Index $105,000 BB<br />
11-May-06 FONDEN CAT-Mex Ltd. Class A Mexico EQ Parametric $150,000 BB+<br />
24-May-06 ACE INA<br />
31-May-06 USAA<br />
6-Jun-06 Swiss Re<br />
Calabash Re Ltd. Series<br />
2006-I<br />
Residential Reinsurance<br />
2006 Limited<br />
Successor Cal Quake<br />
Parametric Ltd.<br />
Class B Mexico EQ Parametric $10,000 BB+<br />
Class A-1 US Wind Industry Index $100,000 BB<br />
Class A US Wind, US EQ Indemnity $47,500 B<br />
Class C US Wind, US EQ Indemnity $75,000 BB+<br />
A-I US EQ Parametric Index $47,500 BB<br />
6-Jun-06 Swiss Re Successor Euro Wind Ltd. A-I Europe Wind Parametric Index $97,130 BB<br />
6-Jun-06 Swiss Re<br />
6-Jun-06 Swiss Re<br />
Successor Hurricane<br />
Industry Ltd.<br />
Successor Hurricane<br />
Modeled Ltd.<br />
A-II Europe Wind Parametric Index $3,000 BB<br />
B-I Europe Wind Parametric Index $18,500 BB-<br />
C-I Europe Wind Parametric Index $110,750 B<br />
C-II Europe Wind Parametric Index $3,000 B<br />
B-I US Wind Industry Index $14,000 BB-<br />
C-I US Wind Industry Index $7,250 B<br />
D-I US Wind Industry Index $34,250 B<br />
D-II US Wind Industry Index $10,250 B<br />
E-I US Wind Industry Index $5,000 NR<br />
E-II US Wind Industry Index $35,000 NR<br />
F-I US Wind Industry Index $54,000 B<br />
B-I US Wind Modeled Loss $42,250 BB-<br />
6-Jun-06 Swiss Re Successor II Ltd. A-I US/EU Wind, US/JP EQ Multiple $73,200 B<br />
E-I US/EU Wind, US/JP EQ Multiple $154,250 NR<br />
6-Jun-06 Swiss Re Successor III Ltd. A-I US/EU Wind, JP EQ Multiple $7,200 NR<br />
6-Jun-06 Swiss Re Successor IV Ltd. A-I US/EU Wind, US/JP EQ Multiple $30,000 B<br />
6-Jun-06 Swiss Re Successor Japan Quake Ltd. A-I Japan EQ Modeled Loss $103,470 BB<br />
B-I Japan EQ Modeled Loss $26,250 BB-<br />
C-I Japan EQ Modeled Loss $70,750 B<br />
C-II Japan EQ Modeled Loss $3,000 B<br />
19-Jun-06 Munich Re Carillon Ltd. Series 1 Class A1 US Wind Industry Index $51,000 B+<br />
Class A2 US Wind Industry Index $23,500 B+<br />
Class B US Wind Industry Index $10,000 B<br />
21-Jun-06 Balboa Ins Group VASCO Re 2006 Ltd. US Wind Indemnity $50,000 BB+<br />
<strong>Aon</strong> Capital Markets<br />
43
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
21-Jun-06<br />
44<br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
30-Jun-06<br />
Liberty Mutual<br />
Ins Co<br />
Dominion<br />
Resources<br />
Mystic Re Ltd. Series<br />
2006-1<br />
Class A US Wind Industry Index $200,000 BB+<br />
Drewcat Capital Ltd. Class A US Wind Parametric Index $50,000 NR<br />
28-Jul-06 Hannover Re Eurus Ltd. Europe Wind Parametric Index $150,000 BB<br />
3-Aug-06<br />
3-Aug-06<br />
Endurance<br />
Specialty Ins Co<br />
Tokio Marine &<br />
Nichido Fire<br />
4-Aug-06 Swiss Re<br />
25-Aug-06<br />
Factory Mutual<br />
Ins Co<br />
Shackleton Re Limited Class A US EQ Industry Index $125,000 Bz3 BB<br />
Class B US Wind Industry Index $60,000 Ba3 BB<br />
Class C US Wind/EQ Industry Index $50,000 Ba2 BB+<br />
Fhu-Jin Ltd. Series 1 Class B Japan Wind Parametric Index $200,000 BB+<br />
