Insurance-Linked Securities. Consistency and Confidence 2011

Transcription

1 Insurance-Linked Securities Consistency and Confidence 2011

2 Aon Benfield Securities, Inc. and Aon Benfield Securities (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 are all wholly-owned subsidiaries of Aon Corporation. Securities advice, products and services described within this report are offered solely through Aon Benfield Securities, Inc. and/or Aon Benfield Securities.

3 Aon Benfield Securities Foreword I am confident you will find the fourth annual Aon Benfield Securities review of the insurance-linked securities (ILS) market to be of great value. As with all our research, we offer an authoritative review and analysis of the asset class, and publish this and our quarterly reviews as a reference for the ILS market. In the year ending June 30, 2011, despite several events affecting the global reinsurance market generally, the ILS market proved resilient as a source of risk transfer capacity. Our report details the market activity in this 12-month period, the events affecting the market, an overall market perspective, and a positive outlook for the future. Specifically, this 2011 edition offers: Our comprehensive review of the catastrophe bond market and the drivers affecting the market; Our exclusive Aon Benfield ILS Indices; A review of investor activity; The impact of natural and economic events on the ILS market; A discussion with Risk Management Solutions; and Our perspective on diversifying perils. Inside, we also offer an initial update on the developing implications of the downgraded U.S. sovereign credit rating and global economic pressures. Based on events at the time this report is being prepared, we have included our assessment of the impact on collateral management in ILS transactions. At a time when we have experienced global catastrophes (as reported herein), we offer our heartfelt thoughts and prayers to those affected. In our business, we work with the probabilities and effects of natural disasters on a daily basis, and our discussion is not intended in any way to minimize the personal impacts of these catastrophes. We appreciate the positive feedback our research has generated. As we continue to enhance the overall understanding of this important market, I welcome your thoughts and suggestions. Paul Schultz President, Aon Benfield Securities 3

4 Insurance-Linked Securities 2011 Contents 5 Aon Benfield Securities Annual Review of the Catastrophe Bond Market 14 The Aon Benfield ILS Indices 16 The Buy Side 21 ILS-Related Markets 24 U.S. Perils 32 Diversifying Perils 40 An Interview with Peter Nakada, Managing Director of RiskMarkets, Risk Management Solutions 44 Appendix I Catastrophe Bond Issuance Statistics 50 Appendix II ILS Market Transaction Summary 68 Appendix III Summary of Sidecar Issuance 4

5 Aon Benfield Securities Aon Benfield Securities Annual Review of the Catastrophe Bond Market For the 12 months ended June 30, 2011, the Insurance-Linked Securities (ILS) market again demonstrated its consistent strength and provided sponsors with an attractive alternative to complement their traditional reinsurance purchases. Two stories emerged in the last 12 months: A healthy and growing market in the first nine months capped by a very active issuance calendar in the fourth quarter of 2010 and the first quarter of 2011, and A market interrupted by model changes and natural catastrophes in the second quarter of Overview Despite the continued confidence of both sponsors and investors, along with steady issuance, outstanding bonds on risk declined over the 12 months ending June 30, The annual issuance volume was only marginally down at $4.4 billion, from $4.7 billion for the same period in The total bonds on risk as of June 30, 2011, however, finished at $11.5 billion, down almost $1.7 billion from the previous June 30. The overall decline was caused by the interruption of issuance in the second quarter of 2011, as well as large maturities of catastrophe bonds issued in 2007 and In all, the catastrophe bond market has seen $37.6 billion of cumulative issuance since 1996, demonstrating its importance as a strategic and efficient risk management tool. Outstanding Catastrophe Bond Volume, (Years ending June 30) Property Outstanding 40,000 Life / Health Outstanding 35,000 30,000 Cumulative Property Bonds Total Cumulative Bonds $ Millions 25,000 20,000 15,000 12,911 16,155 13,249 13,167 11,504 10,000 5,000 2,075 2,589 3,005 3,876 4,741 6, Source: Aon Benfield Securities 5

6 Insurance-Linked Securities 2011 Issuance in the 12 months ending June 30, 2011 was overshadowed by two major factors, which slowed the growth of the ILS market. First, in 2011, Risk Management Solutions (RMS) completed major updates of its U.S. Hurricane Model and Europe Windstorm Model in February and July, respectively. Both updates are explained in more detail below (see Market Drivers RMS ). The RMS changes came after AIR Worldwide Corporation (AIR) had updated its models for the same risks in the third quarter of Even at time of publication, nearly six months after RMS issued version 11.0 of the U.S. Hurricane Model, sponsors and investors alike are still working to thoroughly understand the changes. Second, on March 11, 2011, a mega-earthquake and tsunami, known as the Great East Japan Earthquake, struck the northeastern coast of Japan. This and other natural events, described in detail below (see Natural Events Affecting the ILS Market ), led to a brief pause in the ILS market as both sponsors and investors assessed their impact. During this period, some investors also took time to rebalance their portfolios. Transaction Review Twenty-four transactions totaling $4.4 billion of issuance (including four deals from the life and health sector) closed during the 12-month period ending June 30, 2011, compared to 21 transactions over the same period in the prior year. U.S. hurricane risk continued to dominate the market, with 53 percent of natural catastrophe issuance dedicated to this peril. The proportion of catastrophe bonds covering U.S. earthquake risk declined from 29 percent for the year ending June 30, 2010 to 17 percent for the same period in By comparison, Europe windstorm transactions increased from 9 percent of issuance in the 12-month period ending June 30, 2010 to 21 percent for the same period in U.S. earthquake risk and Europe windstorm risk now price alike for a given level of risk. Life and health issuance activity rebounded with $525 million of issuance, the second largest issuance year following $1.1 billion for the year ending June 30, Catastrophe Bond Issuance By Year (Years ending June 30) Property Issuance Life / Health Issuance 9,000 8,000 7,000 8,145 $ Millions 6,000 5,000 4,000 3,279 5,914 4,661 4,382 3,000 2,000 1,000 1, ,011 1,958 1,499 1,780 Source: Aon Benfield Securities

7 Aon Benfield Securities Traditionally, the third quarter of each calendar year is characterized by light issuance activity as the market readies for U.S. hurricane season. This trend continued in 2010, when only two transactions Shore Re (Shore Re) and Green Valley 2 (Green Valley) closed in the third quarter, providing $232 1 million of catastrophe bond capacity to sponsors: The $96 million Shore Re bond provides investors with exposure to Massachusetts hurricane risk on an indemnity basis. Following on the heels of heavy U.S. hurricaneexposed bond issuance earlier in the year, Shore Re was marketed with two separate tranches. Unfortunately, most investors had already approached or exceeded their U.S. hurricane portfolio limits at that time and, consequently, only Shore Re s Class A tranche closed at a level below its targeted issuance of $100 million. Investors declining interest in U.S. hurricane-exposed bonds following the very active second quarter of 2010 signaled investors need to diversify their portfolios with non-peak peril catastrophe risks. In September, 2010, Groupama S.A. responded with Green Valley, a 100 million France windstorm catastrophe bond. Green Valley was the first non-u.s. exposed catastrophe bond issued in the 2010 calendar year, and only the second that did not include U.S. hurricane risk. Due to strong investor demand, the transaction was oversubscribed with attractive pricing for the reinsured. The 2010 calendar year was capped by a rush of transactions, with the conclusion of 10 catastrophe bond transactions in the fourth quarter, totaling $2 billion in issuance volume. Following the lead of the third quarter, the fourth quarter gave rise to a much diversified offering of catastrophe bonds. This diversification provided investors with a welcome opportunity to invest in other perils and re-balance their existing portfolios by geography and peril. For example: The 275 million Calypso Capital provides repeat sponsor AXA Global P&C (AXA) with Europe windstorm cover based on a PERILS trigger. The deal received strong investor support and was subsequently upsized from the marketed issuance amount of 150 million. American Family Mutual Insurance Company (American Family) followed in November with its first catastrophe bond transaction, sponsoring $100 million of notes through Mariah Re (Mariah Re). As the first ever securitization for pure U.S. severe thunderstorm risk, investors readily embraced the transaction, allowing the Property Claim Services (PCS) indexed annual aggregate bond to price well below initial expectations. Also in the fourth quarter, a handful of sponsors decided to access the capital markets with subsequent issuances from their established shelf programs: SCOR Global P&C SE s (SCOR) 75 million Atlas VI Capital (Atlas VI) transaction covers Europe windstorm and Japan earthquake risk using the Paradex trigger for both perils. 1 Green Valley 2 issue size is 100 million. This was converted at = $ as of September 30,

8 Insurance-Linked Securities 2011 The success of the Mariah Re transaction in November prompted American Family to sponsor a second issuance just one month later. The bond provides an additional $100 million of U.S. severe thunderstorm coverage for the layer directly below the first issuance. The $300 million Residential II (Res Re 2010-II) notes provide sponsor United States Automobile Association (USAA) with indemnity protection for the U.S. perils of hurricane, earthquake, severe thunderstorm, winter storm, and wildfire. This was USAA s second transaction of the calendar year, after its four-tranche Residential I (Res Re 2010-I) deal in May. National Union Fire Insurance Company of Pittsburgh (Chartis) also returned to the market for a second issuance and secured an additional $450 million U.S. multi-peril capacity. This followed the successful issuance of its first bond, the Lodestone Re (Lodestone Re ) in May, which provides $425 million of U.S. multi-peril capacity. Flagstone Reassurance Suisse S.A. (Flagstone) sponsored Montana Re (Montana Re), offering $210 million of coverage on a Paradex and parametric index basis for the perils of U.S. earthquake, U.S. and Cayman Islands hurricane, Europe windstorm, Japan earthquake, and Japan typhoon. The Montana Re transaction is the first deal to use Paradex for U.S. perils. Transactions in the life and health market also contributed to the active fourth quarter of 2010: insurance Company () issued another $175 million of excess mortality risk in October through Vita Capital IV (Vita IV). Aetna Life Insurance Company (Aetna Life) also entered the fray by sponsoring Vitality Re (Vitality Re), a $150 million transaction. The deal provides indemnity-based medical benefit claims protection for the sponsor, conditioned on the medical benefit ratio (MBR) of the covered business exceeding a predefined attachment point. Meanwhile, launched Kortis Capital (Kortis), a $50 million life and health-linked risk bond which is based on the difference in the annualized mortality improvement of United Kingdom males between the ages of 75 and 85 and of U.S. males between 55 and 65 over an eight-year risk period. 8

9 Aon Benfield Securities Catastrophe Bond Issuance By Half-Year January - June ,000 July - December ,000 7,000 3,404 $ Millions 6,000 5,000 4,000 3,168 2,625 3,000 2,000 1, , , ,011 2,510 2,650 1, , Source: Aon Benfield Securities Issuance in the first quarter of 2011 was up significantly from the same period in More than $1 billion was issued in four bonds, compared to just $300 million in two bonds in For example: Federal Insurance Company (Chubb) came back to the market following its East Lane Re III issuance in Chubb s $475 million East Lane Re IV (East Lane IV) transaction included two tranches and replaced some capacity from the maturing East Lane Re and East Lane Re II bonds. The covered perils include Northeast U.S. hurricane, earthquake, severe thunderstorm and winter storm, as well as inland flood arising from hurricanes in selected counties. Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (Munich Re) brought the fourth transaction of the first quarter, the $100 million Queen Street II Capital (Queen Street II). Queen Street II replaced some capacity from the maturing 170 million Queen Street Capital covering Europe windstorm but also added U.S. hurricane cover. Most notably, the deal successfully closed despite market disturbance from the Great East Japan Earthquake several days prior. Under normal circumstances, volume accelerates from the first to the second quarter, but in 2011, the number of transactions increased only slightly from the first to the second quarter while the issuance volume fell. In all, there were five issuances in the second quarter compared to 10 issuances for the same period in Four of these five issuances were from repeat sponsors, including one from the life and health sector. In total, the second quarter of 2011 experienced $741 million in issuance, versus $2.4 billion for the same period in

10 Insurance-Linked Securities 2011 Market Drivers Supply and Demand Despite the fact that June 2011 renewals in Australia and New Zealand priced significantly higher than those in 2010, Aon Benfield clients seeking to transfer U.S. risk through the traditional reinsurance market in the second quarter of 2011 found the market to be priced the same or even marginally lower than the previous year. 2 With stable or lower traditional reinsurance costs and ample capacity, sponsors saw no significant price advantage nor capacity requirement in using ILS for a part of their reinsurance needs. That said, sponsors continued to recognize the positive effects of diversifying their sources of reinsurance capital by periodically issuing ILS to the market. The number of repeat issuers during the past 12-month period demonstrated sponsors desire to maintain relationships with investors and cultivate the ILS market as a source of reinsurance capacity. From the buy-side perspective, investors found themselves with additional capital to invest following, in some cases, successful capital raising efforts in the prior 12 months. This led to some increased demand during the period, particularly for diversifying peril transactions, but in many cases, available capital was either held on the sidelines or invested in other markets. RMS At the time this report is being prepared, sponsors and investors alike are still working to thoroughly understand the RMS updates in version 11.0 of the U.S. Hurricane Model. RMS implemented changes to both the Industry Exposure Database (IED) and to the model itself. Although the RMS model updates primarily drove the increase to the model loss curves, the total industry property exposure also increased by 12 percent across hurricane-exposed states. Commercial lines experienced a larger increase at 18 percent, compared to 8 percent for residential lines. It should be noted that the prior hurricane IED had a 2008 vintage. Both the wind and storm surge hazard modules in version 11.0 of RMS U.S. Hurricane Model have been pushed farther inland. The wind vulnerability module has been updated to include claims data from Hurricane Ike, where previous data was sparse. The module was also updated with reevaluated data from the seasons. The commercial lines average annual losses and select return periods are generally higher, both from the IED and Industry Loss Curves (ILC). Due to the increased inland hazard, the Texas and mid-atlantic regions have the greatest increases for the ILC. The increased inland hazard is only partially offset by reduced coastal hazard. It will take sponsors some additional months to complete this process and implement rate changes. 2 Market Outlook, June and July 2011 Update, Aon Benfield Analytics 10

11 Aon Benfield Securities While we have seen some relatively small price decreases in RMS-modeled hurricane bonds in the secondary market, the ratings downgrades of those bonds do not appear to have had any material impact on prices as of the date of this report. Natural Events A 6.3-magnitude earthquake struck New Zealand s South Island on February 22, 2011, causing widespread damage, fatalities and injuries. Extensive damage occurred throughout Christchurch. Given the intermingled damages from the Darfield earthquake of September 2010, which also impacted Christchurch, determining insured losses from the event proved to be extremely difficult and complex. The Great East Japan Earthquake, which led to a full loss for the Muteki Class A (Muteki) transaction and a partial loss to Vega Capital Class D s Reserve Account, caused two other bonds Montana Re Class E and Topiary Capital (Topiary) to be on-risk for the next event. Maturities For the 12-month period ending June 30, 2011, approximately $5.7 billion of natural catastrophe bonds matured. Since most of the matured transactions originated in 2007 and 2008, the period with the greatest historical ILS issuance thus far, it is not surprising that the amount of maturities exceeded the amount of new issuance, thus causing the market to decline in the overall value of bonds outstanding. We expect to see a reversal of the trend in 2012, as the 2009 issuance year is the lowest since Catastrophe Bonds Maturing By Year (Years ending June 30) Property Maturities 6,000 5,674 Life / Health Maturities 5,000 4,531 $ Millions 4,000 3,000 2,670 3,939 2,483 3,900 2,000 1,412 1,442 1, Source: Aon Benfield Securities 11

