NGAR Secquaero ILS Fund - Banque Privée Edmond de Rothschild ...

NGAR Secquaero ILS Fund -
Investment Strategy and Process
April 2011
Weinbergstrasse 10
CH-8807 Freienbach
Switzerland
Tel.: +41 55 415 99 00
www.secquaero.com

1. Investment strategy and process
2. Trade and order process
3. Description of eligible investments
4. Example transaction analysis summary
April 11 2

Investment strategy and process

Investment objectives
Goal to generate attractive, sustainable, absolute returns for
investors by building and maintaining a well diversified portfolio of
assets carrying exposure to insurance risks
Provide expert exposure to one of the truly uncorrelated asset class
in today’s globally integrated financial markets
Strong emphasis on fundamental bottom-up analysis, portfolio
construction and tail risk management augmented by a proprietary
portfolio management and optimization tool
Dynamic pro-active portfolio management approach
Secquaero management’s extensive industry network to secure a
superior origination pipeline improving portfolio diversification
April 11 4

Target Portfolio NGAR Secquaero ILS Fund
Portfolio composition will be dynamic and subject to realignment as
market conditions change. Initial portfolio is intended to look as
follows:
ILS Bonds:
Investments across a
wide range of different
perils:
US Wind
European Wind
Japan Typhoon
Cal Earthquake
European Earthquake
Tokyo Earthquake
Motor
Health
and others
Targets a net return of Libor + 6% – 9% p.a. with a volatility of about
3% - 5%. Fund launches in May 2011.
April 11 5

Investment strategy
The investment scope is defined as being the entire spectrum of the
ILS market with a focus on the liquid segment. The portfolio will be
composed of listed insurance linked securities with a global scope and
a wide range of underlying perils
The structured, multi-step investment process is based upon
quantitative as well as qualitative considerations
Investment decisions are taken by an investment committee and
supported by SPOT, the proprietary optimization tool
Strong emphasis on risk control, liquidity management and
diversification
April 11 6

Investment process: key points
Each potential investment is re-modeled by a senior investment
professional with actuarial or underwriting experience and profound
knowledge in the corresponding field.
Secquaero validates and where necessary adjusts results and risk
assessments of vendor models. Our analysis starts where others
invest.
SPOT - the unique proprietary portfolio optimization tool allows to
aggregate complex and tail dependent risk profiles across and enables
the construction of a risk-return efficient portfolio.
Qualitative factors influence the risk allocation towards the most
attractive segments. Secquaero thereby takes advantage of its
network as well as expert insights through its advisory services
capabilities.
The investment process is governed by the Investment Committee
which approves each ILS transaction entering the portfolio.
April 11 7

Investment process: overview
Individual
ILS analysis
Portfolio
construction
Structural & quantitative
analysis
Risk assessment / stress
testing
Risk-reward analysis
of / across tranches
qualitative &
quantitative
processes
SPOT – proprietary
portfolio optimization
tool
Qualitative factors
Ongoing monitoring &
rebalancing
Risk management
Independent approval by Investment
Committee
Portfolio guidelines, risk and liquidity
limits
Operational risks
April 11 8

Individual ILS analysis
Secquaero maintains a database of the listed ILS universe tracking
price histories and transaction details on each issue
Excellent access to new deal flow through established contacts to
brokers, investment banks, the strong network within the insurance
industry as well as to peers. Additional leverage comes through
Secquaero’s advisory business which helps the company to be at the
forefront of the industries’ information flow
Structured three stage analysis process for each individual
transaction:
- Structural & quantitative analysis
- Risk assessment / stress testing
- Risk/reward consideration of a transaction across the
different tranches of a transaction and alternative
investment opportunities
I n d i v i d u a l
I L S a n a l y s i s
Po rt f o lio
c o n st ru c t io n
Risk
management
April 11 9

