2013 Insurance Linked-Securities...Coriolis Capital Limited Spun out from Societe Generale 2003...
Transcript of 2013 Insurance Linked-Securities...Coriolis Capital Limited Spun out from Societe Generale 2003...
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ConningJune 2013
2013 Insurance Linked-SecuritiesAs Alternative Risk Transfer Goes Mainstream, the Reinsurer Business Model Is Changing
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Agenda
Overview of Insurance-Linked Securities
History and Development of the ILS Market
ILS Returns and Performance
ILS Investors
Considerations as an Asset Class
Growth Opportunities and Implications
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Nontraditional Reinsurance Capacity, April 2013($ in billions)
Source: Guy Carpenter, Conning analysis
$6.0
$10.0
$13.0
$15.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Apr-13
USD
Bill
ions
Catastrophe Bonds
Collateralized Reinsurance
Retrocession/Sidecars
Industry Loss Warranties
Overview of ILS
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Illustration of Reinsurance and ILS Products
Source: Conning analysis
Retention
Working Layers
High Layers Cat Bonds, ILWs
Traditional and Collateralized Reinsurance
Reinsurers, Sidecars
Typical RiskTransfer Product
Expected Loss/Rate-on-Line
Low
High
Overview of ILS
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Example
Source: Conning analysis
Investors
Special Purpose Vehicle
Investors
Collateralized Reinsurer
Premium
Indemnity
Insurer
Premium
Indemnity
Catastrophe Bond Collateralized Reinsurance$100 (3-Year Bond) Limit $100 (Reinsurance Contract – 1 Year)
$8 (8%) Premium (ROL) $20 (20%)
$100 Investment $80
8% ROL + 0.5% Collateral (per year) Loss-Free Return $20
$100 Return of Principal / Release of Collateral
$80
8.5% (Premium + Interest on Collateral)
Return 25% ($20 / $80)
Cat BondCollateralizedReinsurance
Overview of ILS
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Estimated Global Reinsurance Premiums and Occurrence Limits
Source: Guy Carpenter, Conning analysis
All Other Property$82B
Property Cat
$18B
P&C Casualty$50B
Life$50B
• Property Cat Limits: $240B• ILS Capacity: $44B• ILS / Property Cat: 18%
Premiums: $200 Billion
Overview of ILS
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Estimated Size of Property Catastrophe Market
Source: Guy Carpenter, Conning analysis
Overview of ILS
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Cumulative Cat Bond Issuances 1996-2012
Source: Aon Benfield Securities, Conning analysis
54%Insurers39%
5%2%
Government Entities
Corporates
Reinsurers
US Hurricane
20%
Japan Quake/
Typhoon6%
Rest of World:
Property2%
EU Wind, Quake,
MP9%
Extreme Mortality
6%Health
1%
Global Multiple Perils21%
US Multiple Perils22%
US Earthquake
13%
Catastrophe Bond Issuer by Type Catastrophe Bond Issuances by Peril
Overview of ILS
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Catastrophe Bond Issuances($ in millions)
Source: Aon Benfield Securities, Artemis, Conning analysis
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Outstanding
Cat B
ondsCat
Bon
d Is
suan
ces
Cat Bond Issuance
Oustanding Cat Bonds
Market in Development Recovery and GrowthValidation• Resilience during
financial crisis• Investor demand driven
by efficiency and transparency
• Growth in issuance following Katrina
• Expansion of issuer base
• Infrequent one-off issuances• Many parametric bonds
History and Development
