Insurance-Linked Securities Report 2008 - Aon

Insurance-Linked Securities 

2008 

Innovation and Investor Demand 

Set the Stage for Continued Growth

Aon Capital Markets provides insurance and reinsurance clients 

with a full suite of insurance-linked securities products, including 

catastrophe bonds, contingent capital, collateralized reinsurance, 

industry loss warranties and exposure swaps. In the past 12 months, 

Aon Capital Markets has advised clients on more than $6 billion of 

capital solutions. 

As the most experienced investment banking firm in this market, Aon 

Capital Markets offers expert underwriting and placement of new 

issues, financial advisory services, as well as securities trading in 

the secondary market. Aon Capital Markets’ integration with Aon 

Re Global expands its capabilities to provide analytics, modeling, 

rating agency and other consultative services.

Foreword 

I am pleased to present the first annual Aon Capital Markets review of the 

insurance-linked securities market. Insurance-Linked Securities 2008 offers 

a variety of insights to help you make intelligent, informed decisions about 

this dynamic sector. 

As an investment bank providing insurance and reinsurance clients with access 

to alternative forms of capital, Aon Capital Markets is uniquely positioned 

to share insights about trends and opportunities within this market. As a fully 

integrated advisory business of Aon Re Global, the world’s largest provider of 

reinsurance solutions, we are proud to provide this review as an element of our 

advisory activity. 

In this 2008 edition, we review: 

• Insurance-linked securities (ILS) market performance and growth 

• The surging popularity of indemnity structures 

• Investor demand for insurance-linked securities 

• The contingent capital market 

• The market’s latest innovations in futures and derivative tools 

With this review, Aon Capital Markets also unveils a new means of tracking 

the performance of the increasingly diverse ILS market. The Aon Cat Bond 

Indices provides market observers and participants with a quantitative measure 

of the returns generated by ILS on a sector-by-sector basis. We also compare 

performance to key benchmarks such as U.S. Treasury Bonds and U.S. 

BB-rated corporate bonds. Aon Cat Bond Indices will be updated quarterly, 

giving ILS participants ongoing insight into market trends. 

We look forward to providing the Insurance-Linked Securities review to 

you each year. This inaugural and future editions will be available at 

www.aon.com. It’s important that our reviews offer real value—please 

share your thoughts and suggestions with me at paul_schultz@aon.com. 

President, Aon Capital Markets 

Aon Capital Markets 

3

Insurance-Linked Securities 2008 

4 

Contents 

5 | Aon Capital Markets Review of the Catastrophe Bond Market 

Issuance down from 2007 record, but remains strong 

11 | New Insight into ILS Market Returns 

Aon Capital Markets launches Aon Cat Bond Indices 

15 | Indemnity Triggers Reach New Heights 

Evolving triggers for U.S. perils offer advantages, disadvantages 

19 | The Buy Side 

A review of the ILS investor base 

22 | Contingent Capital: Poised for a Comeback 

Conditions favor the inclusion of this diversifying solution 

27 | Continued Innovation 

Options and futures evolve, but lack liquidity 

33 | Appendix I 

Catastrophe bond issuance statistics 

39 | Appendix II 

ILS market transaction summary

$ MM 

Aon Capital Markets Review of the 

Catastrophe Bond Market 

Issuance down from 2007 record, but remains strong 

During the 12-month period ending June 30, catastrophe bonds solidified their place 

as an important risk management tool, with strong issuance through June 30, 2008 

following record results in 2007. 

Lower reinsurance capacity, late declinations of coverage and high marginal costs 

heading into the 2007 North American hurricane season prompted more insurers 

and reinsurers to sponsor cat bonds. While still strong, issuance volume in the first 

half of 2008 lagged the results for the same period in 2007, a result that is not 

surprising given the absence of large-scale catastrophes in 2006 and 2007. 

The majority of new insurance-linked securities (ILS) issuance continues to close 

before the start of the North American hurricane season and in conjunction with 

the traditional reinsurance market’s June 1 renewal schedule. The mid-year pause 

in bond issuance suggests that June 30 is a natural conclusion to the cat bond year 

for statistical purposes. 

Strong 2008 Showing 

CATASTROPHE BOND ISSUANCE BY YEAR (Years ending June 30) 

8000 

7000 

6000 

5000 

4000 

3000 

2000 

1000 

0 

1,558 

1,071 985 986 1,137 

2001 

2002 

2003 

2004 

2005 

3,124 

2006 

7,003 

2007 

5,815 



CAT Bonds 

5


6 

$ MM 

New issuance declined by $1.2 billion—about 17 percent—in the 12 months ending 

June 30, 2008. Greater reinsurance capacity and lower costs related to a calm 

catastrophe season contributed to the reduction, but the decrease says less about 

conditions in 2008 than it does about the extraordinary activity witnessed in 2007. 

In the 12-month period ending June 30, 2007, the market surged 124 percent to 

over $7 billion of issuance. Indeed, it would have surprised industry participants 

and observers if 2008 activity met or exceeded 2007’s record results. 

CATASTROPHE BOND ISSUANCE BY HALF-YEAR 

5000 

4500 

4000 

3500 

3000 

2500 

2000 

1500 

1000 

500 

0 

521 

1H 05 

977 

2H 05 

2,147 

1H 06 

2,547 

2H 06 

4,455 

1H 07 

3,405 

2H 07 

2,410 

1H 08 

Issuance trends can also be analyzed by reviewing volumes on a six-month basis. 

Catastrophe bonds covering U.S. hurricanes are typically brought to market in the 

first half of the calendar year, and the majority of 2007 issues came during this period. 

CATASTROPHE BOND ISSUANCE BY TRANCHE / DEAL / SPONSOR (Years ending June 30) 

50 

45 

40 

35 

30 

25 

20 

15 

10 

5 

0 

2002 

2003 

2004 

2005 

Tranches Issued Deals Issued 

2006 

2007 


First Time Sponsors 

12 

10 

8 

6 

4 

2 

0 

CAT Bonds

While transaction volumes have fallen, the market remains strong. The total number 

of tranches issued increased in the year ending June 30, 2008, totaling 49 versus 47 

in 2007. Interestingly, the number of deals declined in 2008 from 32 to 22, indicating 

that transactions are being subdivided to reach more classes of investors and more 

investors overall. 

CATASTROPHE BOND ISSUANCE BY YEAR AND PERIL (Years ending June 30) 

Notional Limit Issued by Peril 

8000 

7000 

6000 

5000 

4000 

3000 

2000 

1000 

0 

420 441 301 

2001 

2002 

2003 

All told, there has been more than $15 billion in new risk transfer in the last three 

years. It is also interesting to note that the $5.8 billion volume in the 12 months 

ending June 30, 2008 was nearly double that of the same period ending two years 

earlier. The rapid growth in this market over the past two years is a clear indication 

that we can expect greater transaction volume than the $1.1 billion issued in 2005, 

regardless of the measurement method or date used. 

Hurricane North American Quake Euro Wind Japan Quake Asia Paci�c Other 

476 

2004 

Hurricane North American Quake Euro Wind Japan Quake Asia Pacific Other 

The market continues to focus on U.S. earthquake and wind risks, yet European 

wind and Japanese earthquake transactions maintain a steady presence. Indeed, the 

on-risk volumes for European wind and Japanese earthquake in 2008 exceed those 

of just a few years ago. It is also encouraging to note the increase in bond issuance 

covering other perils in 2008, including tornado, hail, wildfire, and winter storm. 

As an aside, market participants periodically debate the relative merits of singleperil 

and multi-peril bonds. Comparing 2007 and 2008 to the years immediately 

preceding Hurricane Katrina, we find the percentage splits are the same. As such, 

the issue of single- or multi-peril has less relevance in 2008 than, for example, the 

rise of indemnity structures. 

646 

2005 

1,038 

2006 

2,328 

2007 


1,669 


7


8 

The U.S. Credit Crisis 

CATASTROPHE BOND RELATIVE SPREAD GROWTH 

300% 

250% 

200% 

150% 

100% 

50% 

0% 

-50% 

June 2007 

Although the U.S. credit crisis is discussed daily in a variety of markets, it has had a 

comparatively lesser effect on the ILS market than on other sectors. Investors and 

sponsors have long maintained that cat bond spreads have little to no correlation 

with those of the credit markets, even in times of market disruption. The results of 

the credit crisis have supported this view. 

ILS independence is clearly evidenced by comparing the percentage change in spreads 

of cat bonds (either U.S. wind or earthquake, which typically fall in the “BB” rating 

range) with similarly rated corporate issues. While the credit crisis sparked a significant 

widening of corporate bond spreads, cat bonds have not reacted as starkly. This 

demonstrates that, at least from a historical perspective, cat bonds have less systematic 

risk than similarly-rated corporate securities. It is possible, in fact, that the dislocation in 

BB-rated corporate securities may have driven capital toward the less volatile ILS sector. 

Growth Drivers 

3yr BB Corp (swapped to Floating) 

5yr BB Corp (swapped to Floating) 

Aon US Quake 

Aon US Wind 

July 2007 

Aug 2007 

Sept 2007 

Oct 2007 

Nov 2007 

Dec 2007 

Jan 2008 

Feb 2008 

March 2008 

April 2008 

May 2008 

June 2008 

It is not surprising that sponsors seeking alternative risk management solutions 

have continued to drive ILS growth by initiating transactions that meet their 

specific needs. As indemnity structures offer the purest mitigation of sponsors’ risk 

portfolios (with lower basis risk than index structures, for example), sponsors often 

prefer this structure, even at greater cost.

CATASTROPHE BOND ISSUANCE BY LOSS TRIGGER (Years ending June 30) 

Indemnity 

Index 

Modeled Loss 

Multiple 

Parametric 

Parametric Index 

Dual 

11% 

6% 

34% 

4% 

3% 

In the 12-month period ending June 30, 2008, 47 percent of transactions were on 

an indemnity basis, compared to only 26 percent in 2007. At the same time, 

parametric index structures grew to represent 25 percent of transactions in 2008, 

up from 17 percent the year before as the market shifted away from industry-based 

index structures. 

In addition to risk management benefits, ILS transactions also offer sponsors potential 

cost savings over alternatives such as traditional reinsurance. While sponsors have 

benefited from these advantages, there are many others who have yet to do so. Of the 

top 15 property and casualty insurers in the United States based on 1997 revenue, only 

eight sponsored at least one cat bond during the last 10 years. In addition, while there 

are over $15 billion of catastrophe bonds currently on-risk, this represents only a small 

fraction of total catastrophe protection purchased worldwide. As costs for competing 

risk management techniques fluctuate, expect increased issuance from both new and 

experienced sponsors. Clearly, the ILS market has enormous growth potential. 

Increasingly sophisticated analytics may also contribute to higher volumes. Advanced 

modeling techniques will help sponsors and intermediaries structure more transparent 

programs, reduce basis risk, or potentially both. Investors will benefit from a clearer 

understanding of the underlying risks. Some hedge fund managers are leading this 

trend by investing in the development of their own models, as well as applying vendor 

models using their own assumptions. 

Competition among the three leading catastrophe modeling companies—AIR 

Worldwide, EQECAT Inc., and Risk Management Solutions—will also drive innovation, 

advancing the level of analytical sophistication, potentially adding new perils to those 

securitized today and consequently creating new market opportunities. To the benefit 

of all companies, some investors and sponsors are employing multiple models and 

comparing results to provide additional data. Each of the three vendors has introduced 

new catastrophe bond models, allowing investors to gain multi-model perspective on 

new issues. 

26% 

17% 

14% 

4% 

4% 

25% 

4% 

2007 2008 


47% 

9 

Indemnity 

Index 

Modeled Loss 

Multiple 

Parametric 

Parametric Index


10 

A Bright Future 

As in any cyclical market, investors have had their turn at driving structural terms 

and pricing. The 2008 cat bonds featured sponsors’ preference for indemnity 

coverage and tighter risk premiums. Meteorological and seismic changes aside, new 

structures, perils and markets will drive growth. Capital market investors do not 

appear to have reached their capacity for investing in ILS. Aided by lower cat bond 

costs, enhanced analytics and a growing market appetite for risk management, the 

ILS market is poised for continued strength.

