Casualty Actuarial Society:Overview of Catastrophe Risk

Securitization

Presented by:

American Re Securities Corporation

March, 2000

March, 2000 2 of 27

Table of Contents

I. Transaction Structures

II. Transaction Costs

III. Transaction Timing

IV. Catastrophe Bond Investors

Appendix I Gold Eagle Capital Limited

Appendix II Other Transactions

This presentation has been prepared by American Re Securities Corporation on behalf of itself and associated companies, and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. Neither American Re Securities Corporation nor any affiliate has acted or will act as a fiduciary or financial, investment, commodity trading or other advisor of or for any recipient of this presentation and any investment, trading or hedging decision of a party will be based upon its own independent judgement after consultation with such tax, accounting, legal and other advisors as it deemed appropriate. Although the information in this presentation has been obtained from sources believed to be reliable, we make no representations as to its accuracy or completeness and it should not be relied upon as such. Any opinions expressed herein are subject to change. From time to time, American Re Securities Corporation, its associated companies and any of their officers, employees or directors may have a position, or otherwise be interested in, transactions in any securities directly or indirectly the subject of this presentation. American Re Securities Corporation, or its associated companies, may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this presentation.

The information contained herein is confidential and may not be copied or otherwise reproduced or quoted to any party other than the receiving party (including its directors, officers, employees, or professional advisors in whole or in part).

Transaction StructuresTransaction Structures

March, 2000 4 of 27

Insurance Intermediary provides retrocessional coverage for Sponsor Insurance Intermediary cedes risk to a Special Purpose Entity The Special Purpose Entity fully collateralizes the maximum recovery by issuing securities to the Capital Markets

SponsorSponsor InsuranceIntermediary

InsuranceIntermediary

InvestorsInvestors

Special Purpose

Entity

Special Purpose

Entity

CollateralTrust

CollateralTrust

Principal

Interest and remaining principal at maturity

Premium

Contingent Claims Payment

Contingent Claims Payment

Premium

Coupon on Principal Principal

Fundamental Transaction Structure

Optional

March, 2000 5 of 27

Indemnity CAT Bond

Linked to actual losses of Sponsor in excess of retention:

No basis risk

Co-insurance is required

Requires extensive disclosure

Detailed disclosure on underwriting, business practices and underlying exposures

Bond structure must allow for claims development period:

Investors have extension risk

No recovery for Sponsor until the end of the development period

Maximum Possible Exposure

Maximum Possible Exposure

Indemnity Cat Bond

Traditional Reinsurance

Retention

$ A

ctu

al L

oss

es

Insurer

Investors and Insurer

Insurer

Re-Insurers and Insurer

March, 2000 6 of 27

Parametric CAT Bond

Linked to physical event parameters

Location Magnitude for Earthquake Maximum windspeed or barometric pressure

for Windstorm (no precedent exists for Windstorm)

Introduces basis risk between parametric trigger and incurred losses

No Co-insurance

Requires minimal disclosure

No disclosure on underwriting, business practices or underlying exposures

No extension risk for Investors

Less elapsed time before Sponsor’s recovery than for an indemnity bond

Maximum Possible Exposure

Maximum Possible Exposure

Parametric Cat Bond

Traditional Reinsurance

Retention

Ma

gn

itud

e o

f e

ven

t

Insurer

Re-Insurers and Insurer

Investors

Insurer

March, 2000 7 of 27

Modeled Index CAT Bond

Modeled Index Linked Securities: e.g. ModILSSM

Linked to an Index:

Modeled Industry Losses Modeled Insurer Losses

Less basis risk than for a Parametric CAT Bond

No Co-insurance

Requires minimal disclosure

No disclosure on underwriting and business practices

If an industry index, no disclosure on Sponsor's exposures

No extension risk for Investors

Less elapsed time before Sponsor’s recovery than for an indemnity bond

Maximum Possible Exposure

Maximum Possible Exposure

ModILSSM

Cat Bond

Traditional Reinsurance

Retention

$ M

od

ele

d L

os s

es

Insurer

Re-Insurers and Insurer

Investors

Insurer

March, 2000 8 of 27

Coping with the Basis Differential

Basis differential can be placed or retained:

