Insurance-Linked Securities

Transcription

1 Aon Benfield Insurance-Linked Securities Alternative Markets Find Growth Through Innovation September 2016 Risk.. Human Resources.

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

3 Foreword It is my pleasure to bring to you the ninth edition of Aon Securities annual Insurance-Linked Securities (ILS) report. The study aims to offer an authoritative review and analysis of the ILS asset class, and an overview of mergers and acquisitions activity, which represent two key areas of focus for our team. Along with our quarterly ILS Updates, the report is intended to be an important and useful reference document, both for ILS market participants and those with an active interest in the sector. Unless otherwise stated, its analyses cover the 12-month period ending June 30, 2016, during which time substantial progress was made in the ILS market. In the period under review, $5.2 billion of catastrophe bond issuance was secured and overall alternative capital continued to grow across ILS products reaching a new height of $75.1 billion. By June 30, 2016, catastrophe bonds on-risk had reached $22.6 billion, a slight contraction from June 30, During this period, sponsors continued to enhance coverage on catastrophe bond transactions in a variety of ways, including the incorporation of additional perils and aggregate structures. Earlier in the year, we saw the UK outline proposals to develop an ILS hub in the region that would compete with existing domiciles, such as Bermuda, Cayman Islands, Guernsey, and Ireland. Although draft legislation was slated for the end of this year, the coming months will test the importance of this issue following the UK s Brexit decision to leave the European Union. The 2016 edition of this annual ILS report, Alternative Markets Find Growth Through Innovation, covers a wide range of topics in the ILS market, including: Aon Securities comprehensive review of the catastrophe bond market and its key drivers; A review of ILS investor activity; Our exclusive Aon ILS Indices; A summary of mergers and acquisitions (re)insurer activity; An overview of ILS-related markets, including trends in ILW, sidecars, actively managed vehicles, surplus notes, and subordinated debt; A review of North America, Europe, and Asia Pacific activity; A dedicated section on the Life and Health sector; and In-depth discussions with our ILS investor panel Despite a lower overall catastrophe bond issuance than prior years, capital markets investors accessed risks through additional channels collateralized reinsurance, sidecars, start-up vehicles, and managing general agencies. This growing capital deployment demonstrates the commitment of the alternative markets to the reinsurance and insurance industries. We hope you will find this document useful and informative, and if you have any questions relating to the data herein, or any queries regarding any aspect of the ILS sector, please contact me or my colleagues. Paul Schultz, Chief Executive Officer, Aon Securities Inc.

4 Contents Aon Securities Annual Review of the Catastrophe Bond Market... 1 ILS Investor Activity... 8 The Aon ILS Indices Mergers and Acquisitions (Re)Insurer Activity ILS-Related Markets North America Perils Europe Perils Asia Pacific Perils Life and Health Perils A Market Discussion with ILS Investors Appendix I Appendix II Appendix III Appendix IV Contact... 75

5 Aon Securities Annual Review of the Catastrophe Bond Market Overview Catastrophe bond issuance in the 12 months ending June 30, 2016 reached $5.2 billion the lowest for the period since The year-over-year reduction of $1.8 billion was largely due to the lack of issuance in the first half of 2016, which was down over $1.6 billion from the same period in Despite this drop in issuance volume, the total outstanding volume was only reduced by $825 million mitigated by the longer coverage periods witnessed in recent years. The overall lower issuance levels were driven by a number of factors including competition from traditional markets and longer coverage periods, both of which resulted in some cedents renewing capacity less frequently, as well as certain cedents increasing their risk retentions. Despite the lower catastrophe bond issuance, alternative capital continues to grow in the (re)insurance space. Investors found more ways to deploy capacity, such as via sidecars, collateralized reinsurance, and other private arrangements. Collateralized reinsurance, in particular, continues to grow overall market share within cedents risk transfer programs. Bermuda continued to be the domicile of choice for most cedents during the 12 months under review. Fifteen of the 24 new issues utilized the jurisdiction, followed by six in the Cayman Islands and three in Ireland, with Gibraltar still seeking to gain more traction with Europe sponsors. Just 26 percent of the limit offered by new issuances was rated, reflecting investors ongoing sophistication, and acceptance with the risks ceded. Figure 1: Catastrophe bond issuance by year, 2007 to 2016 (years ending June 30) Figure 2: Outstanding and cumulative catastrophe bond volume, 2007 to 2016 (years ending June 30) Property issuance Life and health issuance Property outstanding Life and health outstanding Cumulative property issuance Total cumulative bonds 10,000 9,400 $ millions 8,000 6,000 4,000 8,145 5,914 6,431 6,665 4,736 4,382 6,981 5,190 2,000 1, ,000 $ millions 70,000 60,000 50,000 40,000 30,000 22,422 23,467 22,562 20,000 17,788 16,155 15,123 12,911 13,174 13,167 11,504 10, ,273 28,487 26,782 20,867 37,605 33,223 44,037 50,702 60,102 67, Source: Aon Securities Inc. Source: Aon Securities Inc. Aon Benfield 1

