Insurance-Linked Securities

Transcription

1 Insurance-Linked Securities Fourth Quarter 2012 Update Empower Results

2 Insurance-Linked Securities 2012: Fourth Quarter Update Fourth Quarter 2012 Catastrophe Transaction Review The calendar year 2012 closed strongly and in line with earlier expectations. In total USD6.25 billion of new catastrophe bonds closed, an increase of more than 35 percent from Total new issuance was at its highest levels since 2007 and the total bonds outstanding at year end reached a new record of USD16.54 billion. Outstanding and Cumulative Catastrophe Bond Volume, Property Outstanding Life / Health Outstanding Cumulative Nat Cat Issuance Total Cumulative Issuance 50,000 45,000 40,000 35,000 $ Millions 30,000 25,000 20,000 15,000 16,050 14,380 14,570 13,747 13,945 16,538 10,000 9,553 5,000 2,895 4,436 4,392 5, Source: Aon Benfield Securities, Inc. The fourth quarter included transactions from repeat sponsors, such as SCOR Global P&C SE and United Services Automobile Association (USAA). Compass Re Ltd. Series (Compass Re 2012), from National Union Fire Insurance Company of Pittsburgh, was the largest single class transaction to close in the fourth quarter. The AIG affiliate successfully secured USD400 million in capacity through Compass Re 2012, taking its total cat bond capacity to USD1.85 billion. A number of transactions were successfully upsized as sponsors benefited from investors strong capital inflows. New issuance continued to be driven by U.S. risks, however, investors were also provided with diversity from Mexico, Europe and mortality risks. 2

3 Aon Benfield Securities The table below summarizes the terms of the deals that closed during the fourth quarter: Fourth Quarter 2012 Catastrophe Bond Issuance Beneficiary Issuer Series Class Size (millions) Covered Perils Trigger Rating Expected Loss 1 Interest Spread The Fund for Natural Disasters MultiCat Mexico Limited Series Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München SCOR Global P&C SE 2 Class A $140 MX EQ B (S&P) 4.20% 8.00% Class B $75 MX HU (Atlantic) Parametric B+ (S&P) 2.64% 7.75% Class C $100 MX HU (Pacific) B- (S&P) 4.29% 7.50% Queen Street VII Re Limited $75 US HU, EU Wind Industry Index B (S&P) 2.87% 8.60% Atlas Reinsurance VII Limited Swiss Reinsurance Company Ltd Mythen Re Ltd. Series United Services Automobile Association National Union Fire Insurance Company of Pittsburgh Zurich American Insurance Company and Zurich Insurance Company Ltd Residential Reinsurance 2012 Limited Series 2012-II Class A $60 US HU, EQ BB- (S&P) 1.89% 8.00% Industry Index Class B 130 EU Wind BB (S&P) 1.40% 3.65% Class A $120 US HU, UK Mortality B+ (S&P) 2.20% 8.50% Industry Index Class C $80 US HU B- (S&P) 4.28% 11.75% Class A $155 BB+ (S&P) 0.48% 4.50% Class B $70 BB (S&P) 0.91% 5.75% US HU, EQ, ST, WS, WF Indemnity Class C $95 Not Rated 3.67% 12.75% Class D $80 Not Rated 7.61% 19.00% Compass Re Ltd. Series Class 1 $400 US HU, EQ Industry Index Not Rated 4.14% 14.25% Lakeside Re III Ltd. $270 US, CAN EQ Indemnity B+ (S&P) 2.04% 8.00% Total issuance in Q4 $1,888 Source: Aon Benfield Securities, Inc. Legend CAN Canada EQ Earthquake EU Europe HU MX ST Hurricane Mexico Severe Thunderstorm UK US W United Kingdom United States Windstorm WF WS Wildfire Winter Storm Strong issuance volumes are expected to continue throughout A solid pipeline is anticipated for the first half of next year, again primarily driven by U.S. risks, as sponsors look to secure capacity ahead of hurricane season. Catastrophe Bond Issuance by Quarter 8000 Q1 Q2 Q3 Q $ Millions ,393 1,990 1, , , , ,095 1, Source: Aon Benfield Securities, Inc. 1 Modeled annualized expected loss, except for Residential Reinsurance 2012 Limited and Compass Re Ltd., which are modeled annual expected loss 2 1 EUR = as of Nov. 1,