New Insight into Catastrophe Bond 

Market Returns 

Aon Capital Markets launches Aon Cat Bond Indices 

Whether the result of recent economic conditions, rising public interest in the capital 

markets or the growing volume of assets under management globally, investment 

returns face more scrutiny in all sectors of the capital markets. The ILS industry’s 

concentrated but increasingly active investor base is no exception to this general 

observation. To meet the needs of ILS investors and observers, Aon Capital Markets 

is pleased to introduce the Aon Cat Bond Indices, which provides valuable ILS 

performance data. 

The Indices represent, on a sector-by-sector basis, what an investor would have 

achieved by allocating a weighted amount of capital to each cat bond available in 

the market. We use the indicative bids published monthly by Aon Capital Markets 

to define the market and form the basis for the total return calculations. Indicative 

bids are derived through Aon Capital Markets’ trading experience, combined with 

the results of a proprietary model that presents market dynamics and seasonality 

on a category-by-category basis. Aon Cat Bond Indices’ sectors follow conventional 

market segments: Asia Pacific, Europe, Multi-peril, North American Earthquake, and 

North American Wind. We also segment the market between investment-grade and 

non-investment-grade given the disparity of returns for each of these markets. 

Aon Capital Markets calculates each group of indices by adding the following 

components: 

• Mark-to-market change for each cat bond 

• Coupon returns for each cat bond 

• LIBOR returns for the period 


The Indices present the performance of all outstanding catastrophe bonds on a 

mark-to-market basis. Each security’s contribution to the total return for the sector 

is weighted by issue size and number of days on-risk. For example, an ILS that has 

been on-risk only half the quarter will not contribute the same weighted return as 

an identical issue that was on-risk for the entire quarter. 

11


12 

The Results 

AON CAT BOND INDICES (June 30, 2008) 

Twelve Months Ended Six Months Ended 

CAT BOND SECTOR 6/30/2008 6/30/2007 6/30/2008 6/30/2007 

Asia Pacific 8.07% 10.51% 3.02% 5.64% 

Europe 9.09% 11.35% 3.87% 7.46% 

Multi-peril 9.91% 18.80% 3.07% 8.86% 

NA Earthquake 9.37% 11.01% 3.95% 6.28% 

NA Wind 11.87% 17.68% 3.20% 7.45% 

Investment Grade 3.85% 7.61% 0.08% 4.40% 

Non-Investment Grade 11.69% 15.33% 4.12% 7.64% 

ALL CAT BOND SECTORS 10.07% 14.51% 3.32% 7.29% 

BENCHMARKS 

3-5 Year US Treasury Notes 10.67% 5.39% 2.28% 1.54% 

3 Year US Corporate BB+ 6.46% 6.71% 3.96% 2.69% 

S&P 500 -14.04% 20.59% -11.91% 7.07% 

As a whole, catastrophe bonds provided a total return of 10.07 percent for the year 

ending June 30, 2008, down from 14.51 percent in the previous year. The prior 

period represented the highest returns on record, thanks to a near tripling of cat 

bond issuance in 2006 at substantially wider spreads. 

Evaluating each sector individually, the Indices’ returns for the 2008 period were 

lower in all cases than those observed in the 2007 period. These lower returns can 

be attributed to a combination of factors: 

• A softening reinsurance market. The lower cost of transferring risk in the 

traditional market directly influences costs in the cat bond market. 

• More investor money flowing into the sector. This has driven down returns 

on new issues. Aon Capital Markets has experienced an increase in 

investors’ order sizes. This, combined with the opening of several new 

funds, has added capital to the market. 

• The absence of major catastrophes resulting in large insured losses. The 

12-month period ending June 30, 2008 represents the second consecutive 

year without a major loss to the reinsurance industry. Historically, the 

absence of these events has reduced both reinsurance costs and ILS returns.

AON CAT BOND INDICES BY SECTOR (Years ending June 30) 

20.00% 

18.00% 

16.00% 

14.00% 

12.00% 

10.00% 

8.00% 

6.00% 

4.00% 

2.00% 

0.00% 

Asia Pacific 

Asia/Pacific 

2005 

NA Earthquake 

Europe 

2006 

Europe 

Multi-peril 

2007 

NA Earthquake NA Wind 


Multi-peril 

NA Wind All ILS Sectors 


In the recent period, Aon Cat Bond Indices were greatest for North American Wind 

structures, followed by Multi-peril, North American Earthquake, Europe and Asia 

Pacific respectively. The returns follow the relationship between expected losses 

and rates in the insurance industry as a whole—naturally, one demands greater 

compensation for assuming the risk of larger or more probable insured losses. In 

the latest 12-month period, the multi-peril issuances were impacted by an increased 

supply of multi-peril bonds, which led secondary market prices down. 

Interestingly, issuance in 2008 exhibited a weighted average expected loss of 1.50 

percent, as compared to 1.35 percent in 2007. Further, the number of tranches issued 

with expected loss less than 2 percent in the twelve months ended June 30, 2008 

declined to 57 percent from 69 percent in 2007. As the Indices demonstrate, returns 

declined between these two periods despite an increase in average expected loss. 

Although the reasons behind this unexpected result remain anecdotal, it seems the 

effects of a softening reinsurance market and more demand for cat bond investments 

outweighed investors’ need for greater return with increasing risk. 

Structural innovation can increase returns as investors require a premium to 

compensate for additional analysis and a perceived increase in risk. Investors 

reacted to cat bond innovation in the past year with discipline, which moderated 

the otherwise expected volatility. 

One such transaction—Newton Re 2008—succeeded as investors were willing to 

accept the sponsor’s analysis in exchange for additional transparency throughout the 

process and ongoing validation by a modeling firm. Despite investors’ clear preference 

for the use of an independent modeling firm, innovation combined with market 

discipline in the form of transparency and structure can be expected to continue. 

13


14 

AON CAT BOND INDICES VERSUS MARKET RATES (Years ending June 30) 

25% 

20% 

15% 

10% 

5% 

0% 

-5% 

-10% 

-15% 

2005 

ALL ILS SECTORS 

2006 

2007 

3-5 Year US Treasury Notes 

S&P 500 3 Year US Corporate BB+ 


Over the past few years, cat bond performance compares favorably to other financial 

benchmarks. The recent 12-month period has also exemplified the uncorrelated 

nature of cat bond risks, as they provided solid growth in contrast to the credit-driven 

correction experienced by the equity markets. The Aon Cat Bond Indices’ returns 

have also generally exceeded those offered by corporate and Treasury bonds. 

Investors can anticipate a combination of variables to affect the Aon Cat Bond 

Indices. Prevailing reinsurance rates will play a key role, as sponsors consider the 

economics of reinsurance compared to cat bond issuance. Aon Re Global expects 

U.S. personal property reinsurance rates to decrease between 5 and 20 percent 

in the next year, assuming light meteorological and seismic activity. Outside the 

United States, Aon Re Global expects year-over-year decreases of up to 15 percent. 

Of course, a significant loss event would moderate that decline, or potentially 

increase rates for January 1, 2009 renewals. 

Aon Capital Markets publishes its Aon Cat Bond Indices on a quarterly basis. For 

updates, please visit www.aon.com.

Indemnity Triggers Reach New Heights 

Evolving triggers for U.S. perils offer advantages 

Market Trends 

Prior to 2005, one could characterize the cat bond market as primarily opportunistic 

for both sponsors and investors. During difficult markets when traditional reinsurance 

capacity was tight and rates high, sponsors utilized the ILS market for competing 

coverage while investors eagerly put capital to work at attractive returns. However, 

when reinsurance markets softened and rates declined, so did investors’ appetite for 

insurance risk. During the last 18 months, however, the capital markets have become 

a more stable source of capacity for risk transfer throughout the reinsurance cycle. 

Rise Of Indemnity 

CATASTROPHE BOND ISSUANCE VERSUS PERCENT INDEMNITY (Years ending June 30) 

8,000 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

0 

1,071 985 986 

2001 

2002 

2003 

Cat Bonds 

1,558 

2004 

1,137 

2005 

3,124 

2006 

7,003 

2007 

% Indemnity Issued 

5,815 



Since the beginning of 2006, indemnity issuance has risen considerably. Indemnity 

issuance totaled $1.79 billion during the 12-month period ending June 30, 2007, and 

$2.75 billion during the following 12 months. By comparison, indemnity triggers 

represented just 25 percent of issuance from 1996 to 2006. While overall indemnity 

issuance has grown, transaction sizes have increased as well. In 2007, Aon Capital 

Markets completed a $1.18 billion for Merna Reinsurance Ltd., representing the 

largest-ever indemnity transaction. Finally, the breadth of issuance has also increased 

to include new perils such as winter storm and wildfire. 

50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

15


16 

While sponsor demand for the structure has always been strong, investors previously 

tempered the use of indemnity through higher risk premiums. However, investors have 

gained valuable experience in this market and many have expanded their modeling 

and analytic capabilities, increasing their acceptance of indemnity triggers. Many 

investors have developed internal modeling teams and currently license one or more 

catastrophe models. Additionally, modeling firms have released specific catastrophe 

trading models that investors are beginning to implement. Finally, many investors 

are evaluating new transactions using a multi-model approach, similar to traditional 

reinsurance markets. 

This increased acceptance, combined with the emergence of sophisticated sponsors 

willing to make significant disclosures regarding their claims payment practices, 

has improved the pricing and capacity gap between indemnity and non-indemnity 

transactions and sparked significant growth in indemnity securitizations. 

It is also important to note that investors showed a preference for transactions which 

featured quality underwriting, independent third-party modeling, and straightforward 

structures. Some recent transactions tested the market’s acceptance of different 

modeling approaches. One transaction, which relied on a proprietary internal model, 

was cancelled due to a lack of investor interest. 

Pros And Cons Of Indemnity Triggers 

Similar to other forms of securitization and reinsurance, indemnity triggers have 

a number of advantages and disadvantages. A complete understanding is vital to 

determining if it is the proper trigger for each sponsor. 

The primary benefit of an indemnity trigger is simple: payments are based on a 

sponsor’s actual losses, consequently reducing basis risk for the sponsor as compared 

to a non-indemnity structure (such as parametric or index structures). Additionally, 

as a risk transfer solution, indemnity cat bonds receive reinsurance accounting 

treatment with losses and recoveries accounted for as part of underwriting results. 

That said, indemnity triggers do have some drawbacks compared to non-indemnity 

triggers: 

• Higher risk premium. Due to additional uncertainties such as the ongoing 

management and underwriting policies of the sponsor, investors typically 

require a higher risk premium from indemnity bonds. 

• Complexity. Indemnity transactions are typically more complex to 

structure, which results in higher fractional costs, greater demand on 

sponsor resources, and an increased time to market. 

• More disclosure. Indemnity triggers also require increased sponsor 

disclosure, including current and historical policy and exposure 

information, underwriting and claims practices, risk management 

strategies, and relevant loss history.

• Longer recovery. Since indemnity recoveries are based on actual sponsor 

losses, their recovery time depends on loss development, which lengthens 

recovery time relative to non-indemnity transactions. This not only delays 

sponsor recovery, but can also lead to longer extension periods for the 

bonds supporting the recovery. 

• Residual basis risk. Indemnity solutions (capital markets or traditional 

reinsurance) can never fully eliminate basis risk. Some elements of loss, 

such as loss adjustment expense, are typically included as a nominal 

adjustment factor. In similar fashion, sponsors use nominal adjustment 

factors to cover some exposures that are difficult to model or are not 

included in the catastrophe models (such as auto physical damage, 

demolition and debris removal, etc). While sponsors typically select 

adjustment factors that mimic their historical loss experience, a small 

amount of basis risk remains in the structure due to the estimation of the 

factors themselves. 