The Sponsor can retain the basis

No cost related to third party taking basis Positive value can be structured to equal or

exceed negative value May prevent transaction from being treated as

reinsurance for regulatory purposes

Through an Insurance Intermediary, the index or parametric bond can be transformed into an indemnity policy, and the Intermediary can place or retain the basis risk

An Intermediary can arrange for a cap on the basis differential, thereby ensuring performance within a collar range

L

oss

/Ga

in

Probability of Exceedance

0.X%

Transaction CostsTransaction Costs

March, 2000 10 of 27

Costs of Transaction

Initial transaction costs are constant for any transaction of $100 million in size or less:

Estimated One-Time Transaction CostsLegal Costs $500,000Modeling Costs $250,000Structuring and Underwriting Fee $3,000,000Rating Agencies $200,000Printing Costs $20,000Miscellaneous and Accounting $25,000Trustee Fee $30,000

Total One-Time Transaction Costs $4,025,000

Ongoing transaction costs depend on the maturity of the bond. The following estimates are the spread to LIBOR demanded by Capital Markets investors for a ModILSSM or Parametric bond of BB risk:

1 Year 3 Year 5 Year

400 bps 450 bps 500 bps

March, 2000 11 of 27

Annual Costs of Transaction

All-in, estimated transaction costs, expressed as an annual Rate-on-Line:

1 Year 3 Year 5 Year$50 Million 12.1% 7.2% 6.6%$100 Million 8.0% 5.8% 5.8%

Transaction TimingTransaction Timing

March, 2000 13 of 27

Time Frame

0 1 2 3 4 5 6 7 8

Closing

Marketing

Rating Agency

Documentation

Risk Modeling

Structural Design

Elapsed Time (in months)

Indemnity Bond

ModILS SM or Parametric Bond

Catastrophe Bond InvestorsCatastrophe Bond Investors

March, 2000 15 of 27

Some Previous Investors:

Bank of Montreal Bracebridge Capital Research and Trading Combined Insurance Company

of America Everest Re John Hancock Mutual Life Lazard Lincoln Re Lutheran Brotherhood Pacific Life PIMCO Renaissance Re TIAA Travelers US Fidelity & Guarantee

Investors in CAT bonds

Mutual FundsMutual Funds

Life InsurersLife Insurers

Hedge FundsHedge Funds

ReinsurersReinsurers

BanksBanks

Non-Life InsurersNon-Life Insurers

Gold Eagle Capital LimitedGold Eagle Capital Limited

Appendix I

March, 2000 17 of 27

Transaction Highlights

Gold Eagle Capital Notes offer diversified exposure to catastrophic risk:

East Coast/Gulf Hurricane New Madrid Earthquake California Earthquake

Modeled Index Linked Securities (ModILSSM), where performance is linked to an index reflecting modeled, rather than actual, insurance losses, avoid certain risks associated with indemnity CAT bonds:

Investors exposed solely to frequency of event occurrence, with no uncertainty as to severity of loss

No exposure to claims paying practice or changes in underlying policies Exposure data and associated attachment points are placed in escrow and

remain static No uncertainty from secondary perils Allows rapid post-event settlement period

Class A Notes were the first, fully principal-at-risk, investment grade CAT bond

March, 2000 18 of 27

Transaction Summary

Securities: $50 million of Class A Floating Rate Modeled Index Linked Notes $126.6 million of Class B Floating Rate Modeled Index Linked Notes

Issuer: Gold Eagle Capital Limited, a special purpose Bermuda company

Index Swap Counterparty: American Re Capital Markets, Inc. (“ARCM”), a wholly owned subsidiary of American Re Corporation (“ARC”)

Use of Proceeds: Invested in Permitted Investments to collateralize the Index Swap

Index SwapCalculation Agent: Risk Management Solutions, Inc. (“RMS”)

Maturity Date: April, 2001 (subject to a maximum extension of 2 months)

Risk Period: November 24, 1999 to March 31, 2001, excluding 1999 Hurricane

Coupon: Class A: US$ 3 month LIBOR +295 bpsClass B: US$ 3 month LIBOR +540 bps

Ratings: Class A: Baa3/BBB- Moody’s/FitchClass B: Ba2/BB Moody’s/Fitch

March, 2000 19 of 27

Gold Eagle Capital LimitedNovember 1999

Gold Eagle Capital Limited enters into a cash-collateralized, catastrophe Index Swap with ARCM.