12 Insurance-Linked Securities 2011 Outlook Conditions remain positive for catastrophe bond issuance for the remainder of the 2011 calendar year. As noted, investors have strong demand for bonds, particularly those with non-u.s. hurricane exposure. Both repeat and new sponsors are expected to issue into the ILS market for diversification and to complement overall reinsurance purchases. Both sponsors and investors alike are working through the model change issues and will collectively work to form a commercially acceptable view of risk and return. We expect that more non-u.s. risk will be ceded to the market in the near term. PERILS will have a positive impact on issuance for Europe perils and ILS will provide increasing support for the markets that have experienced loss from recent natural catastrophes. Finally, investors will continue to regard ILS as a viable option that has consistently provided competitive returns versus similarly rated corporate securities. Despite losses from the Great East Japan Earthquake, ILS returns for the 12-month period ended June 30, 2011 were 5.97 percent according to the Aon Benfield All-Bond (please see Aon Benfield ILS Indices section). Also as noted, investors have successfully raised additional capital which must be put to work. 12

13 Aon Benfield Securities 2011 ILS Transaction Summary (Year ending June 30, 2011) Issuance Date Program Class Perils Issue Size ($MM) Trigger Collateral Jul-10 Shore Re Ltd Class A US HU 96.0 Indemnity MMF Sep-10 Green Valley 2 Class A EU Wind 135.6* EBRD Notes Oct-10 Calypso Capital Class A EU Wind 383.5** PERILS TPR Oct-10 Vita Capital IV Ltd III Class E Extreme Mortality IBRD Notes Oct-10 Vita Capital IV Ltd IV Class E Extreme Mortality 75.0 IBRD Notes Nov-10 Mariah Re US ST PCS MMF Dec-10 Dec-10 Dec-10 Residential 2010 Residential 2010 Residential II Class II Class II Class 3 US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF Indemnity MMF 50.0 Indemnity MMF 40.0 Indemnity MMF Dec-10 Atlas VI Capital Class A EU Wind, JP EQ 99.3*** Paradex TPR Dec-10 Vega Capital 2010-I Class C US HU, EQ, EU Wind, JP EQ, TY 63.9 PCS, PERILS, IBRD Notes Dec-10 Vega Capital 2010-I Class D US HU, EQ, EU Wind, JP EQ, TY 42.6 PCS, PERILS, IBRD Notes Dec-10 Mariah Re US ST PCS MMF Dec-10 Lodestone Re Class A-1 US HU, EQ PCS MMF Dec-10 Lodestone Re Class A-2 US HU, EQ PCS MMF Dec-10 Vitality Re Class A Health MBR Indemnity TPR Dec-10 Montana Re Class C US HU, EQ 70.0 Paradex, TPR Dec-10 Montana Re Class D US HU, EQ 80.0 Paradex, TPR Dec-10 Montana Re Class E US HU, EQ, EU Wind, JP EQ, TY 60.0 Paradex, TPR Dec-10 Kortis Capital Class E Longevity 50.0 IBRD Notes Dec-10 Successor X Ltd Class III-R3 US HU, EQ, AUS EQ 65.0 Modeled Loss, IBRD Notes Dec-10 Successor X Ltd Class III-S3 US HU, EQ, AUS EQ 50.0 Modeled Loss, IBRD Notes Dec-10 Successor X Ltd Class III-T3 US HU, EQ, AUS EQ 55.0 Modeled Loss, IBRD Notes Dec-10 Green Fields Capital Class A EU Wind 100.4**** PERILS EBRD Notes Feb-11 Successor X Class IV-E3 US HU, EQ PCS, IBRD Notes Feb-11 Successor X Class IV-AL3 US HU, EQ PCS, MMF Feb-11 Foundation Re III Class A US HU PCS MMF Mar-11 East Lane Re IV Class A US HU, EQ, ST, WS Indemnity MMF Mar-11 East Lane Re IV Class B US HU, EQ, ST, WS Indemnity MMF Mar-11 Queen Street II Capital US HU, EU Wind PCS, PERILS MMF Apr-11 Blue Fin 4 Class B US HU, EQ 40.0 Modeled Loss MMF Apr-11 Vitality Re II Class A Health MBR Indemnity TPR Apr-11 Vitality Re II Class B Health MBR 40.0 Indemnity TPR May-11 Johnston Re Class A US HU 70.0 Indemnity MMF May-11 Johnston Re Class B US HU Indemnity MMF May-11 May-11 Residential 2011 Residential Class Class 2 May-11 Residential Class 5 Jun-11 Loma Class A US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, EU Wind, JP EQ Total 4,383.1 Source: Aon Benfield Securities 57.0 Indemnity MMF 33.0 Indemnity MMF Indemnity MMF PCS, PERILS, Modeled Loss TPR * 100,000 issue size, 1 = $ (9/30/10) ** 275,000 issue size, 1 = $ (10/29/10) *** 75,000 issue size, 1 = $ (12/9/10) **** 75,000 issue size, 1 = $ (12/31/10) Legend HU Hurricane EQ Earthquake WS Winter Storm ST Severe Thunderstorm WF Wild Fire EU Europe JP Japan US United States TY Typhoon 13

14 Insurance-Linked Securities 2011 The Aon Benfield ILS Indices The Aon Benfield ILS Indices are calculated by Thomson Reuters using month-end price data provided by Aon Benfield Securities. 3 Aon Benfield ILS Indices Title Value R e t u r n f o r A n n u a l P e r i o d Ending June 30 Avg A n n u a l Return Aon Benfield ILS Indices 6/30/11 6/30/10 6/30/ All Bond % 12.85% 8.38% BB-rated Bond % 12.95% 7.86% U.S. Hurricane Bond % 15.18% 8.47% U.S. Earthquake Bond % 7.04% 6.69% Benchmarks 3-5 Year U.S. Treasury Notes % 6.61% 5.39% 3-Year U.S. Corporate BB % 14.34% 7.90% S&P % 12.12% 0.76% ABS 3-5 Year, Fixed Rate % 19.54% -0.77% CMBS Fixed Rate 3-5 Year % 26.85% 1.35% Source: Aon Benfield Securities, Bloomberg On an annual basis, through June 30, 2011, all indices posted gains. The Aon Benfield All Bond and BB-rated Bond indices, both negatively impacted by the full loss of Japan earthquake bond Muteki, posted returns of 5.97 percent and 4.52 percent, respectively. The return on the U.S. Hurricane and U.S. Earthquake Bond indices were near their historical averages at 8.51 percent and 7.21 percent respectively. The current annual returns fell below comparable ones for the prior-year period, with the exception of the U.S. Earthquake Bond index which performed marginally better. The drop was primarily due to the effects of the Great East Japan Earthquake, which led to both principal and mark-to-market losses in The 3-5 Year U.S. Treasury Note 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+ 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 represents price performance only, and does not include dividend reinvestments or advisory and trading costs. The ABS 3-5 Year, Fixed Rate 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 Fixed Rate 3-5 Year 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. 14

15 Aon Benfield Securities Additionally, returns for the 12 months ending June 30, 2010 benefited from significant spread tightening as the market recovered from the financial crisis. We do not anticipate similar strong results for the current period ending June 30, While annual returns for the ILS indices lagged many of the benchmark returns in 2011, the 10-year returns of the All Bond index remained superior, demonstrating the value of a diversified book of pure insurance risk. In the absence of a severe catastrophic event, we anticipate that index averages will move closer to their historic average annual returns during Aon Benfield All Bond Indices versus Financial Benchmarks All Bond 3 Year U.S. Corporate BB+ CMBS Fixed Rate 3-5 Yrs ABS 3-5 Yrs, Fixed Rate S&P 500 Total Return 150% 120% 90% 60% 30% 0% -30% -60% Source: Aon Benfield Securities, Bloomberg Aon Benfield ILS Indices All Bond U.S. Hurricane BB-rated U.S. EQ 150% 120% Total Return 90% 60% 30% 0% Source: Aon Benfield Securities 15

16 Insurance-Linked Securities 2011 The Buy Side A review of ILS investor activity In the third quarter of 2010, investors U.S. hurricane exposure as a percentage of outstanding ILS exposure reached previously unseen levels. As of September 30, 2010, approximately 53 percent of the risk in the catastrophe bond market came from U.S. hurricane (based on contribution to expected loss), compared to 27 percent in the period immediately after Hurricane Katrina in August As a result of the large supply, prices declined for U.S. hurricane-exposed bonds in the secondary market in July. Trading in July was relatively light, followed by a rebound in August, with heavy volumes in short-dated U.S. hurricane bonds as well as Europe windstorm bonds. Despite concerns with Hurricane Earl in late August, investors generally maintained their positions in the wind-pool bonds (Johnston Re 2010, Parkton Re 2009, and Shore Re). Ultimately, Hurricane Earl merely brushed the U.S. East Coast and eventually made landfall in Canada s Nova Scotia. Little U.S. loss was incurred and there was no impact on the outstanding bonds. Prices of U.S. hurricane bonds took a short-lived markto-market loss during the storm but quickly rebounded once the storm passed. For the month of August as a whole, the price of U.S. hurricane bonds increased, reversing the losses of the previous month. In September, the market began to experience greater demand for U.S. hurricane bonds. In addition, several investors traded on the expectation that prices would quickly increase if the season ended without a major loss. With greater investor interest throughout the month, prices increased and spreads declined for U.S. hurricane and U.S. multi-peril bonds. Throughout the third quarter, investor demand remained strong for diversifying perils, as indicated by the success of the Green Valley issuance. On the secondary market, prices for diversifying perils exhibited consistent increases throughout the quarter as investors sought diversification away from U.S. peak zone perils. In the fourth quarter of 2010, investors continued their search for diversifying perils but the demand for U.S. hurricane risk also picked up correspondingly, as evidenced by heavy secondary trading volumes across all perils and successful placements of new issues in the primary market. The benefits of shelf programs began to manifest as market conditions prompted several sponsors (including American Family, Chartis and USAA) to utilize their established programs to bring second issuances in the year. In the secondary market, prices for bonds rose at the beginning of the fourth quarter as investors looked to deploy capital. Later, those gains were lost as focus shifted to the primary market at year end, causing prices to finish relatively flat as compared to those in the prior quarter. The year finished with secondary and primary market pricing somewhat misaligned, with new issues priced more tightly than comparable secondary bonds. 16

17 Aon Benfield Securities Secondary trading remained heavy but balanced throughout October and November with similar trading volumes in bonds exposed and not exposed to U.S. hurricane. In early November, investors expected a busy primary pipeline, and some looked to free up cash to participate. Mariah Re, the first to offer severe thunderstorm as a standalone peril, was the only bond to close in the month. Strong investor demand for Mariah Re drove the spread down and, in the next month, investors were offered a second issuance as the sponsor American Family used its shelf program to quickly issue a second layer attaching at a lower level. In December, both the primary and secondary markets were strong. Investors were anxious to deploy their remaining cash before the year ended, which in turn served to drive up the size of primary issuances. This demand boosted the size of the Lodestone Re (Lodestone ) transaction to $450 million, making it the largest transaction of the year. KAMP Re 2005, Zurich American Insurance Company s catastrophe bond which suffered losses from Hurricane Katrina, finally ended its extended redemption period by returning approximately $0.25 on the dollar to its investors. As is typical at year end, rebalancing activities raised trading volumes in the market. Catastrophe Bond Issuance By Peril (Years ending June 30) U.S. Hurricane U.S. Earthquake 1% 1% 8% 6% 12% 1% 1% U.S. Other EU Windstorm Life / Health 29% 54% 19% 46% Japan 7% Rest of World Source: Aon Benfield Securities % 2011 Secondary trading began 2011 with several eager investors looking to deploy their capital. Conversely, we observed investor interest in selling lower-coupon bonds as they sought to add more yield after a year in which most bonds had been issued in the 1 to 2 percent expected loss band. This demand for higher yields also translated into strong demand for Successor X (Successor X ), which kicked off the quarter s new issuances with significant oversubscription and price tightening. Trading volumes remained elevated as investors rebalanced their portfolios in anticipation of an active issuance environment. Foundation Re III Class A (Foundation Re III) was successfully launched during the period, ultimately closing at an upsized level of $135 million. East Lane IV gave trading a boost as investors cleared room for a comparatively 17

18 Insurance-Linked Securities 2011 high-priced transaction relative to the secondary market. This spurred trading in both live and dead (those with little to no risk remaining until maturity) catastrophe bonds, thus pushing trading volumes by Aon Benfield Securities to levels not seen since Most of the trading in Japan-exposed bonds occurred in the first quarter of 2011 when investors were able to liquidate their positions in a fairly organized market. At the end of the quarter, activities were centered on the Great East Japan Earthquake. Several ILS investors exited positions exposed to the earthquake before the extent of its damage could be better understood. In the second quarter, while investors were still attempting to grasp the full impact of the Great East Japan Earthquake on the ILS market, they began shifting their focus to the upcoming U.S. hurricane season. However, the relatively small pipeline was a disappointment to investors, forcing many to go to the secondary market to acquire positions. Fortunately, the dislocation in the retrocessional and Industry Loss Warranty (ILW) markets convinced many collateralized players to liquidate catastrophe bond positions in the secondary market, giving pure ILS investors an opportunity to purchase bonds despite the lack of a heavy primary pipeline. Demand for diversifiers continued throughout the second quarter, although this did not lead to high trading volumes due to reluctance by investors to sell diversifiers without having a replacement security. Following RMS major update to its U.S. Hurricane Model in February 2011, investors anxiously awaited the release of its remodeled statistics for the ILS portfolio management tool, Miu (version 2.6). Meanwhile, given the large increases in modeled losses due to the update, Standard and Poor s (S&P) placed 16 RMSmodeled catastrophe bonds on CreditWatch negative in April. Although the potential downgrade did not have negative effects on pricing, investors remained cautious with those bonds. In May, RMS released its Miu update, which provided subscribers with new modeling statistics for all bonds in the market. Despite the fact that investors had anticipated these modeling statistics to be higher, the magnitude of change was a shock to most. RMS reported that on average the expected losses of existing bonds increased by 90 percent under the new model. As a consequence, buyers on the secondary market instantly lowered their bids by 1 to 2 percent on bonds that had originally been modeled by RMS to account for this new change. However, by the end of the quarter, the bonds had recovered over half of the mark-to-market losses. Between April and June 2011, an extremely active stretch of severe weather swept through areas east of the Rocky Mountains in the U.S., resulting in a price reduction for the Mariah Re bonds, which are structured with an annual aggregate trigger to protect its sponsor, American Family, against a spate of tornado losses. Unlike most catastrophe bonds, which are designed to protect a sponsor from a severe catastrophe, the Mariah Re bonds are a frequency cover, protecting American Family from multiple events occurring in any given risk period. As such, in any normal year, one would expect to see multiple tornadoes eroding the retention. 18

19 Aon Benfield Securities U.S. hurricane capacity began to rebound in earnest toward the end of the second quarter as several investors began to distribute ILS bids across the secondary market. Investor inflows were positive as a number of new indirect investors, who sought to acquire bonds across multiple regions and perils, came into the market through existing catastrophe funds. This demand began to push spreads down throughout the month of June. The weighted average spread for U.S. hurricane bonds began the second quarter at 652 basis points and peaked on May 31 at 755 basis points, only to decline to 703 basis points by the end of June. At the same time, the pricing for U.S. earthquake, Europe windstorm and Japan earthquake continued to decline to 350 basis points, 327 basis points, and 480 basis points, respectively. Investor Participation in Aon Benfield Securities Transactions Aon Benfield Securities analyses of investor category and geographic attributes include only those transactions in which the firm participated. Investor By Category (Years ending June 30) Institutional Catastrophe Fund Mutual Fund Reinsurer Hedge Fund 4% 6% 20% 31% 10% 7% 5% 44% 34% 39% Source: Aon Benfield Securities Institutional investor participation has continued to increase since the global financial crisis and, as a share of market, has surpassed dedicated catastrophe funds as the dominant participant for the year ending June 30, In addition, the majority of capital invested in catastrophe funds today comes from institutional investors. Recent public announcements of ILS investments have come from The Guardian of New Zealand Superannuation Fund, Pensionskassernes Administration A/S, Pennsylvania Public School Employees Retirement System and BBC Pension Scheme. Mutual funds also gained share for the year as existing risk managers increased their appetite for catastrophe risk. However, no new mutual funds entered the sector. Given our work in developing and educating prospective ILS investors, we have become aware of several mutual funds which are involved in the due diligence process for potential investment into the ILS sector. Reinsurer participation fell to a low of 7 percent due to the effects of global catastrophe losses, which led to a decrease in demand for ILS investment. Since market returns had not begun to hit their hurdle rate, hedge fund participation, which tends to be opportunistic, remained at a relatively small percentage. 19