Successor Hurricane<br />
Industry Ltd.<br />
E-III US Wind Industry Index $50,000 NR<br />
Cascadia II Limited US EQ Parametric $300,000 BB+ BB+<br />
17-Nov-06 Catlin Ins Co Ltd. Bay Haven Limited Class A US/EU/JP Wind, US/JP EQ Multiple $133,500 AA<br />
Class B US/EU/JP Wind, US/JP EQ Multiple $66,750 BBB-<br />
17-Nov-06 Hartford Fire Ins Foundation Re II Ltd. Class A US Wind Industry Index $180,000 BB+<br />
30-Nov-06<br />
Liberty Mutual<br />
Ins Co<br />
Mystic Re Ltd. Series<br />
2006-2<br />
Class G US (HU, EQ, ST) Industry Index $67,500 B<br />
Class A US Wind Industry Index $200,000 BB+<br />
Class B US Wind Industry Index $125,000 BB<br />
8-Dec-06 Swiss Re Successor Euro Wind Ltd. C-III Europe Wind Parametric Index $15,000 B3 B<br />
8-Dec-06 Swiss Re<br />
Successor Hurricane<br />
Industry Ltd.<br />
A-III Europe Wind Parametric Index $118,000 Ba3 BB<br />
E-IV US Wind Industry Index $4,000 NR<br />
E-V US Wind Industry Index $26,000 NR<br />
8-Dec-06 Swiss Re Successor I Ltd. B-I NA/EU Wind, CA/JP EQ Multiple $4,000 NR<br />
B-II NA/EU Wind, CA/JP EQ Multiple $24,500 NR<br />
20-Dec-06 Zurich Re Lakeside Re Ltd. US EQ Dual $190,000 BB+<br />
21-Dec-06 SCOR Atlas Reinsurance III p.l.c. Japan EQ, Euro Wind Modeled Loss € 120,000 BB+<br />
29-Dec-06 CEA<br />
8-Jan-07 ACE INA<br />
Redwood Capital IX, Ltd.<br />
Series 1<br />
Calabash Re II Ltd. Series<br />
2006-I<br />
1-Mar-07 Hannover Re Kepler Re Ltd.<br />
Class A California EQ Parametric Index $125,000 Ba2 BB+<br />
Class B California EQ Parametric Index $125,000 Ba2 BB+<br />
Class C California EQ Parametric Index $18,000 Baa3 BBB-<br />
Class D California EQ Parametric Index $20,000 Ba3 BB<br />
Class E California EQ Parametric Index $12,000 B3 B<br />
Class A-1 US Wind Modeled Loss $100,000 BB<br />
Class D-1 US EQ Modeled Loss $50,000 B+<br />
Class E-1 US Wind, US EQ Modeled Loss $100,000 BB<br />
US/Europe/JP/Aus/NZ/<br />
Canada Wind, EQ<br />
Indemnity $200,000 Ba2<br />
14-Mar-07 Swiss Re Australis Ltd Series 2 Australia EQ/Wind Parametric Index $50,000 BB<br />
3-Apr-07 Allianz SE Blue Wings Ltd. Series 1 Class A US EQ, UK Flood Multiple $150,000 BB+<br />
13-Apr-07<br />
Aspen <strong>Insurance</strong><br />
Limited<br />
Ajax Re Limited Series 1 Class A California EQ Industry Index $100,000 BB
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
30-Apr-07 Chubb Group<br />
East Lane Re Ltd. Series<br />
2007-I<br />
Class A US - Northeast Wind Indemnity $135,000 BB+<br />
Class B US - Northeast Wind Indemnity $115,000 BB+<br />
8-May-07 Munich Re Carillon Ltd. Series 2 Class E US Wind Industry Index $150,000 B<br />
8-May-07<br />
Travelers<br />
Indemnity Co<br />
Longpoint Re Ltd. Series<br />
2007-I<br />
Class A US - Northeast Wind Industry Index $500,000 BB+<br />
10-May-07 Swiss Re Successor II Ltd. Class A-2 NA/EU Wind, CA/JP EQ Multiple $100,000 B<br />
14-May-07<br />
Mitusui Sumitomo<br />
Ins Co<br />
AKIBARE Ltd. Series 1 Class A JP Wind Parametric Index $90,000 BB+<br />
Class B JP Wind Parametric Index $30,000 BB+<br />