Structural analysis
Structure of transaction is carefully scrutinized. The analysis considers
factors like:
- In-depth analysis of the prospectus
- Cash Flow distribution, premium ratios and loss / extension mechanics
- Analysis of trigger and attachment / detachment points
- Analysis of the carrier
- Collateralization analysis: Level and form of collateral, release conditions,
swap counterparties and investment risk
- Operational risks involved
- Lines of business covered
- Un-modeled risks
I n d i v i d u a l
I L S a n a l y s i s
Po rt f o lio
c o n st ru c t io n
Risk
management
April 11 10

Risk assessment and stress testing
Secquaero has licensed AIR’s Catrader to analyze its exposure to
event risk related securities
Secquaero validates and where necessary adjusts results and risk
assessments of vendor models for each transaction. Secquaero
thereby benefits from the extensive underwriting experience and
knowledge of its senior investment professionals
Loss distributions are stress tested both on an individual basis as well
as in the context of the overall portfolio using scenario analysis and
Monte Carlo simulations
Non-nat cat transactions are re-modeled using proprietary analysis.
Where deemed appropriate second opinion of brokers or of
Secquaero’s industry contacts are obtained
Stress testing enables Secquaero to pre-define loss
scenarios which supports the determination of exit
strategies and also allows to take advantage from post
event anomalies
April 11 11
I n d i v i d u a l
I L S a n a l y s i s
Po rt f o lio
c o n st ru c t io n
Risk
management

Risk-reward consideration
Cash flow models and premium ratios are carefully re-considered and
are put in perspective to the risk (e.g. expected loss, loss distribution)
Where the transaction consists of different risk tranches, analysis is
conducted across the capital structure in order to determine the sweet
spot of each transaction
Oftentimes this sweet spot is found with tranches carrying higher risks
as increasing complexity provides an over-compensation for investors.
However, Secquaero is not focused on one specific point in the capital
structure
I n d i v i d u a l
I L S a n a l y s i s
Po rt f o lio
c o n st ru c t io n
Risk
management
April 11 12

Portfolio construction
The portfolio construction aims to build an optimal portfolio within
the boundaries imposed by the investment guidelines
SPOT - the proprietary optimization tool allows Secquaero to
aggregate complex and tail dependent risk profiles across the entire
ILS spectrum and enables the construction of an efficient portfolio
Qualitative factors built on the investment professionals experiences
influence the tactical risk allocation process (e.g. market judgment,
expected future issuance, market psychology, seasonal patterns)
Active portfolio management leads to a disciplined portfolio
construction supporting the determination of exit / stop
loss points, hedging strategies and takes advantage of
short-term pricing anomalies
Liquidity considerations are always taking into account
I n d i v i d u a l
I L S a n a l y s i s
Portf olio
construction
Risk
management
April 11 13

Portfolio construction - Spot
The key goals achieved by using SPOT are:
- A quantitative description of the asset universe and the portfolio
- Assessment of the impact investment choices have on characteristics of
the return distribution
- Optimal strategies for achieving diversification
- Controlling and monitoring exposure limits
Goal: Derive the full P&L distribution of the portfolio
- Model single risk factors (mortality, hurricanes, …)
- Model impact of risk factors on stand-alone assets
- Derive joint distribution by taking into account dependencies between riskfactors
and assets
With the full distribution it is easy to
- Calculate key indicators (Mean, risk measures, shortfall
probabilities…)
- Optimise with respect to various criteria
I n d i v i d u a l
I L S a n a l y s i s
Portf olio
construction
Risk
management
April 11 14

Spot Basic Architecture
Stand alone
value of assets
Impact of risk
factors on assets
Models of
risk factors
E.g. pandemic mortality
External
tools
Aggregation
Dependency
Information
E.g. Catrader
Weights
Portfolio
Return distribution
1
0.8
0.6
0.4
0.2
0
0 0.05 0.1 0.15 0.2 0.25
Reports
Optimisation
criteria
Key indicators
TVar, VaR, µ, σ
I n d i v i d u a l
I L S a n a l y s i s
Portf olio
construction
Risk
management
April 11
15