Impact Of Principal Loss 

Market experts acknowledge that the insured losses associated with Hurricane 

Katrina will cause a further principal loss for investors of KAMP RE 2005 Ltd. bonds. 

While this will substantiate the effectiveness of the indemnity recovery mechanism 

for the sponsor, it has also spurred investor concerns over potential loss of capital. 

This loss and difficult market conditions in 2006 contributed to a decrease in 

indemnity issuance to just 8 percent of annual issuance. 

Following this loss, investors now demand more transparency from each 

transaction. Fund managers, institutions, and reinsurers devote more time and 

resources to reviewing model accuracy, data quality, underwriting, claims practices, 

risk management strategies, and relevant loss history. While this has increased the 

time and resources required of investors and sponsors, it has also created a more 

transparent and efficient market. The increase in indemnity issuance during 2007 

and the first half of 2008 can be attributed to both the softer reinsurance market 

and this increased transparency. 

Role Of Rating Agencies 


S&P, Moody’s, Fitch, and A.M. Best have all been involved in rating indemnity 

and non-indemnity transactions. The criteria used to rate an indemnity bond 

differs from that of non-indemnity and, therefore, rating agencies also must 

spend additional time and resources in understanding and rating an indemnity 

transaction. While a single rating agency is typically sufficient to complete most 

indemnity transactions, some investors require multiple ratings. Consequently, 

some of the larger indemnity transactions have engaged multiple rating agencies 

to increase the potential investor base. 

17


18 

Long-term Outlook 

While there are some initiatives underway to standardize catastrophe risk and 

ultimately make it tradeable, the intricacies and unique requirements of catastrophe 

risk combined with regulatory statutes will continue to support sponsor demand for 

indemnity triggers. 

Several recent indemnity sponsors have issued bonds via shelf programs that would 

facilitate subsequent new issuance. Use of these programs will fuel the growth on a 

year-over-year basis. 

Further, many of the recent trends should continue to grow in importance. As 

investors gain more experience, insight, and knowledge, they will evaluate each 

transaction with greater sophistication. As new sponsors and structures come 

to market, investors will continue to rely on existing models for accurate risk 

assessment. As these sponsors become more diverse and structures become more 

complex, investors will increase their use of multiple models. Finally, as the range 

of perils and geographies increase, investors will pay more attention to event and 

peril correlations. For sponsors, all of these trends suggest that investor demand 

for straightforward transactions with quality underwriting and established thirdparty 

modeling will continue to be strong, ultimately leading to an increase in 

available capacity.

The Buy Side 

A review of the ILS investor base 

Growth in the ILS market reflects the efforts of both transaction sponsors and 

investors. Sponsors are insurers and reinsurers seeking to transfer a predefined risk to 

the capital markets. The investors on the other side of the transaction who assume 

that risk, however, are not as easily classified. They are a diverse group and are often 

motivated by differing objectives. 

Catastrophe bonds are the most prevalent insurance-linked security and offer the 

most complete picture of the diversity of ILS investors. 

Segmenting The Cat Bond Investor Market 

INVESTOR BY TYPE 

Cat Fund 

Institutional Investor 

Reinsurer 

Hedge Fund 

Mutual Fund 

21% 

33% 

7% 3% 

The largest players in this market are the cat funds, a type of investment fund 

(including those belonging to corporations) that specializes in collateralized insurance 

coverage. Cat funds, which make up 36 percent of the market, have grown steadily 

since the advent of catastrophe bonds, and have become increasingly sophisticated. In 

conjunction with using established statistical models, many cat fund managers develop 

and invest in proprietary models, quantifying their risk as accurately as possible. Cat 

funds are driven by returns as well as portfolio diversification. Given this, they seek 

investments with a variety of risk characteristics, diversifying as much as possible in a 

market with a limited number of perils. 

Institutional investors currently comprise 33 percent of the market. They have 

robust risk management processes that seek diversification across their portfolio of 

cat bond investments. However, because they have substantial capital invested in all 

parts of the fixed income market, institutional investors systematically analyze and 

monitor portfolio concentrations, managing diversification among cat bonds as well 

as the overall correlation among each class of investments. Catastrophe bonds’ lack 

of correlation with respect to credit risk and interest rate risk generally makes them 

attractive to institutional investors. As discussed earlier, this lack of correlation with 

ILS performance is notable during the recent U.S. credit crisis. 

36% 


19


20 

Reinsurers comprise 21 percent of the investor community today, and play an 

interesting role in the market. In addition to sponsoring transactions, some reinsurers 

also manage funds that invest in securities originated by themselves or by other 

sponsors. They may also accept risks either through reinsurance or investing in the 

ILS market. As an expert participant in the risk management and trading markets, 

reinsurers constantly strive to balance their risk portfolio. At the same time, they use 

their expertise in the market to maximize returns by buying and selling risk. 

Hedge funds and mutual funds, at 7 and 3 percent of the market, respectively, are 

similar to cat funds in specifically dedicating capital to catastrophe risk investments. 

Of course, hedge funds and mutual funds also participate in other markets, 

including equity and debt instruments. Although focused on managing risk and 

achieving diversification, these funds are primarily interested in meeting a high 

return threshold. In the current market, this causes some hedge funds to reserve 

capital for the future when returns may be higher. 

Despite the relatively few categories of catastrophe bond investors, no single 

group exerts disproportionate influence over the price or success of a particular 

transaction. At current volume levels, the market has proven efficient, at least 

from a theoretical perspective. This efficiency can be attributed to sponsors having 

alternative structures with which to manage risk and access capital, and investors 

having alternative uses of capital that offer different risk/return profiles. These 

alternatives can include traditional reinsurance and industry loss warranties (ILWs). 

A Geographic Overview 

INVESTOR BY COUNTRY 

US 

Bermuda 

UK 

Switzerland 

France 

Canada 

Australia 

Germany 

Italy 

12% 

12% 

2% 

4% 

19% 

1% 

1% 

The ILS Market: Beyond Cat Bonds 

Aside from catastrophe bonds, the ILS market includes other instruments that 

appeal to specific investors. ILWs and private collateralized reinsurance layers, for 

example, appeal to hedge funds, cat funds and reinsurers. These investors use ILWs 

on a smaller scale—typically $10 billion to $25 billion—both purchasing coverage 

and selling positions for risk management purposes. These instruments offer returns 

that are driven by typical market forces and can diversify an existing portfolio. 

Sidecars and other newly formed reinsurance companies are of interest to private 

equity investors as well as hedge funds, offering them the opportunity to participate 

in the insurance and risk-transfer markets. Naturally, they are most popular when the 

cost of risk (i.e., insurance) is highest. 

Finally, a relatively new method of participating in the ILS market has evolved from 

the derivatives market. In swap, option, and futures forms, synthetic risk-transfer 

instruments are evolving to use standardized documentation and, in some cases, can 

be traded among market participants. Participants to date include hedge funds as 

well as reinsurers that buy and sell derivatives as part of a risk management strategy. 

Speculators with an interest in taking certain risk positions for a potential return also 

participate in this market. The use of derivatives in the ILS market will increase as 

participants gain knowledge and comfort with the structures. The resulting increase 

in liquidity should accelerate derivatives’ growth as well. 

Correlation And Credit Markets 

As they build portfolios to achieve the greatest return for a given level of risk, 

investors seek assets with low correlation to other investments. As discussed in 

the first section of this report, it is important to emphasize the lack of correlation 

between insurance-linked securities and other fixed income investments. The benefit 

of this low correlation has been underscored during the recent credit crisis. 

If You Don’t Like The Weather… 


The impressive growth of the ILS market has relied in part on the sophisticated 

analysis that illuminates risk and rewards for market participants. ILS investors and 

sponsors have benefited from increasingly sophisticated analytics, using them to 

develop structures, gain understanding, and make well-reasoned investment and 

risk management decisions. 

That said, as the traditional insurance market has demonstrated, demand for risk 

transfer tends to have a direct relationship with the frequency of perils that define 

each instrument. The market’s response to future catastrophes will continue to 

influence ILS supply and demand. 

21


22 

Contingent Capital: Poised for a Comeback 

Conditions favor the inclusion of this diversifying solution 

As enterprise risk management becomes more prominent, insurers are actively managing 

the accumulation of correlated exposures while maintaining financial flexibility and the 

ability to withstand multiple catastrophes in a single period. However, given the relatively 

benign wind seasons in the United States since 2006, coupled with the fact that many 

recent catastrophes have resulted in little insured loss, many companies find themselves 

in a strong capital position. These companies may find this an ideal time to implement a 

contingent capital program. 

External forces are also pointing to an increased use of contingent capital, as regulators 

and rating agencies focus on risk mitigation and capital adequacy at much more remote 

return periods. This, combined with the changes made to the catastrophe models 

since Hurricane Katrina, has resulted in greater capital requirements and a need for 

more comprehensive capital solutions. These trends have sparked greater interest in 

insurance-linked capital market solutions. 

Structural changes to the form and source of contingent capital, including the expansion 

of trigger options, may make this solution more attractive to all counterparties. 

The Capital Conundrum: A Balancing Act 

Capital preservation is fundamental to protecting policyholders and providing adequate 

returns to shareholders. Management teams grapple with how best to maintain a 

strong balance sheet and provide adequate returns to shareholders while retaining 

financial flexibility. 

In a favorable balance sheet environment, corporate boards often consider returning excess 

capital to shareholders by repurchasing stock. Today’s low price-to-book multiples heighten 

the attractiveness of this option. Repurchases, however, ultimately weaken the balance sheet 

and expose the company to distress after a large event, when recapitalization may be more 

costly and difficult. 

Post-event flexibility is paramount; it is the time when companies take advantage 

of a hardening market to recoup losses and refortify the balance sheet. Risk transfer 

solutions, such as traditional reinsurance, provide protection from extreme losses and 

aim to prevent surplus erosion, but do not explicitly provide post-event flexibility.

Just-in-Case Capital 

As a prearranged facility, contingent capital allows companies to obtain a capital 

infusion at a time when it is most needed and potentially hardest to come by. Unlike 

reinsurance, contingent capital is not a risk transfer product—it is a balance sheet 

recovery mechanism. A comprehensive capital management program comprised 

of various forms of protection best positions companies to take advantage of 

post-event market dislocation. Given the possibility of default caused by industry 

wide catastrophic events, contingent capital can also diversify or eliminate credit 

risk through collateralization. 

The capital can take several forms: 

• Contingent surplus notes. Surplus notes have historically been used as a 

source of balance sheet enhancement since, under U.S statutory accounting, 

they serve to increase capital and assets without adding liabilities. 

• Subordinated debt. Contingent debt is a financing arrangement in which 

a bank or other lender agrees to provide a loan to a company after a predefined 

trigger event. 

• Catastrophe Equity Put (CatEPut ® ). CatEPut ® is a contingent capital solution 

introduced by Aon Capital Markets in 1994. It allows a company to increase 

capital by issuing common or preferred equity after a catastrophe. The 

structure can guarantee the equity issuance price, allowing the company 

to know exactly how much capital can be raised. This eliminates pricing 

risk, as stock prices typically decline after a large loss, making a reactionary 

secondary issuance more difficult. 

Historical Issuance: A Look Back Points The Way Forward 


Contingent capital enjoyed a strong 11-year run from 1994 to 2004. Aon Capital 

Markets brought the first industry CatEPut ® solution to market in 1994: $500 

million on behalf of the Hawaii Hurricane Relief Fund. Including this breakthrough 

transaction, over 40 contingent capital transactions have been structured, providing 

over $11 billion in standby capital. 

In the wake of September 11, 2001, the industry began seeking new, less expensive 

risk mitigation alternatives and contingent capital issuance waned. The need for 

hard capital, as opposed to the standby variety, steered this shift. The industry 

recapitalization post-September 11 (approximately $8.3 billion) was predominantly in 

the form of new start-up companies, the majority of which were based in Bermuda. 