Gold Eagle Capital Limited collateralizes this swap by issuing $176.6 million of Modeled Index Linked Notes to investors.

Gold Eagle Capital Limited enters into an Interest Rate Swap to smooth investment income.

Index SwapCounterparty

(ARCM)

Index SwapCounterparty

(ARCM)

CIBC, LondonCIBC, London

CollateralAccount

CollateralAccount

Gold EagleCapital Limited

Gold EagleCapital Limited

ModILSSM

Investors

ModILSSM

Investors

Principal Repayment & Interest

Cash Proceeds

Fixed Payment

Qualifying Event Settlement Amount

Cash Proceeds from Sale of Notes

Return on permitted investments

LIBOR -[XX]

Return on Permitted Investments

DescriptionAmount($MM)

Coupon MaturityMoody’sRating

Class A 50.0 LIBOR+295 17 mo Baa3

Class B 126.6 LIBOR+540 17 mo Ba2

March, 2000 20 of 27

Determination of the Index Value RMS determines if a given Hurricane or Earthquake is a Qualifying Event.

Within 60 days:

RMS parameterizes (quantifies the characteristics of) the Qualifying Event RMS calculates an Index Value utilizing those parameters and the escrowed

Exposure Dataset

If the final Index Value results in a write down of principal, such write down will occur on the Interest Payment Date following the determination of the Index Value

Any Index Value resulting in a principal write-down must be supported by an Agreed Upon Procedures Letter from KPMG to verify the correct application of the RMS model

Generic event and write-down timing example:September, 2000Trigger Event

October, 200030 day PreliminaryIndex Value

November, 200060 day final Index Value

January, 2001Determination Date>60 days after event

January, 2001Interest Payment Datewrite-down of principal

~30 days variable~30 days 5 days

March, 2000 21 of 27

Modeled Risk Profile

Class A NotesAttachment Probability (17 month) 0.24%Exhaustion Probability (17 month) 0.24%Expected Loss (17 month) 0.24%Expected Loss (annualized) 0.17%

Class B NotesAttachment Probability (17 month) 1.10%Exhaustion Probability (17 month) 0.70%Expected Loss (17 month) 0.89%Expected Loss (annualized) 0.63%

Events Qualifying for Calculation:• A Hurricane of category 1 or higher,

occurring in the Eastern Hurricane Region on or after January 1, 2000

• An Earthquake in the New Madrid Seismic Zone or California exceeding magnitude 5.0 at its epicenter

$42 million

$177 million

$127 million

$84 million

Class A

Entire Class B

2/3 Class B

1/3 Class B

0.24%

0.70%

0.86%

1.10%

Principal Reduction

17 monthExceedance

Probability

March, 2000 22 of 27

New Madrid Modeled Risk Profile

Events Qualifying for Calculation:• An Earthquake exceeding certain magnitude

thresholds at its epicenter, in the New Madrid Region:

Mw Mb Ms

5.0 5.0 5.0

400

620

470

435

Class A

Entire Class B

2/3 Class B

1/3 Class B

0.11%

0.18%

0.22%

0.24%

RMS CAT Index Value

17 monthExceedance

Probability

Boundaries for Qualifying New Madrid Earthquake Events

March, 2000 23 of 27

California Modeled Risk Profile

Boundaries for Qualifying California Earthquake Events

Events Qualifying for Calculation:• An Earthquake exceeding certain magnitude

thresholds at its epicenter, in the California Region:

Mw Mb Ms

5.0 5.0 5.0

245

620

291

260

Class A

Entire Class B

2/3 Class B

1/3 Class B

<0.03%

<0.03%

0.05%

0.17%

RMS CAT Index Value

17 monthExceedance

Probability

March, 2000 24 of 27

East Coast/Gulf Modeled Risk Profile

Events Qualifying for Calculation:• A Hurricane occurring in the Eastern Hurricane

Region of category 1 or higher. Any named tropical storm or hurricane that is designated as such by the NHC prior to January 1, 2000 shall be excluded as a Qualifying Event.