20 Insurance-Linked Securities 2011 Investor By Country (Years ending June 30) U.S. Switzerland Bermuda UK Other 24% 5% 10% 43% 7% 5% 33% 8% 47% 18% Source: Aon Benfield Securities The most notable change in investor demographics was the surge in investment from Switzerland, which rose from only 18 percent for the year ending June 30, 2010 to the current 33 percent. Also noteworthy was the decline in ILS investment from Bermuda, from 24 percent for the year ending June 30, 2010 to 7 percent. This decline went hand-in-hand with the drop in reinsurer participation mentioned previously. Other categories remained relatively flat year over year. Outlook The market continues to ponder how the new RMS models will be incorporated into both the traditional reinsurance market and ILS market. Currently, many market participants have pointed out a need for additional rate increases but we do not believe that spreads will increase materially without any additional catastrophic occurrences. In addition, spreads have been stable in the secondary market with increasing investor demand as more capital flows into the market. Investor interest in ILS appears to be at an all-time high. Much of this is undoubtedly due to the performance of the asset class during the 2008 financial crisis. The overwhelming majority of new investor interest is from institutional investors, which tend to have longer investment horizons. This sticky money is well suited for the inherent cyclicality of the property catastrophe ILS markets. Continued interest and investment from these investors will help stabilize the market and make ILS a competitive and attractive form of capital for sponsors. Sponsors have been increasingly interested in developing long-term relationships with investors through both 144A deals and more private club transactions, whereby one or a small number of investors participate. These private deals have added flexibility to ILS transactions that would not otherwise be possible through the 144A market. In addition, a sponsor can test the market without having to go through the process of marketing a full-fledged catastrophe bond. Sponsors who would not otherwise contemplate a catastrophe bond have renewed interest in these types of deals and over the long term, this may be a catalyst to issuance and growth of the market. 20

21 Aon Benfield Securities ILS-Related Markets Sidecar Resurgence Following the market changing events of 2004 and 2005, sidecars played an important role in providing fresh capital to the reinsurance market. Although the recent catastrophic events in Australia, Japan, and New Zealand (as well as the latest RMS U.S. Hurricane Model change) did not cause a dislocation of the same magnitude, they created dislocations and subsequent opportunities. Consistent with 2004 and 2005, sidecars have again stepped up to provide fresh capital and take advantage of these opportunities. The lack of sidecar activity over the past few years and the subsequent resurgence was not happenstance; the sidecar market was operating just as intended. Sidecars are designed to allow investors and sponsors to take advantage of temporary dislocations in the market. Unlike new company formations, sidecars are flexible and temporary by design, facilitating ease of entry and exit for both sponsors and investors. At such time when stability returns to the market, sidecars can be dissolved while capital management becomes much easier for (re)insurance companies. In the absence of any large market-hardening events over the past few years, there were few opportunities for temporary capital. However, recent catastrophes, coupled with RMS s model change have created a dislocation in the retrocessional markets. Consequently, the first half of 2011 featured a new sidecar cycle. During this time, four new sidecars were formed, with total capital of $680 million. Year-to-Date 2011 Sidecars Deal Sponsor Inception Capital ($MM) AlphaCat Re Validus May DaVinci Re Renaissance Re Jun Accordion Re Lancashire Re Jul New Point Re IV Alterra Capital Jul Total Source: Aon Benfield Securities In addition to providing a means for sponsors and investors to capitalize on market opportunities, these vehicles have provided meaningful capacity to the market. Aon Benfield estimates that in the 12 months ending June 30, 2011, more than 40 percent of retrocessional capacity was written in collateralized form, which included sidecar capital. This capital helps provide market stabilization during dislocations, without causing surplus capital to be redeployed once the market softens. Over the near term, additional sidecar activity will be largely dependent on new catastrophe activity. While the market is still incorporating the recent model changes, it is unlikely that the model changes alone will spur additional sidecar formations. However, should another destabilizing catastrophe event occur, particularly a large U.S. event, we would expect to see another cycle of sidecar formation. 21

22 Insurance-Linked Securities 2011 Industry Loss Warranty Market Review Over the past 12 months ending June 30, 2011, ILW transaction volumes grew significantly due to a number of factors, including the RMS' U.S. Hurricane Model change, accumulated catastrophe losses and excess capital in the ILS market. Traditionally, ILW transactions are used as macro hedges for sponsors either to fill gaps in their reinsurance programs or to provide additional risk management at the top of their programs. In particular, sponsors that suffer significant losses which eroded their reinsurance programs choose ILWs as backup protection in preparation for the U.S. hurricane season. In addition, sponsors have also used the ILW market as wider balance sheet protection for their shareholders. Investors funds allocated to the ILS asset class have also grown considerably over this time period with many pension plans now allocating funds to ILS. Due to a lower volume of transactions in the catastrophe bond market during the second quarter of 2011, investors instead deployed a larger share of their capital in ILWs. Growth in ILWs is largely attributable to development of structured ILWs, where basis risk can be significantly reduced through customization of loss triggers. The triggers can be weighted to more closely fit the sponsor's portfolio, enabling access to additional complementary capacity with potentially lower basis risk than standard ILWs. In turn, it has facilitated the reach of index products from an investor s point of view, which has often provided an initial point of entry for new ILS capital. From a pricing perspective, Aon Benfield has observed steady ILW price increases in the first half of 2011, but has noted price stabilization at the time of publication. The largest increases were in U.S. hurricane ILW principally due to the RMS model changes and peak-zone exposure management. Within Europe, pricing has increased more modestly but Aon Benfield expects prices to stabilize over the remainder of the year. Collateralized The collateralized reinsurance market faced challenges throughout the year ending June 30, 2011, ultimately emerging with a validation of this sector from customers and investors. The absence of loss activity up to September 2010 led some managers to cut back their allocations to the sector on grounds of declining rates. However, the sequence of loss activity that commenced in September 2010, culminating with the Great East Japan Earthquake in March 2011, reversed that trend and affected the sector in a number of ways: First, the resulting claims activity eroded capital levels, which resulted in additional capital being held back in favor of cedents per the collateral release clauses in reinsurance contracts, allowing for future loss development; 22

23 Aon Benfield Securities Second, the events provided investors with an opportunity to raise and deploy new capital at historically favorable rates into non-u.s. risks, improving geographical diversification and risk-adjusted returns; and Third, the broader declines in global reinsurer capital levels decelerated market perceptions of rate softening headed into the June 2011 renewal season. New investors were able to enter a more favorably-priced market and traditional (re)insurers also enjoyed the return of sidecars, as investors provided fresh capital in the second quarter of

24 Insurance-Linked Securities 2011 U.S. Perils Transaction Review In the 12 months ending June 30, 2011, 16 catastrophe bonds covering U.S. risks were issued, and U.S. hurricane risk continued to dominate the ILS market with all but two of these containing exposures to the leading peril ILS U.S. Transaction Summary (Q3 & Q4 2010) Program Class Peril Issue Size ($MM) Trigger Collateral Shore Re Ltd Class A US HU 96.0 Indemnity MMF Mariah Re US ST PCS MMF Residential 2010 Residential 2010 Residential II Class II Class II Class 3 Vega Capital 2010-I Class C Vega Capital 2010-I Class D US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, EU Wind, JP EQ, TY US HU, EQ, EU Wind, JP EQ, TY Indemnity MMF 50.0 Indemnity MMF 40.0 Indemnity MMF PCS, PERILS, PCS, PERILS, IBRD Notes IBRD Notes Mariah Re US ST PCS MMF Lodestone Re Class A-1 US HU, EQ PCS MMF Lodestone Re Class A-2 US HU, EQ PCS MMF Montana Re Class C US HU, EQ 70.0 Montana Re Class D US HU, EQ 80.0 Montana Re Class E Successor X Ltd Successor X Ltd Successor X Ltd Class III-R3 Class III-S3 Class III-T3 US HU, EQ, EU Wind, JP EQ, TY US HU, EQ, AUS EQ US HU, EQ, AUS EQ US HU, EQ, AUS EQ Total 1,532.5 Source: Aon Benfield Securities Paradex, Paradex, Paradex, Modeled Loss, Modeled Loss, Modeled Loss, TPR TPR TPR IBRD Notes IBRD Notes IBRD Notes Legend HU Hurricane EQ Earthquake WS Winter Storm ST Severe Thunderstorm WF Wild Fire EU Europe JP Japan US United States TY Typhoon 24

25 Aon Benfield Securities Third quarter issuance was consistently light with just one bond covering U.S. exposures. Shore Re, covering hurricane risk for the benefit of the Massachusetts Property Insurance Underwriting Association, came to market following a strong second quarter concentrated with U.S. hurricane issuance. This saturation of risk ultimately led to capacity constraints for the peril for some investors. As a result, the Shore Re transaction, which was initially marketed with two classes, closed only a single tranche. That tranche was sized slightly less than the targeted $100 million. A new sponsor, American Family entered the catastrophe bond market in the fourth quarter of 2010 with an innovative transaction. Mariah Re was the first catastrophe bond to solely cover the peril of U.S. severe thunderstorm. The $100 million transaction provides coverage for American Family on an annual aggregate basis using a PCS index trigger. An additional feature of this transaction is the use of metro and non-metro factors providing enhanced customization to American Family s portfolio. Investors were keen to participate in the diversifying transaction, which resulted in favorable pricing for the issuer in the $100 million transaction. Following strong investor demand and continuing favorable market conditions, American Family returned to the market with a second issuance from the Mariah Re program one month later. The unrated $100 million Mariah Re transaction provides American Family with coverage for the risk layer below their first issuance. S&P downgraded the transaction in June, following the record number of severe weather outbreaks in the first half of An additional two sponsors utilized their program structures advantageously for second issuances in late 2010 to achieve further capacity. Both programs benefited from accelerated timelines with which the bonds came to market, taking advantage of investors' excess capital prior to year end. USAA, a long-standing frequent sponsor, returned to the market in November following their $405 million issuance in May The Res Re 2010-II, covering U.S. hurricane, earthquake, severe thunderstorm, winter storm and wild fire, provides an additional $300 million capacity for USAA across three classes of notes. Chartis was the third sponsor to return with an additional issuance in late Chartis first entered the catastrophe bond market in May 2010 with Lodestone Re covering U.S. hurricane and earthquake with a PCS index trigger. Lodestone Re achieved $425 million in capacity for the first issuance, which was the largest transaction in the first half of Following this success, Chartis closed the Lodestone Re transaction in December 2010 with an additional $450 million of protection for U.S. hurricane and earthquake. The significant issuances for both USAA and Chartis in one calendar year demonstrate the catastrophe bond market s ability to provide meaningful coverage, both for seasoned and new sponsors. 25

26 Insurance-Linked Securities 2011 Flagstone reentered the market in December, following an issuance in the prior year. Montana Re provides $210 million of coverage for U.S. earthquake, U.S. and Cayman Islands hurricane, Europe windstorm, Japan earthquake and typhoon. The Montana Re transaction is the first deal to use a Paradex trigger for U.S. perils. Due to strong investor demand the transaction was upsized and priced below initial guidance. Montana Re was downgraded in April following the Great East Japan Earthquake. Frequent sponsor returned to the market twice in December 2010 with the Vega Capital 2010-I (Vega Capital) and Successor X 2011 transactions. Successor X was offered in February. These three transactions, which use a variety of triggers, provide with more than $580 million of coverage for perils in the U.S., Europe, Japan and Australia. Issuance in the first quarter of 2011 was up significantly from the same period in More than $1 billion was issued in four bonds, compared to just $300 million in two bonds for the same period in Sponsors seeking U.S. hurricane coverage were anxious to avoid the clustered issuance witnessed in the second quarter of ILS U.S. Transaction Summary (Q1 & Q2 2011) Program Class Peril Issue Size ($MM) Trigger Collateral Successor X Successor X Class IV-E3 Class IV-AL3 US HU, EQ US HU, EQ PCS, PCS, IBRD Notes Foundation Re III Class A US HU PCS MMF East Lane Re IV Class A East Lane Re IV Class B Queen Street II Capital US HU, EQ, ST, WS US HU, EQ, ST, WS US HU, EU Wind MMF Indemnity MMF Indemnity MMF PCS, PERILS MMF Blue Fin 4 Class B US HU, EQ 40.0 Modeled Loss MMF Johnston Re Class A US HU 70.0 Indemnity MMF Johnston Re Class B US HU Indemnity MMF Residential 2011 Residential 2011 Residential Class Class Class 5 Loma Class A US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, ST, WS, WF US HU, EQ, EU Wind, JP EQ 57.0 Indemnity MMF 33.0 Indemnity MMF Indemnity MMF Total 1,606.8 Source: Aon Benfield Securities PCS, PERILS, Modeled Loss TPR Legend HU Hurricane EQ Earthquake WS Winter Storm ST Severe Thunderstorm WF Wild Fire EU Europe JP Japan US United States TY Typhoon 26

27 Aon Benfield Securities Following s Successor X, Hartford Fire Insurance Company (Hartford Fire) was the second sponsor to come to market in The Foundation Re III transaction, covering U.S. hurricane, came to market just prior to the release of the new RMS' U.S. Hurricane Model. Hartford Fire, which utilized RMS in its previous transactions, selected AIR as the modeling firm. This eliminated a potential distraction around the RMS model change. A number of potential sponsors that had utilized RMS considered issuances in the first half of The uncertainty around the new RMS model resulted in sponsors waiting to assess the impact, with none eager to be the first sponsor to utlize this new model. In fact, for the remainder of the first half of 2011, AIR was the sole modeling firm on transactions. U.S. Hurricane Model Market Share AIR EQE RMS 49.5% 29.7% 19% 20.8% 81% July - December 2010 January - June 2011 Source: Aon Benfield Securities Also in the first quarter, repeat sponsor Chubb came back to the market following its East Lane Re III issuance in East Lane IV achieved significant capacity, with $475 million indemnity protection against Northeast hurricane and U.S. earthquake, severe thunderstorm and winter storm. Additionally, coverage is provided for inland flood arising from hurricanes in selected counties. The transaction replaced some capacity from the maturing East Lane Re and East Lane Re II bonds. Frequent sponsor Munich Re brought Queen Street II to market in March. The $100 million transaction provides coverage for U.S. hurricane and Europe windstorm. Despite the Great Japan Earthquake occurring during the marketing period, the deal successfully closed at its targeted size of $100 million and within price guidance just days later. This again demonstrated the robustness of the ILS market during such disturbances. Allianz Argos 14 GmbH (Allianz) returned to the market for its sixth issuance since 2007 and the fourth issuance from its Blue Fin program. The Blue Fin 4 transaction utilizes a modeled loss trigger and provides coverage against U.S. hurricane and earthquake on a term aggregate basis. Combined with their 3 Class B transaction in 2010, Allianz s total term aggregate protection for the layer is $100 million. 27