Following the devastating storm seasons of 2004 and 2005, reinsurance sidecars 

emerged as a recapitalization response of choice. These vehicles allow investors to 

take on the risks (and share in the returns) of a book of business written by an insurer 

or reinsurer. They add capacity when most needed and take advantage of a postevent 

hardening market. 

23


24 

Structural Considerations For Future Issuance 

A company’s decision to issue contingent capital depends on its ability to support 

additional leverage, generate liquidity for repayment and issue new equity. The 

differing tax treatment of debt and equity is also a consideration. 

Historically, contingent capital structures contained accounting-type triggers. 

Taking the lead from catastrophe bonds, it is reasonable to expect that various 

triggers or trigger combinations will be used to structure future contingent capital 

transactions. Given the opportunities that traditionally accompany post-event 

market dislocation, companies with access to capital following an event stand to 

benefit more than their capital-constrained peers. 

As the use of non-indemnity triggers becomes more commonplace in the cat bond 

market, investors are becoming more comfortable with their use and execution. 

Non-indemnity transactions usually get to market much faster than indemnity 

transactions, and the associated costs and disclosure requirements are much lower. 

The same can be said for a contingent capital deal, which could be structured like 

a cat bond/line of credit/ILW hybrid. The introduction of new trigger mechanisms 

into the contingent capital market would open the doors to new investors seeking 

diversification while creating price benefits for sponsors. 

For a company electing a contingent equity structure (such as a CatEPut ® ), certain 

structural innovations should be considered to improve investor demand and make 

the product more efficient for sponsors. 

• Legal form of pass-through trust. CatEPut ® arrangements use a special 

purpose entity established under Bermuda or Cayman Islands law to 

maximize tax efficiency. 

• Preferred versus common stock. The issuance of common shares dilutes 

voting rights, while the use of preferred shares maintains voting rights 

and provides a more attractive dividend to the investor. Preferred 

shares could be convertible to common at a predetermined ratio after a 

requisite holding period of three to four years. By structuring a CatEPut ® 

using convertible preferred equity, dilution can be delayed, giving a 

company time to recover from the catastrophe loss by seizing post-event 

market opportunities. This allows the company to plan for the preferred 

conversion in an orderly fashion, or indeed avoid conversion (and the 

resulting dilution) altogether through a repurchase of the preferred 

shares (see “Repurchase Agreement” below). Dividends on preferred 

shares issued through a CatEPut ® will be dictated by the market and will 

reflect the rate paid by similar hybrid instruments. 

• Speed of execution. Speed of post-event recapitalization is vital to 

maintaining business continuity and exploiting market conditions. 

Unfortunately, providing subscription rights to current shareholders bogs 

down the recapitalization process. By excluding preemptive subscription 

rights via shareholder resolution (coupled with a pre-subscription 

agreement with new investors), a contingent capital agreement can be 

executed quickly.


• Repurchase agreement. In the market that typically follows a large 

industry event, a company may see its balance sheet reconstituted 

quickly and, therefore, desire to buy back the preferred shares issued 

through the CatEPut ® arrangement. In these instances, the repurchase 

price can be tied to the company’s common stock price on a formula 

and limited to a percentage of registered share capital. 

• Registration of securities. In order for the investor to have an ultimate 

“exit strategy,” the company generally must grant the investor certain 

opportunities to demand registration and listing of the contingent 

capital securities. 

Increased Capital Requirements Compel Changes To Capital Solutions 

Pressure on financial strength ratings and increased attention by regulators has resulted 

in changes to capital models as well as risk mitigation programs that underscore the 

benefits of contingent capital programs. As regulators and rating agencies struggle to 

keep pace with the changing global landscape, their views on what comprises sound 

risk management and adequate capitalization continue to evolve. 

After Hurricane Katrina, A.M. Best made many changes to its Best’s Capital 

Adequacy Ratio (BCAR) model to require more capital under their two-event 

scenario. More significantly, A.M. Best explicitly stated that post-event financial 

flexibility concerned them. In March 2008, A.M. Best announced plans to include 

a terrorism Probable Maximum Loss (PML) in the calculation of stressed BCAR, as 

opposed to performing a separate test as in prior years. 

In November 2006, Standard & Poor’s overhauled their capital adequacy model 

and released the final details of their new Enhanced Capital Model in May 2007. 

The changes to their capital requirements contemplated the historical volatility in 

the industry, resulting in a $45 billion decline in the industry’s capital adequacy. 

Rating agency capital models have their roots in the National Association of 

Insurance Commissioner’s (NAIC) Risk Based Capital (RBC) model. Historically, 

this model has not included an explicit charge for catastrophe risk. However, in 

March 2008, the NAIC released a draft proposal for a new RBC charge for property 

catastrophe risk. The NAIC specifically created the charge to address its increasing 

concern over post-event capital levels and, while still in its comment period, the 

change contemplates the inclusion of a 1-in-250 year PML for both hurricane and 

earthquake risks. 

The losses incurred for the 2004 and 2005 hurricane events in the United States 

were underestimated by the major vendor firms’ models available at that time. 

Since then, the modeling firms made significant investments to refine model 

performance and provide more precise estimates of future losses. However, 

even with these substantial changes, regulators and rating agencies continue to 

encourage companies to use more than modeled PMLs to assess exposures. In their 

view, a thorough assessment of exposures and the design of a comprehensive risk 

management plan employs not only the models per se, but also the models used 

25


26 

in conjunction with other analyses and metrics. To that end, Tail Value at Risk, or 

TVaR, has emerged as a complementary metric to assess exposures. TVaR, which 

considers all possible extreme events, is a function of the slope of the exceedance 

probability curve, fostering a more conservative approach that would increase 

capital requirements. 

Contingent Capital Reemerges 

The major rating agencies (A.M. Best, Standard & Poor’s, Moody’s and Fitch) and 

the key insurance regulatory bodies (NAIC in the United States, BMA in Bermuda 

and FSA in the United Kingdom) have diverse criteria, with some underlying 

commonalities, for the treatment of contingent capital solutions. The amount of 

explicit equity credit granted in their respective capital adequacy models fluctuates 

and, in some cases, may be capped. Qualitative ratings credit is generally afforded, 

as contingent capital is characteristically regarded as a solid risk management tool. 

Catastrophe risk management programs are best structured with an optimized 

balance of risk transfer products and capital solutions. This diversity can mitigate 

a company’s credit risk while providing the greatest comprehensive protection 

from extreme loss. In addition, increased capital requirements from regulators and 

rating agencies compel management to seek additional sources of capital. However, 

favorable treatment of contingent solutions by regulators and rating agencies can 

serve to offset these additional capital requirements. 

Given current market conditions, we believe that insurers now have an opportunity to 

secure contingent capital at favorable terms. As they do, they may find their results are 

enhanced by the incorporation of a qualified triggering insurance loss which would 

further improve pricing for the sponsor and lower the risk of loss to the investor. They 

can also benefit from the addition of new trigger mechanisms and other structural 

innovations, which could spur an increase in capacity that creates price benefits for 

sponsors. Finally, global marketing to institutional investors through a sophisticated 

distribution partner will help elicit the most favorable terms and conditions.

Continued Innovation 

Options and futures evolve, but lack liquidity 

Innovation in the financial markets has characterized the growth of economies for 

a very long time, and its impact on the banking, investing, and insurance industries 

is well documented. Indeed, in just the past several years we have witnessed the 

development of various forms of options and futures, new methods of risk transfer, 

and customized forms of capital. The demand for further customization, combined 

with the competitive forces encouraging intermediaries to meet it, have propelled 

market players in the United States, Europe, and Asia to foster new ideas. Thanks 

to an improved computational resources and increasing analytical sophistication, 

innovation in insurance finance continues to be a work in process. The use of options 

and futures contracts in the insurance industry is a prime example. 

Historic Perspective 


In 1992, the Chicago Board of Trade (CBOT) introduced the first insurance derivative 

contracts, which were based on the experience of 22 insurers. The futures and 

options contracts initially focused on various regions of the United States, offering a 

new method to manage catastrophic risk. Due to a lack of historical reference data on 

these initial contracts, however, risk-takers avoided them. In response, contract terms 

were changed to include well-known metrics such as those compiled by the Property 

Claims Service (PCS). Concurrent with this change, contracts became available 

based on nine regional U.S. indices (National, Eastern, Northeastern, Southeastern, 

Midwestern, Western, California, Florida and Texas). 

Rising to a high of over nine million contracts in 1997, volume declined to negligible 

levels in subsequent years and the CBOT eventually discontinued trading. These 

standardized contracts, available in various combinations, offered more trading 

flexibility than ever before, but were unable to sustain ongoing popularity. 

Three exchange-traded derivative platforms have been created in the past year, and 

deserve review. They are the Insurance Futures Exchange, Carvill Hurricane Index, 

and Re-Ex. 

• The Insurance Futures Exchange (IFEX). 

Continuing the evolution of insurance derivatives, IFEX launched Event 

Linked Futures (ELF) last year. IFEX created ELFs as contracts for difference 

with full payment triggered once losses exceed pre-specified amounts, unlike 

reinsurance policies. ELFs more closely resemble industry loss warranties 

(ILW) than options. Unlike ILWs, buyers of ELFs do not have to suffer direct 

losses to receive a payment once the industry loss strike amount has been 

reached. These industry losses are determined by PCS, which is commonly 

used to estimate catastrophe losses in support of index cat bonds. 

IFEX currently offers 2008 and 2009 ELF US Tropical Wind First and Second 

Event contracts. Trigger levels are at $10 billion, $20 billion, $30 billion, $40 

billion and $50 billion of industry losses over a calendar-year risk period. 

27


28 

There is presently a lack of liquidity across this array of contracts. To date, 

trading has been limited to the $10 billion and $20 billion contracts and, 

even for those contracts, volume has been light. Only 1,104 of the $10 

billion 2008 contracts changed hands from its inception in September 

through December 2007. From January through June 30, 2008, only 354 

contracts changed hands. IFEX plans to offer other geographies including 

Europe and Japan, as well as U.S. catastrophe sub-zones. In fact, contracts 

dealing with Florida tropical wind and Gulf Coast tropical wind are currently 

under review by the Commodities Futures Trading Commission (CFTC). 

IFEX has also created an infrastructure for trading the contracts. All contracts 

trade and clear through the Chicago Climate Futures Exchange (CCFE) with 

variable margin requirements set by the exchange based on an estimated 

daily risk of loss as determined by an outside consultant. The CCFE is 

regulated by the CFTC and the National Futures Association. 

A simple way to review the economics of these instruments is to compare 

prices for ILWs to those of the comparable IFEX contracts. The differences in 

indicative prices as of June 30, 2008 demonstrate a potential for arbitrage 

between the exchange-traded contracts and the negotiated ILW market. 

The accompanying table compares these prices as percentage rates-on-line. 

COMPARATIVE PRICING FOR NORTH AMERICAN RISKS (as of June 30, 2008) 

Trigger ILW 1st 2008 Event IFEX 1st 2009 Event IFEX 

$10 B N/A 36.85% 37.20% 

$20 B 27.50% 26.00% 23.80% 

$30 B 18.50% 16.80% 15.55% 

$40 B 14.00% 12.90% 11.90% 

$50 B 12.00% 10.30% 8.90% 

Pricing differences between ILW and IFEX contracts can be attributed to 

structural differences between the instruments, the bespoke nature of 

ILWs, collateralization, transaction costs, currently low liquidity, and the 

comparatively short operating history of IFEX itself. A trader’s view of 

these risks would determine the potential profit from an arbitrage trade. 

Similarly, an insurer seeking to hedge a particular exposure would need 

to weigh the relative risks (including basis risk) with the lower cost of IFEX 

futures to determine its applicability and attractiveness. 

• Carvill Hurricane Index (CHI). 