5/29/07 Nephila Gamut Reinsurance Limited Class A US/EU/JP Wind, US/JP EQ Indemnity $60,000 Aa3 A-<br />
31-May-07<br />
Liberty Mutual<br />
Ins Co<br />
Mystic Re II Ltd. Series<br />
2007-1<br />
31-May-07 Swiss Re MedQuake Ltd. Class A<br />
31-May-07 USAA<br />
11-Jun-07<br />
Glacier<br />
Reinsurance AG<br />
14-Jun-07 Allstate Ins Co<br />
15-Jun-07 Swiss Re<br />
20-Jun-07<br />
CIG Reinsurance<br />
Ltd, New Castle<br />
Reinsurance<br />
Co Ltd<br />
21-Jun-07 Brit Ins Limited<br />
22-Jun-07 Swiss Re<br />
25-Jun-07<br />
Swiss Re/Kyoei<br />
Fire and Marine<br />
Ins Co<br />
Residential Reinsurance<br />
2007 Limited, Series 2007-I<br />
Class B US/EU/JP Wind, US/JP EQ Indemnity $120,000 Baa3 BBB-<br />
Class C US/EU/JP Wind, US/JP EQ Indemnity $60,000 Ba3 BB-<br />
Class B<br />
FL/Northeast Wind Industry Index $150,000 B+<br />
Turkey/Greece/Israel/<br />
Portugal/Cyprus EQ<br />
Turkey/Greece/Israel/<br />
Portugal/Cyprus EQ<br />
Parametric Index $50,000 BB-<br />
Parametric Index $50,000 B<br />
Class 1 US Wind, US EQ Indemnity $145,000 BB<br />
Class 2 US Wind, US EQ Indemnity $125,000 B<br />
Class 3 US Wind, US EQ Indemnity $75,000 B<br />
Class 4 US Wind, US EQ Indemnity $155,000 BB+<br />
Class 5 US Wind, US EQ Indemnity $100,000 BB+<br />
Nelson Re Ltd. Series 2007-I Class A US/EU Wind, US EQ Multiple $75,000 B<br />
Willow Re Ltd. Series<br />
2007-1<br />
Spinnaker Capital Ltd.<br />
Series 1<br />
Emerson Reinsurance Ltd. Class A<br />
Fremantle Limited Series<br />
2007-I<br />
Spinnaker Capital Ltd.<br />
Series 2<br />
Class B US - Northeast Wind Industry Index $250,000 BB+<br />
Class B<br />
Class C<br />
Class D<br />
US Wind Industry Index $200,000 B1<br />
NA/EU/UK/JP/Aus/NZ All<br />
Natural Perils<br />
NA/EU/UK/JP/Aus/NZ All<br />
Natural Perils<br />
NA/EU/UK/JP/Aus/NZ All<br />
Natural Perils<br />
NA/EU/UK/JP/Aus/NZ All<br />
Natural Perils<br />
Indemnity $185,000 A2<br />
Indemnity $140,000 Baa3<br />
Indemnity $130,000 Ba2<br />
Indemnity $45,000 Ba3<br />
Class A US/EU/JP Wind, US/JP EQ Multiple $60,000 Aa1 AAA<br />
Class B US/EU/JP Wind, US/JP EQ Multiple $60,000 A3 BBB+<br />
Class C US/EU/JP Wind, US/JP EQ Multiple $80,000 Ba2 BB-<br />
FL Wind Industry Index $130,200 Ba2<br />
Fusion 2007 Ltd. Class A JP Wind, Mexico EQ Parametric Index $30,000 B<br />
Class B JP Wind, Mexico EQ Parametric Index $80,000 B<br />
Class C Mexico EQ Parametric Index $30,000 BB+<br />
<strong>Aon</strong> Capital Markets<br />
45
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
46<br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
5-Jul-07<br />
18-Jul-07<br />
State Farm Mutual<br />
Automobile Ins Co<br />
Arrow Capital<br />
Reinsurance<br />
Co, Ltd<br />
20-Jul-07 Swiss Re<br />
15-Oct-07<br />
Japan Railway<br />
East<br />
Merna Reinsurance Ltd. Class A<br />
Class A<br />
(loan)<br />
Class B<br />
Class B<br />
(loan)<br />
Class C<br />
Class C<br />
(loan)<br />
US/Canada (Wind, EQ, ST,<br />
WS, WF)<br />
US/Canada (Wind, EQ, ST,<br />
