Extreme Catastrophe Exposures Are the Capital Markets the Answer?
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Extreme Catastrophe ExposuresAre the Capital Markets the Answer?
Grahame Chilton, CEO, Benfield
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The information contained in this document is strictly proprietary and confidential. © Benfield 2006
Overview
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$2.7 $4.1 $4.2 $5.2 $6.6 $8.3 $10.0 $11.7
$22.3
$45.0
$0
$5
$10
$15
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$50
$ B
illio
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Top 10 Most Costly Hurricanes in US History (Insured Losses)
Source: Swiss Re sigma No 2/2006, losses indexed to 2005
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1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000+
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)).Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
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1930s – mid-1960s:
Period of Intense Tropical Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense Tropical Cyclone Activity
Tropical cyclone activity in the mid-1990s entered the active phase of
the “multi-decadal signal” that could last into the 2030s
Already as many major storms in 2000-2005 as in all of the 1990s
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
Est.
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Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006
Forecast US land falling hurricane activity
30% above the 1950 -2005 norm in 2006
(Forecast 4th August 2006)
Professor Mark Saunders, Dr. Adam Lea, Tropical Storm Risk Consortium
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Comparing 2004 to Past Years
Only 2004 Has Had 4 Hurricanes Making Landfall in this Region
0
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1926 1935 1950 1964 2004
Sa
ffir
-Sim
ps
on
Ca
teg
ory
All Years (1899-2004) With 3 or More Hurricanes Making
Landfall Between Mobile Bay & Jacksonville, FL
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Source : Rigzone – 26/9/2005
Katrina & Rita: storm tracks
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Hurricane Katrina Hurricane Rita
Destroyed Damaged Rigs Adrift Unaccounted For
No. of Platforms/Rigs Destroyed, Damaged or Adrift, as of October 4, 2005.
Source: Minerals Management Service (MMS), US Department of the Interior.
Hurricanes Katrina/Rita: Damage to Oil Platforms and Rigs in Gulf of Mexico
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The information contained in this document is strictly proprietary and confidential. © Benfield 2006
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Estimated Energy Losses 2004/2005
OIL, Assureds Retentions Uncovered
Claims
OIL, Assureds Retentions Uncovered
Claims
CAT Losses$5.1B
CAT Losses$9.1B$12.9B
$3.8B
Operational Losses
Estimated Premium
$2.8B
Estimated Premium
$2.8B
Commercial Market Losses
Commercial Market Losses
$7.7B
$2.6B
2004 2005
Operational Losses
$18.8B Total Losses
$10.2B TotalLosses
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2004-2005 Combined
Global Commercial Market Premium
Global Commercial
Market Premium
Global Commercial Energy Market Insured
Losses
$5.6B
$18.0B
Estimated Combined Loss Ratio (2004/2005) = 321%
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Post Ivan, Katrina and Rita
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Source: WeatherUnderground.com, January 18, 2006.
2005 Hurricane Season
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Reinsurance market overview
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Largest insured catastrophe losses
Source: Swiss Re
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US
D b
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Natural Catastrophes Man-made Catastrophes
1994 Northridge Earthquake
1992 Hurricane Andrew
1999 Storm Lothar
2001 September 11
2005 Katrina, Rita, Wilma
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Post-KRW new capital 2005-6
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1992/3 2001/2 2005/6 1992/3 2001/2 2005/6 1992/3 2001/2 2005/6
Cap
ital
rai
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US
Db
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Cat bonds
Sidecars
Recapitalisation
Start-ups
Recaps and Start ups Sidecars Cat Bonds
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The new market spectrum
Capital markets
Rei
nsur
ance
Retro
Property Cat
Hedge fund SPVs
Cat bonds
Hybrid capital
ART
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1 Based on Benfield analysis using RMS v5.0
Many Programs Partially Placed
June 2006 Renewals
0%
10%
20%
30%
40%
50%
60%
0% 5% 10% 15% 20% 25% 30%
2005 BOUND PROGRAMS VS 2006 MARKET QUOTES
Probability of Attachment1
Rat
e O
n L
ine
2005 Bound
2006 Quotes
Price Increases Outstrip Risk
US Property Catastrophe Reinsurance: June 06
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Gulf Exposed/Loss Sensitive Programs Hit Hardest
*Other includes four companies with Puerto Rico and Texas exposure
PRICE IMPACT BY RENEWAL DATE(Percent Increase)
January 112 10 45June 236 74 154
HI LO AVG
January 40 0 13June 35 6 20
HI LO AVG
With Ceded Loss
Without Ceded Loss
Source: Benfield analysis of Jan – July placements.
