Insurance-Linked Securities - Aon Benfield

Insurance-Linked Securities Fourth Quarter 2013 Update

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Insurance-Linked Securities 2013: Fourth Quarter Update

Fourth Quarter 2013 Catastrophe Bond Transaction Review New catastrophe bond issuance for the calendar year 2013 finished strongly at USD7.5 billion. As of December 31, 2013, USD20.3 billion of total limit was outstanding, the highest level in the market’s history. Sixteen transactions closed during the second half of 2013. Market pricing conditions for insurance-linked securities remained in line with the historical lows seen in the first half of 2013, as strong demand for cat bonds continued among sponsors and investors. During the second half of 2013, several new sponsors entered the market including the Metropolitan Transportation Agency, AXIS Specialty, American Modern Insurance Group, Inc. ("American Modern"), QBE Insurance Group (“QBE”) and Achmea Reinsurance Company N.V. ("Achmea"). A broad range of risks was offered to investors including Australia earthquake and cyclone, Japan earthquake and Europe windstorm, as well as U.S. perils. The table below summarizes the terms of the deals that closed during the second half of 2013: Third and Fourth Quarter 2013 Catastrophe Bond Issuance Beneficiary

Issuer

Series

Class

Size (millions)

Series 2013-1

Class A

€ 280

Covered Perils

Trigger

Rating

Expected Loss

Interest Spread

0.82%

2.75% 8.00%

Third Quarter 2013 Groupama S.A.

Green Fields II Capital Limited

Swiss Reinsurance Company Ltd.

Mythen Re Ltd.

Series 2013-1

Class B-1

Renaissance Reinsurance Ltd.

Mona Lisa Re Ltd.

Series 2013-2

Class A

American International Group

Tradewynd Re Ltd.

Series 2013-1

Metropolitan Transportation Authority

MetroCat Re Ltd.

FR Wind

Industry Index

BB

$100

US HU

Industry Index

Not rated

2.98%

$150

US HU & EQ

Industry Index

BB-

2.08%

7.30%

Class 1

$125

US/CB HU & US/CAN EQ

Indemnity

B+

1.49%

8.25%

Series 2013-1

Class A

$200

Northeast Storm Surge

Parametric Index

BB-

1.68%

4.50%

AXIS Specialty Limited

Northshore Re Limited

Series 2013-1

Class A

$200

US HU & EQ

Industry Index

BB-

2.17%

7.25%

Zenkyoren

Nakama Re Ltd.

Series 2013-1

Class 1

$300

JP EQ

Indemnity

BB+

0.90%

2.75%

SCOR Global Life SE

Atlas IX Capital Limited

Series 2013-1

Class B

$180

US Mortality

Index

BB

0.92%

3.25%

Class A

€ 185

Industry Index

0.95%

2.60%

€ 165

EU Wind

BB-

Class B

B+

1.56%

2.90%

Class A

$300

US HU & EQ, EU Wind

Industry Index

Not rated

2.59%

7.40%

Class 1

$80

Indemnity

14.23%

20.00%

$70

US HU, EQ, ST, WS, CAL WF

Not rated

Class 4

BB-

1.80%

5.25%

Class 1-A

$100

1.28%

6.25%

1.26%

6.25%

Fourth Quarter 2013 AXA Global P&C

Calypso Capital II Limited

Catlin Insurance Company Ltd.

Galileo Re Ltd.

Series 2013-1

United Services Automobile Association

Residential Reinsurance 2013 Limited

Series 2013-II

American International Group

Tradewynd Re Ltd.

Series 2013-2

$140 € 40

EU Wind

Indemnity

US HU

Indemnity

Series 2013-1

Class A

American Modern

Series 2013-1

Class A

$75

Class A

$32 $75

Argo Re, Ltd.

Loma Reinsurance (Bermuda) Ltd.

Series 2013-1

Class B Class C

$65

QBE

VenTerra Re Ltd.

Series 2013-1

Class A

$250

Total Closed During Q3 and Q4

US/CB HU, US, ST, SCS, US/CB/CAN EQ US EQ, AU EQ, AU CY

Not rated

1.60%

7.00%

Not rated

1.35%

3.25%

Not rated

0.57%

3.50%

3.94%

9.75%

Indemnity, Industry Index

Not rated

5.26%

12.00%

8.15%

17.00%

Indemnity

BB

1.34%

3.75%

$3,498

* All $ figures are USD unless otherwise stated

Legend

Source: Aon Benfield Securities, Inc.

AU – Australia CAL – California CAN – Canada CB – Caribbean

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Indemnity

$160

Class 3-B Achmea Reinsurance Company N.V. Windmill I Re Ltd. Queen City Re Ltd.