6 Key market drivers Enhanced coverage Coverage provided by the alternative markets continued to expand with longer coverage periods and additional perils. The average coverage period for catastrophe bonds outstanding on June 30, 2016 was higher than prior periods at 3.6 years. A variety of aggregate structures, including annual, rolling, and entire risk periods, were also placed at competitive rates in the alternative markets. For the 12-month period under review, approximately 30 percent of transactions based on both the total limit and number of issuances utilized aggregate structures. The majority of new issuances, including each of those for primary cedents, secured indemnity protection while reinsurers continued to favor industry coverage. Two corporate beneficiaries and the Turkish Catastrophe Insurance Pool (TCIP) secured parametric protection, which provides the benefit of speedier payouts and coverage for hard-to-capture lines such as contingent business interruption. Supply and demand Aon Securities estimates the size of the alternative market increased 10 percent to $75.1 billion 1 in the 12-month period ending June 30, As equity market volatility and negative interest rates in certain regions persist, the ILS market represents an attractive investment opportunity for many investors. As discussed earlier, demand outstripped supply during the first half of As a result, catastrophe bond cedents were able to secure enhanced coverage such as additional perils and aggregate structures at favorable rates. With fewer opportunities to invest in catastrophe bonds than recent years, investors deployed capital in other products with the collateralized reinsurance segment experience the largest growth. Furthermore, investors are continuing to look at innovative ways to access (re)insurance risks. For example, Nephila Capital (Nephila) established a managing general agent and Credit Suisse Asset Management (CSAM) formed an additional rated carrier. Loss activity 2 Global natural disasters in 2015 combined to cause economic losses of $123 billion, an amount 30 percent below the 15-year average of $175 billion. The disasters caused insured losses of $35 billion 31 percent below the 15-year mean of $51 billion. This was the fourth consecutive calendar year with declining global catastrophe losses since the record-setting year of However, this trend did not continue into the first half of 2016, with both overall economic and insured losses above their 16-year averages and at their highest levels since North America, in particular, experienced several billion dollar loss events during the 12-month period under review. This included severe weather outbreaks in the United States, which amounted to $12.3 billion of aggregate losses in the first half of In addition, the Fort McMurray wildfires in Canada that commenced in May 2016 are estimated to have caused CAD4.67 billion ($3.63 billion) of insured losses 3 the costliest natural disaster in the country s history. Finally, Hurricane Patricia made landfall in Mexico in October 2015 and was the strongest ever recorded in the eastern Pacific. The MultiCat Mexico 2012-I Class C (MultiCat Mexico 2012-I C) notes experienced a partial loss of principal due to Hurricane Patricia which, despite the strength of the storm, caused only relatively minor damage by making landfall in a sparsely populated area. Despite the uptick in natural catastrophes during this period, there was limited impact to the catastrophe bond market. 1 Source: Aon Securities Inc. 2 Aon Benfield Impact Forecasting Annual Global Climate and Catastrophe Report, Jan. 2016; and Global Catastrophe Recap: First Half of 2016, July Source: Property Claim Services estimate as of Aug. 16, 2016 and converted at 1 CAD = $ Insurance-Linked Securities

7 Transaction review Third quarter 2015 TCIP sponsored its second issuance Bosphorus (Bosphorus ) in the third quarter of The parametric transaction provided an additional $100 million in coverage for the disaster fund, until the prior issuance of $400 million matured in May The transaction was one of two transactions in the quarter to utilize AAA-rated medium term notes from the International Bank for Reconstruction and Development (IBRD) as collateral. In September 2015, the California Earthquake Authority (CEA) utilized the catastrophe bond market for the fifth time since The latest issuance from Ursa Re provides the CEA with an additional $250 million in annual aggregate protection, and brought the total limit provided by catastrophe bonds to $650 million as of June 30, Table 1: Third quarter 2015 catastrophe bond issuance Beneficiary Issuer Class Size (millions) Covered perils Trigger Recovery Collateral Hannover Rück SE Acorn Re $300 West coast NA EQ Occurrence IBRD Turkish Catastrophe Insurance Pool Bosphorus $100 Turkey EQ Occurrence IBRD California Earthquake Authority Ursa Re Class B $250 CAL EQ Indemnity Annual aggregate MMF Total $650 Source: Aon Securities Inc. Legend CAL California NA North America EQ Earthquake IBRD International Bank for Reconstruction and Development Notes MMF US Treasury Money Market Funds Aon Benfield 3

8 Fourth quarter 2015 In December 2015, Everest Company (Everest Re) returned to the catastrophe bond market with its third transaction under the Kilimanjaro Re program. The Class D and E notes provide North America named storm and earthquake per occurrence coverage on an industry basis for four years. The $625 million issuance brought total catastrophe bond capacity secured by Everest Re to $1.58 billion and ranked the property and casualty reinsurer third overall in total outstanding limit as of June 30, 2016 all in just two years of issuance. (Swiss Re), historically the largest sponsor of catastrophe bonds since market inception, issued its first catastrophe bond transaction since 2013 with the Vita Capital VI (Vita Capital VI) transaction. The $100 million extreme mortality transaction, which has a risk period of five years, combined with two prior life and health transactions placed earlier in 2015 brought life and health annual issuance to $610 million a record level for this catastrophe bond sector in a single calendar year. Table 2: Fourth quarter 2015 catastrophe bond issuance Beneficiary Issuer Class Size (millions) Covered perils Trigger Recovery Collateral Passenger Railroad Insurance, (National Railroad Passenger Corporation) PennUnion Re $275 US HU (surge and wind) and EQ Occurrence MMF Everest Company Kilimanjaro Re Class D $300 Class E $325 US, CAN, PR HU and EQ Industry Occurrence MMF Automobile Association II Class 3 $125 US HU, EQ, ST, WS, WF, VE, MI Indemnity Annual aggregate MMF Münchener Rückversicherungs- Gesellschaft Aktiengesellschaft (Munich Re) Queen Street XI Re dac $100 US HU and AUS CY Industry, modeled loss Occurrence MMF Vita Capital VI $100 AUS, CAN, and UK mortality Industry Term aggregate IBRD National Mutual Insurance Federation of Agricultural Cooperatives Nakama Re Class 1 $100 Class 2 $200 JP EQ Indemnity Occurrence Rolling term aggregate MMF Total $1,525 Source: Aon Securities Inc. Legend AUS Australia CAN Canada JP Japan PR Puerto Rico UK United Kingdom US United States CY Cyclone EQ Earthquake HU Hurricane MI Meteorite Impact ST Severe Thunderstorm VE Volcanic Eruption WF Wildfire WS Winter Storm IBRD International Bank for Reconstruction and Development Notes MMF US Treasury Money Market Funds 4 Insurance-Linked Securities

