Insurance-Linked Securities - Aon...

Insurance-LinkedSecuritiesFirst Quarter 2015 Update

Aon Benfield

Risk. Reinsurance. Human Resources.

1 Insurance-Linked Securities: First Quarter 2015 Update

First Quarter 2015 Catastrophe Bond Transaction ReviewThe record-breaking market trends established for insurance-

linked securities in 2014 continued in the first quarter of 2015,

with strong total issuance driven largely by repeat sponsors

seeking coverage in the competitive rate environment.

Records continued to be set with USD1.7 billion of

catastrophe bond limit secured in the first quarter—the most

of any first quarter in history. Total outstanding catastrophe

bonds settled at USD22.1 billion by March 31, 2015, with

USD3.9 billion of bonds having come off-risk since year end

2014. Additionally, total cumulative issuance for property

catastrophe bonds since the market’s inception had surpassed

the USD60.0 billion mark by the end of the first quarter.

During the quarter, the USD3.9 billion of maturing catastrophe

bonds freed-up capital for investors to reallocate in the ILS

market. As a result, secondary market activity was unusually

strong in the normally quiet month of January as investors

sought to reinvest excess capital in the catastrophe bond market.

Activity in the secondary market began to slow in February and

March as investors focused their attention on primary issuances.

Outstanding Catastrophe Bond Volume

Source: Aon Benfield Securities, Inc.

Investor demand in the catastrophe bond market is currently greatest in less remote tranches as investors search for enhanced yields

in their portfolios. We anticipate this trend to continue for the foreseeable future absent any major loss experience.

0

5,000

10,000

15,000

20,000

25,000

30,000

Q1 20152014201320122011

Life / Health OutstandingProperty Outstanding

13,947

16,740

20,583

24,287

22,111

USD

mill

ion

s

Aon Benfield 2

First Quarter 2015 Catastrophe Bond Issuance

Beneficiary Issuer Series Class Size (millions)

Covered Perils

Trigger Rating (S&P)

Expected Loss1

Interest Spread

First Quarter

Aetna Life Insurance Company (“Aetna”)

Vitality Re VI Limited

Series 2015-1

Class A $140US Medical

Benefits RatioIndemnity

BBB+ 0.01% 1.75%

Class B $60 BB+ 0.24% 2.10%

Catlin Insurance Company Ltd. (“Catlin”)

Galileo Re Ltd.

Series 2015-1

Class A $300US HU, US/

CAN EQ, EU Wind

Industry Index

Not Rated 8.60% 13.50%

SCOR Global P&C SE (“SCOR”)

Atlas IX Capital Limited

Series 2015-1

Class A $150US HU, US/

CAN EQIndustry

IndexNot Rated 3.76% 7.00%

Chubb Group of Insurance Companies (“Chubb”)

East Lane Re VI Ltd.

Series 2015-I

Class A $250Northeast HU,

EQ, ST, WS, WF, VE, MI

Indemnity BB 1.34% 3.75%

Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio Marine”)

Kizuna Re II Ltd.

Series 2015-1

Class A ¥35,000* JP EQ Indemnity BBB- 0.018% 2.00%

Safepoint Insurance CompanyManatee

Re Ltd.Series

2015-1Class A $100 FL HU Indemnity Not Rated 1.15% 5.00%

Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft

Queen Street X Re Limited

$100US HU, AUS CY

Industry Index and Modeled

Loss

Not Rated 2.72% 5.75%

State Farm Fire and Casualty Company (“State Farm”)

Merna Re Ltd.

Series 2015-1

Class A $300New Madrid

EQIndemnity Not Rated 0.41% 2.00%

Total Closed During Q1 2015 $1,694


1 Expected loss represents initial one-year annualized figures with WSST sensitivity when applicable* Converted at 1¥ = $0.0084 as of March 26, 2015

AUS − AustraliaEU − EuropeFL − FloridaJP − JapanUS – United States

CY − CycloneEQ − EarthquakeHU − HurricaneMI − Meterorite ImpactST − Severe Thunderstorm

VE − Volcanic EruptionWF − WildfireWS − Winter Storm

Legend

A new sponsor, Safepoint Insurance Company, entered the market

in March with the first Florida-only hurricane bond of 2015, a peril

which represented approximately a third of the total issuance of

2014 on a contribution to expected loss basis. Returning sponsors

Aetna, Catlin, Tokio Marine and State Farm saw opportunity

to increase the share of alternative capital in their risk transfer

programs, while SCOR and Chubb achieved expanded coverage

and terms with their new issuances. In all, catastrophe bonds

placed in the first quarter provided investors with a selection of

natural perils, as well as another health transaction from Aetna.

The covered perils and geographies reflected a spectrum of

interest spreads on both an indemnity and industry index basis.

The regions covered included the United States nationwide,

Northeast, New Madrid and stand-alone Florida; while

international territories included Australia, Europe and Japan.

The table below summarizes the terms of the eight catastrophe

bond transactions that closed during the first quarter.


In the first quarter, SCOR, a seasoned ILS sponsor, came to

market with a new offering from Atlas IX Capital Limited.

This time SCOR secured USD150 million in industry index

U.S. hurricane and North America earthquake coverage,

following its U.S. mortality issuance under the same program

in 2013. Canada earthquake risk is a new addition for the

sponsor, as well as the inclusion of a permitted investment yield

floor on the bond’s collateral given the uncertain interest rate

environment surrounding the investment in European Bank

of Reconstruction Development Medium Term Notes.

East Lane VI Ltd. provides Chubb with USD250 million of

indemnity Northeast multi-peril coverage for personal and

commercial lines. The transaction is Chubb’s ninth catastrophe

bond, but the first to provide coverage for the un-modeled

perils of volcanic eruption and meteorite impact. In addition,

the latest issuance provides coverage for Chubb for the longest

term yet, with a scheduled maturity in five years.