28 Insurance-Linked Securities 2011 USAA and the North Carolina Insurance Underwriting Association / Joint Underwriting Association returned in the second quarter with their 16th and third issuances, respectively. The second quarter finished with a new sponsor, Argo Re, (Argo Re) coming to market with Loma (Loma Re) in June. The transaction provides coverage for U.S. hurricane and earthquake, Europe windstorm and Japan earthquake on a second event basis over an 18-month period based on industry loss estimates. PCS and PERILS are used for the U.S. and Europe perils, respectively, with Japan recoveries based on modeled industry losses. After some increases to the initial price guidance, Loma Re provided Argo Re with $100 million capacity. In the second quarter, S&P made a number of downgrades based on model changes, despite the fact that many of the bonds did not reset under the latest model. In May 2011, S&P downgraded the Class 1 notes of Residential 2009 one notch due to AIR s updated hurricane model. According to S&P, their criteria say that if a modeling company issues an updated model and we believe there are significant changes in our perception of the risk for such peril, we may change the rating on any outstanding bonds, even if there is no model-based reset in the terms of any of the bonds concerned. Although the changes between versions 10.5 and 12.5 were not as significant as other model updates have been, the changes were significant enough to cause a one-notch downgrade to these notes. In July, S&P subsequently downgraded 11 tranches of U.S. hurricane cat bonds that utilized the RMS model, after first putting 16 catastrophe bonds on CreditWatch negative in April. S&P Rating Changes S&P Rating Cat Bond Reason Initial Current Mariah Re Storm Activity B CCC+ Res Re AIR Model Change BB- B+ Calabash Re III A RMS Model Change BB- B+ Foundation Re III 2010 RMS Model Change BB+ BB Ibis Re 2009 B RMS Model Change BB- B+ Ibis Re 2010 A RMS Model Change BB BB- Ibis Re 2010 B RMS Model Change B+ B Lodestone Re A RMS Model Change BB+ BB Lodestone Re B RMS Model Change BB BB- Lodestone Re A-1 RMS Model Change BB+ BB Montana Re 2009 A RMS Model Change BB- B Montana Re 2009 B RMS Model Change B- CCC+ Montana Re 2010 C RMS Model Change B CCC+ Source: Aon Benfield Securities 28

29 Aon Benfield Securities Severe Weather in the United States 4 An extremely active stretch of severe weather occurred across areas east of the Rocky Mountains during April This tornado outbreak, the largest in recorded history with 334 separate tornado touchdowns, led to catastrophic damage throughout the Southeastern U.S. and the Tennessee Valley. The city of Tuscaloosa, Alabama took a direct hit from a high-end tornado that caused widespread devastation. At least three EF-5 tornadoes touched down during this outbreak. Reports from state government insurance agencies noted that combined insured losses were in excess of $1.3 billion. In late May, another outbreak spawned an EF-5 tornado that destroyed a large section of Joplin, Missouri. This massive tornado had at least a 0.75-mile width over a 22.1-mile path. National Weather Service (NWS) meteorologists confirmed that the tornado contained winds at one point up to 250 mph, marking the fourth EF-5 tornado of the year in the U.S. According to local law enforcement officials, up to 25 percent of Joplin was completely destroyed after the tornado struck. The tornado led to 154 fatalities in the city, becoming the deadliest singular tornado since the NWS officially began keeping records in City managers noted that as much as 75 percent of the city had suffered various degrees of damage. A second EF-5 tornado in May was confirmed in central Oklahoma. Total economic and insured losses from severe weather in the U.S. during the month of May were anticipated to reach billions of dollars. The Joplin tornado will likely be one of the costliest single tornadoes ever recorded. Floods were prevalent in the Missouri River and Souris River Basins in the U.S. and Canada during June. In Minot, North Dakota, the Souris River set an all-time record crest and flooded more than 4,100 homes in the city. The floods caused at least $200 million in damages and reconstruction costs throughout the river basin. The U.S. endured at least four additional periods of severe weather in July, particularly across parts of the Midwest, Plains and the Rockies. Total combined economic losses from these storms were preliminarily listed at $1.3 billion while insured losses were a combined $900 million. Impact of S&P s Downgrade of the U.S. Sovereign Debt Rating On August 5, 2011, S&P lowered the long-term sovereign credit rating of the U.S. from AAA to AA+. At the same time, S&P affirmed the short-term "A-1+" rating, the highest short-term rating, and removed it from CreditWatch negative. While the ILS market is generally isolated from the standard credit markets, 62 percent of catastrophe bonds issued in the 12 months ending June 30, 2011 are invested in U.S. Treasury Money Market Funds. As a result, the overall credit health of the U.S. remains important to the ILS market. Fortunately, Aon Benfield Securities does not expect this downgrade to significantly impact these funds from a regulatory or rating standpoint. 4 Data obtained from Monthly Cat Recap, Impact Forecasting LLC 29

30 Insurance-Linked Securities 2011 Catastrophe Bond Issuance By Collateral Structure (12 months ending June 30) Money Market Funds Tri-Party Repurchases Medium Term Notes 11% 17% 21% 62% 89% Source: Aon Benfield Securities Regarding regulatory concerns, the U.S. Security and Exchange Commission s (SEC) Rule 2a-7 states that funds may hold a security as long as it is rated by multiple Nationally Recognized Statistical Rating Organizations (NRSRO), and two or more of those NRSROs rate the security in either their highest (First Tier) or second-highest (Second Tier) short-term rating levels. Since S&P affirmed the short-term rating, this downgrade had no impact on whether catastrophe bond collateral funds could invest in U.S. Treasuries. Furthermore, it is evident that multiple NRSROs would need to downgrade their short-term ratings of the U.S. before Money Market Funds lose their ability to invest in U.S. Treasuries. Money Market Fund Rating Categories Money Market Fund Category Moody s Standard & Poor s Fitch Long-term Short-term Long-term Short-term Long-term Short-term Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA A-1+ Aa3 AA- AA- F-1+ First Tier A1 P-1 A+* A2* Eligible Securities A3* A+ A+* A* A-1 A F-1 A-* A2* A* A-* Second Tier A3* A- BBB+ P-2 A-2 Baa1 BBB+ BBB* F-2 Baa2* BBB* Ineligible Securities Third Tier and Below Baa2* BBB* BBB* Baa3 P-3 BBB- A-3 BBB- BB+* F-3 Source: Investment Company Institute * Due to the inherent complexities in comparing long-term risks with short-term risks, all three agencies allow some overlap in rating categories. 30

31 Aon Benfield Securities There is also concern over whether the downgrade of U.S. sovereign debt will cause the NRSROs to lower their Money Market Fund ratings. When assigning fund ratings, the NRSROs consider both the ratings of the underlying securities in the fund as well as the Net Asset Value (NAV) stability of the fund. Like the SEC, the NRSROs consider the short-term ratings of the underlying securities. Since the short-term U.S. rating is unchanged, it is unlikely that this will have an impact on the overall fund ratings. Regarding NAV stability, S&P issued a press release on August 8 which stated we will track movements (if any) in a rated fund's NAV to see if it remains within the criteria metrics for their specific rating category (i.e., +/ percent for 'AAA', which translates to $ $1.0025). The potential exists for NAV fluctuations to affect Money Market Fund ratings. However, given the recent performance of U.S. Treasuries and the stability of these funds, this seems unlikely. 31

32 Insurance-Linked Securities 2011 Diversifying Perils ILS in Europe European insurance companies continue to be active sponsors of catastrophe bonds, despite a lack of broad Europe peril coverage. In the 12-month period ending June 30, 2011, European insurers sponsored 44 percent of the bonds based on issuance amount, which included transactions covering risk from the U.S., Europe and Asia ILS Non-U.S. Transaction Summary (Year ending June 30) Program Class Peril Issue Size ( MM) Trigger Collateral Green Valley 2 Class A EU Wind EBRD Notes Calypso Capital Class A EU Wind PERILS TPR Atlas VI Capital Class A Green Fields Capital EU Wind, JP EQ 75.0 Paradex TPR Class A EU Wind 75.0 PERILS EBRD Notes Total Source: Aon Benfield Securities Legend HU Hurricane EQ Earthquake WS Winter Storm ST Severe Thunderstorm WF Wild Fire EU Europe JP Japan US United States TY Typhoon Of the transactions covering Europe windstorm, the market share for PERILSstructured triggers and recovery mechanics continued its upward trend. Of the eight transactions issued covering Europe windstorm, six utilized PERILS, including two of the three transactions that solely covered Europe windstorm. Transaction Review In September 2010, Groupama S.A. provided investors with much needed geographic diversification by sponsoring Green Valley, a 100 million France windstorm catastrophe bond that utilizes a parametric index trigger. Proceeds from the issuance were invested in European Bank for Reconstruction and Development (EBRD) global medium-terms notes rated AAA / Aaa / AAA, also providing investors with diversification of underlying collateral. Green Valley offers investors the opportunity to expose capital to a short-dated regional Europe windstorm transaction and, due to strong investor demand; the transaction was oversubscribed, resulting in competitive pricing for the issuer. 32

33 Aon Benfield Securities The 275 million Calypso kicked off the fourth quarter of 2010 by providing repeat sponsor AXA with Europe windstorm cover based on a modified PERILS trigger weighted by line of business (LOB) and CRESTA zone. LOBs include residential, commercial, industrial and agricultural, where defined. The modified trigger provides more customized coverage, reducing basis risk for the sponsor. Although the transaction closed in October 2010, the risk period did not begin until January 1, The deal received strong investor support and was subsequently upsized from the marketed issuance amount of 150 million. SCOR s 75 million Atlas VI transaction offers Europe windstorm and Japan earthquake risk using a Paradex trigger for both perils. It is the first transaction that utilizes a Paradex trigger for Japan earthquake risk. Atlas VI , issued a year earlier, utilizes a Paradex trigger for Europe windstorm and a parametric index for Japan earthquake. The transaction closed at the low end of the price guidance due to strong investor demand in the transaction. Vega Capital 2010-I Class C and Class D bonds, sponsored by in December, included $106.5 million of Europe windstorm protection based on the PERILS Industry Loss trigger. Other perils covered included U.S. hurricane, California earthquake and Japan typhoon and earthquake. As a result of the Japan exposures, the Class C bonds were placed on review for a possible downgrade by Moody s in March Following its Green Valley bond in September, Groupama S.A. sponsored yet another France windstorm transaction, Green Fields Capital (Green Fields), to close out the fourth quarter. The 75 million Green Fields bond secures four years of windstorm protection based on a modified PERILS trigger weighted by LOB and CRESTA, although Green Fields is the first PERILS bond to be country specific in coverage. The transaction closed at the low end of the price guidance. In March 2011, Munich Re brought Queen Street II to the market. The $100 million transaction includes coverage Europe windstorm protection based on a modified PERILS trigger weighted by country. Queen Street II is the first PERILS structured transaction modeled by AIR. Due to the inclusion of U.S. hurricane risk, the transaction priced wider than comparable European windstorm only transactions. Europe Windstorm Model Variances RMS Europe Windstorm Model version 11.0 was released in July The new version now offers coverage across 15 countries in Europe with the additions of Poland, Slovakia and the Czech Republic. It is the first time the model has been updated since The claims data and observations from recent Europe windstorms such as Kyril (2007), Emma (2008), Klaus (2009) and Xynthia (2010) have been incorporated. Overall, the expected loss of ILS was relatively stable as a decline in hazard offset a rise in vulnerability. The inclusion of significantly higher frequency events in the wind field model caused the change. Certain parametric deals, especially aggregate deals which had experienced an increase in expected loss, were exceptions. RMS also explained that clustering causes larger increases on aggregate instruments and also changes the regional distribution of risk. 33

34 Insurance-Linked Securities 2011 RMS Europe Bond Benchmark Study Benchmark Bond V10.0 Europe Windstorm Expected Loss % V11.0 Europe Windstorm Expected Loss % Fixed Exposure Bond Occurrence Fixed Exposure Bond Aggregate Interpolated Bond Occurrence Interpolated Bond Aggregate Station Bond Occurrence Station Bond Aggregate Source: RMS ILS in the Asia / Pacific Region The year ending June 30, 2011 experienced a series of significant events occurring in the Asia/Pacific region: A 7.1-magnitude earthquake in Darfield, New Zealand (September 4, 2010), Flooding in Australia (December 2010 to early 2011), Tropical Cyclone Yasi (end of January 2011 to early February 2011), A 6.3-magnitude earthquake in New Zealand s South Island (February 22, 2011), A 9.0-magnitude earthquake and subsequent tsunami on the northeastern coast of Japan (March 11, 2011); and Two powerful earthquakes (magnitudes 5.2 and 6.0) in Christchurch, New Zealand, as aftershocks of the February 2011 earthquake (June 13, 2011). The Darfield New Zealand earthquake had no impact on catastrophe bonds and only limited impact on collateralized reinsurance or ILWs. Since many of the covers had limits on contribution to the aggregate or excluded New Zealand, January renewals went smoothly within the collateralized reinsurance market. Similarly, the Australian flooding, Tropical Cyclone Yasi and the New Zealand aftershocks only marginally affected the sector. Nonetheless, the Great East Japan Earthquake, along with all the above events in the region, had substantial impact on the reinsurance space for the first quarter of According to the Aon Benfield Aggregate dated March 31, 2011, global reinsurer capital fell by 6.4 percent due primarily to losses from these events. 34

35 Aon Benfield Securities The Great East Japan Earthquake and the Asia ILS Market 5 On March 11, 2011, a mega-earthquake and tsunami struck the northeastern coast of Japan, killing more than 15,500 people, injuring over 5,300 and causing damage to at least 330,000 homes and other structures. The Great East Japan Earthquake, as it is known, had a magnitude of 9.0 and the epicenter was 80 miles east of Sendai city and 231 miles northeast of Tokyo. The quake was at a depth of nearly 20 miles and ground shaking from the temblor was generally estimated to last between two to five minutes. Following the main tremor, more than 830 aftershocks rattled the region with at least 57 aftershocks registering above magnitude The Japanese government estimated total economic losses to range between 16 to 25 trillion ($192 to $301 billion 7 ), while the World Bank calculated that insured losses fell between 1 to 3 trillion ($12 to $36 billion 8 ). 9 Following the initial jolt, a tsunami with waves estimated by various news sources to exceed 32 feet swept away thousands of homes, boats, cars and buildings, leaving a huge amount of debris. The waves rushed several miles inland and flattened nearly everything in their path. One of the hardest hit coastal locations was in Sendai, where a large part of the city was submerged in a nearly 32-foot wave of water. Widespread damage to commercial facilities (including manufacturing sites for companies such as Toyota, Nissan, Honda and Sony) forced a stop in production. The earthquake also triggered multiple fires throughout the island of Honshu. Many sections of the Tohoku Expressway serving northern Japan sustained severe damages and all roads out of Tokyo toward quakeaffected areas were closed to all but emergency vehicles. Tokyo s main Narita International Airport and its secondary Haneda Airport were both shut down leaving a combined 25,000 passengers stranded. Underground subway trains and bullet train service were also halted throughout the country, but have since been restored. After the earthquake and tsunami, the Fukushima Daiichi Nuclear Power Plant lost electricity and back-up generators also failed. This caused the essential cooling systems to shut down, rendering them unable to regulate temperatures and keep the reactor fuel cool. According to the Japan Meteorological Agency (JMA), the earthquake may have ruptured the fault zone from Iwate to Ibaraki with a length of 250 miles and a width of 120 miles. JMA pointed out that this event might have had the same mechanism as another large tsunami-spawning tremor that struck Japan in It should be noted that Japan has a rigorous earthquake building code in direct response to its location on the Pacific Ocean Ring of Fire a seismically active region. Nearly 90 percent of the world s earthquakes have occurred on this arc. The Great East Japan Earthquake was the fourth most powerful since 1900 and one of the strongest ever recorded in recent global history. The temblor was the largest since 2004, when a 9.1-magnitude earthquake triggered a tsunami off northern Sumatra in Indonesia, leaving approximately 220,000 people dead or missing in 12 countries around the Indian Ocean. The largest recorded earthquake in world history was the 9.5-magnitude earthquake that hit Chile on May 22, Unless otherwise noted, all data is from United States Geological Survey (USGS), Magnitude 9.0, 2011 March 11 Earthquake Summary or USGS, Largest Earthquakes in the World since Data obtained from March 2011 Monthly Cat Recap, Impact Forecasting LLC 7 $1 = as of March 31, Ibid 9 Data obtained from March 2011 Monthly Cat Recap, Impact Forecasting LLC 35