WS, WF)<br />
US/Canada (Wind, EQ, ST,<br />
WS, WF)<br />
US/Canada (Wind, EQ, ST,<br />
WS, WF)<br />
US/Canada (Wind, EQ, ST,<br />
WS, WF)<br />
US/Canada (Wind, EQ, ST,<br />
WS, WF)<br />
Indemnity $256,000 Aa2 AAA<br />
Indemnity $94,000 Aa2 AAA<br />
Indemnity $647,600 A2 AA+<br />
Indemnity $19,000 A2 AA+<br />
Indemnity $155,000 Baa2 A-<br />
Indemnity $9,000 Baa2 A-<br />
Javelin Re Ltd. Class A Worldwide All Perils Indemnity $94,500 A-<br />
Spinnaker Capital Ltd.<br />
Series 3<br />
Class B Worldwide All Perils Indemnity $30,750 BBB-<br />
US Wind Industry Index $50,000 NR<br />
MIDORI Ltd. Class A JP EQ Parametric $260,000 BB+<br />
7-Nov-07 Allianz SE Blue Fin Ltd. Series 1 Class A EU Wind Parametric Index € 155,000 BB+<br />
17-Nov-07 Catlin<br />
29-Nov-07 SCOR<br />
Newton Re Limited; Series<br />
2007-1<br />
Atlas Reinsurance IV<br />
Limited<br />
Class B EU Wind Parametric Index $65,000 BB+<br />
Class A US EQ Industry Index $87,500 BB+<br />
Class B US Wind Industry Index $137,500 BB+<br />
Class A EU Wind, JP EQ Modeled Loss € 160,000 B<br />
21-Dec-07 Swiss Re GlobeCat Ltd. Series USW Class A-1 US Wind Industry Index $40,000 B3e<br />
Class A-1 US EQ Industry Index $20,000 B1e<br />
Class A-1 Latin America EQ Modeled Loss $25,000 Ba3e<br />
27-Dec-07 Groupama SA Green Valley Ltd. Series 1 Class A France Wind Parametric Index € 200,000 BB+<br />
28-Dec-07 Swiss Re<br />
Successor Hurr Industry<br />
Ltd.<br />
C-VI US Wind Industry Index $30,000 B2 B<br />
D-VI US Wind Industry Index $30,000 B<br />
28-Dec-07 Swiss Re Successor II Ltd.; Series 3 C-III US/EU Wind, US/JP EQ Multiple $50,000<br />
28-Dec-07 Swiss Re Successor II Ltd.; Series 3 E-III US/EU Wind, US/JP EQ Multiple $50,000<br />
31-Dec-07 CEA<br />
31-Dec-07 CEA<br />
21-Feb-08 Catlin<br />
Redwood Capital X Ltd.<br />
Series 1<br />
Redwood Capital X Ltd.<br />
Series 2<br />
Newton Re Ltd. Series<br />
<strong>2008</strong> - 1<br />
Class A US EQ Parametric Index $25,000 Baa3<br />
Class B US EQ Parametric Index $227,700 Ba2<br />
Class C US EQ Parametric Index $50,200 Ba3<br />
Class D US EQ Industry Index $130,500 Ba3<br />
Class E US EQ Industry Index $45,200 B2<br />
Class F US EQ Industry Index $20,000 NR<br />
Class A US/EU/JP Wind, US/JP EQ Indemnity $150,000 BB<br />
14-Mar-08 Munich Re Queen Street Ltd. Series 1 Class A Europe Wind Parametric Index € 70,000 BB+<br />
Class B Europe Wind Parametric Index € 100,000 B
SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, <strong>2008</strong><br />
Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch<br />
31-Mar-08 Chubb Group<br />
East Lane Re II Ltd. Series<br />
<strong>2008</strong>-I<br />
Class A<br />
Class B<br />
Class C<br />
Northeast US All Natural<br />
Perils<br />
Northeast US All Natural<br />
Perils<br />
US/Canada All Natural<br />
Perils<br />
Indemnity $75,000 BB<br />
Indemnity $70,000 BB<br />
Indemnity $55,000 B-<br />
14-May-08 Zenkyoren Muteki Ltd. Series <strong>2008</strong>-1 Top JP EQ Parametric Index $300,000 Ba2<br />