4 Insurance-Linked Securities 2012: Fourth Quarter Update Superstorm Sandy Superstorm Sandy, which made landfall in New Jersey as a post-tropical cyclone on October 29, was one of the most damaging storms in U.S. history. The storm exhibited both tropical cyclone and winter storm characteristics, bringing an extended period of heavy rainfall, record storm surge, high winds, severe inland flooding and multiple feet of snow. Aon Benfield estimates total economic losses of at least USD62 billion 3, with insured industry loss estimates significantly lower, as shown in the table below. Insured Industry Loss Estimates (in billions) AIR 4 EQE 5 RMS 6 PCS 7 USD16 22 USD10 20 USD20 25 USD11 The level of uncertainty in estimating the insured losses of Sandy remains high due to the extensive flood damage. The two primary components underlying this uncertainty are the ultimate level of commercial flood coverage as well as losses related to leakage for residential and low rise commercial lines. Prior to coming ashore in the U.S., Sandy first tracked through the Caribbean where it made separate landfalls in Jamaica (Category 1, 80 mph (130 kph)) and Cuba (Category 2, 110 mph (175 kph)) before crossing the Bahamas. Damage was extensive throughout the Caribbean, with total combined economic losses estimated at approximately USD2.5 billion. The insurance impact was much less significant, with the combined total around USD100 million in the Bahamas. Sandy s remnants later affected Canada, where insurers noted more than USD108 million in losses. In the months following Sandy s arrival in the U.S., much has been discussed about the storm s classification at the time of landfall in New Jersey. The National Hurricane Center officially declared that Sandy had lost all of its tropical characteristics and had fully transitioned into a post-tropical cyclone approximately one hour prior to coming ashore near Atlantic City, NJ. This means that Sandy had shifted from having a warm core to a cold core. Following is a brief explanation of each: A warm core system is one in which a storm s center has higher or warmer temperatures than its outer periphery. This warmth near the center occurs because of heat energy being released due to evaporation. In the case of tropical cyclones, maximum evaporation in the atmosphere is found over the warmest ocean waters. This is why cyclones tend to intensify the most during the peak summer months, when water temperatures are at their peak and storms are fueled by the warmth. A cold core system is one which derives from cold air aloft near the storm s center sinking towards the surface. In the specific case of a warm core system transitioning into a cold core system (or an extratropical/post-tropical cyclone), a tropical cyclone will enter a region with a large temperature gradient (or differential). A normal scenario involves the tropical cyclone becoming extratropical and being absorbed by a larger frontal boundary. Sandy also brought a heightened awareness of National Flood Insurance Program (NFIP) legislation that was passed this summer. Despite a USD17 billion deficit still remaining from 2005 s Hurricane Katrina, NFIP is expected to increase its debt cap to USD30.45 billion in the wake of Sandy. While legislation was extended for five years when the program was slated to expire (unless further extensions were passed), Congress had already asked for a 10-year payback plan to be developed for the current debt outstanding. With only USD3.5 billion of annual premium, paying back the original USD17 billion would already mean significant price increases for policyholders 8. 3 Impact Forecasting November 2012 Global Catastrophe Recap 4 AIR Worldwide Corporation ("AIR") as of November 26, EQECAT, Inc. ("EQE") as of November 1, Risk Management Solutions, Inc. ("RMS") as of November 14, Property Claim Services ("PCS") as of November 23, Aon Benfield s Reinsurance Market Outlook, January

5 Aon Benfield Securities 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 The All Bond and BB-rated Bond indices were up 2.1 percent and 1.4 percent, while the U.S. Hurricane Bond and U.S. Earthquake Bond indices were up 2.2 percent and 1.6 percent, respectively. The All Bond index outperformed all benchmarks for the quarter primarily due to coupon returns as pricing remained relatively flat for all indices. For the full year in 2012, all indices posted gains. The Aon Benfield All Bond and BB-rated Bond indices posted returns of 9.9 percent and 7.6 percent, outperforming gains for the prior year in which performance was affected by the full loss of three bonds Muteki Ltd. Series Class A, Mariah Re Ltd. Series and Series The U.S. Hurricane Bond index posted strong returns of 10.5 percent for the year, beating the prior year returns of 6.1 percent, which were affected by mark-to-market decreases during the year. The U.S. Earthquake Bond index remained stable posting a return of 5.0 percent, compared to 5.4 percent for the prior annual period. In the absence of severe catastrophic events, we expect 2013 to be another positive year of returns for ILS market. Aon Benfield ILS Indices 9 Index Title Return for Quarterly Period Ending December 31 Return for Annual Period Ending December 31 Aon Benfield ILS Indices All Bond Bloomberg Ticker (AONCILS) BB-rated Bond Bloomberg Ticker (AONCBB) U.S. Hurricane Bond Bloomberg Ticker (AONCUSHU) U.S. Earthquake Bond Bloomberg Ticker (AONCUSEQ) 2.1% 1.7% 9.9% 3.2% 1.4% 1.7% 7.6% 2.9% 2.2% 1.7% 10.5% 6.1% 1.6% 0.7% 5.0% 5.4% Benchmarks 3-5 Year U.S. Treasury Notes 0.0% 0.7% 1.6% 6.5% 3-Year U.S. Corporate BB 2.0% 2.7% 7.6% 3.1% S&P % 11.2% 13.4% 0.0% ABS 3-5 Year, Fixed Rate 0.7% 0.4% 6.4% 6.0% CMBS Fixed Rate 3-5 Year 1.9% 3.7% 10.8% 7.1% Source: Aon Benfield Securities Inc., Bloomberg 9 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. 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 USD250 million. The CMBS Fixed Rate 3-5 Year 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 USD250 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. 5