9 First quarter 2016 In the first quarter of 2016, Automobile Association (USAA), an anchor sponsor in the catastrophe bond market, issued through Espada (Espada Re) instead of its typical programs. The new program included the addition of other perils any natural catastrophe event assigned a catastrophe code by Property Claim Services (PCS) not already named in the coverage. This coverage was subsequently included in USAA s 2016 transaction in the second quarter. Additionally, Espada Re s coverage is placed across a broad layer, which has a modeled trigger probability of 9.65 percent and modeled expected loss of 2.25 percent on a sensitivity basis. Ultimately the transaction closed at the upper range of initial price guidance as well as at the bottom range of size guidance with $50 million in coverage. State Farm Fire and Casualty Company (State Farm) raised $300 million of New Madrid earthquake indemnity coverage. The transaction is State Farm s fourth consecutive year of issuance and replaces an expiring 2013 transaction as the insurer maintains its catastrophe bond coverage at $900 million. The end of the first quarter saw the successful close of a pair of indemnity Japan typhoon transactions. The first, Akibare Re (Akibare Re ), was issued for the benefit of Mitsui Sumitomo Insurance Co., (Mitsui Sumitomo); the second, Aozora Re (Aozora Re ), was issued for the benefit of Sompo Japan Nipponkoa Insurance Inc. (SJNK). Both transactions found marketing success, with Akibare Re upsizing by almost 15 percent to $200 million and pricing at the lower end of initial price guidance at 2.25 percent. This upsized transaction expanded Mitsui Sumitomo s overall utilization of the capital markets; it replaced the matured $130 million Akibare II transaction. It was also the cedent s first indemnity and first aggregate transaction. Similarly, Aozora Re grew by over 25 percent to reach $220 million more than double SJNK s inaugural 2014 issuance. These two issuances likely benefitted from the early redemption of Kizuna Re II on April 1, 2016; many investors looked to these transactions to help maintain the diversity of their portfolios. Table 3: First quarter 2016 catastrophe bond issuance Beneficiary Issuer Class Size (millions) Covered perils Trigger Recovery Collateral SCOR Global P&C SE Atlas IX Capital DAC $300 US, PR HU and US, PR, CAN EQ Industry Annual aggregate EBRD $100 XL Insurance (Bermuda) Ltd Galileo Re Class B $100 US HU, EU wind and US, CAN EQ Industry Annual aggregate MMF Class C $100 Aetna Life Insurance Company Vitality Re VII 2016 $140 Class B $60 US medical benefits ratio Indemnity Annual aggregate MMF Heritage Property & Casualty Insurance Company and Zephyr Insurance Company, Inc. Citrus Re Class D-50 $150 Class E-50 $100 FL, HI HU Indemnity Occurrence MMF Nationwide Mutual Insurance Company Caelus Re IV $300 US HU, EQ, ST, WS, WF, VE, MI Indemnity Occurrence MMF Automobile Association Espada 2016-I Class 20 $50 US HU, EQ, ST, WS, WF, VE, MI, OP Indemnity Annual aggregate MMF Safepoint Insurance Company Manatee Re $75 Class C $20 FL, LA HU Indemnity Occurrence MMF Mitsui Sumitomo Insurance Co., Akibare Re $200 JP TY Indemnity Annual aggregate IBRD Sompo Japan Nipponkoa Insurance Inc. Aozora Re $220 JP TY Indemnity Occurrence IBRD State Farm Fire and Casualty Company Merna Re $300 New Madrid EQ Indemnity Occurrence MMF Total $2,215 Source: Aon Securities Inc. Legend CAN Canada EU Europe FL Florida HI Hawaii JP Japan LA Louisiana PR Puerto Rico US United States EQ Earthquake HU Hurricane MI Meteorite Impact OP Other PCS-reported perils ST Severe Thunderstorm TY Typhoon VE Volcanic Eruption WF Wildfire WS Winter Storm EBRD European Bank for Reconstruction and Development Notes IBRD International Bank for Reconstruction and Development Notes MMF US Treasury Money Market Funds Aon Benfield 5