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Sidecar Issuances by Year($ in millions)
Source: Aon Benfield Securities, Conning analysis
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
History and Development
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ILS Index Performance
Note: Past performance is not a guarantee of future results
Source: Swiss Re, Conning analysis
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
100
120
140
160
180
200
220
240
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Ann
ual I
LS In
dex
Perf
orm
ance
Cum
ulat
ive
Inde
x R
etur
nsCat Bond Index Annual Return
Cat Bond Index CumulativeReturnAverage Annual ILS IndexPerformance
HurricaneKatrina Financial Crisis
Tohoku / US
Tornadoes
HurricaneSandy
ILS Returns and Performance
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ILS Index Return Components—All Cat Bonds
Source: Lane Financial, Conning analysis
Insurance-Related ReturnYield on
Insurance Price Total Collateral TotalYear Premium Change Insurance (Floating) Return2002 5.63% 1.23% 6.86% 1.93% 8.91%2003 5.26% 0.83% 6.09% 1.25% 7.41%2004 4.85% -0.59% 4.26% 1.50% 5.82%2005 4.78% -6.22% -1.44% 3.31% 1.84%2006 6.81% -0.68% 6.13% 5.27% 11.69%2007 7.11% 1.80% 8.91% 5.50% 14.86%2008 8.06% -6.78% 1.28% 1.35% 2.65%2009 7.20% 4.45% 11.65% 1.43% 13.22%2010 7.25% 3.26% 10.51% 1.18% 11.81%2011 7.71% -4.67% 3.04% 0.57% 3.63%2012 9.04% 0.59% 9.63% 0.60% 10.28%
Post-loss event pricing Price impact
from defaults and crisis
Total Return Swaps – no longer utilized
ILS Returns and Performance
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Catastrophe Bond Defaults
Catastrophe Bond Defaults—Significant or Total Loss of Principal
Catastrophe Bond: Muteki Ltd. Mariah Re Ltd. (Series 2010-1 / 2010-2) KAMP Re 2005
Issuer: Zenkyoren American Family Mutual Insurance Co. Zurich American
Covered Peril(s): Japan earthquake U.S. severe thunderstorm U.S. hurricane and U.S. earthquake
Size (MM): $300 $200 $190
Initial Rating: Ba2 (Moody's) B (S&P) / NR BB+ (S&P)
Date of Loss: Mar-11 Nov - 11 / Nov - 11 Aug-05
Cause of Loss: Tohoku Earthquake U.S. tornados (Joplin) Hurricane Katrina
Percentage of Investment Lost: 100% 100% 75%
Catastrophe Bond Defaults—Partial Loss of Principal
Transaction Year Issued Sponsor
$ Size
(millions) Loss Percentage Reason for Default
Kelvin Ltd. 1999 Koch Energy Trading $50 NA Temperatures
Avalon Re 2005 Oil Casualty Ins. Ltd. $405 9% in Class C Explosions
Carillon Ltd. 2006 Munich Re $84.5 NA Lehman failure
Ajax Re Ltd. 2007 Aspen Insurance $100 NA Lehman failure
Newton Re 2008 Catlin $150 Received collateral Lehman failure
Willow Re 2008 Allstate $250 NA Lehman failure
Source: Artemis, National Association of Insurance Commissioners, Conning analysis
ILS Returns and Performance
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Historical Catastrophe Bond Performance
Note: Past performance is not a guarantee of future results
Source: Bloomberg, Conning analysis
40
90
140
190
240
290
1/1/
2002
5/1/
2002
9/1/
2002
1/1/
2003
5/1/
2003
9/1/
2003
1/1/
2004
5/1/
2004
9/1/
2004
1/1/
2005
5/1/
2005
9/1/
2005
1/1/
2006
5/1/
2006
9/1/
2006
1/1/
2007
5/1/
2007
9/1/
2007
1/1/
2008
5/1/
2008
9/1/
2008
1/1/
2009
5/1/
2009
9/1/
2009
1/1/
2010
5/1/
2010
9/1/
2010
1/1/
2011
5/1/
2011
9/1/
2011
1/1/
2012
5/1/
2012
9/1/
2012
1/1/
2013
S&P 500 Total Return Index
A.M. Best Reinsurance Total Return
Swiss Re Total Return Cat Bond Index
80
130
180
230
280
1/1/
2002
5/1/
2002
9/1/
2002
1/1/
2003
5/1/
2003
9/1/