36 Insurance-Linked Securities 2011 Impact of the Great East Japan Earthquake on the Japanese Insurance Industry The General Insurance Association of Japan has released an update to the loss development associated with the Great East Japan Earthquake. The update report states that, as of June 15, 2011, the total amount of the claims paid for "Earthquake Insurance on Dwelling Risks" had reached approximately 974 billion ($12 billion 10 ) about 13 times larger (in today s dollars) than the claims paid for the Great Hanshin Earthquake in January The insurers' exposures for the dwelling earthquake risks are covered by the government-backed earthquake pool and Japan Earthquake Co., The net retention, provisioned by the private sector insurers under the pool, stands at billion ($6.2 billion) for losses ranging from 115 billion ($1.4 billion) to 1.12 trillion ($13.8 billion). 11 In other words, the risk reserve retained by the private sector insurers is sufficient to fully cover the current losses. In contrast, insurers commercial risks with exposure to earthquake are principally covered by traditional reinsurance programs, most of which are renewed annually on April 1. Earthquake programs saw prices increase by 25 to 50 percent from the previous year while the programs for typhoon risks kept a moderate increase of five to 10 percent. Once the loss situation became clear, some insurers, especially cooperatives, opted to extend their existing programs for three months to allow pricing negotiations to take place. They consummated the renewals at the end of June, with price increases of 30 to 50 percent. Impact of the Great East Japan Earthquake on the Catastrophe Bond Market In the aftermath of the Great East Japan Earthquake, the $300 million Muteki catastrophe bond was fully exhausted, and the sponsor, Munich Re, received the full payout from the bond for losses suffered in the earthquake. Thus, the bond became the first ever catastrophe bond that sustained a total loss due to a natural catastrophe event. Subsequently, due to the effectiveness of the Muteki bond, potential Japanese insurers are looking to secure capacity from the ILS space as an alternative to traditional reinsurance markets. Demand for Japan earthquake coverage through the capital markets is expected to grow with increasing traditional reinsurance costs. We have also noticed increased demand from the corporate sector that cannot secure sufficient covers from primary insurers. 10 $1 = as of June 15, Ibid 36

37 Aon Benfield Securities Muteki was downgraded by Moody s soon after the Great East Japan Earthquake in March, 2011 and then about two months later, on May 9, Munich Re, the sponsor on behalf of Zenkyoren, confirmed that the Muteki bond would be a total loss to investors. Initially, there was some delay in the calculation of the parametric index resulting from damage to the Kyoshin Network (K-NET) recording stations and lack of seismic data. By design, stations where no data was available would be assigned a zero value in calculating the index value. This could have been a significant issue if there were a large number of the K-NET stations with no available data. However, there was sufficient data to calculate the relevant index and decisively conclude that the Muteki bonds had reached the exhaustion level, which in turn caused investors to lose the entire principal on the bond. S&P Rating Changes Japan S&P Rating Cat Bond Reason Initial Current Atlas VI Capital 2009 Japan Quake BB- B Montana Re 2010 E Japan Quake B- CCC Topiary Capital Japan Quake BB+ CCC+ Vita Capital IV E-3 Japan Quake BB+ BB Source: Aon Benfield Securities Aside from the Muteki bond, the Great East Japan Earthquake also affected some catastrophe bonds with exposures to Japan earthquake, including Montana Re and Topiary, both of which were downgraded by S&P as they have apparently been activated for the second or further event triggers. Pricing on these bonds dropped by 30 percent on average from their pre-downgrade levels, and investors realized mark-to-market losses. Japanese corporations in various sectors have also suffered from property damage, as well as business interruption and contingent business interruption losses. These losses were caused not only by the events themselves, but also by continued power shortages related to the nuclear power generation disruption. Catastrophe bonds can potentially provide viable options for such corporations as a means to mitigate their exposures in future earthquakes. 37

38 Insurance-Linked Securities 2011 Australia Flooding 12 Beginning in December 2010, persistent heavy rains brought major flooding across eastern Australia. As the drenching rain continued throughout the month of January 2011, 36 people died and dozens more were injured in what became, in economic terms, the costliest natural disaster in Australian history. The most affected areas were Queensland, Victoria and New South Wales, though Queensland bore the major brunt of the damage. More than 2.1 million people were impacted by flash flooding from dozens of major rivers and tributaries overflowing their banks. Hundreds of cities, towns and villages were flooded, including Brisbane, the capital of Queensland. There was extensive damage to property, the transportation infrastructure, the coal mining industry and agriculture. Preliminary assessments of economic damages were listed at A$5.6 billion ($5.7 billion) by the government, though economists estimated that total economic losses could reach A$20 billion ($20.4 billion 13 ). The Insurance Council of Australia (ICA) declared four separate catastrophes during the floods. More than 38,460 claims had been filed in Queensland (including Brisbane, Lockyer Valley and Toowoomba) with an estimated value of A$1.5 billion ($1.5 billion). For Victoria, the ICA reported 4,780 claims with payouts totaling A$69.0 million ($70.2 million 14 ). New Zealand Earthquake 15 A 6.3-magnitude earthquake struck New Zealand s South Island on February 22, 2011, causing widespread damage, fatalities and injuries. More than 180 people were killed and about 2,000 injured. The epicenter was near the suburb of Lyttleton in Christchurch, at a shallow depth of 3.1 miles. Extensive damage occurred throughout Christchurch as buildings collapsed into roads; parked cars were buried under rubble; water, sewer and gas lines ruptured; streets and sidewalks split; bridges collapsed; and fires scattered in the city. Churches, government buildings, historic buildings, offices in the central business district, homes and schools were either destroyed or sustained severe damage. According to the New Zealand government, the total estimated economic impact from the earthquake was between NZ$10 to 15 billion ($7.5 to $11.3 billion 16 ). On June 13, 2011, the greater Christchurch region was struck by two aftershocks (magnitudes 5.5 and 6.0 respectively), leaving at least one person dead and 46 more injured, and bringing more damage to the area. In addition to the two shocks, several smaller tremors (ranging from magnitudes 3.4 to 4.9) also rattled the region in the following days. According to the U.S. Geological Survey, at least 487,000 residents in New Zealand felt various levels of shaking during the 6.0-magnitude aftershock. 12 Data obtained from Monthly Cat Recap, Impact Forecasting LLC 13 Converted at $1 = A$ and $1 = NZ$ as of February 28, Ibid 15 Data obtained from Monthly Cat Recap, Impact Forecasting LLC 16 Converted at $1 = A$ and $1 = NZ$ as of February 28,

39 Aon Benfield Securities Extreme Mortality, Longevity, and Health Risks Recently, the life market has expanded significantly to provide coverage not only for extreme mortality, but also for longevity and health risks. For the 12-month period ending June 30, 2011, four issuances came to market securing a total of $525 million in capacity, compared to just $50 million in the prior year period, with just a single issuance. Notably, a new sponsor, Aetna Life, was one of the four ILS Life Transaction Summary (Year ending June 30) Program Class Peril Issue Size ($MM) Trigger Collateral Vita Capital IV Ltd III Class E Extreme Mortality IBRD Notes Vita Capital IV Ltd IV Class E Extreme Mortality 75.0 IBRD Notes Vitality Re Class A Health MBR Indemnity TPR Kortis Capital Class E Longevity 50.0 IBRD Notes Vitality Re II Class A Health MBR Indemnity TPR Vitality Re II Class B Health MBR 40.0 Indemnity TPR Total Source: Aon Benfield Securities Frequent sponsor returned in the fourth quarter seeking coverage for extreme mortality risk for the seventh time since December The $175 million Vita Capital IV III transaction provides protection against this risk in Japan and the U.S., while the IV bonds provides coverage for Canada and Germany. As a result of the Great East Japan Earthquake, the III bond was downgraded one notch by S&P in June 2011 to BB. Later in the fourth quarter, successfully closed Kortis, securing $50 million in longevity improvement protection for the U.S. and U.K. Aging populations and the associated cost are increasingly becoming a concern for life companies. The recovery mechanism is based on the difference in the annualized mortality improvement of U.K. males between the ages of 75 and 85 and of U.S. males between 55 and 65 over an eight-year risk period, using publicly reported data. This new coverage highlighted the ability for investors to accept new risks. Vitality Re was launched in December for new sponsor Aetna Life, further highlighting interest in life and health risks. Initially, two tranches came to market; however only the less risky Class A notes closed for $150 million. The transaction, modeled by Milliman Inc., provides stop loss protection for Aetna Life based on their actual MBR. Aetna Life returned to the market in April 2011 and secured an additional $150 million in capacity across two tranches, as investors proved their ongoing acceptance for this type of risk. 39

40 Insurance-Linked Securities 2011 An Interview with Peter Nakada, Managing Director of RiskMarkets, Risk Management Solutions 1. What were your expectations for market reaction to the release of version 11.0 of the U.S. Hurricane Model in February 2011? I ll take the liberty of restating what I think is behind this question: Did you know the changes to your U.S. Hurricane Model would have such a dramatic impact on the ILS market? If so, why did you change the model so much? The short answer is that as modelers we have a responsibility to build our models independently from any market considerations. RMS brings the best data together with the best science and analytics to produce an unbiased view of risk. Furthermore, the RiskMarkets group at RMS is kept deliberately separate from the modeling teams. This means we receive information on the new release at the same time external clients do. When we discovered the magnitude of the changes, we prepared for a strong market reaction especially from would-be sponsors who were faced with the possibility of significantly higher expected losses compared to the old model. Some have asked why we didn t hold back and introduce incremental changes to the model over time. This is simply against our philosophy we don t withhold information available to us that could help the market make better risk decisions. 2. Would you provide some color on market reaction of discussions with users following the new model release insurance companies, reinsurers and catastrophe bond sponsors and investors? The market reaction to the models pretty much followed five of what are commonly referred to as Seven Stages of Grief and Loss. In this case, the market was mourning the loss of RMS version Shock and Disbelief You can t be serious? Denial At July 1 renewals, the market reaction was barely noticeable. Reinsurers spoke about RMS version 11.0, but from a pricing and portfolio management perspective they were acting as if it didn t exist. In the ILS market, secondary market prices seemed unaffected by the new model. We also heard that bonds were changing hands at pre-version 11.0 seasonally adjusted prices. Anger How could you do this to us? After clients had a chance to evaluate the impact on their risk and capital requirements, some were upset. We spent a great deal of time with senior-level clients explaining that we had their best interests in mind, and that this view of risk could help them make smart underwriting and capacity management decisions. Most meetings ended with the client understanding that the onus was on them to make the best use of this information, rather than being upset with us for providing it to them. 40

41 Aon Benfield Securities Bargaining When clients realized that our science was sound, How about we use the long-term rates instead of the medium-term rates and dial down the storm surge leakage assumptions? Version 11.0 allows users to turn the dials to better reflect their own risks; we have advised clients to tailor the modeling to fit their books, but also to back up any assumptions with hard data. Acceptance and Hope The majority of clients have come to terms with the science of the new model, and crafted plans on how to work this new view of risk into their underwriting and portfolio management. 3. Would you explain some of the largest drivers of model change, and their impact on specific regions, such as Florida, Texas, Mid-Atlantic? What about the impact on commercial lines versus personal lines in those regions? Would you also provide some general commentary about coastal and non-coastal exposed business? The four largest drivers of loss are: Medium-term activity rates We altered our methodology to provide the best predictive power for each of six different regions. While the overall activity rate didn t change much, more of the rate is weighted toward higher intensity storms (Category 3 5) and Cape Verde storms which favor Florida and the Gulf States. Industry exposure database RMS has adopted new higher resolution datasets (i.e. property by property information on the building stock and values), and a full bottom-up replacement cost methodology for calculating industry exposures, which results in an increase in estimated total insured values and industry loss. Hazard and vulnerability Our new wind field model indicates that winds decay more slowly as they move inland, founded on the results of a three-year R&D program conducted with the University of Miami. This change increases the risk for inland exposures across the U.S. hurricane states. Our new vulnerability curves show the highest increases in Texas and the Gulf, based on research post-ike into building quality standards and the impacts of highhumidity causing more rapid deterioration of certain types of roofs. Storm surge Our new storm surge model simulates wave formation (from behavior of storms over the ocean, the flow of water in different coastal topology (e.g., bays and inlets), and simulates the buildup of surge over the entire lifecycle of the hurricane. This better captures the disproportionately large surges from storms such as Hurricanes Ike and Katrina. This new approach shows more damage from catastrophic surges resulting in higher industry loss risk. 41

42 Insurance-Linked Securities Would you provide some color on the more recent release of the Europe Windstorm Model? The new RMS Europe Windstorm Model now provides coverage across 15 countries, including three new Eastern European countries: Poland, Slovakia and the Czech Republic. Changes are driven by analysis of over 2 million individual claims since the last model update in 2006 and significant improvements in computing power that enable us to produce much more realistic event simulations. Compared to version 11.0 of the U.S. Hurricane Model release, the market impact of the Europe Windstorm release was less eventful. While components of the model changed (hazard up for return periods less than 50 years, hazard down for return periods greater than 50 years, vulnerability up across the board), the net impact on the ILS market was minimal (see figure below): PERILS industry bonds were virtually unchanged and Paradex bonds experienced moderate declines in expected loss V10.0 to V11.0 Change in Expected Loss for EUWS Cat Bond Perils 10% Paradex 8% v11 Expected Loss 6% 4% 2% 0% 0% 2% 4% 6% 8% 10% v10 Expected Loss Source: RMS Analysis 5. Given market reception to version 11.0 of the U.S. Hurricane Model and ongoing discussions with users, are there any planned updates to version 11.0 of the U.S. Hurricane Model or other RMS global models? We are confident in our version 11.0 view of risk. We will continue to help the market understand and implement this new view of risk but we will not change it until we have significant new data or science that would warrant a further update to the model 42

43 Aon Benfield Securities 6. Looking forward, what modeling issues will the ILS markets need to contemplate? We believe the biggest modeling issue the natural catastrophe ILS market needs to contemplate is how to deal with significantly different views of risk in the market. When the three modeling firms are fairly close in their risk assessments, it is easy for the market to adopt technical pricing rules of thumb. However, with RMS version 11.0 estimating expected losses twice of what other modelers are showing, investors will need to have the sophistication to take both of these measures as inputs and develop an informed internal view of the risk. Looking outside the natural catastrophe ILS market, we believe the next big thing is longevity risk. We are excited that S&P assigned a BB+ rating to Swiss Re s Kortis transaction, based on output from the RMS Longevity Model. The combination of transparent accounting (pension liability risk marked-to-market through the income statement), low interest rates, and awareness of longevity risk makes conditions ripe for this market to take off. The challenge for both RMS and the ILS market is to get familiar with this new type of model so that the capital markets can provide the capacity to meet this market s needs. 7. What are your plans to release a new Japanese earthquake model that incorporates tsunami risk? Following the recent earthquakes in Japan and Chile, we plan to enhance our tsunami modeling capabilities. Currently, we provide tsunami accumulation footprints for a set of scenarios impacting the U.S. Pacific Northwest, Portugal, and New Zealand. Our first priority is to develop a suite of tsunami scenarios resulting from seismic activity in the Nankai Trough and the Japan Trench. After that, we plan to look at tsunami risk in the Western U.S. and Canada. The scientific community was collectively surprised at the magnitude of the Japan Earthquake. The Japanese research community is now re-evaluating seismic hazard, with a goal to release a revised view of Japanese earthquake hazard through the Earthquake Research Committee in April RMS intends to release a new Japan earthquake model, linked to a stochastic tsunami model, after the hazard update. 8. Will the severe liquefaction in the Christchurch event result in a reassessment of liquefaction risk in earthquake models? The Christchurch event triggered an investigation into how to treat areas of very high susceptibility to liquefaction. Because the Christchurch water table is so shallow (less than 3 feet deep) it experienced extreme liquefaction impacting structures, contents, infrastructure, and roadways, as well as flooding by ejected water. In light of the Christchurch earthquake sequence, RMS is re-evaluating the modeling of liquefaction, and may add an extreme susceptibility class to account for areas with very shallow water tables. RMS researchers continue to work to identify other regions that would be classified for extreme susceptibility. 43

44 Insurance-Linked Securities 2011 Appendix I Catastrophe Bond Issuance Statistics As of June 2011 Source: Aon Benfield Securities 44