10 Second quarter 2016 First Coast Re provides Security First Insurance Company (Security First) with $75 million of indemnity protection against named storms and severe thunderstorms in Florida. The transaction utilizes a cascading structure, common with Florida cedents, allowing the covered layer to lower as underlying stated reinsurance is eroded. Security First initially marketed $100 million of coverage to investors, but reduced the offering to $75 million after Everest Re, an equity holder of the company, exercised its right of first refusal and wrote a $25 million line. Laetere Re also provides cascading indemnity protection to named subsidiaries of United Insurance Holdings Corporation. The three classes of notes provide a total of $100 million of coverage for losses arising from named storms and earthquakes in peak-exposed regions (excluding California quake). The one-year notes were issued at a discount to par, which is relatively uncommon in the capital markets. The notes provided investors with a wide spectrum of risk with equivalent annual returns ranging from 6.00 to percent. As the second quarter came to a close, Allianz Risk Transfer (Bermuda) (ART Bermuda) returned to the catastrophe bond market for the first time since 2008 with Blue Halo Re (Blue Halo Re) a three-year term aggregate cover. The transaction was upsized from its initial target and provides $185 million of industry coverage for named storms and earthquakes in the United States. Blue Halo Re utilized Aon s CATstream program a platform that allows an expedited process for issuance and was also the first multi-peril and US-exposed term aggregate catastrophe bond to come to market since Building on this success, ART Bermuda subsequently returned to the market in July for a second issuance from Blue Halo Re, which provides $225 million of US multi-peril coverage on an annual aggregate basis. Table 4: Second quarter 2016 catastrophe bond issuance Beneficiary Issuer Class Size (millions) Covered perils Trigger Recovery Collateral I Class 10 $65 Class 11 $75 Class 13 $110 US HU, EQ, ST, WS, WF, VE, MI, OP Indemnity Annual aggregate MMF Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft Queen Street XII Re dac $190 US HU and EU wind Industry Occurrence IBRD Security First Insurance Company First Coast Re $75 FL HU, ST Indemnity Occurrence MMF United Property & Casualty Insurance Company, Family Security Insurance Company, Inc., Interboro Insurance Company Laetere Re $30 Class B $40 Class C $30 US HU and EQ Indemnity Occurrence MMF Allianz Risk Transfer (Bermuda) Blue Halo Re $130 Class B $55 US HU and EQ Industry Term aggregate MMF Total $800 Source: Aon Securities Inc. Legend EU Europe FL Florida US United States EQ Earthquake HU Hurricane MI Meteorite Impact OP Other PCS-reported perils ST Severe Thunderstorm VE Volcanic Eruption WF Wildfire WS Winter Storm IBRD International Bank for Reconstruction and Development Notes MMF US Treasury Money Market Funds 6 Insurance-Linked Securities

11 Outlook Alternative capital continues to show its commitment to the (re)insurance markets. Despite the slowdown in catastrophe bond issuance during the first half of 2016, investors found ways to deploy capital into the sector. This included utilizing established products, such as collateralized reinsurance and sidecars, as well as innovative ways to access risks. These factors demonstrate the willingness of capital markets investors to be a permanent source of (re)insurance capacity across market cycles. In addition, sponsors that utilized catastrophe bonds for risk transfer benefitted from favorable pricing and terms. Aon Securities expects current pricing trends will continue for the remainder of the year. Catastrophe bond issuance for the second half of 2016 is expected to be similar to recent years, with total issuance for the calendar year closing between $5 to $6 billion. Figure 3: Catastrophe bond issuance by half-year, 2009 to ,000 January - June July - December 8,000 7,000 2,325 6,000 3,498 2,175 $ millions 5,000 4,000 2,625 2,692 3,000 2,000 2,086 2,843 3,588 3,973 5,902 4,656 1,000 1,385 2,650 1,757 3, Source: Aon Securities Inc. Aon Benfield 7

12 ILS Investor Activity Capacity providers 4 Figure 4: Investor by category (years ending June 30) Catastrophe fund 6% 8% 9% 20% Institutional 57% Mutual fund Reinsurer 2% 10% 9% 32% Hedge fund 47% Institutions and dedicated catastrophe funds remained the largest providers of capacity during the 12 months ending June 30, Combined, the two categories provided 77 percent of the total capacity. Continued softening of rates, however, resulted in the overall capacity from institutions declining by more than one third to 20 percent. Capacity from reinsurers and mutual funds was relatively stable compared to the prior 12-month period. Hedge funds market share increased to six percent as some increased their participations in response to the number of high-yielding transactions coming to market Source: Aon Securities Inc. Capital origins 5 Figure 5: Investor by country/region (years ending June 30) 25% 12% 8% 5% 2016 US 50% UK Bermuda Switzerland Other 13% 34% 28% 11% 14% 2015 The geographic mix of catastrophe bond investors in 2016 varied significantly from The US continued to be the main source of capital, with a 50 percent market share regaining the amount lost in 2015 and reaching the highest participation rate in the last decade. The significant year-over-year increase of the US resulted in decreases across the remaining regions. The UK experienced the largest decline in participation, returning to levels closer to its historical average. The Other regions category decreased largely due to lower participation from Germany in 2016, with France and Japan holding at levels consistent with Source: Aon Securities Inc. 4 Aon Securities analysis of investor category includes only those transactions in which the firm participated. 5 Aon Securities analysis of geographic attributes includes only those transactions in which the firm participated and is based on the domicile of the investment manager. 8 Insurance-Linked Securities