2003
1/1/
2004
5/1/
2004
9/1/
2004
1/1/
2005
5/1/
2005
9/1/
2005
1/1/
2006
5/1/
2006
9/1/
2006
1/1/
2007
5/1/
2007
9/1/
2007
1/1/
2008
5/1/
2008
9/1/
2008
1/1/
2009
5/1/
2009
9/1/
2009
1/1/
2010
5/1/
2010
9/1/
2010
1/1/
2011
5/1/
2011
9/1/
2011
1/1/
2012
5/1/
2012
9/1/
2012
1/1/
2013
Barclays US Corporate High Yield Total ReturnIndexBarclays US Secruitized Total Return Index:MBS/ABS/CMBSSwiss Re Total Return Cat Bond Index
ILS Returns and Performance
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Investment Options
Source: Conning analysis
Security Type Investment VehicleIllustrative Investor
Type
Debt • Cat Bond • Alternative Asset Fixed Income
Equity• ILS Fund• Public Reinsurer• Sidecars
• Hedge Fund• Institutional
Investor• Private Equity
Derivative • ILW• Insurer• Non-Insurer
Counterparty
ILS Investors
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Selected ILS Managers
Source: Company websites, Conning analysis
YearILS Fund / Company Sponsor(s) / Investor(s) Founded
Aeolus Capital Management Warburg Pincus, Merrill Lynch Private Equity, Arch Capital, Allied World 2006
CatCo Investment Management Qatar Insurance Co., J.P. Morgan Asset Mgmt., Henderson Global Investors, Baillie Gifford, Co-operative Insurance Society
2010
Coriolis Capital Limited Spun out from Societe Generale 2003
Credit Suisse Insurance Limited Strategies
Credit Suisse NA
D.E. Shaw & Co. NA 2006
Elementum Advisors, LLC NA 2009
Eskatos Capital Management NA 2008
Fermat Capital Management NA 2001
ILS Capital Management NA 2012
Iris Reinsurance Ltd. Joint Venture - Cartesian Capital and Aspen Insurance 2009
Leadenhall Capital Partners Amlin Group 2008
Leine Investment General Partner Hannover Re 2008
LGT Capital Management (1) NA 2012
Nephila Capital Originally Willis Group, now partnered with Man Investments, KKR 1997
Pentelia Capital Management White Mountains, Nataxis 2007
Pillar Capital Management Aquiline Capital Partners, Marsh & McLennan, management, Transatlantic Re
2008
Plenum Investments Ltd. NA 2001
Securis Investment Partners Northill Capital (2012), replaced Swiss Re and Stone Point Capital 2006
Traymar Capital Stategic relationship with The Coventry Group 2010
Twelve Capital Management owned 2010
ILS Investors
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Reinsurers—Participation in ILS
Source: Company websites, Conning analysis
ReinsurerSponsor /
IssuerILS
InvestorAllied World
Alterra Capital
Amlin
Arch Capital
Argo Group
Aspen
AXIS
Beazley
Catlin
Endurance
Everest Re
Greenlight Re
Hannover Re
Hiscox
Lancashire
ReinsurerSponsor /
IssuerILS
InvestorMontpelier Re
Munich Re
PaCRe
Partner Re
Platinum
Renaissance Re
S.A.C Re
SCOR
Swiss Re
Third Point
Tokio Marine
Transatlantic
Validus Re
White Mountains
XL Group
ILS Investors
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Correlation to Catastrophe Bonds: 5-Year Average Projected Simulations
0%5%
10%15%20%25%30%35%40%45%
U.S
. Mun
i (3-
5 Y)
U.S
. MB
S
U.S
. CM
BS
U.S
. Gov
(3-5
Y)
U.S
. Cor
p (3
-5 Y
)
U.S
. AB
S
U.S
. HY
PE
EM
D
EA
FE
HFR
X G
loba
l HF
Inde
x
U.S
. Lar
ge C
ap
Col
late
raliz
ed R
eins
uran
ce
Cor
rela
tion
to C
at B
onds
(%)
Source: Bloomberg, Pillar Capital Management Ltd., Conning analysis
Considerations as an Asset Class
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Historical Average Total Return and Standard Deviation—Selected Asset Classes
Swiss Re Cat Bond
Barclays US Corporate High Yield
S&P 500
Barclays US Aggregate
S&P Private Equity