6 Insurance-Linked Securities 2012: Fourth Quarter Update ILS Sales and Distribution As noted in the transaction review, investors were able to secure diversifying perils during the fourth quarter. Issuances included risks in both Mexico (MultiCat Mexico Limited) and Europe (Queen Street VII Re Limited, Atlas Reinsurance VII Limited Class B). The secondary market began the quarter with many investors paying premiums to secure bonds. In October, U.S. hurricane bonds on their final risk season began trading at levels reflecting many investors views that the season would end without a loss. Superstorm Sandy impacted the northeastern U.S. on October 29, after devastating parts of the Caribbean the week prior, leading to broad price decreases. U.S. hurricane bonds decreased 4.1 percent between October 19 and November 16, while U.S. multi-peril bonds decreased 7.9 percent over the same period. On November 21, PCS released its preliminary estimate of insured industry property damage of USD11 billion. This was on the low end of many investors' initial expectations. By the end of the period, secondary prices for U.S. hurricane bonds had decreased 1.9 percent and U.S. multi-peril bonds had decreased 3.8 percent between October 19 and December 31. By the close of 2012, no bonds had been impaired due to Sandy. The table below outlines the effect of Sandy on several bonds' secondary market pricing. Impact of Sandy on Secondary Market Prices of Select Cat Bonds Issuance Peril(s) Trigger Bid Price 10 October 19 November 16 December 31 Successor X Ltd. Series Class V-F4 U.S. Hurricane Industry Index Long Point Re III Ltd. Series Class A Northeast U.S. Hurricane Indemnity East Lane Re IV Ltd. Series 2011-I Class B Northeast All Natural Perils Indemnity Mystic Re III Ltd. Series Class B U.S. Hurricane, U.S. Earthquake Indemnity Long Point Re III, East Lane Re IV and Mystic Re III, which utilize indemnity triggers, are all sponsored by insurance companies with heavy exposure to the northeast. All three of these classes of notes in the above table recouped the majority of their initial mark-to-market losses by year-end. The Successor X class of notes, however, utilizes an industry index trigger and has a relatively high modeled probability of attachment. This transaction continues to trade at a discount, reflecting the likelihood of impairment if the PCS estimate increases significantly. Losses from Sandy have not led to spread increases in the cat bond market, as demonstrated by the terms achieved by transactions closing after the superstorm. Repeat sponsor USAA was the first sponsor to come to market post-sandy with their subsequent issuance from Residential Reinsurance 2012 Limited. The transaction was significantly upsized and two classes also closed below marketed price guidance. Compass Re 2012 secured significant capacity consistent with pre-sandy spreads. Secondary trading in the fourth quarter has historically been active as investors rebalanced their portfolios. This year, investors had ample capital to take down all the primary market issuances without having to make major changes. Additionally, trading throughout the quarter was relatively one-sided, as more market participants were looking to purchase than sell bonds. One exception was in short-dated U.S. earthquake-exposed transactions in which there were more sellers than buyers. As the quarter closed, investors had excess capacity and were looking forward to another active year in Source: Aon Benfield Securities' RLS Indicative Price Sheets 6

7 Aon Benfield Securities An Interview With Jed Rhoades, President & Chief Underwriting Officer, Reinsurance Alterra Bermuda Limited 1. Could you explain the business of underwriting retro for the benefit of those unfamiliar with the risk? Underwriting direct property catastrophe reinsurance treaty business is more straightforward than underwriting retrocessional property catastrophe reinsurance treaty business. Retrocessional business, often times referred to as simply Retro, is nothing more than further risk sharing of direct property cat business. Said another way, it s reinsurance of reinsurers. The underwriting process for ultimate net loss (UNL) Retro is very different and frankly much more complex than underwriting an indexed ILW product or a direct property cat book. Retro underwriters are one step further removed from the underlying property exposures, and the data quality is typically much more opaque. Because of the this, Retro underwriters must utilize different and additional underwriting techniques to assess the risk. 2. As a leading retro underwriter, what compels you to write this type of business? 3. Following Hurricane Sandy, what is your forecast for the 2013 retro market? Given that Sandy really was not much of a Retro or reinsurance treaty event, we don t believe it will cause rates to rise. On the other hand, we do believe that additional demand for retro will follow on from the additional demand for new direct facultative and treaty reinsurance from certain companies impacted by Sandy. 4. You have established a good track record with the New Point Vehicle; what advantages does it provide investors with? New Point has one of the longest track records in the sidecar space. We are in our seventh consecutive year with New Point providing retro capacity. Our track record demonstrates good underwriting skills, solid profits through the market cycle, continuity of client base, and product offering. We expect many more years of New Point success offering UNL Retro capacity. This is good for investors, clients, the market and Alterra. We like writing UNL Retro business because we take advantage of our insights on the direct property cat book and our ILW writings and are able to utilize such knowledge to understand whether the returns on Retro are better or inferior to other property cat opportunities in the market. At any given time, one cat reinsurance product or another may be more profitable and we like the flexibility to choose between them. Furthermore, Retro frequently has higher returns or profit upside in certain geographic zone perils than writing the business on a direct cat or ILW basis. 7

8 Aon Benfield 200 E. Randolph Street Chicago, Illinois t f 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, 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. # /2013