Portfolio construction - Spot
Spot’s methods are based on state of the art Enterprise Risk
Management and methods for internal models within (re)insurance
companies
SPOT – knows different running modes:
- Optimization of the full universe
- Optimization across specific perils
- Modeling of a single transactions allows to determine the effect of an
inclusion of a specific transaction
- Optimization can also be ran on the price of a single transaction in order
to determine at what price an unattractive transaction would become
eligible or vice versa.
Two optimization modes possible.
- Return maximization under tail loss constraint
- Utility optimization – currently used
I n d i v i d u a l
I L S a n a l y s i s
Portf olio
construction
Risk
management
April 11 16

Portfolio and indicators for various “Risk
Aversion” factors
Risk aversion
Assets 0.8 0.4 0.2 0.1 0.05 0.025
cash 9% 0% 0% 0% 0% 0%
ri_lighthouse-2010-_2ndlayer_6xs3_submission_louisiana 1% 2% 4% 8% 10% 10%
blue coast 2008 i a 0% 1% 0% 0% 0% 6%
blue coast 2008 i b 1% 3% 4% 9% 10% 10%
blue coast 2008 i c 1% 3% 6% 10% 10% 10%
calabash re iii class b 2% 2% 1% 0% 0% 0%
carillon e 2 0% 0% 0% 0% 10% 10%
east lane ii b 0% 0% 5% 10% 10% 10%
east lane iii 2% 1% 0% 0% 0% 0%
eurus ii 2% 0% 0% 0% 0% 0%
fhu jin b 5% 3% 0% 0% 0% 0%
fremantle a 8% 0% 0% 0% 0% 0%
fremantle b 10% 7% 0% 0% 0% 0%
fremantle c 0% 6% 10% 10% 0% 0%
green valley 2% 3% 2% 2% 0% 0%
Portfolio statistics unit 0.8 0.4 0.2 0.1 0.05 0.025
Expected return return 1.06 1.08 1.10 1.13 1.14 1.14
Excess return bps 575 795 1004 1250 1406 1443
Standard deviation number 2% 3% 5% 7% 10% 11%
Sharp Ratio number 3.0 3.0 2.2 1.7 1.4 1.3
Maximal return return 1.07 1.10 1.12 1.16 1.18 1.19
Expected Loss bps -107 -151 -239 -353 -429 -437
Value at Risk 95% return 1.02 1.03 1.00 0.96 0.94 0.94
Tail VaR 95% return 0.99 0.99 0.95 0.87 0.77 0.73
Value at Risk 99% return 0.97 0.97 0.91 0.80 0.66 0.56
Tail VaR 99% return 0.95 0.94 0.87 0.75 0.58 0.48
Probability of default probability 58% 43% 43% 39% 30% 27%
Loss given default bps -184 -352 -561 -902 -1427 -1592
Probability of Loss probability 2.2% 2.4% 4.8% 7.1% 7.4% 7.1%
Prob. of large Loss probability 0.00% 0.00% 0.02% 0.35% 1.91% 2.38%
I n d i v i d u a l
I L S a n a l y s i s
Portf olio
construction
Risk
management
April 11
17

Diversification
90 cat bonds
19 cat bonds
100%
100%
90%
90%
80%
80%
70%
60%
50%
USWS only
USEQ only
USWS&EQ
JPWS only
70%
60%
50%
USWS only
USEQ only
USWS&EQ
JPWS only
40%
30%
JPEQ only
JPWS&EQ
EUWS only
40%
30%
JPEQ only
JPWS&EQ
EUWS only
20%
10%
MULTI / OTHER
Cash
20%
10%
MULTI / OTHER
Cash
0%
0 0.2 0.4 0.6 0.8
0%
0 0.2 0.4 0.6 0.8
Risk Aversion (gamma)
Risk Aversion (gamma)
Diversification: selection of cat bonds from diverse “buckets”
Diversification varies with the Risk Aversion and with the group
of bonds
Highest yielding cat bond is selected as Risk Aversion decreases
Cash is selected if number of available cat bonds is small
I n d i v i d u a l
I L S a n a l y s i s
Portf olio
construction
Risk
management
April 11
18