13 General market trends Third quarter 2015 Similar to the prior year period, the third quarter of 2015 was fairly inactive when it came to both primary issuances and secondary market activity. Three new issuances closed during the third quarter, all covering earthquake risks. Both Acorn Re (Acorn Re ) and Ursa Re cover the North America west coast, while Bosphorus covers earthquakes in Turkey. With few new issuances in the quarter and expectations for a light pipeline for the remainder of 2015, investors did not see the need to rebalance portfolios. This led to low activity in the secondary market with FINRA s Trade Reporting and Compliance Engine (TRACE) reporting volume of $176 million across 180 trades.* Investors saw strong gains in the pricing of US hurricane-exposed transactions, driven by seasonality, with the hurricane season passing without incident during the quarter. Overall, pricing started to rebound from the first half of the year as selling pressure eased up. In August 2015, Lombard Odier Investment Managers (Lombard Odier) hired an ILS investment team, led by Dr. Gregor Gawron. Lombard Odier currently has one actively managed Undertakings for Collective Investment in Transferable Securities (UCITS) fund that invests in a diversified portfolio of catastrophe bonds, targeting maximum diversification across different risk types and various regions. Fourth quarter 2015 On October 23, Hurricane Patricia made landfall in Mexico as the strongest landfalling Pacific hurricane on record, and was expected to cause a loss of principal to MultiCat Mexico 2012-I C notes. The bond was structured to fully recover when the barometric pressure reached 920 millibars or below within the defined covered area; and a 50 percent payout at pressure up to 932 millibars. Throughout the quarter, investors waited for the Best Track Data from the National Hurricane Center (NHC) to determine the payout of the notes. Despite several offers from sellers looking to exit their position prior to the landfall, there was a lack of interested buyers. The notes traded on October 26 after the event passed at a price of 4.35 cents, with trading levels subsequently increasing to between and cents in the quarter. Trading was relatively active in the fourth quarter of According to TRACE, there were 244 trades totaling $277.1 million in the period. Overall, there were more sellers than buyers, which caused secondary pricing reductions. Many investors utilized the secondary markets to make room for new issues and January 1 renewals. As is typical for the fourth quarter, a number of investors attempted to sell short-dated bonds. In prior years, these bonds traded at discount margins ranging from basis points; however, in 2015 the buying interest during the fourth quarter ranged from basis points, reflecting a higher cost of holding capital. Strong investor interest continued for bonds with higher coupons. Demand from investors for new issuances in the catastrophe bond market remained strong as 2015 came to a close. Investors secured $1.5 billion during the fourth quarter from the primary market across six bonds, with the majority of issuances occurring in December. Also during the quarter, Markel completed the acquisition of CATCo Investment Management (CATCo). Prior to its acquisition, CATCo raised additional capital for its Opportunities Fund. After the merger, the capital invested in the fund was redeemed and reinvested into a new Markel CATCo master fund. The acquisition of CATCo and the launch of CSAM s Humboldt Re (Humboldt Re) discussed in the ILS-Related Markets chapter of this report followed the trend of ILS funds seeking new growth strategies. First quarter 2016 In the new year, secondary market activity picked up with TRACE reporting 311 trades totaling $307.7 million in the first quarter, representing an increase in trade count of more than 27 percent compared to the prior quarter. This rise in activity was supported by capital being redeployed following the maturing of 10 catastrophe bonds during the quarter. Peril-specific activity was further motivated by the upcoming early redemption of Kizuna Re II on April 1, In anticipation of this redemption, many investors sought to maintain the diversity of their portfolios by buying into other Japan earthquake bonds on the secondary market. As a result, TRACE s reported trade count for Japan earthquake catastrophe bonds increased 140 percent over the fourth quarter of * Note that this is an underestimate of total market volume as trades in bonds rated below investment grade are capped at USD1 million, and foreign trades as well as trades by non-us broker dealers are excluded. Aon Benfield 9

14 Toward the end of the quarter there were more secondary buyers than sellers, putting upward pressure on prices. Despite the lower supply of catastrophe bonds for sale, many investors were reluctant to increase bids, preferring to hold onto cash in anticipation of new issues. By the end of the quarter there were 10 primary issuances totaling $2.2 billion in limit. Catastrophe bonds that reported at least 10 trades included Everglades Re (Everglades Re ), Tar Heel Re , Bosphorus 1 Re (Bosphorus Re ), and Kilimanjaro Re Class D (Kilimanjaro Re D). Everglades Re and Bosphorus Re were more heavily traded earlier in the quarter, and saw downward pressure on pricing until midquarter, when it became clear to investors that the primary pipeline was not going to satisfy demand. As a result, an upward surge in pricing was witnessed in bonds actively traded in the second half of the quarter, such as Kilimanjaro Re D. The maturity of the MultiCat Mexico 2012-I C notes was extended one quarter from the initial maturity date to March 4, 2016, following Hurricane Patricia. The Government of Mexico received $50 million (i.e. 50 percent recovery) after AIR Worldwide Corporation (AIR), the calculation agent for the transaction, delivered its final report using the NHC s Best Track Data. Second quarter 2016 Fourteen catastrophe bonds, totaling $2.9 billion of limit, matured in the second quarter of This led to continuing downward pressure on bond spreads. TRACE reported a trade count of 218 trades across $245.2 million in volume. This represented a decrease in trade count and volume from the first quarter of 2016, partially due to a reduction in primary issuance, as only $800 million of limit was placed. Everglades Re and Acorn Re were the most actively traded bonds during the quarter. In addition, the Vitality Re V notes represented around nine percent of the total reported volume with just six trades. Most of these trades occurred on a single date. Everglades Re traded heavily in the last few days of the quarter, with prices slightly lower from the all-time high in April. The slight reduction in pricing corresponded to the start of the US hurricane season on June 1. By contrast, the west coast earthquake-exposed Acorn Re continued to function as a portfolio diversifier, and achieved steady price increases throughout the quarter rising from to cents by quarter end. Similar price increases were achieved for other portfolio diversifiers, as strong demand persisted for earthquake and non-us bonds. Interestingly, secondary pricing for loweryielding bonds continued to rebound. Following several high-yielding primary issuances, and with additional capital still available for deployment, demand increased for lower coupon bonds in order to further diversify investors portfolios. Outlook While the primary market is not typically very active during the third quarter, our firm does expect sponsors to return to the market in the second half of Many investors have capital to deploy, which may lead to further spread compression. Demand for bonds that diversify investors ILS portfolios by providing exposure to alternative perils, such as casualty and non-us perils, will continue to grow. Overall, we believe the market will continue to be attractive for sponsors that choose to incorporate alternative capital. Investors continued to utilize the secondary market to redeploy available capital, resulting in more buyers than sellers. This trend held steady throughout the quarter. The one notable exception to this was Gator Re (Gator Re ) when its aggregate retention was partially eroded due to severe weather losses. The loss activity caused the price to decrease significantly to 76 cents in mid-june before partially rebounding to 80.5 cents by the end of the quarter. 10 Insurance-Linked Securities

