Hurricane Andrew (1992) Photo credit: FEMA

20% 18% 17.75% Florida Citizens CAT Bonds Attachment (Default) Probability Coupon 16% 14% 12% 10% 10.00% 8% 7.50% 6% 4% 2.71% 2.91% 2.89% 2% 0% Series 2012 Series 2013 Series 2014

What happened?

How might it be relevant to your pool?

Catastrophe Bonds for Governmental Risk Pools: Exploring the Possibilities 2015 AGRiP Fall Educational Forum Chicago, IL Aaron Koch, FCAS, MAAA Allison Gorniak, ACI, CCRA

1) What is a catastrophe bond? What is alternative capital? 2) How have they been used to date to insure public sector risk? What are the reasons to consider utilizing alternative capital? 3) Is alternative capital a good fit for your governmental risk pool?

Alternative capital is What is a catastrophe bond? What is alternative capital?

Investors A Reinsurance Transaction Reinsurer Broker Cat Modeler Risk Pool

Investors An Alternative Capital Transaction Reinsurer SPV/SPI Broker Cat Modeler Risk Pool

Alternative capital = Financial investors acting as reinsurers (primarily on property CAT business)

Who are alternative capital investors? How can non-insurers offer catastrophe (re)insurance coverage?

Minor instruments Major instruments Sidecars ILWs CAT Bonds Collateralized Reinsurance

Catastrophe Bond (ILS) Investors Cedent gets reinsurance credit Tradable coupons Multi-year protection Coupons SPV Collateral Security (bond) form But Structuring process can be expensive, slow Premiums Cedent Reinsurance Limit

Collateralized Reinsurance Investors Reinsurance cell contract More customizable But Premium SPI Collateral Reinsurance contract form Smaller than CAT bond Usually one year Less liquid Premium Reinsurance Limit Cedent

What? Financial investors directly writing CAT reinsurance Alternative capital How? Fully-collateralized instruments Who? Pension fund / hedge fund capital

Alternative capital why does it matter?

Alternative Capital Growth 10-13: Renewed Growth 05-07: Post- Katrina 08-09: Financial crisis (CAT Bonds)

Source: Artemis Public Sector Catastrophe Bond Issuance

Public Sector Issuance By Deal

Two Examples Sunshine Re (2013) MetroCat Re (2013)

Sunshine Re Florida Municipal Insurance Trust Catastrophe Bond Lite (privately traded) $20 million Available Limit 3 Year Coverage Period Florida Hurricane Losses Covered

MetroCat Re Metropolitan Transit Authority Rule 144A Catastrophe Bond (publicly traded) $200 million Available Limit 3 Year Coverage Period NYC Storm Surge Losses Covered

Diversity Utilize additional sources of reinsurance coverage Why?

Sample Catastrophe Reinsurance Structure - CCRIF 135M Traditional Reinsurance Catastrophe Bond Cat bond = partial share of highest layers (5% or less chance of loss) 60M Traditional Reinsurance 30M Pool Retention Traditional Reinsurance 25M Lower layers = traditional reinsurance or self-retention Pool Retention 0M

Diversity Utilize additional sources of reinsurance coverage Capacity Some perils difficult to reinsure Why? Flexibility Options for various payment triggers based on pool loss and/or industry loss

Superstorm Sandy (2012)

MTA Superstorm Sandy Impacts 6,000 5,000 $5B 4,000 3,000 Funding Gap: $920M 2,000 1,000 $950M 0 Total Sandy Cost Net Sandy Cost (After insurance and federal recoveries) $30M Average Net Annual Operating Income Source: MTA Annual Reports

MetroCat Reporting Stations Source: MetroCat Offering

Diversity Utilize additional sources of reinsurance coverage Capacity Some perils difficult to reinsure Why? Price Alternative capital competitive with traditional reinsurance, and in some cases even more affordable Flexibility Options for various payment triggers based on pool loss and/or industry loss

A Softening Market Cat Bond Prices 2011: Most catastrophe losses on record (Japan earthquake/tsunami) 2012: Superstorm Sandy Coupon 2013: ~40% price drop Source: Plenum Investments and Guy Carpenter BB Rated Cat Bonds

Price Drops Reinsurance Market Softening Could 2013 Be the Apex of the Next Few Years? (2014) Past the Tipping Point: Competition and Soft Pricing Could Lead to Rating Pressure for Global Reinsurers (2014)

Is Alternative Capital a Good Fit for Governmental Risk Pools? Geographically concentrated catastrophe risk exposure? Yes Active and innovative risk management programs? Yes Necessary size of portfolio? Increasingly Yes

(CAT Bonds) Alternative Capital Growth

Size of Market (in $B) Projected Growth of Alternative Capital 160 140 120 Range: $90B to $150B 100 80 60 40 20 0 1 2 3 4 5 6 Est. YE 2014 Est. 2020 (Various Sources)

Size of Transaction (in $M) Different Scales for Different Insureds 3,125 Median 625 125 25 5 1 Catastrophe Bonds Cat Bond Lites Collateralized Re

Key Takeaways 1. Catastrophe bonds and other alternative capital tools allow financial investors to participate directly in the reinsurance markets. 2. Cedents utilize alternative capital to diversify their reinsurance portfolio, gain access to additional capacity and flexibility, and reduce reinsurance costs. 3. Historically, only large cedents utilized alternative capital but rapid growth is allowing for smaller and more custom deals, helping to drive down prices across the entire reinsurance market.

Thank You

Questions?

A Side-by-Side Comparison

What Does the Alternative Capital Market Cover? General Liability Professional Liability Energy Crop US Storm Surge US Hurricane Japan Earthquake EU Windstorm Lack of models Long tail or time to settle claims More minor perils Developing models and indices Key perils Detailed models and indices Low alternative capital involvement High alternative capital involvement