US/CB HU & US/CAN EQ

Class 3-A

FL – Florida LA – Louisiana MX – Mexico NC – North Carolina

US – United States CY – Cyclone EQ – Earthquake HU – Hurricane

ST – Severe Thunderstorm WF – Wildfire WS – Winter storm

Aon Benfield Securities

Fourth Quarter 2013 Catastrophe Bond Transaction Review In the third quarter, Zenkyoren successfully sponsored its first indemnity transaction. Nakama Re Ltd. provides the insurer with USD300 million in coverage for Japan earthquakes. SCOR Global Life SE sponsored its first nonproperty cat transaction. Atlas IX Capital Limited secured USD180 million in capacity and provides coverage for extreme mortality in the U.S. In the fourth quarter, QBE came to market with its first transaction, which provides indemnity coverage for U.S. earthquakes, Australia cyclones and Australia earthquakes.

VenTerra Re Ltd. provides QBE with USD250 million in capacity and closed at the low end of marketed guidance. Also in the fourth quarter, Argo Re returned to the cat bond market with its third issuance, Loma Reinsurance (Bermuda) Ltd. The transaction provides the sponsor with U.S. multiperil coverage using a combination on industry index and indemnity triggers. The chart below shows catastrophe bond issuance by half year since 2007:

Catastrophe Bond Issuance by Half Year 9,000

July-December

January-June

8,000

7,000

3,404 6,000

USD millions

3,498 2,692

5,000

4,000

2,625

232

2,842

3,000

4,976

320

2,000

2,011 3,973 2,650

2,510

1,000

1,460

3,588 1,757

0 2007

2008

2009

2010

2011

2012

2013

Source: Aon Benfield Securities, Inc.

Strong issuance volumes are expected to continue throughout 2014 with sponsors utilizing the catastrophe bond market as core component of their risk transfer programs.

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Aon Benfield ILS Indices The Aon Benfield ILS Indices are calculated by Thomson Reuters using month-end price data provided by Aon Benfield Securities. Each ILS index posted increases for the fourth quarter of 2013. The All Bond and BB-rated Bond Indices were up 1.98% and 1.31% respectively, while the U.S. Hurricane Bond and U.S. Earthquake Bond Indices were up 2.06% and 1.04% respectively in the quarter. The All Bond Index outperformed all comparable fixed income benchmarks for the quarter; however it did not outperform the strong performance seen in the S&P 500 index. Index values for the fourth quarter of 2013 were similar, albeit, slightly lower than those witnessed in the 2012. For the full year 2013, all indices posted gains. The All Bond, U.S Hurricane Bond and U.S. Earthquake Bond

indices outperformed 2012 returns. The BB-rated index underperformed the prior year’s returns by 40 basis points. The Aon Benfield All Bond and BB-rated Bond indices posted returns of 10.87% and 7.11% while the U.S. Hurricane and U.S. Earthquake Bond indices posted returns of 11.64% and 6.85%, respectively. Returns for the All Bond Index outperformed all comparable fixed income indices in 2013. In the absence of severe catastrophic events, we would expect 2014 to be another positive year as the market broadens the spectrum of available risks and expands coverage to lower layers of reinsurance coverage. We expect a slight reduction in the mark-to-market increases in 2014 versus those witnessed throughout 2013 due to the significantly lower spreads seen in 2013.

Aon Benfield ILS Indices1 Index Title

Return for Quarterly Period Ending December 31

Return for Annual Period Ending December 31

Aon Benfield ILS Indices

2013

2012

2013

2012

All Bond Bloomberg Ticker (AONCILS)

1.98%

2.08%

10.87%

9.75%

BB-rated Bond Bloomberg Ticker (AONCBB)

1.31%

1.40%

7.11%

7.51%

U.S. Hurricane Bond Bloomberg Ticker (AONCUSHU)

2.06%

2.28%

11.64%

10.45%

U.S. Earthquake Bond Bloomberg Ticker (AONCUSEQ)

1.04%

1.55%

6.85%

4.99%

3-5 Year U.S. Treasury Notes

-0.40%

-0.01%

-0.98%

1.56%

3-Year U.S. Corporate BB

1.82%

2.03%

4.86%

7.62%

S&P 500

9.92%

-1.01%

29.60%

13.41%

ABS 3-5 Year, Fixed Rate

0.47%

0.67%

0.36%

6.36%

CMBS 3-5 Year, Fixed Rate

0.63%

1.86%

0.90%

10.81%

Benchmarks

Source: Aon Benfield Securities Inc., Bloomberg The 3-5 Year U.S. Treasury Note Index is calculated by Bloomberg and simulates the performance of U.S. Treasury notes with maturities ranging from three to five years.