45 Aon Benfield Securities Outstanding Catastrophe Bond Volume, (Years ending June 30) Property Outstanding 40,000 Life / Health Outstanding 35,000 30,000 Cumulative Property Bonds Total Cumulative Bonds $ Millions 25,000 20,000 15,000 12,911 16,155 13,249 13,167 11,504 10,000 5,000 2,075 2,589 3,005 3,876 4,741 6, Source: Aon Benfield Securities Catastrophe Bond Issuance By Year (Years ending June 30) Property Issuance Life / Health Issuance 9,000 8,000 7,000 8,145 $ Millions 6,000 5,000 4,000 3,279 5,914 4,661 4,382 3,000 2,000 1,000 1, ,011 1,958 1,499 1, Source: Aon Benfield Securities Catastrophe Bond Issuance By Half-Year January - June ,000 July - December ,000 7,000 3,404 $ Millions 6,000 5,000 4,000 3,168 2,625 3,000 2,000 1, , , ,011 2,510 2,650 1, , Source: Aon Benfield Securities 45

46 Insurance-Linked Securities 2011 Catastrophe Bonds Maturing By Year (Years ending June 30) Property Maturities 6,000 5,674 Life / Health Maturities 5,000 4,531 $ Millions 4,000 3,000 2,670 3,939 2,483 3,900 2,000 1,412 1,442 1, Source: Aon Benfield Securities Aon Benfield All Bond Indices versus Financial Benchmarks All Bond 3 Year U.S. Corporate BB+ CMBS Fixed Rate 3-5 Yrs ABS 3-5 Yrs, Fixed Rate S&P 500 Total Return 150% 120% 90% 60% 30% 0% -30% -60% Source: Aon Benfield Securities, Bloomberg 46

47 Aon Benfield Securities Aon Benfield ILS Indices All Bond U.S. Hurricane BB-rated U.S. EQ 150% 120% Total Return 90% 60% 30% 0% Source: Aon Benfield Securities Catastrophe Bond Issuance By Peril (Years ending June 30) U.S. Hurricane U.S. Earthquake 1% 1% 8% 6% 12% 1% 1% U.S. Other EU Windstorm Life / Health 29% 54% 19% 46% Japan 7% Rest of World 15% Source: Aon Benfield Securities Investor By Category (Years ending June 30) Institutional Catastrophe Fund Mutual Fund Reinsurer Hedge Fund 4% 6% 20% 31% 10% 7% 5% 44% 34% 39% Source: Aon Benfield Securities 47

48 Insurance-Linked Securities 2011 Investor By Country (Years ending June 30) U.S. Switzerland Bermuda UK Other 24% 5% 10% 43% 7% 5% 33% 8% 47% 18% Source: Aon Benfield Securities U.S. Hurricane Model Market Share AIR EQE RMS 29.7% 19% 49.5% 20.8% 81% Source: Aon Benfield Securities July - December 2010 January - June 2011 Catastrophe Bond Issuance By Collateral Structure (12 months ending June 30) Money Market Funds Tri-Party Repurchases Medium Term Notes 11% 17% 21% 62% 89% Source: Aon Benfield Securities 48

49 Aon Benfield Securities 49

50 Insurance-Linked Securities 2011 Appendix II ILS Market Transaction Summary As of June 2011 Source: Aon Benfield Securities 50

51 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Dec-96 St Paul Re U.K. George Town Re, Worldwide All Perils incl. Marine & Aviation Indemnity $44,500 Dec-96 St Paul Re U.K.* George Town Re, Worldwide All Perils incl. Marine & Aviation Indemnity $24,000 Aaa AAA Jun-97 United States Automobile Association Residential Class A-1 US HU Indemnity $163,800 Aaa AAA Jun-97 United States Automobile Association Residential Class A-2 US HU Indemnity $313,180 Ba2 BB BB Oct-97 SR Earthquake Fund, Class A-1 US EQ Industry $42,000 Baa3 BBB- Oct-97 * SR Earthquake Fund, Class A-2 US EQ Industry $20,000 Baa3 BBB- Oct-97 SR Earthquake Fund, Class B US EQ Industry $60,300 Ba1 BB Oct-97 SR Earthquake Fund, Class C US EQ Industry $14,700 Ba3 B Nov-97 Tokio Marine & Nichido Fire Insurance Co., Re, JP EQ $80,000 Ba2 Nov-97 Tokio Marine & Nichido Fire Insurance Co., Re, $20,000 Baa3 Mar-98 Mar-98 Centre Solutions (Bermuda) (Zurich Group) Centre Solutions (Bermuda) (Zurich Group) Trinity Re, Class A-1 US HU Indemnity $10,467 Aaa AAA Trinity Re, Class A-2 US HU Indemnity $61,533 Ba3 BB Jun-98 United States Automobile Association Residential US HU Indemnity $450,000 Ba2 BB BB Jun-98 Jul-98 Jul-98 Jul-98 The Yasuda Fire and Marine Insurance Company United States Fidelity and Guaranty Company United States Fidelity and Guaranty Company United States Fidelity and Guaranty Company Pacific Re, JP TY Indemnity $80,000 Ba3 BB- Mosaic Re, Class A US HU, EQ, ST Indemnity $24,000 Mosaic Re, Class B US HU, EQ, ST Indemnity $21,000 Mosaic Re, Indemnity $9,000 Dec-98 Centre Solutions (Bermuda) (Zurich Group) Trinity Re 1999, Class A-1 US HU Indemnity $2,385 Aaa AAA Dec-98 Centre Solutions (Bermuda) (Zurich Group) Trinity Re 1999, Class A-2 US HU Indemnity $51,615 Ba3 BB * Equity 51

52 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Feb-99 United States Fidelity and Guaranty Company Mosaic Re II, Class A US HU, EQ, ST Indemnity $25,000 Feb-99 United States Fidelity and Guaranty Company Mosaic Re II, Class B US HU, EQ, ST Indemnity $20,000 Mar-99 Kemper Domestic, Inc. US EQ Indemnity $80,000 Ba2 BB+ Mar-99 Kemper* Domestic, Inc. Indemnity $20,000 Apr-99 Sorema S..A Halyard Re B.V. EU/JP Wind, JP EQ Indemnity $17,000 May-99 Oriental Land Co., Concentric, JP EQ $100,000 Ba1 BB+ Jun-99 United States Automobile Association Residential US HU Indemnity $200,000 Ba2 BB Jun-99 Gerling- Konzern Globale Rückversicherungs- Aktienfesellschaft Juno Re, US HU Indemnity $80,000 BB BB+ Nov-99 American Re Gold Eagle Capital Class A US HU, EQ Modeled Loss $50,000 Baa3 BBB- Nov-99 American Re Gold Eagle Capital Class B US HU, EQ Modeled Loss $126,600 Ba2 BB Nov-99 American Re* Gold Eagle Capital Modeled Loss $5,500 Ba1 BB+ Nov-99 American Re* Gold Eagle Capital Modeled Loss $3,600 BB+ Nov-99 Gerling- Konzern Globale Rückversicherungs- Aktienfesellschaft Namazu Re, JP EQ Modeled Loss $100,000 BB Mar-00 Lehman Re Seismic US EQ Industry $145,500 Ba2 BB+ Mar-00 Lehman Re * Seismic Industry $4,500 Mar-00 SCOR Atlas p.l.c. Class A EU Wind. CA/ JP EQ Indemnity $70,000 BBB+ BBB+ Mar-00 SCOR Atlas p.l.c. Class B EU Wind. CA/ JP EQ Indemnity $30,000 BBB- BBB- Mar-00 SCOR Atlas p.l.c. Class C EU Wind. CA/ JP EQ Indemnity $100,000 B- B- Apr-00 Sorema S..A Halyard Re B.V. EU/JP Wind, JP EQ Indemnity $17,000 May-00 State Farm Companies Alpha Wind 2000-A US HU Indemnity $52,500 BB+ May-00 State Farm Companies* Alpha Wind 2000-A Indemnity $37,500 BB Jun-00 United States Automobile Association Residential 2000 US HU Indemnity $200,000 Ba2 BB+ Jul-00 Vesta Fire Insurance Corporation NeHi, Inc. US HU Modeled Loss $41,500 Ba3 BB * Equity 52

53 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jul-00 Vesta Fire Insurance Corporation* NeHi, Inc. Modeled Loss $8,500 Nov-00 Assurances Generales de France I.A.R.T. Mediterranean Re p.l.c. Class A EU Wind, EQ Modeled Loss $41,000 Baa3 BBB+ BBB Nov-00 Assurances Generales de France I.A.R.T. Mediterranean Re p.l.c. Class B EU Wind, EQ Modeled Loss $88,000 Ba3 BB+ BB+ Dec-00 Munich Re PRIME Capital CalQuake & EuroWind US EQ/ EU Wind $129,000 Ba3 BB+ BB Dec-00 Munich Re* PRIME Capital CalQuake & EuroWind Class B $6,000 Dec-00 Munich Re PRIME Capital Hurricane US HU $159,000 Ba3 BB+ BB Dec-00 Munich Re* PRIME Capital Hurricane Class B $6,000 Feb-01 Western Capital US EQ Industry $97,000 Ba2 BB+ Feb-01 * Western Capital Industry $3,000 Mar-01 American Re Gold Eagle Capital 2001 US HU, EQ Modeled Loss $116,400 Ba2 BB+ Apr-01 Sorema SA Halyard Re B.V. EU/JP Wind, JP EQ Indemnity $17,000 May-01 * SR Wind Class B-1 May-01 * SR Wind Class B-2 May-01 SR Wind Class A-1 US/EU Wind May-01 SR Wind Class A-2 US/EU Wind $1,800 BB BB $1,800 BB BB $58,200 BB+ BB+ $58,200 BB+ BB+ Jun-01 United States Automobile Association Residential 2001 US HU Indemnity $150,000 Ba2 BB+ Jun-01 Zurich Insurance Company* Trinom Modeled Loss $4,856 B2 B+ Jun-01 Zurich Insurance Company Trinom Class A-1 US/EU Wind, US EQ Modeled Loss $60,000 Ba2 BB BB- Jun-01 Zurich Insurance Company Trinom Class A-2 US/EU Wind, US EQ Modeled Loss $97,000 Ba1 BB+ BB Dec-01 SCOR Atlas II p.l.c. Class A EU Wind. CA/ JP EQ Parmetric/ $50,000 A3 A Dec-01 SCOR Atlas II p.l.c. Class B EU Wind. CA/ JP EQ Parmetric/ $100,000 Ba2 BB+ Dec-01 Lehman Re Redwood Capital I, US EQ Industry $160,050 Ba2 BB+ Dec-01 Lehman Re * Redwood Capital I, Industry $4,950 * Equity 53

54 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Mar-02 Lehman Re Redwood Capital II, Ltd US EQ Industry $194,000 Baa3 BBB- Mar-02 Lehman Re * Redwood Capital II, Ltd Industry $6,000 Ba1 BBB- Apr-02 Lloyd's Syndicate 33 (Hiscox) St. Agatha Re US EQ Modeled Loss $33,000 BB+ May-02 May-02 Nissay Dowa General Insurance Co., Nissay Dowa General Insurance Co., * Fujiyama JP EQ $67,900 BB+ Fujiyama $2,100 BB May-02 United States Automobile Association Residential 2002 US HU Indemnity $125,000 Ba3 BB+ Jun-02 PIONEER Class A US HU $85,000 Ba3 BB+ Jun-02 PIONEER Class B EU Wind $50,000 Ba3 BB+ Jun-02 PIONEER Class C US EQ $30,000 Ba3 BB+ Jun-02 PIONEER Class D US EQ $40,000 Baa3 BBB- Jun-02 PIONEER Class E JP EQ $25,000 Ba3 BB+ Jun-02 PIONEER Class F US/EU Wind, US/JP EQ $25,000 Ba3 BB+ Sep-02 PIONEER Class B EU Wind $5,000 Ba3 BB+ Sep-02 PIONEER Class C US EQ $20,500 Ba3 BB+ Sep-02 PIONEER Class D US EQ $1,750 Baa3 BBB- Dec-02 PIONEER Class A US HU $8,500 Ba3 BB+ Dec-02 PIONEER Class B EU Wind $21,000 Ba3 BB+ Dec-02 PIONEER Class C US EQ $15,700 Ba3 BB+ Dec-02 PIONEER Class D US EQ $25,500 Baa3 BBB- Dec-02 PIONEER Class E JP EQ $30,550 Ba3 BB+ Dec-02 PIONEER Class F US/EU Wind, US/JP EQ $3,000 Ba3 BB+ Dec-02 Vivendi Universal, S.A. Studio Re US EQ $150,000 Ba2 BB+ Dec-02 Vivendi Universal, S.A.* Studio Re US EQ $25,000 B1 BB Mar-03 PIONEER Class A US HU $6,500 Ba3 BB+ Mar-03 PIONEER Class B EU Wind $8,000 Ba3 BB+ * Equity 54

55 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Mar-03 PIONEER Class C US EQ $6,500 Ba3 BB+ Mar-03 PIONEER Class D US EQ $5,500 Baa3 BBB- Mar-03 PIONEER Class E JP EQ $8,000 Ba3 BB+ Mar-03 PIONEER Class F US/EU Wind, US/JP EQ $8,140 Ba3 BB+ May-03 United States Automobile Association Residential 2003 US HU, EQ Indemnity $160,000 Ba2 BB+ Jun-03 PIONEER Class A US HU $9,750 Ba3 BB+ Jun-03 PIONEER Class B EU Wind $12,250 Ba3 BB+ Jun-03 PIONEER Class C US EQ $7,250 Ba3 BB+ Jun-03 PIONEER Class D US EQ $2,600 Baa3 BBB- Jun-03 Zenkyoren Phoenix Quake JP EQ $192,500 Baa3 BBB+ Jun-03 Zenkyoren Phoenix Quake Wind II JP TY, EQ $85,000 Ba1 BBB- Jun-03 Zenkyoren Phoenix Quake Wind JP TY, EQ $192,500 Baa3 BBB+ Jul-03 Arbor I 1 US/EU Wind, CA/JP EQ $95,000 B Jul-03 Arbor II 1 US/EU Wind, CA/JP EQ $26,500 A1 A+ Jul-03 Palm Capital 1 US HU $22,350 Ba3 BB+ Jul-03 Oak Capital 1 EU Wind $23,600 Ba3 BB+ Jul-03 Sequoia Capital 1 US EQ $22,500 Ba3 BB+ Jul-03 Sakura Capital 1 JP EQ $14,700 Ba3 BB+ Aug-03 Central Corporation (for TREIP) Formosa Re Taiwan EQ Indemnity $100,000 NR Sep-03 Arbor I 2 US/EU Wind, CA/JP EQ $60,000 B Dec-03 Palm Capital 2 US HU $19,000 Ba3 BB+ Dec-03 Arbor I 3 US/EU Wind, CA/JP EQ $8,850 B Dec-03 PIONEER 2002 US EQ $51,000 Baa3 BBB- Dec-03 Electricite de France Pylon Class A EU Wind 70,000 A2 BBB+ * Equity 55