15 The Aon ILS Indices The Aon ILS Indices are calculated by Bloomberg using month-end price data provided by Aon Securities. Aon ILS Indices returned positive results during the 12 months ending June 30, The All Bond and BB-rated Bond Indices posted gains of 6.84 percent and 5.34 percent, respectively. The BB-rated Bond Index rebounded from the prior 12-month period, which experienced adverse mark-to-market impacts from a declining Euro-USD valuation. The US Hurricane Bond and US Earthquake Bond indices also yielded positive results for the year of 7.73 percent and 4.85 percent, respectively. The All Bond Index outperformed relative to most comparable fixed income benchmarks, but was slightly lower than the 3-5 Year BB US High Yield Index that returned 6.93 percent during the period under review. The annual returns for all Aon ILS Indices outperformed the prior year s annual returns. This was driven by tightening spreads in the secondary market, particularly for low coupon bonds, and the absence of a major catastrophe. The 10- year average annual return of the All Bond Index 8.56 percent continued the trend of outperforming comparable benchmarks, and in doing so reinforced the value of a diversified book of pure insurance risks for investors portfolios over the long term. Table 5: Aon ILS Indices 6 Index title Return for annual period ended June 30 5-year average annual return 10-year average annual return Aon ILS Indices All Bond Bloomberg Ticker (AONCILS) BB-rated Bond Bloomberg Ticker (AONCBB) US Hurricane Bond Bloomberg Ticker (AONCUSHU) US Earthquake Bond Bloomberg Ticker (AONCUSEQ) 6.84% 2.81% 7.26% 8.56% 5.34% 0.46% 5.10% 6.98% 7.73% 5.66% 8.72% 9.99% 4.85% 2.59% 4.78% 6.06% Benchmarks 3-5 Year US Treasury Notes Index 3.72% 1.24% 2.37% 4.49% 3-5 Year BB Cash Pay US High Yield Index 6.93% 2.75% 6.05% 7.10% S&P 500 Index 2.69% 0.20% 9.73% 5.16% ABS 3-5 Year, Fixed Rate Index 3.35% 1.71% 3.45% 3.89% CMBS 3-5 Year, Fixed Rate Index 4.03% 1.48% 4.77% 6.86% Source: Aon Securities, Bloomberg 6 The 3-5 Year US Treasury Note Index is calculated by Bloomberg and simulates the performance of US Treasury notes with maturities ranging from three to five years. The 3-5 Year BB Cash Pay US High Yield Index is calculated by Bank of America Merrill Lynch (BAML) and tracks the performance of US dollar denominated corporate bonds with a remaining term to final maturity ranging from three to five years and are rated BB1 through BB3. Qualifying securities must have a rating of BB1 through BB3, a remaining term to final maturity ranging from three to five years, fixed coupon schedule and a minimum amount outstanding of $100 million. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transactions from a fixed to a floating rate security. The S&P 500 Index is Standard & Poor s broad-based equity representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price performance only, and does not include dividend reinvestments or advisory and trading costs. The ABS 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of US dollar denominated investment grade fixed rate asset backed securities publicly issued in the US domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one year remaining term to final stated maturity, a fixed coupon schedule and an original deal size for the collateral group of at least $250 million. The CMBS 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of US dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the US 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 will vary based on the characteristics of, and risks inherent in, each of the various securities that comprise the. As such, the relative performance of an is likely to vary, often substantially, over time. Investors cannot invest directly in indices. While the information in this document has been compiled from sources believed to be reliable, Aon Securities has made no attempts to verify the information or sources. This information is made available as is and Aon Securities makes no representation or warranty as to the accuracy, completeness, timeliness or sufficiency of such information, and as such the information should not be relied upon in making any business, investment or other decisions. Aon Securities undertakes no obligation to update or revise the information based on changes, new developments or otherwise, nor any obligation to correct any errors or inaccuracies in the information. Past performance is no guarantee of future results. This document is not and shall not be construed as (i) an offer to sell or a solicitation of an offer to buy any security or any other financial product or asset, or (ii) a statement of fact, advice or opinion by Aon Securities. Aon Benfield 11

16 Equity markets experienced a volatile period during the 12 months ending June 30, Concerns around the slow-down in growth from China, geo-political turmoil in the Middle East and disappointing US economic data resulted in US equity markets experiencing the worst start to a year on record. Meanwhile, fixed income markets tightened significantly during the period under review. The higher returns were driven by surging bond prices as investors fled to the safety of government debt. Figure 6: Historical performance of Aon ILS Indices Figure 7: Aon All Bond versus financial benchmarks Aon ILS US HU Index Aon ILS BB Index Aon ILS Index Aon ILS US EQ Index Aon All Bond ILS Index ABS 3-5 Year, Fixed Rate Index S&P 500 Index 3-5 Year BB Cash Pay US High Yield Index CMBS 3-5 Year, Fixed Rate Index 3-5 Year US Treasury Notes Index 180% 160% 140% 120% 100% 80% 60% 40% 20% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% 0% June 2016 June 2015 June 2014 June 2013 June 2012 June 2011 June 2010 June 2009 June 2008 June 2007 June % June 2016 June 2015 June 2014 June 2013 June 2012 June 2011 June 2010 June 2009 June 2008 June 2007 June 2006 Source: Aon Securities Inc., Bloomberg. Source: Aon Securities Inc., Bloomberg. 12 Insurance-Linked Securities