30-May-08 Flagstone Valais Re Ltd. Series <strong>2008</strong>-1 Class A US/EU/JP Wind, US/JP EQ Indemnity $64,000 Ba2<br />
30-May-08<br />
Glacier<br />
Reinsurance AG<br />
30-May-08 Homewise<br />
30-May-08 USAA<br />
17-Jun-08 Allstate Ins Co<br />
25-Jun-08<br />
Nationwide Mutual<br />
Ins Co<br />
27-Jun-08 Swiss Re<br />
Nelson Re Ltd. Series<br />
<strong>2008</strong>-I<br />
Mangrove Re Ltd. Series<br />
<strong>2008</strong>-1<br />
Residential Reinsurance<br />
<strong>2008</strong> Limited Series <strong>2008</strong>-I<br />
Willow Re Limited Series<br />
<strong>2008</strong>-1<br />
Caelus Re Limited Series<br />
<strong>2008</strong>-1<br />
Vega Capital Ltd. Series<br />
<strong>2008</strong>-I<br />
Class C US/EU/JP Wind, US/JP EQ Indemnity $40,000 B3<br />
Class G US Wind, US EQ Indemnity $67,500 B3<br />
Class H EU Wind Indemnity $45,000 B3<br />
Class I EU Wind Indemnity $67,500 B1<br />
Class A FL Wind Indemnity $150,000 Ba2<br />
Class B FL Wind Indemnity $60,000 B1<br />
Class 1 US Wind, US EQ Indemnity $125,000 BB<br />
Class 2 US Wind, US EQ Indemnity $125,000 B<br />
Class 4 US (Wind, EQ, ST, WS, WF) Indemnity $100,000 BB+<br />
Class D Texas Wind Industry Index $250,000 BB+<br />
Class A US Wind, US EQ Indemnity $250,000 BB+<br />
Class A US/EU/JP Wind, US/JP EQ Multiple $21,000 A3 A-<br />
Class B US/EU/JP Wind, US/JP EQ Multiple $22,500 Baa2 BBB<br />
Class C US/EU/JP Wind, US/JP EQ Multiple $63,900 Ba3<br />
Class D US/EU/JP Wind, US/JP EQ Multiple $42,600<br />
Territory Abbreviation<br />
CA CALIFORNIA<br />
EU EUROPE<br />
FL FLORIDA<br />
JP JAPAN<br />
NA NORTH AMERICA<br />
US UNITED STATES<br />
Peril Abbreviation<br />
EQ EARTHQUAKE<br />
ST SEVERE THUNDERSTORM<br />
WF WILDFIRE<br />
WS WINTER STORM<br />
<strong>Aon</strong> Capital Markets<br />
47
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
SUMMARY OF MORTALITY BONDS<br />
48<br />
Sponsor Class S&P Incept Maturity Territories Size ($MM)<br />
AXA Cessions Osiris Series I - B AAA 9-Nov-06 15-Jan-10 France, Japan, US 128.35<br />
Osiris Series II - B A- 9-Nov-06 15-Jan-10 France, Japan, US 64.18<br />
Osiris Series III - C BBB 9-Nov-06 15-Jan-10 France, Japan, US 150.00<br />
Osiris Series III - D BB+ 9-Nov-06 15-Jan-10 France, Japan, US 100.00<br />
Munich Re Nathan Ltd. Series I - A A- 19-Feb-08 15-Jan-13 Canada, Germany, UK, US 100.00<br />
Scottish Annuity<br />
& Life <strong>Insurance</strong><br />
Company Ltd.<br />
Tartan Capital<br />
Limited - A<br />
Tartan Capital<br />
Limited - B<br />
Swiss Re Vita Capital II - B A+ 13-Apr-05 1-Jan-10<br />
AAA 4-May-06 7-Jan-09 US 75.00<br />
BB+ 4-May-06 7-Jan-09 US 80.00<br />
Vita Capital II - C A- 13-Apr-05 1-Jan-10<br />
Vita Capital II - D BBB 13-Apr-05 1-Jan-10<br />
Vita Capital III - A IV AAA 11-Jan-07 1-Jan-11<br />
Vita Capital III - A V AAA 11-Jan-07 1-Jan-12<br />
Vita Capital III - A VI AAA 11-Jan-07 1-Jan-11<br />
Vita Capital III - A VII AA- 11-Jan-07 1-Jan-12<br />
Vita Capital III - B I A 27-Dec-06 1-Jan-11<br />
Vita Capital III - B II A 27-Dec-06 1-Jan-12<br />