56 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Dec-03 Electricite de France Pylon Class B EU Wind 120,000 Ba1 BB+ Dec-03 Redwood Capital III, US EQ Industry $150,000 Ba1 BB+ Dec-03 Redwood Capital IV, US EQ Industry $200,000 Baa3 BBB- Mar-04 Oak Capital 2 EU Wind $24,000 Ba3 BB+ Mar-04 Sequoia Capital 2 US EQ $11,500 Ba3 BB+ Mar-04 Arbor 4 US/EU Wind, CA/JP EQ $21,000 B May-04 United States Automobile Association Residential 2004 Class A US HU, EQ Indemnity $127,500 BB May-04 United States Automobile Association Residential 2004 Class B US HU, EQ Indemnity $100,000 B Jun-04 Converium Helix 04 US/EU Wind, US/JP EQ Modeled Loss $100,000 BB+ Jun-04 Arbor 5 US/EU Wind, CA/JP EQ $18,000 B Jun-04 Gi Capital JP EQ Sep-04 Oak Capital 3 EU Wind $125,000 BB+ $10,500 Ba3 BB+ Sep-04 Sequoia Capital 3 US EQ $11,000 Ba3 BB+ Sep-04 Arbor 6 US/EU Wind, CA/JP EQ $31,800 B Nov-04 Hartford Fire Insurance Company Foundation Re 2004-I Class A US HU Industry $180,000 BB+ Nov-04 Hartford Fire Insurance Company Foundation Re 2004-I Class B US HU, EQ Industry $67,500 BBB+ Dec-04 Arbor I 7 US/EU Wind, CA/JP EQ $15,000 B Dec-04 Redwood Capital V, US EQ Industry $150,000 Ba2 BB+ Dec-04 Redwood Capital VI, US EQ Industry $150,000 Ba2 BB+ Mar-05 Arbor I 8 US/EU Wind, CA/JP EQ $20,000 B May-05 United States Automobile Association Residential 2005 Class A US HU, EQ Indemnity $91,000 BB May-05 United States Automobile Association Residential 2005 Class B US HU, EQ Indemnity $85,000 B Jun-05 Factory Mutual Insurance Company Cascadia US EQ $300,000 BB+ BB Jun-05 Arbor I 9 US/EU Wind, CA/JP EQ $25,000 B * Equity 56

57 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jul-05 Zurich American Insurance Company KAMP Re 2005 US HU, EQ Indemnity $190,000 BB+ Nov-05 PXRE Atlantic & Western Re Class A US/EU Wind Modeled Loss $100,000 BB+ BB Nov-05 PXRE Atlantic & Western Re Class B US/EU Wind, US HU Modeled Loss $200,000 B+ B Nov-05 Munich Re Aiolos EU Wind 110,000 BB+ Dec-05 Arbor I 10 US/EU Wind, CA/JP EQ $18,000 B Dec-05 PXRE Atlantic & Western Re II Class A US/EU Wind, US EQ Modeled Loss $125,000 BB+ Dec-05 PXRE Atlantic & Western Re II Class B US/EU Wind, US EQ Modeled Loss $125,000 BB+ Dec-05 Montpelier Champlain Class A US/JP EQ Modeled Loss $75,000 B B- Dec-05 Montpelier Champlain Class B US HU, EQ Modeled Loss $15,000 B+ B- Jan-06 Australis 1 AU CY, EQ $100,000 BB Feb-06 Redwood Capital VII, US EQ Industry $160,000 BB+ Feb-06 Redwood Capital VIII, US EQ Industry $65,000 BB+ Feb-06 Hartford Fire Insurance Company Foundation Re 2006-I Class D US HU, EQ Industry $105,000 BB May-06 May-06 The Fund for Natural Disasters The Fund for Natural Disasters CAT-Mex Class A Mexico EQ $150,000 BB+ CAT-Mex Class B Mexico EQ $10,000 BB+ May-06 ACE American Insurance Company Calabash Re 2006-I Class A-1 US HU Industry $100,000 BB May-06 United States Automobile Association Residential 2006 Class A US HU, EQ Indemnity $47,500 B May-06 United States Automobile Association Residential 2006 Class C US HU, EQ Indemnity $75,000 BB+ Jun-06 Successor Hurricane Industry 2 Class D US HU Industry $10,250 B Jun-06 Successor Hurricane Industry 2 Class E US HU Industry $35,000 NR Jun-06 Successor Japan Quake 2 Class C JP EQ Modeled Loss $3,000 B Jun-06 Successor Euro Wind 2 Class A EU Wind $3,000 BB * Equity 57

58 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jun-06 Successor Euro Wind 2 Class C EU Wind $3,000 B Jun-06 Successor Hurricane Industry 1 Class B US HU Industry $14,000 BB- Jun-06 Successor Hurricane Industry 1 Class C US HU Industry $7,250 B Jun-06 Successor Hurricane Industry 1 Class D US HU Industry $34,250 B Jun-06 Successor Hurricane Industry 1 Class E US HU Industry $5,000 NR Jun-06 Successor Hurricane Industry 1 Class F US HU Industry $54,000 B Jun-06 Successor Hurricane Modeled 1 Class B US HU Modeled Loss $42,250 BB- Jun-06 Successor Cal Quake 1 Class A US EQ $47,500 BB Jun-06 Successor Japan Quake 1 Class A JP EQ Modeled Loss $103,470 BB Jun-06 Successor Japan Quake 1 Class B JP EQ Modeled Loss $26,250 BB- Jun-06 Successor Japan Quake 2 Class C JP EQ Modeled Loss $70,750 B Jun-06 Successor Euro Wind 1 Class A EU Wind $97,130 BB Jun-06 Successor Euro Wind 1 Class B EU Wind $18,500 BB- Jun-06 Successor Euro Wind 1 Class C EU Wind $110,750 B Jun-06 Successor II 1 Class A Jun-06 Successor II 1 Class E Jun-06 Successor III 1 Class A Jun-06 Successor IV 1 Class A US/EU Wind, US/JP EQ US/EU Wind, US/JP EQ US/EU Wind, JP EQ US/EU Wind, US/JP EQ Multiple $73,200 B Multiple $154,250 NR Multiple $7,200 NR Multiple $30,000 B Jun-06 Munich Re Carillon 1 Class A-2 US HU Industry $23,500 B+ Jun-06 Munich Re Carillon 1 Class B US HU Industry $10,000 B Jun-06 Munich Re Carillon 1 Class A-1 US HU Industry $51,000 B+ Jun-06 Liberty Mutual Insurance Company Mystic Re Class A US HU Industry $200,000 BB+ Jun-06 Balboa Insurance Group VASCO Re 2006 US HU Indemnity $50,000 BB+ Jun-06 Dominion Resources DREWCAT Capital, Class A US HU $50,000 NR * Equity 58

59 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jul-06 Hannover Re Eurus EU Wind $150,000 BB Aug-06 Endurance Specialty Insurance Company Shackleton Re Class A US EQ Industry $125,000 Bz3 BB Aug-06 Endurance Specialty Insurance Company Shackleton Re Class B US HU Industry $60,000 Ba3 BB Aug-06 Endurance Specialty Insurance Company Shackleton Re Class C US HU, EQ Industry $50,000 Ba2 BB+ Aug-06 Tokio Marine & Nichido Fire Insurance Co., Fhu-Jin 1 Class B JP TY TRS $200,000 BB+ Aug-06 Successor Hurricane Industry 3 Class E US HU Industry $50,000 NR Aug-06 Factory Mutual Insurance Company Cascadia II US EQ $300,000 BB+ BB+ Nov-06 Hartford Fire Insurance Company Foundation Re II 2006-I Class G US (HU, EQ, ST) Industry $67,500 B Nov-06 Hartford Fire Insurance Company Foundation Re II 2006-I Class A US HU Industry $180,000 BB+ Nov-06 Liberty Mutual Insurance Company Mystic Re Class A US HU Industry $200,000 BB+ Nov-06 Liberty Mutual Insurance Company Mystic Re Class B US HU Industry $125,000 BB Dec-06 Successor I 1 Class B NA/EU W, CA/JP Q Multiple $4,000 NR Dec-06 Successor Hurricane Industry 4 Class E US HU Industry $4,000 NR Dec-06 Successor I 2 Class B NA/EU W, CA/JP Q Multiple $24,500 NR Dec-06 Successor Hurricane Industry 5 Class E US HU Industry $26,000 NR Dec-06 Successor Euro Wind 3 Class A EU Wind $118,000 Ba3 BB Dec-06 Successor Euro Wind 3 Class C EU Wind $15,000 B3 B Dec-06 Zurich American Insurance Company Lakeside Re US EQ Multiple $190,000 BB+ Dec-06 SCOR Atlas III p.l.c. JP EQ, EU Wind Modeled Loss 120,000 BB+ Dec-06 Redwood Capital IX 1 Class A US EQ $125,000 Ba2 BB+ Dec-06 Redwood Capital IX 1 Class B US EQ $125,000 Ba2 BB+ Dec-06 Redwood Capital IX 1 Class C US EQ $18,000 Baa3 BBB- Dec-06 Redwood Capital IX 1 Class D US EQ $20,000 Ba3 BB * Equity 59

60 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Dec-06 Redwood Capital IX 1 Class E US EQ $12,000 B3 B Jan-07 ACE American Insurance Company Calabash Re II 2006-I Class A-1 US HU Modeled Loss $100,000 BB Jan-07 ACE American Insurance Company Calabash Re II 2006-I Class D-1 US EQ Modeled Loss $50,000 B+ Jan-07 ACE American Insurance Company Calabash Re II 2006-I Class E-1 US HU, EQ Modeled Loss $100,000 BB Mar-07 Australis 2 AU CY, EQ $50,000 BB Apr-07 Allianz Global Corporate & Specialty AG Blue Wings 1 Class A US EQ, UK Flood Multiple $150,000 BB+ Apr-07 Aspen Insurance Ajax Re 1 Class A US EQ Industry $100,000 BB Apr-07 Chubb Group East Lane Re Apr-07 Chubb Group East Lane Re 2007-I 2007-I Class A US HU Indemnity TRS $135,000 BB+ Class B US HU Indemnity TRS $115,000 BB+ May-07 Munich Re Carillon 2 Class E US HU Industry TRS $150,000 B May-07 The Travelers Indemnity Company Longpoint Re Class A US HU Industry $500,000 BB+ May-07 Successor II 2 Class A NA/EU W, CA/JP Q Multiple $100,000 B May-07 Mitsui Sumitomo Insurance Co., AKIBARE 1 Class A JP TY TRS $90,000 BB+ May-07 Mitsui Sumitomo Insurance Co., AKIBARE 1 Class B JP TY TRS $30,000 BB+ May-07 MedQuake 1 Class A EU EQ May-07 MedQuake 1 Class B EU EQ $50,000 BB- $50,000 B May-07 Liberty Mutual Insurance Company Mystic Re II US HU Industry TRS $150,000 B+ May-07 United States Automobile Association Residential I Class 1 US HU, EQ Indemnity $145,000 BB May-07 United States Automobile Association Residential I Class 2 US HU, EQ Indemnity $125,000 B May-07 United States Automobile Association Residential I Class 3 US HU, EQ Indemnity $75,000 B May-07 United States Automobile Association Residential I Class 4 US HU, EQ Indemnity $155,000 BB+ May-07 United States Automobile Association Residential I Class 5 US HU, EQ Indemnity $100,000 BB+ Jun-07 Glacier AG Nelson Re 2007-I Class A US/EU W, US Q Multiple $75,000 B * Equity 60

61 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jun-07 Allstate Insurance Company Willow Re Class B US HU Industry $250,000 BB+ Jun-07 Spinnaker Capital US HU Industry $200,000 B1 Jun-07 Brit Insurance Fremantle Class A US/EU/JP Wind, US/JP EQ Industry $60,000 Aa1 AAA Jun-07 Brit Insurance Fremantle Class B US/EU/JP Wind, US/JP EQ Industry $60,000 A3 BBB+ Jun-07 Brit Insurance Fremantle Class C US/EU/JP Wind, US/JP EQ Industry $80,000 Ba2 BB- Jun-07 Spinnaker Capital US HU Industry $130,200 Ba2 Jun-07 FUSION 2007 Class A JP TY, Mexico EQ $30,000 B Jun-07 FUSION 2007 Class B JP TY, Mexico EQ $80,000 B Jun-07 FUSION 2007 Class C Mexico EQ $30,000 BB+ Jul-07 State Farm Mutual Automobile Insurance Company Merna Tranche A US/Canada (Wind, EQ, ST, WS, WF) Indemnity $350,000 Aa2 AAA Jul-07 State Farm Mutual Automobile Insurance Company Merna Tranche B US/Canada (Wind, EQ, ST, WS, WF) Indemnity $666,600 A2 AA+ Jul-07 State Farm Mutual Automobile Insurance Company Merna Tranche C US/Canada (Wind, EQ, ST, WS, WF) Indemnity $164,000 Baa2 A- Jul-07 Arrow Capital Company, Javelin Re Class A Worldwide All Perils Indemnity $94,500 A- Jul-07 Arrow Capital Company, Javelin Re Class B Worldwide All Perils Indemnity $30,750 BBB- Jul-07 Spinnaker Capital US HU Industry $50,000 NR Oct-07 East Japan Railway Company MIDORI JP EQ TRS $260,000 BB+ Nov-07 Allianz Argos 14 GmbH Blue Fin 1 Class A EU Wind Nov-07 Allianz Argos 14 GmbH Blue Fin 1 Class B EU Wind TRS 155,000 BB+ TRS $65,000 BB+ Nov-07 SCOR Global P&C SE Atlas IV EU Wind, JP EQ Modeled Loss TRS 160,000 B Dec-07 Catlin Group Newton Re Class A US EQ Industry Deposit $87,500 BB+ Dec-07 Catlin Group Newton Re Class B US HU Industry Deposit $137,500 BB+ Dec-07 GlobeCat LAQ Class A-1 Latin America EQ Modeled Loss TRS $25,000 Ba3e Dec-07 GlobeCat USW Class A-1 US HU Industry TRS $40,000 B3e Dec-07 GlobeCat CAQ Class A-1 US EQ Industry TRS $20,000 B1e * Equity 61

62 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Dec-07 Groupama S.A. Green Valley 1 Class A EU Wind TRS 200,000 BB+ Dec-07 Successor Hurricane Industry 6 Class C US HU Industry TRS $30,000 B2 B Dec-07 Successor Hurricane Industry 6 Class D US HU Industry TRS $30,000 B Dec-07 Successor II 3 Class C US/EU Wind, US/JP EQ TRS $50,000 Dec-07 Successor II 3 Class E US/EU Wind, US/JP EQ TRS $50,000 Dec-07 Redwood Capital X 1 Class A US EQ TRS $25,000 Baa3 Dec-07 Redwood Capital X 1 Class B US EQ TRS $227,700 Ba2 Dec-07 Redwood Capital X 1 Class C US EQ TRS $50,200 Ba3 Dec-07 Redwood Capital X 2 Class D US EQ Industry TRS $130,500 Ba3 Dec-07 Redwood Capital X 2 Class E US EQ Industry TRS $45,200 B2 Dec-07 Redwood Capital X 2 Class F US EQ Industry TRS $20,000 NR Feb-08 Catlin Group Newton Re Class A US/EU/JP Wind, US/JP EQ Indemnity TRS $150,000 BB Mar-08 Munich Re Queen Street 1 Class A EU Wind TRS 70,000 BB+ Mar-08 Munich Re Queen Street 1 Class B EU Wind TRS 100,000 B Mar-08 Chubb Group East Lane Re II 2008-I Class A Northeast US All Natural Perils Indemnity TRS $75,000 BB Mar-08 Chubb Group East Lane Re II 2008-I Class B Northeast US All Natural Perils Indemnity TRS $70,000 BB Mar-08 Chubb Group East Lane Re II 2008-I Class C US/Canada All Natural Perils Indemnity TRS $55,000 B- May-08 Zenkyoren Muteki Class A JP EQ TRS $300,000 Ba2 May-08 HomeWise Preferred Insurance Company and HomeWise Insurance Company Mangrove Re Class A US HU Indemnity TRS $150,000 Ba2 May-08 HomeWise Preferred Insurance Company and HomeWise Insurance Company Mangrove Re Class B US HU Indemnity TRS $60,000 B1 May-08 United States Automobile Association Residential I Class 1 US HU, EQ Indemnity TRS $125,000 BB May-08 United States Automobile Association Residential I Class 2 US HU, EQ Indemnity TRS $125,000 B * Equity 62