In addition to ELFs, the market has witnessed the development of CHI, 

a numerical measure of the potential for damage from a hurricane and 

is based on Carvill’s Hurricane Damage Potential Index. In addition 

to incorporating the Saffi-Simpson Hurricane Scale, CHI incorporates 

additional factors such as sustained wind speed and the radius of hurricane 

force winds. It is a continuous measurement, rather than a discrete scale, 

starting from zero and having no maximum value.


CME Group developed three types on contracts for hurricane futures and 

options in six defined U.S. areas: Gulf Coast, Florida, Southern Atlantic 

Coast, Northern Atlantic Coast, Eastern U.S., and Galveston-Mobile. The 

contracts are also listed in terms of numbered events (e.g., first hurricane 

of the season to make landfall, second hurricane, etc.). The value of each 

future will be 1,000 times the value of the CHI. The contracts trade on the 

CME Globex ® system. 

According to Carvill, the nominal value of derivatives traded since its 

inception has reached nearly $60 million, making the CME derivatives as 

successful as IFEX ELFs. With the multiple defined areas available as a basis 

for the futures and options, theoretical basis risk is reduced versus ELFs. 

• Re-Ex Index. 

Gallagher Re, now a part of Aon Re Global, launched the Re-Ex Index in 

2007. The Re-Ex Index was created by taking Property Claim Services (PCS) 

loss damage estimates and dividing by $10 million. For example, if the PCS 

estimate totaled $25 billion, the Re-Ex Index would be $2,500. Aon adjusts 

the underlying PCS data only to eliminate losses related to earthquake and 

terrorism. Three indices are offered, including Nationwide, Texas to Maine 

(excluding Florida) and Florida itself. The Re-ex index includes losses up to 

the end of a calendar year, plus a three-month development period. Thus, 

the settlement date for the index is March 31 of each year. Note that the 

Re-Ex Index is cumulative over the course of the annual period. 

NYMEX offers Cat Risk Index Contracts based on the Re-Ex Index. The 

contracts are standardized futures and options with some commercial 

terms modeled on ISDA terms. They are financially settled against the 

Re-Ex Index by taking the Index value and multiplying by a contract value 

of 10. In the example above, if the Re-Ex Index was $2,500 on a settlement 

date, contracts would be settled at $25,000. The variety offered by Re-Ex’s 

three indices creates the ability to trade contracts specific to one of the 

three geographies, or a combination. 

The contracts are executed off-exchange in the OTC market, and cleared 

through NYMEX’s ClearPort ® system. Unfortunately, volumes to date 

have been low and the resulting activity level has not provided sufficient 

price information for an analysis of the contracts’ economics. However, 

market participants should be encouraged by the development of 

the index and associated contracts, as they offer another method for 

hedging catastrophe risk. The contracts’ association with well-established 

stakeholders such as PCS, NYMEX, and Aon also provides them strength 

and market acceptability. 

NYMEX contracts offer a theoretically lower level of basis risk vis-à-vis 

IFEX contracts by virtue of the three specialized geographic indices. The 

proposed creation of additional IFEX contracts will temporarily minimize 

this advantage until additional specialized contracts can be created by 

either player, based on demand. 

29


30 

The Nemesis: Basis Risk 

The risk that an insurer or investor would recover less from a hedging product than 

their actual event loss has beleaguered insurance derivatives since their inception. 

Although traders can be satisfied with less-than-perfect hedges, many insurance and 

reinsurance risk managers desire more precise coverage. While a set of nine regional 

index contracts is more appealing than a single national index, the diversity does 

not go far enough to reduce basis risk for many insurers. 

The effectiveness of more specific derivatives has been studied and substantiated 

on a state-specific basis. In a recent analysis, Harrington and Hipp compared 

individual insurers’ annual loss ratios to state-specific catastrophe loss ratios using 

PCS data. They found that “state-specific catastrophe derivatives could be used 

effectively to hedge insurers’ aggregate underwriting results across lines and 

states.” In these contracts, coverage is afforded to perils in specific states or groups 

of states. However, such disaggregation has not yet been developed in derivative 

form due to difficulties in developing interest and liquidity. 

While the ILS derivatives market has the potential to increase—indeed, create— 

efficiencies among those wishing to trade U.S. hurricane risk, the existing contracts 

still do not sufficiently address the persistent problem of basis risk. In the case of 

IFEX, for example, geography-specific contracts for sub-zones such as Florida and 

the Gulf Coast will narrow the gap between an insurer’s risk and its management 

needs. For insurers with diverse businesses, a combination of derivatives (including 

the new regional contracts) would have to be statistically evaluated to determine if 

it presents a risk management alternative to traditional reinsurance or ILWs. 

Use Of Derivative Platforms 

Market participants, including insurers, investors, and speculators, will respond 

positively to derivatives that provide efficient risk transfer. However, efficiency in the 

catastrophe derivatives market requires a certain level of liquidity that does not yet 

exist. As a complement (and/or competitor) to ILWs, the derivatives market does not 

offer sufficient volumes. Consider that one would need to purchase 500 ELF contracts 

at $10,000 each to replace one $5 million ILW. This would represent an unwieldy 

transaction in today’s market. Until the derivatives market becomes more liquid and 

experienced, participants will continue to make use of existing options like traditional 

reinsurance, catastrophe bonds and ILWs. These options are more readily available 

and proven versus the existing set of derivatives, particularly in a market where 

reinsurance exists at an equivalent or near-equivalent cost to newer instruments.


Despite some growing pains, all three derivative platforms have immediate application 

for hedging purposes by fund managers investing in catastrophe-related securities or 

equities of companies exposed to hurricane risk. They may also have limited use by 

insurers who wish to supplement their risk management practices by decreasing their 

exposure to U.S. tropical wind through the purchase of derivatives. As noted, basis risk 

must be considered and evaluated in these cases. Considering contemporary pricing 

indications, the lower cost of options and futures may induce insurers to implement 

some derivatives hedging as part of their risk management strategy. Finally, as with 

most derivatives, there is certainly potential for investors to take a speculative position 

on wind risk. 

It is safe to say that the development of derivatives in the insurance sector will 

continue, particularly as analytical methods evolve in tandem with the financial 

markets. The further development of cost-effective methods that adequately 

address basis risk will hasten this evolution. In addition, the occurrence of a 

natural event resulting in major loss to the reinsurance industry can be expected 

to accelerate the acceptance of such products. Solutions that closely resemble 

existing—and accepted—risk management tools will be more rapidly adopted and 

incorporated into stakeholders’ risk management strategies. 

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32

Appendix I 

Catastrophe bond issuance statistics 

As of June 30, 2008 


33


CATASTROPHE BONDS ON-RISK BY YEAR (Years ending June 30) 

$MM 

16000 

14000 

12000 

10000 

8000 

6000 

4000 

2000 

0 

CATASTROPHE BONDS ON-RISK BY YEAR AND PERIL (Years ending June 30) 

Risk capital in each tranche allocated equally to all perils that expose the tranche to any loss of principal 

34 

2001 

2002 

2003 

2004 

2005 

2006 

2007 


CAT Bonds

CATASTROPHE BOND ISSUANCE BY YEAR (Years ending June 30) 

$ MM 

8000 

7000 

6000 

5000 

4000 

3000 

2000 

1000 

CATASTROPHE BOND ISSUANCE BY HALF-YEAR 

$ MM 

0 

5000 

4500 

4000 

3500 

3000 

2500 

2000 

1500 

1000 

500 

0 

1,558 

1,071 985 986 1,137 

2001 

521 

1H 05 

2002 

977 

2H 05 

2003 

2,147 

1H 06 

2004 

2,547 

2H 06 

2005 

4,455 

3,124 

2006 

1H 07 

7,003 

2007 

3,405 

2H 07 


5,815 


2,410 

1H 08 

35 

CAT Bonds 

CAT Bonds


CATASTROPHE BOND ISSUANCE BY TRANCHE / DEAL / SPONSOR (Years ending June 30) 

50 

45 

40 

35 

30 

25 

20 

15 

10 

5 

0 

2002 

2003 

2004 

2005 

Tranches Issued Deals Issued 

CATASTROPHE BOND ISSUANCE BY YEAR AND PERIL (Years ending June 30) 

Risk capital in each tranche allocated equally to all perils that expose the tranche to any loss of principal 

36 

Notional Limit Issued by Peril 

8000 

7000 

6000 

5000 

4000 

3000 

2000 

1000 

0 

420 441 301 

2001 

2002 

2003 

476 

2004 

2005 

2006 

2006 

2007 


First Time Sponsors 

Hurricane North American Quake Euro Wind Japan Quake Asia Pacific Other 

646 

1,038 

2,328 

2007 

1,669 


12 

10 

8 

6 

4 

2 

0

CATASTROPHE BOND ISSUANCE BY TRIGGER (Years ending June 30) 

8,000 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0 

0% 

CATASTROPHE BOND ISSUANCE VERSUS PERCENT INDEMNITY (Years ending June 30) 

1,071 985 986 

2001 

2002 

2003 

Cat Bonds 

1,558 

2004 

1,137 

2005 

3,124 

2006 

7,003 

2007 

% Indemnity Issued 


5,815 


50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

37


CATASTROPHE BOND ISSUANCE BY LOSS TRIGGER (Years ending June 30) 

Indemnity 

Index 

Modeled Loss 

Multiple 

Parametric 

Parametric Index 

Dual 

11% 

6% 

34% 

4% 

3% 

26% 

17% 

4% 

4% 

25% 

4% 


CATASTROPHE BOND ISSUANCE BY ExPECTED LOSS PERCENTAGE (Years ending June 30) 

38 

>5% 

4% to 5% 

3% to 4% 

2% to 3% 

1% to 2% 

.5% to 1% 

0% to .5% 

4% 

6% 

7% 

15% 

24% 

26% 

19% 

14% 

19% 

5% 

10% 

10% 


19% 

14% 

47% 

24% 

Indemnity 

Index 

Modeled Loss 

Multiple 

Parametric 

Parametric Inde

Appendix II 

ILS market transaction summary 

As of June 30, 2008 


39


SUMMARY OF CATASTROPHE BONDS - 1997 THROUGH JUNE 30, 2008 

40 

Date Sponsor Issuer Class Territories/ Perils Trigger Issue Size ($000s) MIS S&P Fitch 

16-Jun-97 USAA Residential Reinsurance I Class A-1 US Gulf/East Coast Wind Indemnity $86,814 Aaa AAA 

Class A-2 US Gulf/East Coast Wind Indemnity $313,180 Ba2 BB BB 

16-Oct-97 Swiss Re SR Earthquake Fund, Ltd. Class A-1 California EQ Index $25,200 Baa3 BBB- 

19-Nov-97 

Tokio Marine & 

Nichido Fire 

Class A-2 California EQ Index $12,000 Baa3 BBB- 

Class B California EQ Index $60,300 Ba1 BB 

Class C California EQ Index $14,700 Ba3 B 

Parametric Re Ltd. Japan EQ Parametric $80,000 Ba2 

3-Mar-98 Zurich Group Trinity Re Ltd. Class A-1 Florida Wind Indemnity $10,467 Aaa AAA 

Class A-2 Florida Wind Indemnity $61,533 Ba3 BB 

16-Jun-98 USAA Residential Reinsurance II US Gulf/East Coast Wind Indemnity $450,000 Ba2 BB BB 

16-Jun-98 Yasuda Pacific Re, Ltd. Japan Wind Indemnity $80,000 Ba3 BB- 

17-Jul-98 USF&G Mosaic Re Ltd. Class A US (Wind, EQ, ST) Indemnity $15,000 

Class B US (Wind, EQ, ST) Indemnity $21,000 

21-Dec-98 Centre Solutions Trinity Re 1999, Ltd. Class A-1 Florida Wind Indemnity $2,385 Aaa AAA 