Vita Capital III - B III A 27-Dec-06 1-Jan-11<br />
Vita Capital III - B V AAA 11-Jan-07 1-Jan-11<br />
Vita Capital III - B VI AAA 11-Jan-07 1-Jan-11<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Canada, Germany, Japan,<br />
UK, US<br />
Total on Risk 1,316.70<br />
62.00<br />
200.00<br />
100.00<br />
100.00<br />
100.00<br />
70.97<br />
129.04<br />
90.00<br />
50.00<br />
38.71<br />
50.00<br />
70.97
SUMMARY OF SIDECAR ISSUANCE<br />
<strong>Aon</strong> Capital Markets<br />
Name Coverage Principal Sponsor Date Line of Business Size ($MM)<br />
Rockridge Re Quota Share Montpelier Re Jun-05 High excess cat retrocessional 90.9<br />
Kaith/K5 Quota Share Hannover Re Dec-05 Property cat, property risk, aviation and marine 370.0<br />
Helicon Re Quota Share White Mountains Re Dec-05 Short-tailed property and marine 146.0<br />
Flatiron Re Quota Share Arch Re Dec-05 Property and marine reinsurance 840.0<br />
Cyrus Re Quota Share XL Capital Dec-05 Property cat reinsurance and retrocessional 525.0<br />
Blue Ocean Re Quota Share Montpelier Re Dec-05 Property cat retrocessional 300.0<br />
Olympus Re II Quota Share White Mountains Re Jan-06 Property cat, property risk, retro and marine 156.0<br />
Starbound Re Quota Share Ren Re May-06 Short-tailed property and marine 310.5<br />
Petrel Re Quota Share Validus May-06 Marine and offshore energy reinsurance contracts 125.0<br />
Sirocco Re Quota Share Lancashire Jun-06 Marine and offshore energy insurance contracts 75.0<br />
Bay Point Re Quota Share Harbor Point Jun-06 US property, marine, retro, and workers' comp 150.0<br />
Timicuan Side by Side RenaissanceRe Jul-06 Reinstatement Premium Protection 70.0<br />
Mont Fort Re Quota Share Flagstone Re Aug-06 Peak zone and ILW 60.0<br />
Concord Re Quota Share Lexington <strong>Insurance</strong> Co Aug-06 US commercial property 730.0<br />
Cyrus Re Quota Share XL Capital Nov-06 Property cat reinsurance and retrocessional 635.0<br />
Stoneheath Re Contingent Capital XL Re Dec-06 US and European property and terror 350.0<br />
Norton Re Side by Side Brit <strong>Insurance</strong> Dec-06 Property cat retrocessional 107.7<br />
Syncro Ltd. Quota Share Lloyd's #4242 (Chaucer) Dec-06 Property cat reinsurance 100.0<br />
Panther Re Quota Share Hiscox Dec-06 Property cat reinsurance 360.0<br />
New Point Re Side by Side Harbor Point Dec-06 Property cat retrocessional 250.0<br />
Triomphe Re Quota Share Paris Re Dec-06 Property cat retrocessional 185.0<br />
Syndicate 6103 Quota Share Mapfre Ltd. Jan-07 Property cat reinsurance 78.6<br />
Syndicate 6104 Quota Share Hiscox Jan-07 Property cat reinsurance 69.0<br />
Syndicate 6105 Quota Share Ark Underwriting Jan-07 Property cat reinsurance 40.0<br />
MaRI Ltd. Side by Side ACE Jan-07 Property cat reinsurance 400.0<br />
Sector Re Quota Share Swiss Re Jan-07 Property cat, aviation 220.0<br />
Kepler Re XOL Hannover Re Mar-07 Property cat, property risk, aviation and marine 200.0<br />
Emerson Re XOL CIG Re, New Castle Re May-07 Property cat reinsurance and retro 550.0<br />