Risk management –
a key focus in Secquaero’s portfolio management
Risk
measures
Market
Risk
portfolio guidelines, concentration limits, risk budgets, active
portfolio management, pre-defined loss scenarios, stop loss limits
Liquidity
Risk
fund terms, element of portfolio construction, exit strategies, deal
structures, leverage
Tail Risk
management
active position management, diversification, oportunistic hedging,
leverage and concentration limits, Foucs on Tail risk is one of the
major considertaion in the portfolio construction
Operational
Risk
straigth through processing, in-house reconciliation of positions
and NAV, four eye principle applied wherever possible
Disaster
Recovery
disaster recovery site, daily back-up copies of data, full remote
access on server for each employee, disaster recovery manual
I n d i v i d u a l
I L S a n a l y s i s
P ort fol i o
c on s t ru c t i on
Risk
management
April 11 19

Risk management
Ongoing checks of portfolio profile by portfolio management as well
as risk management
Portfolio liquidity receives a key focus. Long notice period enables
Secquaero to optimally manage portfolio liquidity.
The investment process is governed by the Investment Committee
which approves each ILS transaction entering the portfolio to provide
investors with an additional layer of comfort
Independent monitoring of portfolio and risk guidelines by risk
management
I n d i v i d u a l
I L S a n a l y s i s
P ort fol i o
c on s t ru c t i on
Risk
management
April 11 20

Trade and order process

Decision making bodies
Trade recommendations from the Investment Process are provided
from Secquaero to ACATIS
Decision making bodies at ACATIS
- ACATIS investment team consists of 4 core members
- Dr. Hendrik Leber, Marcus Reck, Ulrich Rathmann, Daniel Kröger
- Daniel Kröger has the task of supervising the order process
- Every single transaction has to be approved in writing by one of the
three managing partners (Yargucu, Giani-Leber, Leber)
- In addition, ACATIS works with several external advisory partners, one
of them being Daniel Ineichen. They can make proposals which have to
be executed through the ACATIS investment team.
All decisions are consensual and are usually the result of a monthly,
3-week-long decision marking process
- There are no „lone-cowboy“ decisions
- There are no rushed decisions
April 11
22

Position capturing
Who:
Secquaero
using he
ACATIS order
system – has to
be signed off by
ACATIS
Key data of the
position are
entered into the
system
April 11 23

Order placement
Who:
Secquaero
using the
ACATIS order
system
With these data
an orderrecommendation
is generated
April 11 24

Order placement
Who: ACATIS only
A standard BVI-template is being filled electronically with the data
necessary to place the order
April 11 25

Order sign-off
Who: ACATIS only
If approved, orders are then
signed-off physically by one of
the managing partners of
ACATIS and transmitted to the
broker
April 11 26

Settlement
Who: ACATIS only
After execution all relevant
trade confirmation data are
entered into the system and
then sent as confirmation to
the management company
to enable settlement
April 11 27

Controlling
Who: Secquaero and
ACATIS
Various execution data can be reviewed summarily for controlling
purposes
April 11 28

Examples of eligible investments

Descriptions of instruments
The vast majority of the eligible securities are ILS issued in bond
format
They usually have a term of three years, rarely more than five years
Interest on these ILS bonds are composed out of a money market
rate plus a fixed risk spread that is paid over the life of the
transaction. The money market element is either Libor/Euribor or the
return on a money market fund. Interest is paid quarterly
Bonds are actively traded in the secondary market. Settlement is
usually on a T +3 days basis either via Euroclear/Clearstream for
EUR denomintated bonds or DTC for USD denomintated securities
Trading activities are over the phone. There are currently 6 major, 4
medium sized and 5 smaller broker houses trading ILS bonds
Even though smaller in size, it is best compared to either the high
yield bond or the convertible bond markets
April 11
30