63 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch May-08 United States Automobile Association Residential I Class 4 US (HU, EQ, ST, WS, WF) Indemnity TRS $100,000 BB+ May-08 Flagstone and Flagstone Reassurance Suisse SA Valais Re Class A US/EU/JP Wind, US/JP EQ Indemnity TRS $64,000 Ba2 May-08 Flagstone and Flagstone Reassurance Suisse SA Valais Re Class C US/EU/JP Wind, US/JP EQ Indemnity TRS $40,000 B3 Jun-08 Glacier AG Nelson Re Jun-08 Glacier AG Nelson Re Jun-08 Glacier AG Nelson Re 2008-I 2008-I 2008-I Class G US HU, EQ Indemnity TRS $67,500 B3 Class H EU Wind Indemnity TRS $45,000 B3 Class I EU Wind Indemnity TRS $67,500 B1 Jun-08 Allstate Insurance Company Willow Re Class D US HU Industry TRS $250,000 BB+ Jun-08 Nationwide Mutual Insurance Company Caelus Re Class A US HU, EQ Indemnity TRS $250,000 BB+ Jun-08 Vega Capital 2008-I Class A US/EU/JP Wind, US/JP EQ TRS $21,000 A3 A- Jun-08 Vega Capital 2008-I Class B US/EU/JP Wind, US/JP EQ TRS $22,500 Baa2 BBB Jun-08 Vega Capital 2008-I Class C US/EU/JP Wind, US/JP EQ TRS $63,900 Ba3 Jun-08 Vega Capital 2008-I Class D US/EU/JP Wind, US/JP EQ TRS $42,600 Jul-08 Allianz Risk Transfer (Bermuda) Blue Coast Class A US HU Industry TRS $70,000 BB- Jul-08 Allianz Risk Transfer (Bermuda) Blue Coast Class B US HU Industry TRS $30,000 B+ Jul-08 Allianz Risk Transfer (Bermuda) Blue Coast Class C US HU Industry TRS $20,000 B- Aug-08 Platinum Underwriters Bermuda Topiary Capital Class A US/EU W, US/ JP EQ Industry TRS $200,000 BB+ Feb-09 SCOR Global P&C SE Atlas V Capital 1 US HU, EQ Industry TRS $50,000 B+ Feb-09 SCOR Global P&C SE Atlas V Capital 2 US HU, EQ Industry TRS $100,000 B+ Feb-09 SCOR Global P&C SE Atlas V Capital 3 US HU, EQ Industry TRS $50,000 B Mar-09 Chubb Group East Lane Re III 2009-I Class A US HU Indemnity TRS $150,000 BB Mar-09 Liberty Mutual Insurance Company Mystic Re II 2009-I US HU, EQ Industry TRS $225,000 BB Apr-09 Allianz Argos 14 GmbH Blue Fin 2 Class A US HU, EQ Modeled Loss MTN $180,000 BB- Apr-09 Successor II 4 Class F US HU, EQ MMF $60,000 May-09 Assurant Ibis Re May-09 Assurant Ibis Re Class A US HU Industry TRS $75,000 BB Class B US HU Industry TRS $75,000 BB- * Equity 63

64 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch May-09 United States Automobile Association Residential I Class 1 US HU, EQ Indemnity MMF $70,000 BB- May-09 United States Automobile Association Residential I Class 2 US HU, EQ Indemnity MMF $60,000 B- May-09 United States Automobile Association Residential I Class 4 US (HU, EQ, ST, WS, WF) Indemnity MMF $120,000 BB- Jun-09 Munich Re Ianus Capital EU Wind, EQ Multiple (EUW); Modeled Loss (TUQ) MTN 50,000 B2 Jun-09 ACE American Insurance Company Calabash Re III 2009-I Class A US HU, EQ Modeled Loss MITT MTN $86,000 BB- Jun-09 ACE American Insurance Company Calabash Re III 2009-I Class B US EQ Modeled Loss MITT MTN $14,000 BB+ Jul-09 North Carolina JUA/ IUA Parkton Re NC Wind Indemnity MMF $200,000 B+ Jul-09 Hannover Re Eurus II Class A EU Wind Repo 150,000 BB Oct-09 The Fund for Natural Disasters MultiCat Mexico I Class A Mex EQ MMF $140,000 B Oct-09 The Fund for Natural Disasters MultiCat Mexico I Class B Mex, HU Pacific MMF $50,000 B Oct-09 The Fund for Natural Disasters MultiCat Mexico I Class C Mex, HU Pacific MMF $50,000 B Oct-09 The Fund for Natural Disasters MultiCat Mexico I Class D Mex, HU Atlantic MMF $50,000 BB- Nov-09 Flagstone Reassurance Suisse SA Montana Re Class A US HU, EQ Industry Repo $75,000 B- Nov-09 Flagstone Reassurance Suisse SA Montana Re Class B US HU Industry Repo $100,000 BB- Dec-09 Successor X Class I-S1 US HU, EQ, EU Wind Multiple Industry ; MMF $50,000 Dec-09 Successor X Class I-U1 US HU, EQ Multiple Industry ; MMF $50,000 B- Dec-09 Successor X Class I-X1 US HU, EQ Multiple Industry ; MMF $50,000 Dec-09 SCOR Global P&C SE Atlas VI Capital Class A EU Wind, JP EQ Repo 75,000 BB- Dec-09 The Travelers Indemnity Company Longpoint Re II Class A US HU Industry MMF $250,000 BB+ Dec-09 The Travelers Indemnity Company Longpoint Re II Class B US HU Industry MMF $250,000 BB+ Dec-09 Zurich American Insurance Company, Zurich Insurance Company Ltd Lakeside Re II CA EQ Indemnity MMF $225,000 BB- Dec-09 Redwood Capital XI Class A CA EQ Industry MMF $150,000 B1 * Equity 64

65 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jan-10 Hartford Fire Insurance Company Foundation Re III Class A US HU Industry MMF $180,000 BB+ Mar-10 Successor X Class II-CN3 US HU, EU Wind Multiple Industry (EUW), Modeled Loss (USH) MMF $45,000 B- Mar-10 Successor X Class II-CL3 US HU, EU Wind Multiple Industry (EUW), Modeled Loss (USH) MMF $35,000 Mar-10 Successor X Class II-BY3 US HU, EQ EU Wind, JP EQ Multiple Industry (EUW), Modeled Loss (USH), (USQ), (JPQ) MMF $40,000 Apr-10 State Farm Fire and Casualty Company Merna II US EQ Indemnity MMF $350,000 BB+ Apr-10 Assurant Ibis Re Apr-10 Assurant Ibis Re Class A US HU Industry MMF $90,000 BB Class B US HU Industry MMF $60,000 B+ May-10 North Carolina JUA/ IUA Johnston Re Class A US HU Indemnity MMF $200,000 BB- May-10 North Carolina JUA/ IUA Johnston Re Class B US HU Indemnity MMF $105,000 BB- May-10 National Union Fire Insurance Company of Pittsburgh Lodestone Re Class A US HU, EQ Industry MMF $175,000 BB+ May-10 National Union Fire Insurance Company of Pittsburgh Lodestone Re Class B US HU, EQ Industry MMF $250,000 BB May-10 Munich Re EOS Wind Class A US HU Industry MMF $50,000 Ba3 May-10 Munich Re EOS Wind Class B US HU, EU Wind Multiple Industry (US HU); Paradex (EUWS) MMF $30,000 Ba3 May-10 Nationwide Mutual Insurance Company Caelus Re II Class A US HU, EQ Indemnity MMF $185,000 BB+ May-10 Allianz Argos 14 GmbH Blue Fin 3 Class A US HU, EQ Modeled Loss MMF $90,000 B- May-10 Allianz Argos 14 GmbH Blue Fin 3 Class B US HU, EQ Modeled Loss MMF $60,000 BB May-10 United States Automobile Association Residential I Class 1 US (HU, EQ, ST, WS, WF) Indemnity MMF $162,500 BB May-10 United States Automobile Association Residential I Class 2 US (HU, EQ, ST, WS, WF) Indemnity MMF $72,500 B+ May-10 United States Automobile Association Residential I Class 3 US (HU, EQ, ST, WS, WF) Indemnity MMF $52,500 B- May-10 United States Automobile Association Residential I Class 4 US (HU, EQ, ST, WS, WF) Indemnity MMF $117,500 Jun-10 State Farm Mutual Automobile Insurance Company Merna III Ltd US/Canada (Wind, EQ, ST, WS, WF) Indemnity MMF $250,000 * Equity 65

66 Insurance-Linked Securities 2011 Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Jul-10 Massachusetts Property Insurance Underwriting Association Shore Re Class A US HU Indemnity MMF $96,000 BB Sep-10 Groupama S.A. Green Valley 2 Class A EU Wind MTN 100,000 BB+ Oct-10 AXA Global P&C Calypso Capital Class A EU Wind Industry Repo 275,000 BB Nov-10 American Family Mutual Insurance Company Mariah Re US ST Industry MMF $100,000 B Dec-10 United States Automobile Association Residential II Class 1 US (HU, EQ, ST, WS, WF) Indemnity MMF $210,000 BB Dec-10 United States Automobile Association Residential II Class 2 US (HU, EQ, ST, WS, WF) Indemnity MMF $50,000 Dec-10 United States Automobile Association Residential II Class 3 US (HU, EQ, ST, WS, WF) Indemnity MMF $40,000 Dec-10 SCOR Global P&C SE Atlas VI Capital Class A EU Wind, JP EQ Repo 75,000 B- Dec-10 Vega Capital 2010-I Class C US/EU/JP Wind, US/JP EQ Multiple MTN $63,900 Ba3 Dec-10 Vega Capital 2010-I Class D US/EU/JP Wind, US/JP EQ Multiple MTN $42,600 Dec-10 American Family Mutual Insurance Company Mariah Re US ST Industry MMF $100,000 Dec-10 National Union Fire Insurance Company of Pittsburgh Lodestone Re Class A-1 US HU, EQ Industry MMF $125,000 BB+ Dec-10 National Union Fire Insurance Company of Pittsburgh Lodestone Re Class A-2 US HU, EQ Industry MMF $325,000 BB Dec-10 Flagstone Reassurance Suisse SA Montana Re Class C US HU, EQ Multiple Repo $70,000 B Dec-10 Flagstone Reassurance Suisse SA Montana Re Class D US HU, EQ Multiple Repo $80,000 Dec-10 Flagstone Reassurance Suisse SA Montana Re Class E US HU, EQ/ EU Wind, JP TY, JP EQ Multiple Repo $60,000 B- Dec-10 Successor X Class III-R3 US HU, EQ, AUS EQ Multiple Modeled Loss (USH), (USQ), (AUQ) MTN $65,000 B- * Equity 66

67 Aon Benfield Securities Summary of Catastrophe Bonds December 1996 through June 2011 Issuance Date Beneficiary Issuer Class Perils Trigger Additional Trigger Details Collateral Size ($MM) MIS S&P Fitch Dec-10 Successor X Class III-S3 US HU, EQ, AUS EQ Multiple Modeled Loss (USH), (USQ), (AUQ) MTN $50,000 B- Dec-10 Successor X Class III-T3 US HU, EQ, AUS EQ Multiple Modeled Loss (USH), (USQ), (AUQ) MTN $55,000 Dec-10 Groupama S.A. Green Fields Capital Class A EU Wind Industry MTN 75,000 BB+ Feb-11 Hartford Fire Insurance Company Foundation Re III Class A US HU Industry MMF $135,000 BB+ Feb-11 Successor X Class IV-E3 US HU, EQ Industry MTN $160,000 B Feb-11 Successor X Class IV-AL3 US HU, EQ Industry MTN $145,000 Mar-11 Chubb Group East Lane Re IV 2011-I Class A US HU, EQ, ST, WS Indemnity MMF $225,000 BB+ Mar-11 Chubb Group East Lane Re IV 2011-I Class B US HU, EQ, ST, WS Indemnity MMF $250,000 BB Mar-11 Munich Re Queen Street II Capital US HU, EU Wind Industry MMF $100,000 BB- Apr-11 Allianz Argos 14 GmbH Blue Fin 4 Class B US HU, EQ Modeled Loss MMF $40,000 May-11 North Carolina JUA/IUA Johnston Re Class A US HU Indemnity MMF $70,000 BB- May-11 North Carolina JUA/IUA Johnston Re Class B US HU Indemnity MMF $131,835 BB- May-11 United States Automobile Association Residential I Class 1 US (HU, EQ, ST, WS, WF) Indemnity MMF $57,000 B+ May-11 United States Automobile Association Residential I Class 2 US (HU, EQ, ST, WS, WF) Indemnity MMF $33,000 B- May-11 United States Automobile Association Residential I Class 5 US (HU, EQ, ST, WS, WF) Indemnity MMF $160,000 B+ Jun-11 Argo Re, Loma Class A US HU, EQ, EU Wind, JP EQ Industry Repo $100,000 BB- * Equity 67

68 Insurance-Linked Securities 2011 Appendix III Summary of Sidecar Issuance As of June 2011 Source: Aon Benfield Securities 68

69 Aon Benfield Securities Summary of Sidecar Issuance SideCar Principal Sponsor Inception Line of Business Initial Size ($MM) Renewal ($MM) Top Layer Re Renaissance Re, SF December 1999 High Excess Us Property Cat Olympus Re White Mountains Re December 2001 Property Cat, Property Risk, Retro, And Marine DaVinci Re Renaissance Re, SF December 2001 Property Cat Rockridge Re Montpelier Re June 2005 High Excess Cat Retrocessional 90.9 Blue Ocean Re Montpelier Re December 2005 Property Cat Retrocessional Cyrus Re XL Capital December 2005 Property Cat And Retrocessional Flatiron Re Arch Re December 2005 Property And Marine Helicon Re White Mountains Re December 2005 Short-Tailed Property And Marine Kaith/K5 Hannover Re December 2005 Property Cat, Property Risk, Aviation And Marine Olympus Re II White Mountains Re January 2006 Property Cat, Property Risk, Retro And Marine Petrel Re Validus May 2006 Marine And Offshore Energy Contracts Starbound Re Renaissance Re May 2006 Short-Tailed Property And Marine Bay Point Re Harbor Point June 2006 US Property, Marine, Retro, And Workers Comp Sirocco Re Lancashire June 2006 Marine And Offshore Energy Insurance Contracts 75.0 Timicuan Re Renaissance Re July 2006 Reinstatement Premium Protection 70.0 Concord Re Lexington Insurance Co August 2006 US Commercial Property Mont Fort Re Flagstone Re August 2006 Peak Zone And ILW 60.0 Cyrus Re XL Capital November 2006 Property Cat And Retrocessional Panther Re Hiscox December 2006 Property Cat Syncro Lloyd s #4242 (Chaucer) December 2006 Property Cat Norton Re Brit Insurance December 2006 Property Cat Retrocessional New Point Re Harbor Point December 2006 Property Cat Retrocessional Triomphe Re Paris Re December 2006 Property Cat Retrocessional Sector Re January 2007 Property Cat, Aviation MaRI ACE January 2007 Property Cat Syndicate 6105 Ark Underwriting January 2007 Property Cat 40.0 Syndicate 6104 Hiscox January 2007 Property Cat 69.0 Syndicate 6103 Mapfre January 2007 Property Cat 78.6 Bridge Re April 2007 Property Cat, Aviation Starbound Re II Ren Re June 2007 Property Cat Mont Gele Re Flagstone Re July 2007 Property Cat 60.0 Norton Re II Brit Insurance December 2007 Property Cat Retrocessional Sector Re II April 2008 Property Cat, Aviation Globe Re Hannover Re May 2008 Property Cat Retrocessional Kaith/K6 Hannover Re March 2009 Property Cat, Property Risk, Aviation And Marine Timicuan Re II Renaissance Re June 2009 Property Cat Retrocessional, Primarily Florida 60.4 Fac Pool Re Hannover Re September 2009 Worldwide Fac 60.0 Long Bay Re Catlin April 2010 Property Cat - AlphaCat Re Validus May 2011 Property Cat And Retrocessional DaVinci Re Renaissance Re June 2011 Property Cat, Specialty Accordion Re Lancashire Re July 2011 Property Cat New Point Re IV Harbor Point July 2011 Property Cat Total Initial Capacity 9,619.3 Total Capacity Including Renewals 10,

70 Insurance-Linked Securities 2011 Scan here to access all editions of Insurance-Linked Securities. 70