Class A-2 Florida Wind Indemnity $51,615 Ba3 BB 

2-Feb-99 USF&G Mosaic Re II, Ltd. Class A US (Wind, EQ, ST) Indemnity $25,000 

Class B US (Wind, EQ, ST) Indemnity $20,000 

25-Mar-99 Kemper Domestic, Inc. New Madrid EQ Indemnity $80,000 Ba2 BB+ 

15-Apr-99 Sorema SA Halyard Re B.V. (Yr 1) EU/JP Wind, JP EQ Indemnity $17,000 

12-May-99 Oriental Land Concentric, Ltd. Japan EQ Parametric $100,000 Ba1 BB+ 

1-Jun-99 USAA Residential Reinsurance III US Gulf/East Coast Wind Indemnity $200,000 Ba2 BB 

24-Jun-99 Gerling Juno Re, Ltd. US Wind Indemnity $80,000 BB BB+ 

23-Nov-99 American Re Gold Eagle Capital Limited Class A US Wind, US EQ Modeled Loss $50,000 Baa3 BBB- 

Class B US Wind, US EQ Modeled Loss $126,600 Ba2 BB 

23-Nov-99 Gerling Namazu Re, Ltd. Japan EQ Modeled Loss $100,000 BB 

3-Mar-00 Lehman Re Seismic Limited California EQ Index $145,500 Ba2 BB+ 

10-Mar-00 SCOR Atlas Reinsurance p.l.c. Class A Europe Wind. CA/JP EQ Indemnity $70,000 BBB+ BBB+ 

Class B Europe Wind. CA/JP EQ Indemnity $30,000 BBB- BBB- 

Class C Europe Wind. CA/JP EQ Indemnity $100,000 B- B- 

1-Apr-00 Sorema SA Halyard Re B.V. (Yr 2) EU/JP Wind, JP EQ Indemnity $17,000 

23-May-00 State Farm Alpha Wind 2000-A Ltd. Florida Wind Indemnity $52,500 BB+ 

26-May-00 USAA 

Residential Reinsurance 

2000 Limited 

US Gulf/East Coast Wind Indemnity $200,000 Ba2 BB+ 

12-Jun-00 Vesta Fire Ins NeHi, Inc. Northeast/Hawaii Wind Modeled Loss $41,500 Ba3 BB 

19-Nov-00 AGF Mediterranean Re p.l.c. Class A France Wind, Monaco EQ Modeled Loss $41,000 Baa3 BBB+ BBB 

28-Dec-00 Munich Re 

Prime Capital CalQuake & 

EuroWind Ltd. 

Class B France Wind, Monaco EQ Modeled Loss $88,000 Ba3 BB+ BB+ 

Califorina EQ/ Europe 

Wind 

Parametric Index $129,000 Ba3 BB+ BB 

28-Dec-00 Munich Re Prime Capital Hurricane Ltd. US Wind Parametric Index $159,000 Ba3 BB+ BB 

8-Feb-01 Swiss Re Western Capital Limited US EQ Index $97,000 Ba2 BB+ 

22-Mar-01 American Re 

Gold Eagle Capital 2001 

Limited 

US Wind, US EQ Modeled Loss $116,400 Ba2 BB+ 

30-Mar-01 Sorema SA Halyard Re B.V. (Yr 3) EU/JP Wind, JP EQ Indemnity $17,000



9-May-01 Swiss Re SR Wind Ltd. Class A-1 US/France Wind Parametric Index $58,200 BB+ BB+ 

1-Jun-01 USAA 


2001 Limited 

Class A-2 US/France Wind Parametric Index $58,200 BB+ BB+ 


15-Jun-01 Zurich Re Trinom Ltd. Class A-1 US/EU Wind, US EQ Modeled Loss $60,000 Ba2 BB BB- 

Class A-2 US/EU Wind, US EQ Modeled Loss $97,000 Ba1 BB+ BB 

27-Dec-01 CEA Redwood Capital I, Ltd Califorina EQ Industry Index $160,050 Ba2 BB+ 

28-Dec-01 SCOR Atlas Reinsurance II p.l.c. Class A Europe Wind. CA/JP EQ Parametric Index $50,000 A3 A 

Class B Europe Wind. CA/JP EQ Parametric Index 100,000 Ba2 BB+ 

28-Mar-02 CEA Redwood Capital II, Ltd California EQ Industry Index $194,000 Baa3 BBB- 

8-Apr-02 Hiscox St. Agatha Re Ltd. California/New Madrid EQ Modeled Loss $33,000 BB+ 

22-May-02 Nissay Dowa Fujiyama Ltd. Japan EQ Parametric $67,900 BB+ 



2002 Limited 


26-Jun-02 Swiss Re Pioneer 2002 Ltd. A-02-1 US Wind Parametric Index $85,000 Ba3 BB+ 

B-02-1 Europe Wind Parametric Index $50,000 Ba3 BB+ 

C-02-1 California EQ Parametric Index $30,000 Ba3 BB+ 

D-02-1 Central US EQ Parametric $40,000 Baa3 BBB- 

E-02-1 Japan EQ Parametric Index $25,000 Ba3 BB+ 

F-02-1 US/EU Wind, US/JP EQ Parametric Index $25,000 Ba3 BB+ 

16-Sep-02 Swiss Re Pioneer 2002 Ltd. B-02-2 Europe Wind Parametric Index $5,000 Ba3 BB+ 



16-Dec-02 Swiss Re Pioneer 2002 Ltd. A-02-3 US Wind Parametric Index $8,500 Ba3 BB+ 






30-Dec-02 Vivendi Studio Re Ltd. California EQ Parametric Index $150,000 Ba2 BB+ 

17-Mar-03 Swiss Re Pioneer 2002 Ltd. A-03-1 US Wind Parametric Index $6,500 Ba3 BB+ 



2003 Limited 






US Wind, US EQ Indemnity $160,000 Ba2 BB+ 

17-Jun-03 Swiss Re Pioneer 2002 Ltd. A-03-2 US Wind Parametric Index $9,750 Ba3 BB+ 




25-Jun-03 Zenkyoren Phoenix Quake Wind Ltd. Japan Wind, Japan EQ Parametric Index $192,500 Baa3 BBB+ 

25-Jun-03 Zenkyoren Phoenix Quake Ltd. Japan EQ Parametric Index $192,500 Baa3 BBB+ 

25-Jun-03 Zenkyoren Phoenix Quake Wind II Ltd. Japan Wind, Japan EQ Parametric Index $85,000 Ba1 BBB- 


41



42 


24-Jul-03 Swiss Re Palm Capital Ltd. Series 1 US Wind Parametric Index $22,350 Ba3 BB+ 

24-Jul-03 Swiss Re Oak Capital Ltd. Series 1 Europe Wind Parametric Index $23,600 Ba3 BB+ 

24-Jul-03 Swiss Re Sequoia Capital Ltd. Series 1 US EQ Parametric Index $22,500 Ba3 BB+ 

24-Jul-03 Swiss Re Sakura Capital Ltd. Series 1 Japan EQ Parametric Index $14,700 Ba3 BB+ 

24-Jul-03 Swiss Re Arbor I Ltd. Series 1 US/EU Wind, CA/JP EQ Parametric Index $95,000 B 

24-Jul-03 Swiss Re Arbor II Ltd. Series 1 US/EU Wind, CA/JP EQ Parametric Index $26,500 A1 A+ 

25-Aug-03 TREIP Formosa Re Ltd. Taiwan EQ Indemnity $100,000 NR 

15-Sep-03 Swiss Re Arbor I Ltd. Series 2 US/EU Wind, CA/JP EQ Parametric Index $60,000 B 

15-Dec-03 Swiss Re Pioneer 2002 Ltd. D-03-3 Central US EQ Parametric $51,000 Baa3 BBB- 

15-Dec-03 Swiss Re Palm Capital Ltd. Series 2 US Wind Parametric Index $19,000 Ba3 BB+ 

15-Dec-03 Swiss Re Arbor I Ltd. Series 3 US/EU Wind, CA/JP EQ Parametric Index $8,850 B 

18-Dec-03 EDF Pylon Ltd. Class A France Wind Parametric Index € 70,000 A2 BBB+ 

Class B France Wind Parametric Index € 120,000 Ba1 BB+ 

31-Dec-03 CEA Redwood Capital III, Ltd. California EQ Industry Index $150,000 Ba1 BB+ 

31-Dec-03 CEA Redwood Capital IV, Ltd. California EQ Industry Index $200,000 Baa3 BBB- 

15-Mar-04 Swiss Re Oak Capital Ltd. Series 2 Europe Wind Parametric Index $24,000 Ba3 BB+ 

15-Mar-04 Swiss Re Sequoia Capital Ltd. Series 2 US EQ Parametric Index $11,500 Ba3 BB+ 

15-Mar-04 Swiss Re Arbor I Ltd. Series 4 US/EU Wind, CA/JP EQ Parametric Index $21,000 B 



2004 Limited 

Class A US Wind, US EQ Indemnity $127,500 BB 

Class B US Wind, US EQ Indemnity $100,000 B 

10-Jun-04 Converium Helix 04 Limited US/EU Wind, US/JP EQ Modeled Loss $100,000 BB+ 

15-Jun-04 Swiss Re Arbor I Ltd. Series 5 US/EU Wind, CA/JP EQ Parametric Index $18,000 B 

30-Jun-04 Swiss Re Gi Capital Ltd. Japan EQ Parametric Index $125,000 BB+ 

15-Sep-04 Swiss Re Oak Capital Ltd. Series 3 Europe Wind Parametric Index $10,500 Ba3 BB+ 

15-Sep-04 Swiss Re Sequoia Capital Ltd. Series 3 US EQ Parametric Index $11,000 Ba3 BB+ 

28-Sep-04 Swiss Re Arbor I Ltd. Series 6 US/EU Wind, CA/JP EQ Parametric Index $31,800 B 

17-Nov-04 Hartford Fire Ins 

Foundation Re Ltd. Series 

2004-I 

Class A US Wind Industry Index $180,000 BB+ 

Class B US Wind, US EQ Industry Index $67,500 BBB+ 

15-Dec-04 Swiss Re Arbor I Ltd. Series 7 US/EU Wind, CA/JP EQ Parametric Index $15,000 B 

31-Dec-04 CEA Redwood Capital V, Ltd. California EQ Industry Index $150,000 Ba2 BB+ 

31-Dec-04 CEA Redwood Capital VI, Ltd. California EQ Industry Index $150,000 Ba2 BB+ 

15-Mar-05 Swiss Re Arbor I Ltd. Series 8 US/EU Wind, CA/JP EQ Parametric Index $20,000 B 


7-Jun-05 

Factory Mutual 

Ins Co 


2005 Limited 

Class A US Wind, US EQ Indemnity $91,000 BB 

Class B US Wind, US EQ Indemnity $85,000 B 

Cascadia Limited Pacific Northwest EQ Parametric $300,000 BB+ BB 

15-Jun-05 Swiss Re Arbor I Ltd. Series 9 US/EU Wind, CA/JP EQ Parametric Index $25,000 B 

28-Jul-05 Zurich KAMP Re 2005 Ltd. US Wind, Central US EQ Indemnity $190,000 BB+ 

8-Nov-05 PXRE 

Atlantic & Western Re 

Limited 

Class A US/EU Wind Modeled Loss $100,000 BB+ BB 

Class B US/EU Wind Modeled Loss $200,000 B+ B 

15-Nov-05 Munich Re Aiolos Ltd. Europe Wind Parametric Index € 110,000 BB+ 

15-Dec-05 Swiss Re Arbor I Ltd. Series 10 US/EU Wind, CA/JP EQ Parametric Index $18,000 B



21-Dec-05 PXRE 

Atlantic & Western Re II 

Limited 

Class A US/EU Wind, US EQ Modeled Loss $125,000 BB+ 

Class B US/EU Wind, US EQ Modeled Loss $125,000 BB+ 

22-Dec-05 Montpelier Re Champlain Limited Class A US/JP EQ Modeled Loss $75,000 B B- 

Class B US Wind, US EQ Modeled Loss $15,000 B+ B- 

26-Jan-06 Swiss Re Australis Ltd. Series 1 Australia EQ/Wind Parametric Index $100,000 BB 

9-Feb-06 CEA Redwood Capital VII, Ltd. California EQ Industry Index $160,000 BB+ 

9-Feb-06 CEA Redwood Capital VIII, Ltd. California EQ Industry Index $65,000 BB+ 

17-Feb-06 Hartford Fire Ins 

Foundation Re Ltd. Series 

2006-I 

Class D US Wind, US EQ Industry Index $105,000 BB 

11-May-06 FONDEN CAT-Mex Ltd. Class A Mexico EQ Parametric $150,000 BB+ 

24-May-06 ACE INA 


6-Jun-06 Swiss Re 

Calabash Re Ltd. Series 

2006-I 


2006 Limited 

Successor Cal Quake 

Parametric Ltd. 