Examples of securities
Key features of ILS bonds can be found in Bloomberg. Some sample
ISIN numbers are:
ISIN Nummer NAME Cedent Deal Size Interest Rate Maturity Peril Rating
FR0010492413 SPARC 2007 - C Axa EUR 100.1 mm 3m Euribor + 0.79% 15.07.2011 Motor BBB
US64037RAC79 Nelson Re 2008 - H Glacier Re USD 45 mm 3m Libor + 11.25% 06.06.2011 Europe Wind B
US540209AB92 Lodestone Re 2010 B National Union Fire USD 250 mm Money Market + 8.25% 17.05.2013 US Wind, US EQ BB
US825132AA17 Shore Re A Munich Re America USD 96 mm Money Market + 7.00% 08.07.2013 US Wind BB
US62545LAA35 Multicat Mexico Class A Fonden of Mexico USD 140 mm Money Market + 11.50% 19.12.2012 Mexican EQ B
US59011BAA61 Merna Re II State Farm USD 350 mm Money Market + 3.65% 08.04.2013 New Madrid EQ BB
April 11
31

Example transaction
analysis summary

Transaction analysis summary
April 11
33

Transaction analysis summary
Modelling Results Comparison
Catrader
Ratio Catrader/OC
Expected Loss 1.64% 1.00
Prob (Attachment) 2.00% 1.00
Prob (Exhaustion) 1.25% 1.00
Std Dev 12.2%
Structure analysis
Swap counterparty
Rating
Swap spread paid
Claims receiver
Loss Reserve Specialist
Unusual features
Reporting availability
Unusual features
Illustrative chart attached
Inuring reinsurance
Modelling information
Comment
Modelling agent
AIR
Risk curves provided to investors
Modelling approach
Data resolution / Data quality
Special features:
items to highlight, brief description
This is the first Europe Wind parametric deal that has been done by AIR (the first Eurus deal was done
by EQE).
Collateral Analysis
Collateral manager
Targeted investments
Excluded investments
Comments
Secquaro modelling results - loss curve
Comment
Secquaro modelling results - cash flow model
Secquaro modelling results - Portfolio effect
See attached sheets. The Optimiser prefers the Parkton deal (on offer at par at the same time)
much more than the Eurus II deal.
The Optimiser does not select Eurus II when in free float with the invested portfolio and with Parkton.
Strengths
Wind peril only in Europe.
Wind index.
No historical losses (from 1976).
Weaknesses
AIR's first parametric deal.
The index formula is biased towards lower windspeeds (ax + bx^2 + cx^3).
High concentrations in Germany (40%) and UK (27%) and in windstorm corridor of UK-Belgium-
Netherlands-Germany (85%).
Recommendations for ILS Fund
NEW ISSUE - Recommendation to buy at par
April 11
34

Disclaimer and Important Information
This material is communicated by Secquaero Advisors Ltd. (Secquaero) only to institutional investors, investment
professionals or market counterparties and has been communicated to you upon request, solely for informational purposes.
This material is proprietary information of Secquaero and may not be reproduced or otherwise disseminated in whole or in
part without prior written consent from Secquaero. Although we have taken every professional care in gathering this
information, we do not assume any liability in the case of incorrectly reported or incomplete information. This material does
not constitute a prospectus, a request/offer, nor a recommendation/ solicitation of any kind, e.g. to buy/subscribe or
sell/redeem the described investment instruments or to perform other transactions of any kind. This document and all
information contained herein is not intended for persons and/or organisations subject to U.S. federal, state or local law, or
to any jurisdiction or legal provisions prohibiting the subscription/buying or redemption/selling of any shares/units of the
described investment product whether on the basis of domicile, nationality or for any other reasons. Please be aware that
investment funds involve investment risks, including the possible loss of the principal amount invested. Please see the
relevant Offering Memorandum for a detailed description of the risks in relation to each share/unit of the investment fund.
Secquaero may have an investment in the described investment products.
There is no guarantee of performance and past performance is no indication of current or future performance.
April 11
35