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The 3-Year U.S. Corporate BB+ Index is calculated by Bloomberg and simulates the performance of corporate bonds rated BB+ on a zero coupon basis. Zero coupon yields are derived by stripping the par coupon curve. The maturities of the BB+ rated bonds in this index are three years. The S&P 500 is Standard & Poor's broad-based equity index representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price performance only, and does not include dividend reinvestments or advisory and trading costs. The ABS 3-5 Year, Fixed Rate Index is calculated by Bank of America Merrill Lynch (BAML) and tracks the performance of U.S. dollar denominated investment grade fixed rate asset backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one year remaining term to final stated maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million. The CMBS 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, at least one year remaining term to final maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million. The performance of an index will vary based on the characteristics of, and risks inherent in, each of the various securities which comprise the index. As such, the relative performance of an index is likely to vary, often substantially, over time. Investors cannot invest directly in indices. Past performance is no guarantee of future results.

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ILS Sales and Distribution The ILS market remained strong as 2013 came to a close. Investors secured USD1.8 billion in the fourth quarter and USD3.5 billion in the second half of 2013 in new issuance. Strong investor demand continued with the diverse range of transactions o ered. Many transactions increased from the announced issuance size and priced at the low end of, or below, interest spread guidance. During the fourth quarter, secondary market buyers showed interest in accumulating relatively high yielding securities as well as short-dated U.S. hurricane bonds. Investors sourced a variety of peril types via primary issuance during the second half of the year. Perils included extreme mortality (Atlas IX Capital Limited), Australia cyclone and earthquake (VenTerra Re Ltd.), Japan earthquake (Nakama Re Ltd.), Europe windstorm (Calypso II Re Limited, Green Fields II Capital Limited, Windmill I Re Ltd.). Demand for diversifiers was evident throughout the second half as each diversifying peril issued during the period priced at the low end, or below, initial guidance. Traditional markets responded to the competition driven by spread compression in the ILS market with rate decreases, as well as, enhanced terms and conditions. A competitive environment between the traditional and ILS markets is expected to continue into 2014.

Given the amount of bonds issued with relatively low coupons throughout the year, investor demand for highyielding transactions remains strong. The fourth quarter saw the issuance of several bonds with higher coupons. Loma Reinsurance (Bermuda) Ltd. Series 2013-1, covering U.S. multi-peril, included three tranches with yields ranging from 9.75% for the Class A notes to 17.00% for the Class C notes. The highest yielding transaction of the year was also issued during the fourth quarter. The Residential Reinsurance 2013 Limited Series 2013-II Class 1 notes, covering U.S. multi-peril, paid a coupon of 20.00%. Strong demand for these notes pushed the interest spread below the modeled sensitivity case attachment probability, a first for the market. The secondary market was active during the fourth quarter, even with yields compressing and increases in the o ering size of new issuances. October and November were particularly active for trading as investors looked to round out portfolios, paying a premium to secure bonds shortly after issuance. In December, trading slowed as buyers focused on the multiple new issuances o ered before year end. New capital continuing to be allocated to ILS investment mandates points to a positive outlook for increasing the breadth of the ILS market.

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An Interview with Yoichi Azuma, General Manager of Reinsurance Office, Zenkyoren 1. Please tell us about the lessons you have learned from your experience with the Great East Japan earthquake. The Great East Japan earthquake caused unprecedented damage not only to Zenkyoren but to Japanese insurance industry as a whole. As a result, we have re-recognized the importance of being well-prepared for such an event of unimaginable scale, as well as the importance of strong and effective Business Continuity Planning. It was fortunate we had a well-structured risk management program with both traditional reinsurance and a cat bond so that we were able to utilize the insurance proceeds from the program to pay out insurance claims promptly without fail. We would like to express our warmest gratitude to the market participants for the support they provided. 東日本大震災は未だかつてない規模で甚大な被害を本会および日本市場にもたらしました。この災害を通して我々は有事への備えと災害後のBCPプランの重要性を痛感しています。幸い、リスク管理の一環として伝統的再保険とキャットボンドを実施していたため、当該再保険金を契約者への支払財源に当てることができました。この場を借りて関係各社に御礼と感謝を申し上げます。