Class B Mexico EQ Parametric $10,000 BB+ 

Class A-1 US Wind Industry Index $100,000 BB 

Class A US Wind, US EQ Indemnity $47,500 B 

Class C US Wind, US EQ Indemnity $75,000 BB+ 

A-I US EQ Parametric Index $47,500 BB 

6-Jun-06 Swiss Re Successor Euro Wind Ltd. A-I Europe Wind Parametric Index $97,130 BB 



Successor Hurricane 

Industry Ltd. 


Modeled Ltd. 

A-II Europe Wind Parametric Index $3,000 BB 

B-I Europe Wind Parametric Index $18,500 BB- 

C-I Europe Wind Parametric Index $110,750 B 

C-II Europe Wind Parametric Index $3,000 B 

B-I US Wind Industry Index $14,000 BB- 

C-I US Wind Industry Index $7,250 B 

D-I US Wind Industry Index $34,250 B 

D-II US Wind Industry Index $10,250 B 

E-I US Wind Industry Index $5,000 NR 

E-II US Wind Industry Index $35,000 NR 

F-I US Wind Industry Index $54,000 B 

B-I US Wind Modeled Loss $42,250 BB- 

6-Jun-06 Swiss Re Successor II Ltd. A-I US/EU Wind, US/JP EQ Multiple $73,200 B 

E-I US/EU Wind, US/JP EQ Multiple $154,250 NR 

6-Jun-06 Swiss Re Successor III Ltd. A-I US/EU Wind, JP EQ Multiple $7,200 NR 

6-Jun-06 Swiss Re Successor IV Ltd. A-I US/EU Wind, US/JP EQ Multiple $30,000 B 

6-Jun-06 Swiss Re Successor Japan Quake Ltd. A-I Japan EQ Modeled Loss $103,470 BB 

B-I Japan EQ Modeled Loss $26,250 BB- 

C-I Japan EQ Modeled Loss $70,750 B 

C-II Japan EQ Modeled Loss $3,000 B 

19-Jun-06 Munich Re Carillon Ltd. Series 1 Class A1 US Wind Industry Index $51,000 B+ 

Class A2 US Wind Industry Index $23,500 B+ 

Class B US Wind Industry Index $10,000 B 

21-Jun-06 Balboa Ins Group VASCO Re 2006 Ltd. US Wind Indemnity $50,000 BB+ 


43



21-Jun-06 

44 


30-Jun-06 

Liberty Mutual 

Ins Co 

Dominion 

Resources 

Mystic Re Ltd. Series 

2006-1 


Drewcat Capital Ltd. Class A US Wind Parametric Index $50,000 NR 

28-Jul-06 Hannover Re Eurus Ltd. Europe Wind Parametric Index $150,000 BB 

3-Aug-06 

3-Aug-06 

Endurance 

Specialty Ins Co 

Tokio Marine & 

Nichido Fire 

4-Aug-06 Swiss Re 

25-Aug-06 

Factory Mutual 

Ins Co 

Shackleton Re Limited Class A US EQ Industry Index $125,000 Bz3 BB 

Class B US Wind Industry Index $60,000 Ba3 BB 

Class C US Wind/EQ Industry Index $50,000 Ba2 BB+ 

Fhu-Jin Ltd. Series 1 Class B Japan Wind Parametric Index $200,000 BB+ 


Industry Ltd. 

E-III US Wind Industry Index $50,000 NR 

Cascadia II Limited US EQ Parametric $300,000 BB+ BB+ 

17-Nov-06 Catlin Ins Co Ltd. Bay Haven Limited Class A US/EU/JP Wind, US/JP EQ Multiple $133,500 AA 

Class B US/EU/JP Wind, US/JP EQ Multiple $66,750 BBB- 

17-Nov-06 Hartford Fire Ins Foundation Re II Ltd. Class A US Wind Industry Index $180,000 BB+ 

30-Nov-06 


Ins Co 

Mystic Re Ltd. Series 

2006-2 

Class G US (HU, EQ, ST) Industry Index $67,500 B 


Class B US Wind Industry Index $125,000 BB 

8-Dec-06 Swiss Re Successor Euro Wind Ltd. C-III Europe Wind Parametric Index $15,000 B3 B 

8-Dec-06 Swiss Re 


Industry Ltd. 

A-III Europe Wind Parametric Index $118,000 Ba3 BB 

E-IV US Wind Industry Index $4,000 NR 

E-V US Wind Industry Index $26,000 NR 

8-Dec-06 Swiss Re Successor I Ltd. B-I NA/EU Wind, CA/JP EQ Multiple $4,000 NR 

B-II NA/EU Wind, CA/JP EQ Multiple $24,500 NR 

20-Dec-06 Zurich Re Lakeside Re Ltd. US EQ Dual $190,000 BB+ 

21-Dec-06 SCOR Atlas Reinsurance III p.l.c. Japan EQ, Euro Wind Modeled Loss € 120,000 BB+ 

29-Dec-06 CEA 

8-Jan-07 ACE INA 

Redwood Capital IX, Ltd. 

Series 1 

Calabash Re II Ltd. Series 

2006-I 

1-Mar-07 Hannover Re Kepler Re Ltd. 

Class A California EQ Parametric Index $125,000 Ba2 BB+ 

Class B California EQ Parametric Index $125,000 Ba2 BB+ 

Class C California EQ Parametric Index $18,000 Baa3 BBB- 

Class D California EQ Parametric Index $20,000 Ba3 BB 

Class E California EQ Parametric Index $12,000 B3 B 

Class A-1 US Wind Modeled Loss $100,000 BB 

Class D-1 US EQ Modeled Loss $50,000 B+ 

Class E-1 US Wind, US EQ Modeled Loss $100,000 BB 

US/Europe/JP/Aus/NZ/ 

Canada Wind, EQ 

Indemnity $200,000 Ba2 

14-Mar-07 Swiss Re Australis Ltd Series 2 Australia EQ/Wind Parametric Index $50,000 BB 

3-Apr-07 Allianz SE Blue Wings Ltd. Series 1 Class A US EQ, UK Flood Multiple $150,000 BB+ 

13-Apr-07 

Aspen Insurance 

Limited 

Ajax Re Limited Series 1 Class A California EQ Industry Index $100,000 BB



30-Apr-07 Chubb Group 

East Lane Re Ltd. Series 

2007-I 

Class A US - Northeast Wind Indemnity $135,000 BB+ 

Class B US - Northeast Wind Indemnity $115,000 BB+ 

8-May-07 Munich Re Carillon Ltd. Series 2 Class E US Wind Industry Index $150,000 B 

8-May-07 

Travelers 

Indemnity Co 

Longpoint Re Ltd. Series 

2007-I 

Class A US - Northeast Wind Industry Index $500,000 BB+ 

10-May-07 Swiss Re Successor II Ltd. Class A-2 NA/EU Wind, CA/JP EQ Multiple $100,000 B 

14-May-07 

Mitusui Sumitomo 

Ins Co 

AKIBARE Ltd. Series 1 Class A JP Wind Parametric Index $90,000 BB+ 

Class B JP Wind Parametric Index $30,000 BB+ 

5/29/07 Nephila Gamut Reinsurance Limited Class A US/EU/JP Wind, US/JP EQ Indemnity $60,000 Aa3 A- 

31-May-07 


Ins Co 

Mystic Re II Ltd. Series 

2007-1 

31-May-07 Swiss Re MedQuake Ltd. Class A 


11-Jun-07 

Glacier 

Reinsurance AG 

14-Jun-07 Allstate Ins Co 


20-Jun-07 

CIG Reinsurance 

Ltd, New Castle 

Reinsurance 

Co Ltd 

21-Jun-07 Brit Ins Limited 


25-Jun-07 

Swiss Re/Kyoei 

Fire and Marine 

Ins Co 


2007 Limited, Series 2007-I 

Class B US/EU/JP Wind, US/JP EQ Indemnity $120,000 Baa3 BBB- 

Class C US/EU/JP Wind, US/JP EQ Indemnity $60,000 Ba3 BB- 

Class B 

FL/Northeast Wind Industry Index $150,000 B+ 

Turkey/Greece/Israel/ 

Portugal/Cyprus EQ 

Turkey/Greece/Israel/ 

Portugal/Cyprus EQ 

Parametric Index $50,000 BB- 

Parametric Index $50,000 B 

Class 1 US Wind, US EQ Indemnity $145,000 BB 

Class 2 US Wind, US EQ Indemnity $125,000 B 


Class 4 US Wind, US EQ Indemnity $155,000 BB+ 

Class 5 US Wind, US EQ Indemnity $100,000 BB+ 

Nelson Re Ltd. Series 2007-I Class A US/EU Wind, US EQ Multiple $75,000 B 

Willow Re Ltd. Series 

2007-1 

Spinnaker Capital Ltd. 

Series 1 

Emerson Reinsurance Ltd. Class A 

Fremantle Limited Series 

2007-I 


Series 2 

Class B US - Northeast Wind Industry Index $250,000 BB+ 

Class B 

Class C 

Class D 

US Wind Industry Index $200,000 B1 

NA/EU/UK/JP/Aus/NZ All 

Natural Perils 







Indemnity $185,000 A2 

Indemnity $140,000 Baa3 



Class A US/EU/JP Wind, US/JP EQ Multiple $60,000 Aa1 AAA 

Class B US/EU/JP Wind, US/JP EQ Multiple $60,000 A3 BBB+ 

Class C US/EU/JP Wind, US/JP EQ Multiple $80,000 Ba2 BB- 

FL Wind Industry Index $130,200 Ba2 

Fusion 2007 Ltd. Class A JP Wind, Mexico EQ Parametric Index $30,000 B 

Class B JP Wind, Mexico EQ Parametric Index $80,000 B 

Class C Mexico EQ Parametric Index $30,000 BB+ 


45



46 


5-Jul-07 

18-Jul-07 

State Farm Mutual 

Automobile Ins Co 

Arrow Capital 

Reinsurance 

Co, Ltd 

20-Jul-07 Swiss Re 

15-Oct-07 

Japan Railway 

East 

Merna Reinsurance Ltd. Class A 

Class A 

(loan) 

Class B 

Class B 

(loan) 

Class C 

Class C 

(loan) 

US/Canada (Wind, EQ, ST, 

WS, WF) 


WS, WF) 


WS, WF) 


WS, WF) 


WS, WF) 


WS, WF) 

Indemnity $256,000 Aa2 AAA 

Indemnity $94,000 Aa2 AAA 

Indemnity $647,600 A2 AA+ 

Indemnity $19,000 A2 AA+ 

Indemnity $155,000 Baa2 A- 

Indemnity $9,000 Baa2 A- 

Javelin Re Ltd. Class A Worldwide All Perils Indemnity $94,500 A- 


Series 3 

Class B Worldwide All Perils Indemnity $30,750 BBB- 

US Wind Industry Index $50,000 NR 

MIDORI Ltd. Class A JP EQ Parametric $260,000 BB+ 

7-Nov-07 Allianz SE Blue Fin Ltd. Series 1 Class A EU Wind Parametric Index € 155,000 BB+ 

17-Nov-07 Catlin 

29-Nov-07 SCOR 

Newton Re Limited; Series 

2007-1 

Atlas Reinsurance IV 

Limited 

Class B EU Wind Parametric Index $65,000 BB+ 

Class A US EQ Industry Index $87,500 BB+ 

Class B US Wind Industry Index $137,500 BB+ 

Class A EU Wind, JP EQ Modeled Loss € 160,000 B 

21-Dec-07 Swiss Re GlobeCat Ltd. Series USW Class A-1 US Wind Industry Index $40,000 B3e 

Class A-1 US EQ Industry Index $20,000 B1e 

Class A-1 Latin America EQ Modeled Loss $25,000 Ba3e 

27-Dec-07 Groupama SA Green Valley Ltd. Series 1 Class A France Wind Parametric Index € 200,000 BB+ 

28-Dec-07 Swiss Re 

Successor Hurr Industry 

Ltd. 