Starbound Re II Quota Share Ren Re Jun-07 Property cat reinsurance 341.5<br />
Mont Gele Re XOL Flagstone Re Jul-07 Property cat reinsurance 60.0<br />
7,895.2<br />
49
<strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong><br />
<strong>Aon</strong> Capital Markets (“ACM”) is providing this <strong>Insurance</strong>-<strong>Linked</strong> <strong>Securities</strong> <strong>2008</strong> (ILS <strong>2008</strong>) for informational purposes only. ILS <strong>2008</strong> is not<br />
intended as advice with respect to any specific situation, and should not be relied upon as such. In addition, readers should not place undue<br />
reliance on any forward-looking statements. ACM undertakes no obligation to revise or update any such statements based on changes, new<br />
developments or otherwise.<br />
ILS <strong>2008</strong> is intended only for designated recipients, and it is not be considered (1) an offer to sell any security, loan or other financial product, (2)<br />
a solicitation or basis for any contract for purchase of any security, loan or other financial product, (3) an official confirmation, or (4) a statement<br />
of ACM or its affiliates. With respect to indicative values, no representation is made that any transaction can be effected at the values provided<br />
and the values provided are not necessarily the value carried on ACM’s books and records.<br />
Discussions of tax, accounting, legal or actuarial matters are intended as general observations only based on ACM’s experience, and should not<br />
be relied upon as tax, accounting, legal or actuarial advice. Readers should consult their own professional advisors on these matters as ACM<br />
does not provide such advice.<br />
ACM makes no representation or warranty, whether express or implied that the products or services described in ILS <strong>2008</strong> are suitable or<br />
appropriate for any issuer, investor or participant, or in any location or jurisdiction. The products and services described in ILS <strong>2008</strong> are complex<br />
and speculative, and are intended for sophisticated issuers, investors or participants capable of assessing the significant risks involved.<br />
Except as otherwise noted, the information in the ILS <strong>2008</strong> was compiled by ACM from sources it believes to be reliable. However, ACM makes<br />
no representation or warranty as to the accuracy, reliability or completeness of such information, and the information should not be relied upon<br />
in making business, investment or other decisions.<br />
ACM and/or it affiliates may have independent business relationships with, and may have been or in the future will be compensated for services<br />
provided to, companies mentioned in the ILS <strong>2008</strong>.<br />
50
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Copyright <strong>Aon</strong> Re Global, Inc. <strong>2008</strong> | Published by <strong>Aon</strong> Corporate Communications | #1170 - 08/<strong>2008</strong>