17 Mergers and Acquisitions (Re)insurer Activity Although not as strong as the comparable period last year, a significant amount of M&A activity occurred in the global (re)insurance space during the six months ending June 30, 2016, across non-life, life, and health companies. According to S&P Capital IQ, the global insurance sector announced M&A deal volume through the first six months of 2016 totaling $9.1 billion across 419 deals, compared to $41.2 billion across 454 deals for the same period in 2015 a deal value decrease of 78 percent and a deal volume decrease of 8 percent. Table 6 below highlights selected recent activity in the (re)insurance space. Table 6: Select (re)insurance M&A activity Acquirer Target Rationale Timing Price (millions) BB&T Corp. CGSC North America Holdings Corp. CGSC, which includes wholesale broker Swett & Crawford, enhances BB&T s insurance business and diversifies its product stream. February 23, 2016 $500.0 CGSC said it would use the proceeds from the sale to lower or eliminate corporate debt. Hartford Fire Insurance Co. Northern Homelands Co. Northern Homelands, the holding company for Maxum Specialty Insurance Group, adds E&S lines capabilities and increased distribution capacity to Hartford s small commercial business. March 17, 2016 $170.0 AmTrust Financial Services, Inc. ANV Holdings BV The ANV acquisition allows AmTrust to boost its existing Lloyd s operations and presence. April 19, 2016 $218.7 Fujian Thai Hot Investment Co. Dah Sing Life Assurance and Dah Sing Insurance Company (1976) The sale of the businesses is part of Dah Sing Financial Group s strategic initiatives announced earlier in the year to focus on its banking operations while divesting non-core assets. The businesses will maintain a distribution partnership with Dah Sing Financial Group while operating as part of the Fujian Thai Hot Investment portfolio. June 2, 2016 $1,400.0 Allianz SE Zurich Assurances Maroc SA Zurich Assurance Maroc is the seventh largest P&C company in Morocco with over 600,000 customers. June 17, 2016 $274.5 Allianz perceives Africa as a future growth market, and sees Morocco as a large opportunity to grow its business in the region. National General Holdings Corp. Elara Holdings, Inc. Elara Holdings, the holding company of Direct General Corp., allows National General to grow its personal lines portfolio, boost its direct marketing abilities and expand its product distribution channel. June 24, 2016 $165.0 Source: Various company press releases. 9 Source: Bloomberg Aon Benfield 13

18 While the year-over-year volume of transactions is relatively similar, the average deal size decreased meaningfully as many of the most likely acquirers were focused on the integration of previous transactions. M&A conditions still remain ripe for deals, as long-term trends towards consolidation in the insurance and reinsurance industries continue. M&A activity has been driven by acquirers desire to expand (i) geographically, (ii) into new products or distribution channels (such as fintech trends, as digital offerings become more prevalent), and (iii) to achieve scale and strengthen client relationships amid a challenging environment for organic growth. (Re)insurance pricing remains tepid and smaller players may struggle to remain profitable under increased capital and technology investment requirements, becoming targets for buyers looking to acquire books of business to build scale. Additionally, entrants such as asset managers, hedge funds, and foreign buyers (especially from Asia) searching for investment, and/or diversification in geography and products, continue to assess opportunities in the sector, further providing increased competition in M&A activity. Another avenue of potential M&A activity involves ILS funds. As a result of the hunt for scale and relevance in the global reinsurance industry, companies are increasingly examining the possibility of acquiring ILS managers. One such example, which closed in late 2015, was Markel s $200 million acquisition of CATCo, a leading reinsurance- and retrocessional reinsurance-linked investment and fund manager with $2.5 billion of assets under management. Low interest rates, excess capital, and fierce competition from new alternative capital, among other factors, have made organic growth more difficult to achieve for (re)insurers. This environment is driving acquirers to become more active in utilizing existing capital. Even a rise in interest rates is not expected to slow M&A activity, as the need for improved capital utilization and operational efficiencies will continue to stimulate buyers interest. In addition, rising interest rates should improve insurance companies investment returns and overall profitability, which could make these companies more attractive to potential buyers. As summarized in the Aon Securities Weekly Public Market Recap, most global reinsurers and insurers stock prices and valuation multiples have decreased, on average, by approximately 20 percent from their 52-week highs. The Florida Specialty, Financial/Mortgage Guaranty, and Western European Large Cap sectors stock performance has decreased significantly, down approximately 35 percent from their 52- week highs, while the Personal Lines and Specialty sectors stock performance has been strong relative to their peers, trading just below 52-week highs. Over the near term, Aon Securities expects M&A activity to continue at high levels. While the Brexit decision will affect the (re)insurance environment, the total impact of the UK s decision to leave the European Union (EU) remains unclear. Regardless of the ultimate outcome, (re)insurers will continue to seek to satisfy their strategic, diversification, and assetgathering objectives through acquisitions. 14 Insurance-Linked Securities