C-VI US Wind Industry Index $30,000 B2 B 

D-VI US Wind Industry Index $30,000 B 

28-Dec-07 Swiss Re Successor II Ltd.; Series 3 C-III US/EU Wind, US/JP EQ Multiple $50,000 

28-Dec-07 Swiss Re Successor II Ltd.; Series 3 E-III US/EU Wind, US/JP EQ Multiple $50,000 

31-Dec-07 CEA 

31-Dec-07 CEA 

21-Feb-08 Catlin 

Redwood Capital X Ltd. 

Series 1 

Redwood Capital X Ltd. 

Series 2 

Newton Re Ltd. Series 

2008 - 1 

Class A US EQ Parametric Index $25,000 Baa3 

Class B US EQ Parametric Index $227,700 Ba2 

Class C US EQ Parametric Index $50,200 Ba3 

Class D US EQ Industry Index $130,500 Ba3 

Class E US EQ Industry Index $45,200 B2 

Class F US EQ Industry Index $20,000 NR 

Class A US/EU/JP Wind, US/JP EQ Indemnity $150,000 BB 

14-Mar-08 Munich Re Queen Street Ltd. Series 1 Class A Europe Wind Parametric Index € 70,000 BB+ 

Class B Europe Wind Parametric Index € 100,000 B



31-Mar-08 Chubb Group 

East Lane Re II Ltd. Series 

2008-I 

Class A 

Class B 

Class C 

Northeast US All Natural 

Perils 

Northeast US All Natural 

Perils 

US/Canada All Natural 

Perils 

Indemnity $75,000 BB 

Indemnity $70,000 BB 

Indemnity $55,000 B- 

14-May-08 Zenkyoren Muteki Ltd. Series 2008-1 Top JP EQ Parametric Index $300,000 Ba2 

30-May-08 Flagstone Valais Re Ltd. Series 2008-1 Class A US/EU/JP Wind, US/JP EQ Indemnity $64,000 Ba2 

30-May-08 

Glacier 

Reinsurance AG 

30-May-08 Homewise 


17-Jun-08 Allstate Ins Co 

25-Jun-08 

Nationwide Mutual 

Ins Co 


Nelson Re Ltd. Series 


Mangrove Re Ltd. Series 

2008-1 


2008 Limited Series 2008-I 

Willow Re Limited Series 


Caelus Re Limited Series 


Vega Capital Ltd. Series 


Class C US/EU/JP Wind, US/JP EQ Indemnity $40,000 B3 

Class G US Wind, US EQ Indemnity $67,500 B3 

Class H EU Wind Indemnity $45,000 B3 

Class I EU Wind Indemnity $67,500 B1 

Class A FL Wind Indemnity $150,000 Ba2 

Class B FL Wind Indemnity $60,000 B1 

Class 1 US Wind, US EQ Indemnity $125,000 BB 


Class 4 US (Wind, EQ, ST, WS, WF) Indemnity $100,000 BB+ 

Class D Texas Wind Industry Index $250,000 BB+ 

Class A US Wind, US EQ Indemnity $250,000 BB+ 

Class A US/EU/JP Wind, US/JP EQ Multiple $21,000 A3 A- 

Class B US/EU/JP Wind, US/JP EQ Multiple $22,500 Baa2 BBB 

Class C US/EU/JP Wind, US/JP EQ Multiple $63,900 Ba3 

Class D US/EU/JP Wind, US/JP EQ Multiple $42,600 

Territory Abbreviation 

CA CALIFORNIA 

EU EUROPE 

FL FLORIDA 

JP JAPAN 

NA NORTH AMERICA 

US UNITED STATES 

Peril Abbreviation 

EQ EARTHQUAKE 

ST SEVERE THUNDERSTORM 

WF WILDFIRE 

WS WINTER STORM 


47


SUMMARY OF MORTALITY BONDS 

48 

Sponsor Class S&P Incept Maturity Territories Size ($MM) 

AXA Cessions Osiris Series I - B AAA 9-Nov-06 15-Jan-10 France, Japan, US 128.35 

Osiris Series II - B A- 9-Nov-06 15-Jan-10 France, Japan, US 64.18 

Osiris Series III - C BBB 9-Nov-06 15-Jan-10 France, Japan, US 150.00 

Osiris Series III - D BB+ 9-Nov-06 15-Jan-10 France, Japan, US 100.00 

Munich Re Nathan Ltd. Series I - A A- 19-Feb-08 15-Jan-13 Canada, Germany, UK, US 100.00 

Scottish Annuity 

& Life Insurance 

Company Ltd. 

Tartan Capital 

Limited - A 

Tartan Capital 

Limited - B 

Swiss Re Vita Capital II - B A+ 13-Apr-05 1-Jan-10 

AAA 4-May-06 7-Jan-09 US 75.00 

BB+ 4-May-06 7-Jan-09 US 80.00 

Vita Capital II - C A- 13-Apr-05 1-Jan-10 

Vita Capital II - D BBB 13-Apr-05 1-Jan-10 

Vita Capital III - A IV AAA 11-Jan-07 1-Jan-11 

Vita Capital III - A V AAA 11-Jan-07 1-Jan-12 

Vita Capital III - A VI AAA 11-Jan-07 1-Jan-11 

Vita Capital III - A VII AA- 11-Jan-07 1-Jan-12 

Vita Capital III - B I A 27-Dec-06 1-Jan-11 

Vita Capital III - B II A 27-Dec-06 1-Jan-12 

Vita Capital III - B III A 27-Dec-06 1-Jan-11 

Vita Capital III - B V AAA 11-Jan-07 1-Jan-11 

Vita Capital III - B VI AAA 11-Jan-07 1-Jan-11 

Canada, Germany, Japan, 

UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 


UK, US 

Total on Risk 1,316.70 

62.00 

200.00 

100.00 

100.00 

100.00 

70.97 

129.04 

90.00 

50.00 

38.71 

50.00 

70.97

SUMMARY OF SIDECAR ISSUANCE 


Name Coverage Principal Sponsor Date Line of Business Size ($MM) 

Rockridge Re Quota Share Montpelier Re Jun-05 High excess cat retrocessional 90.9 

Kaith/K5 Quota Share Hannover Re Dec-05 Property cat, property risk, aviation and marine 370.0 

Helicon Re Quota Share White Mountains Re Dec-05 Short-tailed property and marine 146.0 

Flatiron Re Quota Share Arch Re Dec-05 Property and marine reinsurance 840.0 

Cyrus Re Quota Share XL Capital Dec-05 Property cat reinsurance and retrocessional 525.0 

Blue Ocean Re Quota Share Montpelier Re Dec-05 Property cat retrocessional 300.0 

Olympus Re II Quota Share White Mountains Re Jan-06 Property cat, property risk, retro and marine 156.0 

Starbound Re Quota Share Ren Re May-06 Short-tailed property and marine 310.5 

Petrel Re Quota Share Validus May-06 Marine and offshore energy reinsurance contracts 125.0 

Sirocco Re Quota Share Lancashire Jun-06 Marine and offshore energy insurance contracts 75.0 

Bay Point Re Quota Share Harbor Point Jun-06 US property, marine, retro, and workers' comp 150.0 

Timicuan Side by Side RenaissanceRe Jul-06 Reinstatement Premium Protection 70.0 

Mont Fort Re Quota Share Flagstone Re Aug-06 Peak zone and ILW 60.0 

Concord Re Quota Share Lexington Insurance Co Aug-06 US commercial property 730.0 

Cyrus Re Quota Share XL Capital Nov-06 Property cat reinsurance and retrocessional 635.0 

Stoneheath Re Contingent Capital XL Re Dec-06 US and European property and terror 350.0 

Norton Re Side by Side Brit Insurance Dec-06 Property cat retrocessional 107.7 

Syncro Ltd. Quota Share Lloyd's #4242 (Chaucer) Dec-06 Property cat reinsurance 100.0 

Panther Re Quota Share Hiscox Dec-06 Property cat reinsurance 360.0 

New Point Re Side by Side Harbor Point Dec-06 Property cat retrocessional 250.0 

Triomphe Re Quota Share Paris Re Dec-06 Property cat retrocessional 185.0 

Syndicate 6103 Quota Share Mapfre Ltd. Jan-07 Property cat reinsurance 78.6 

Syndicate 6104 Quota Share Hiscox Jan-07 Property cat reinsurance 69.0 

Syndicate 6105 Quota Share Ark Underwriting Jan-07 Property cat reinsurance 40.0 

MaRI Ltd. Side by Side ACE Jan-07 Property cat reinsurance 400.0 

Sector Re Quota Share Swiss Re Jan-07 Property cat, aviation 220.0 

Kepler Re XOL Hannover Re Mar-07 Property cat, property risk, aviation and marine 200.0 

Emerson Re XOL CIG Re, New Castle Re May-07 Property cat reinsurance and retro 550.0 

Starbound Re II Quota Share Ren Re Jun-07 Property cat reinsurance 341.5 

Mont Gele Re XOL Flagstone Re Jul-07 Property cat reinsurance 60.0 

7,895.2 

49


Aon Capital Markets (“ACM”) is providing this Insurance-Linked Securities 2008 (ILS 2008) for informational purposes only. ILS 2008 is not 

intended as advice with respect to any specific situation, and should not be relied upon as such. In addition, readers should not place undue 

reliance on any forward-looking statements. ACM undertakes no obligation to revise or update any such statements based on changes, new 

developments or otherwise. 

ILS 2008 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) 

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 

of ACM or its affiliates. With respect to indicative values, no representation is made that any transaction can be effected at the values provided 

and the values provided are not necessarily the value carried on ACM’s books and records. 

Discussions of tax, accounting, legal or actuarial matters are intended as general observations only based on ACM’s experience, and should not 

be relied upon as tax, accounting, legal or actuarial advice. Readers should consult their own professional advisors on these matters as ACM 

does not provide such advice. 

ACM makes no representation or warranty, whether express or implied that the products or services described in ILS 2008 are suitable or 

appropriate for any issuer, investor or participant, or in any location or jurisdiction. The products and services described in ILS 2008 are complex 

and speculative, and are intended for sophisticated issuers, investors or participants capable of assessing the significant risks involved. 

Except as otherwise noted, the information in the ILS 2008 was compiled by ACM from sources it believes to be reliable. However, ACM makes 

no representation or warranty as to the accuracy, reliability or completeness of such information, and the information should not be relied upon 

in making business, investment or other decisions. 

ACM and/or it affiliates may have independent business relationships with, and may have been or in the future will be compensated for services 

provided to, companies mentioned in the ILS 2008. 

50

200 E. Randolph Street, Chicago, Illinois 60601 

t: +1 312 381 5300 | f: +1 312 381 0160 | www.aon.com 

Copyright Aon Re Global, Inc. 2008 | Published by Aon Corporate Communications | #1170 - 08/2008

Insurance-Linked Securities Report 2008 - Aon

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