July 164 65 104
July 57 36 47
AVERAGE ROL CHANGE FOR TOTAL BENFIELD LIMIT PLACED ( Percent )
Southeast 13.60 5.65 140.45
Nationwide 12.60 6.07 108.29
Florida 20.20 9.97 102.45
Northeast 4.30 3.45 25.93
California 6.70 5.96 11.94
Other* 6.32 5.63 11.38
Midwest 6.20 5.98 4.38
Total 10.70 6.11 74.57
Region 2006 ROL 2005 ROL Change
Source: Benfield analysis of Jan – June placements. Other includes four companies with Puerto Rico and Texas exposure.
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Jan.22% Feb.-May
11%
June65%
0.0
20.0
40.0
60.0
80.0
Limit Change
AVERAGE PROGRAMME LIMIT INCREASES VERSUS 2005 ( Percent Change )
US Property Catastrophe: Limit purchased
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Solutions for Current Dislocation
RMS Estimate of New Capital Required
$124 billion
Cat Bonds
Sidecars
Risk Transfer to Capital Markets
Startups
Capital Raising
Risk Financing from Capital Markets
Retained EarningsBenefits of Increased Pricing & Improved Risk Management
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Solutions for Current Dislocation
RMS Estimate of New Capital Required
$124 billion
Cat Bonds
Sidecars
Risk Transfer to Capital Markets
Startups
Capital Raising
Risk Financing from Capital Markets
Retained EarningsBenefits of Increased Pricing & Improved Risk Management
Merrill Lynch JV
Starbound Re
Montpelier, Glacier, Lancashire
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A Benfield Solution: Starbound Re
• A sidecar (dedicated underwriting vehicle) created by Benfield and Renaissance Re in May/June 2006
• Specifically structured for the Florida exposures of Benfield customers using detailed portfolio data
• Created US$285 million of additional Florida catastrophe capacity exclusive to Benfield
• No other broker was able to respond to the Florida capacity crunch in this way
• Numerous Benfield customers with Florida exposures benefited and were able to complete their renewal programmes as a result
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Alternative Capacity Will Become More Significant
• Bermuda sidecars, start-ups and
recapitalization offset some reduction
in other region capacity / additional
limit for 2006 property cat renewals
SAMPLE 6/1 PROPERTY CAT LIMIT DISTRIBUTION( Percent )
Traditional Catastrophe Coverage
• ILW placements expected to double this year
2005 limit placed approx. $2bn
2006 limit expected: $3bn - $4bn
• Considerable activity in Cat Bond market
following Katrina
Record number of first time sponsors in 2005 (AXA, Zurich, FM Global, Montpelier Re)
• Capital Markets appetite may better serve as
stabilizing force for large events
2004 global reinsurance surplus = approx. $377bn
2004 global securities and bank assets = approx. $144trillion
Alternative Catastrophe Coverage
24.7
26.2
34.5
53.4
8.2
8.3
32.6
12.1
0.0 20.0 40.0 60.0 80.0 100.0
2005
2006
Domestic Bermuda Europe London
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The new market spectrum
Capital markets
Rei
nsur
ance
Retro
Property Cat
Hedge fund SPVs
Cat bonds
Hybrid capital
ART
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Benfield Capabilities
Capital markets
Rei
nsur
ance
Retro
Property Cat
Hedge fund SPVs
Cat bonds
Hybrid capital
ART
Analytics
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Questions