19 ILS-Related Markets Total capital deployed by the alternative markets grew to $75.1 billion by June 30, 2016 an increase of 10 percent from the prior year. As shown in Figure 9, alternative capital markets represented 13 percent of the global reinsurer capital at June 30, Quota share sidecars Five quota share sidecar transactions incepted at January 1, 2016, and all were renewals from A total of $1.1 billion in limit was secured for the four sidecars that disclosed sizes and each of the four sidecars increased in size between 10 and 47 percent from the prior year. Silverton Re returned for the fourth consecutive year, securing $125 million for the issuance. The Aspen Bermuda sidecar expanded by $40 million compared to the 2015 issuance. Hannover Rück SE s (Hannover Re) K-Cession and Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft s (Munich Re) Eden Re II sidecars each expanded around 25 percent from the prior year, upsizing by $100 million and $70 million, respectively. The expansion of these quota share sidecars demonstrates the growing importance of alternative capital for certain sponsors. In addition, private quota share reinsurance arrangements continue to be utilized by a number of cedents. Figure 8: Alternative market development $ billions Catastrophe bonds Sidecar ILW Collateralized re and others H12016 Source: Aon Securities Inc. Figure 9: Global reinsurer capital $ billions 800 Traditional capital Alternative capital Global reinsurer capital 700 6% -2% 4% 600 7% % -3% % % 18% H12016 Source: Individuals company reports, Aon Benfield Analytics, Aon Securities Inc. Table 7: Quota share sidecars launched during 12 months to June 30, 2016 Sidecar Inception date (Re)insurer Size (millions) Percent increase in size from 2015 Silverton Re Jan-16 Aspen Bermuda $ % Eden Re II Jan-16 Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft $ % Altair Re IV Jan-16 ACE Tempest Re (now part of Chubb) undisclosed - K-Cession Jan-16 Hannover Rück SE $ % Versutus 2016 Jan-16 Brit plc $ % Total $1,067.5 Source: Various company filings and press releases. Aon Benfield 15

20 Actively managed sidecars and start-up reinsurance vehicles 7 Over the past few years, the number of reinsurers accessing alternative capital through actively managed vehicles has grown substantially. There were significant changes in the sizes of actively managed sidecars in the past calendar year. Mt. Logan Re, (Mt. Logan), Kiskadee Investment Managers (Kiskadee), and AlphaCat Managers (AlphaCat) each grew their assets under management during this time. As of January 1, 2016, both Mt. Logan and Kiskadee had surpassed $800 million in capital; while AlphaCat, which began managing third party capital in 2011, saw its assets under management reach $2.4 billion. In contrast, RenaissanceRe Holdings (RenRe) reduced the size from last year of its Upsilon RFO Re (Upsilon RFO) vehicle for risks incepting at January 1 this year. Capital from third parties and RenRe totaled $87.8 million, down $108.4 million compared to January 1, 2015, and even further reduced from the 2014 underwriting period. The reduced size of Upsilon RFO, which provides retrocessional property catastrophe and worldwide aggregate collateralized capacity, likely reflects RenRe s view of current market conditions for those lines. In October 2015, CSAM launched another Guernsey-domiciled reinsurer Humboldt Re (Humboldt Re). The reinsurer was launched with CHF500 million in capital and received an A- rating from A.M. Best. Humboldt Re is supported by funds from CSAM s investors and its conservative investment strategy will focus on a high liquid fixed income paper. Humboldt Re is targeting to write approximately CHF140 million of gross written premiums focused on globally diversified property catastrophe exposures. The trend of reinsurers seeking to complement underwriting results with an asset management strategy continued in the period under review, albeit at a slower pace that was not without challenges. In December 2015, Enstar Group (Enstar) and UBS O Connor LLC announced their partnership forming Aligned Re (Aligned Re). Business is expected to include quota share contracts with subsidiaries of StarStone Insurance Holdings, part of Enstar, and loss portfolio transfers from certain subsidiaries of Enstar in run-off. Aligned Re is targeting capital from high net worth clients; the startup has $220 million of capital pledged by Enstar, Stone Point Capital LLC, and its management team. By July 2016, AXIS Capital Holdings (AXIS) and The Blackstone Group L.P. (Blackstone) had completed the capital raise for Harrington Re (Harrington Re) raising approximately $550 million of equity and $50 million of debt. Harrington Re received an A- financial strength rating from A.M. Best, demonstrating the rating agency s willingness to rate such start-ups despite taking a tougher stance than several years ago. Harrington Re is expected to write a multi-line reinsurance portfolio, focusing on liability and professional lines while limiting catastrophe exposure. The company will write external business as well as risks sourced from AXIS. According to Jay Nichols, CEO of AXIS, Harrington Re is an integral part of our larger alternative capital strategy, which is designed to match the right risk with the right capital. He also noted, The Company will expand the already broad product offering and capacity of AXIS across medium- to long-tail lines of business to better serve our clients and distribution partners. We look forward to creating value and innovating at the intersection of risk financing and risk transfer. Meanwhile Watford Specialty Insurance Co., a unit of Watford Re (Watford Re), announced that it had acquired Professionals Direct Insurance Co in August The acquisition has been renamed Watford Insurance Company and progresses Watford Re s strategy of expanding in the US, allowing the company to access admitted property and casualty insurance market across all 50 states. A start-up venture from Matthew Fairfield, the founder of ANV, was also announced in August Exin Re AG (Exin Re), which is domiciled in Zurich, is in the process of finalizing its license from the local regulator. The start-up, which is seeking a rating of A- from A.M. Best, is planning to launch in September ahead of the January 1 renewal season. Exin Re is understood to have raised $1 billion of capital, of which $300 million is earmarked for future growth. However, challenges continue to plague some initiatives in the current underwriting, economic, and regulatory environment. On the underwriting side, recent start-up reinsurers have typically produced higher loss and expense ratios in an effort to achieve top line growth. Along with poor investment returns, this has resulted in start-up reinsurers performing significantly worse as a group compared to traditional reinsurers. In January 2016, it was announced that PaCRe (PaCRe) had stopped 7 Source: Various company filings and press releases. 16 Insurance-Linked Securities