[380]

[620]

[410]

[395]

Class A

Entire Class B

2/3 Class B

1/3 Class B

[0.11%]

[0.49%]

[0.59%]

[0.70%]

RMS CAT Index Value

15 monthExceedance

Probability

Boundaries for Qualifying Hurricane Events

March, 2000 25 of 27

Historical Events

EventMagnitude(1)

/ Cat Intensity(2)

LocationModeled

Index Value

Loss to Class B

Loss to Class A

New Madrid EarthquakeNew Madrid 1811-1812 8.2 New Madrid 846 100% 100%Charleston, MO 1895 6.2 New Madrid 43 0 0California EarthquakeSan Francisco 1906 8.3 San Francisco Area 291 100% 0Northridge 1994 (3) 6.8 Los Angeles 39 0 0U.S. HurricaneNot Named 1926 4 Florida 364 0 0Andrew 1992 4 Florida 209 0 0Not Named 1938 3 New England 126 0 0Donna 1960 4 Florida, East Coast 76 0 0Camille 1969 5 Louisiana, Mississippi 49 0 0(1) Magnitudes for New Madrid events are moment magnitudes (Mw). Magnitudes for California events are surface wave magnitudes (Ms).(2) The highest Saffir-Simpson category as assigned by the NHC.(3) The Modeled Index Value for the Northridge earthquake of 1994 is reflective of the policy structures that were in place as of 1997 and is subsequently lower than estimates of the actual Northridge loss.

Other TransactionsOther Transactions

Appendix II

March, 2000 27 of 27

Some Comparable Transactions

Parametric Re (Parametric) 11/97 Tokyo Marine & Fire $100.0 10 0.70% L+430 Ba2Concentric, Ltd (Parametric) 5/99 Tokyo Disneyland $100.0 5 0.42% L+310 Ba1Namazu Re 11/99 GKG (Gerling) $100.0 5 0.75% L+450 BB(S&P)

Pacific Re 6/98 Yasuda Fire & Marine $80.0 5 0.96% L+370 Ba3(Includes Modeled elements)

SR Earthquake Ltd 8/97 Swiss Re $137.0 2 0.68% 10.49% Ba1Domestic Inc. 3/99 Kemper Insurance $100.0 3 0.50% L+369 Ba2Seismic Limited 3/00 Lehman Re $150.0 1.83 0.73% L+450 Ba2

Residential Re 6/97 USAA $477.0 1 0.70% L+582 Ba2Trinity Re 2/98 Centre Solutions $83.5 1 0.83% L+367 Ba3Residential Re 6/98 USAA $450.0 1 0.60% L+404 Ba2Trinity Re 12/98 Centre Solutions $56.6 1 0.77% L+417 Ba3Residential Re 6/99 USAA $200.0 1 0.43% L+366 Ba2Juno Re, Ltd 6/99 GKG (Gerling) $80.0 3 0.45% L+420 Ba2

Mosaic Re 7/98 F&G Re $54.0 1 0.61% L+440 BB(S&P)Mosaic Re II 2/99 F&G Re $45.7 1 0.43% L+400 BB(S&P)Gold Eagle Capital (Class A) 11/99 American Re $50.0 1.42 0.17% L+295 Baa3Gold Eagle Capital (Class B) 11/99 American Re $126.6 1.42 0.63% L+540 Ba2

Diversified US Risk

Japan Earthquake

Japan Windstorm

US Earthquake

US Windstorm