2. What were the lessons you learned from the Muteki cat bond Since we used the parametric index as a trigger for the Muteki cat bond, we were able to swiftly recover the full amount within three months after the earthquake. This in turn enabled us to pay out the insureds in need without much delay. The Muteki cat bond was designed so as to rely on peak ground acceleration observed at Kyoshin Network (K-net) stations to determine whether a loss had triggered. As the damage from the tsunami was especially significant for the Great East Japan earthquake, we experienced issues where the observed parameters could not be reported soon after the event because some observation stations were damaged or swept away by the tsunami. This experience gave us a lesson and we are now fully aware of the importance of carefully designing a backup plan so that a parametric index cat bond behaves as expected at the time of loss. キャットボンドムテキでは、パラメトリックトリガーを採用していたため、震災発生後、約３ヶ月という非常に短期間で再保険回収を実施することが出来ました。この回収金は即座に被災されたお客様への支払原資とされ、大変有意義なものとなりました。災害についてお話しすると、東日本大震災の特徴の一つとして津波被害が挙げられます。我々は回収指標を事前に決定された各観測地点でのPGA値としていましたが、当該観測地点の観測機器が津波により流されてしまったり、破壊されてしまったものがあり、一定期間計測値が報告されない事態が発生しました。これを受けて、そのような最悪の事態まで想定したバックアッププランを検討することの必要性を再認識し、今後の課題としています。

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3. What was the rationale for your shift to use an indemnity structure? We’ve been fully satisfied with the parametric loss trigger we utilized in our previous transactions in terms of the transparency of the trigger and rapid settlement of the transactions. On the other hand, there is always certain amount of basis risk present and mitigating this risk is a huge part of the tasks involved in issuing parametric cat bonds. For this reason, we decided to choose an indemnity trigger with minimal basis risks, which in turn offers more flexibility to fit within our traditional reinsurance program. 従来採用してきたパラメトリックトリガーも透明性、再保険金回収の迅速性の観点では十分満足できるものでした。

ただしパラメトリックを採用する場合は、ベーシスリスクは常につ

いてまわる課題であり、我々はこのリスクの最小化を検討し続けています。今回のインデムニティトリガーは、このベーシスリスクをよ

り少なくすることができるため、新たに採用することを決めました。

4. What would you like to see from ILS investors in order to make alternative capital solutions more attractive for your reinsurance strategy? We always wish to build stable long-term relationships with our reinsurance partners in traditional programs. We value the trust we have with reinsurers greatly and are hoping to enhance the established business relationships further. This, we think, is the core nature of our business and we do our business based on this philosophy. As the ILS market has steadily been expanding and building up its history, we expect to see many more stable capacity providers coming into the market with whom we are able to build long-term relationships in a similar manner to the traditional partners.

5. In your opinion, what is the right balance between traditional reinsurance capacity and alternative capacity? We are continuously looking for alternative ways of transferring risk in order to establish the optimal risk management solution. As we see a significant growth of the ILS market in recent years, we believe that the use of capital markets as a source of additional capacity is becoming increasingly important for us. On the other hand, as mentioned earlier, the relationships we have with traditional reinsurance partners are very strong and we greatly value their support. We are hoping to build even stronger relationships with them. We will continue our effort to optimize our risk management program by combining the traditional market with capital markets solutions, keeping traditional reinsurance as our core strategy and benefitting from the ever growing ILS market at the same time. 我々は適正なリスク管理の観点から、常に代替的なリスク移転手法を検討しています。

キャットボンド（ART）市場の進化、拡大は近年目覚ましいものがあり、重要性が高まってきています。

一方で我々と伝統的再保険パートナーとの関係は深く、彼らのパフォーマンスにも非常に満足しており、さらなる関係強化を望んでいます。

これからはリスク管理のコアである伝統的再保険とILS市場をうまく組み合わせ、最適なプログラム構築を考えていくことになるでしょう。

まず、我々は毎年実施している伝統的再保険のパートナーには、長

期安定的な取引を継続して欲しいと常々要望しています。また、そのような相手先との取引を望んでいます。これは全共連のネイチャーであり、我々が最も大事にしている理念であります。

このILS市場も徐々に拡大してきており、歴史も積み重ねてきていることから、さらに安定したキャパシティの提供者が増えることや長期的視点に立ったパートナーが増えることを望んでいます。

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Aon Benfield 200 E. Randolph Street Chicago, Illinois 60601 t +1.312.381.5300 f +1.312.381.0160 aonbenfield.com

Aon Benfield Securities, Inc. and Aon Benfield Securities Limited (collectively, “Aon Benfield Securities”) provide insurance and reinsurance clients with a full suite of insurance-linked securities products, including catastrophe bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties, and derivative products. As one of the most experienced investment banking firms in this market, Aon Benfield Securities offers expert underwriting and placement of new debt and equity issues, financial and strategic advisory services, as well as a leading secondary trading desk. Aon Benfield Securities’ integration with Aon Benfield’s reinsurance operation expands its capability to provide distinctive analytics, modeling, rating agency, and other consultative services. Aon Benfield Inc., Aon Benfield Securities, Inc. and Aon Benfield Securities Limited are all wholly-owned subsidiaries of Aon plc. Securities advice, products and services described within this report are offered solely through Aon Benfield Securities, Inc. and/or Aon Benfield Securities Limited.

© Aon Benfield, LLC, 2014. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document. #13804 - 1/2014