MSCI EAFE
Barclays Global Emerging Markets
HFRI
3 Month Treasuries
2%
4%
6%
8%
10%
12%
14%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Ave
rage
Tot
al R
etur
ns
Standard Deviation
Note: Past performance is not a guarantee of future results
Source: Bloomberg, New York University, Conning analysis
Considerations as an Asset Class
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Loss Probabilities and Return Distributions
Note: Past performance is not a guarantee of future resultsSource: Bloomberg, Pillar Capital Management Ltd., Conning analysis
0%
10%
20%
30%
40%
MSCI EAFE S&P PE MSCI EM CollateralizedReinsurance
Global HedgeFund Index
S&P 500 Barclays USCorp HY
Barclays USAgg Index
Historical Loss Probabilities for Various Asset Classes
Considerations as an Asset Class
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Total Return Efficient Frontier
Source: Conning’s ADVISE® model
Disclosure: The efficient frontier does not reflect the deduction of investment management and transaction fees that the client may incur. All dividends and other earnings are assumed to be reinvested annually.
AB
CD
EF
GH
I J
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Ave
rage
Standard Deviation
With ILS
Without ILS
ABCD
EF
GH
IJ
K
-10%
-5%
0%
5%
10%
15%
-80% -30% 20% 70% 120% 170%
Cha
nge
in E
cono
mic
Val
ue fr
om
Cur
rent
Indu
stry
Change in Standard Deviation from Current Industry
Without ILS
W/ILS ConstrainedCurrent Industry
Constraints include CML and Private Placements capped at 15% each, High yield capped at 5%, US equities capped at 2%, Private Equity and EMD capped at 1% each, and ILS capped at 10%.
Economic Value of Illustrative Life Insurer
Asset Only
Considerations as an Asset Class
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Catastrophe Bonds Held by Insurers (2011)($ in millions)
Data source: © A.M. Best Company — used by permission, Conning analysis
Number of CarryingCompany Bonds ValueGenworth 19 $76.9Protective Life 10 13.3Nuclear Electric 9 13.1Reassure America Life 5 25.0Pacific Life 4 34.0United of Omaha Life 1 20.0TIAA-CREF 1 5.0Thrivent Financial 1 5.0Texas Life 1 2.0Wilton Re 1 1.9New York Life 1 0.75Total 53 $197.0
Considerations as an Asset Class
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U.S. Property Catastrophe Rate on Line Index
0
50
100
150
200
250
300
‐20%
0%
20%
40%
60%
80%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Cumulative RO
L Inde
x (Base 1990
= 100)
Year over Y
ear C
hange in Rate on
Line
(Base 1990)
YoYChange CumulativeROLIndex
Source: Guy Carpenter, Conning analysis
Growth Opportunities and Implications
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Global Property Catastrophe Rate on Line Index
Source: Guy Carpenter, Conning analysis
Growth Opportunities and Implications
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ILS—Diversification for Issuers and Investors
Re/Insurer(Issuers)
Capital Markets(Investors)
Diversification ILS Investments(cat risk)
Removal of Peak Risks /
Alternative Capital Source
Source: Conning analysis
Growth Opportunities and Implications
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Traditional Reinsurance vs. Capital Markets—the Cultural Differences Can Be Stark
Traditional Reinsurance ILS Market
“All risks are covered, except those specifically excluded…”
“All risks are excluded, except those specifically included…”
Growth Opportunities and Implications
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