Tokio Marine again issued under its Kizuna Re II Ltd. program

in the first quarter. The transaction provides JPY35,000 million

in Japan earthquake coverage at a more remote level than the

2014 issuance. With an expected loss of 0.018 percent, the

notes are rated “BBB-” by S&P and for the first time for the

Japan insurer are denominated in Japanese yen. This is the

largest Japanese yen transaction for the catastrophe bond

market to date. The proceeds from the issuance are invested in

Japanese yen investment funds.

State Farm raised USD300 million of New Madrid earthquake

indemnity coverage for the third consecutive year. With a

combined USD900 million of total limit outstanding, the

leading writer of personal lines in the U.S. successfully placed

its entire New Madrid USD1 billion xs USD450 million layer

(less the company’s retention within the layer) in the alternative

market. The latest issuance from State Farm includes an

innovative extension event, which allows a reduced extension

interest spread of 10 basis points if the loss estimate is within

the reinsured layer or a loss payment has been made.

The chart below shows catastrophe bond issuance by quarter

since 2011.

Catastrophe Bond Issuance by Quarter


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Q1 20152014201320122011

Q2 Q3 Q4Q1

854

1,990

1,105

742

1,888

804

1,493

2,095 3,303

1,621

1,877

670

2,075

250

4,492

1,410 1,694

USD

mill

ion

s

Aon Benfield 4

Aon Benfield ILS IndicesThe Aon Benfield ILS Indices are calculated by Bloomberg using

month-end price data provided by Aon Benfield Securities.

During the quarter, Aon Benfield ILS Indices posted mixed results.

The Aon Benfield All Bond and U.S. Hurricane Bond Indices were

negative for the quarter with losses of -0.26 percent and -0.55

percent, respectively. The BB-rated and U.S. Earthquake Bond

Indices were positive with returns of 0.42 percent and 0.69 percent,

respectively. The Aon Benfield ILS Indices underperformed relative

to comparable fixed income benchmarks.

The annual returns for all Aon Benfield ILS Indices underperformed

the prior one-year returns as keeping pace with the historic Aon

Benfield ILS average annual returns remains challenging given the

current market environment without a major catastrophe loss or

an increase in the overall level of risk ceded to the market. Despite

these decreases, the 10-year average annual return of the Aon

Benfield All Bond Index, 8.33 percent, again produced superior

returns relative to the other benchmarks. This demonstrates the

value a diversified book of pure insurance risks can bring long

term investors’ portfolios.

Aon Benfield ILS Indices2

Index Title Return for Quarterly Period Ended March 31 Return for Annual Period Ended March 31

Aon Benfield ILS Indices 2015 2014 2015 2014

All Bond Bloomberg Ticker (AONCILS)

-0.26% 1.50% 3.14% 9.68%

BB-rated Bond Bloomberg Ticker (AONCBB)

0.42% 1.05% 1.81% 6.77%

U.S. Hurricane Bond Bloomberg Ticker (AONCUSHU)

-0.55% 1.08% 6.27% 10.06%

U.S. Earthquake Bond Bloomberg Ticker (AONCUSEQ)

0.69% 1.02% 3.12% 5.12%

Benchmarks

3-5 Year U.S. Treasury Notes 1.49% 0.50% 3.22% -0.73%

3-5 Year BB U.S. High Yield Index 2.05% 1.94% 3.10% 7.09%

S&P 500 0.44% 1.30% 10.44% 19.32%

ABS 3-5 Year, Fixed Rate 1.59% 0.98% 3.52% 0.81%

CMBS 3-5 Year, Fixed Rate 1.75% 1.14% 3.85% 1.82%

Source: Aon Benfield Securities, Inc., Bloomberg

2 The 3-5 Year U.S. Treasury Note Index is calculated by Bloomberg and simulates the performance of U.S. Treasury notes with maturities ranging from three to five years.

The 3-5 Year BB Cash Pay U.S. High Yield Index is calculated by Bank of America Merrill Lynch (BAML) and tracks the performance of U.S. dollar denominated corporate bonds with a remaining term to final matu-rity 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 is Standard & Poor’s broad-based equity index representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price performance only, and does not include dividend reinvestments or advisory and trading costs.

The ABS 3-5 Year, Fixed Rate Index is calculated by 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 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, at least one year remaining term to final maturity, a fixed coupon schedule and an original deal size for the collateral group of at least $250 million.

The performance of an index will vary based on the characteristics of, and risks inherent in, each of the various securities that 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.

While the information in this document has been compiled from sources believed to be reliable, Aon Benfield Securities has made no attempts to verify the information or sources. This information is made avail-able “as is” and Aon Benfield 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 Benfield 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 Benfield Securities.


An Interview with Brett Houghton, Managing Principal at Fermat Capital Management, LLCFermat Capital Management, LLC is a specialty investment management firm founded in Westport, Connecticut in 2001. With over USD5 billion in assets under management as of 31 December 2014, Fermat Capital manages institutional portfolios of Insurance-Linked Securities (ILS) with a particular emphasis on catastrophe bonds. As a complementary overlay to its long only, fundamental value approach to investing, the firm develops and employs an active trading strategy supported by proprietary systems that adapt and consolidate traditional insurance industry risk estimation models for the continuous-time trading of ILS.

1. As one of the pioneers in the insurance-linked securities market, you have seen a number of developments over the years that have fueled growth. How do we continue to build substantial growth over the coming years?

Absolutely, Fermat has seen tremendous advancements in the ILS market over the years as the product has evolved to meet the risk management needs of the insurance industry. Looking forward to the years ahead, we see substantial opportunities for ILS investors to provide meaningful coverage to public entities where the private market has fallen short. Governments and even major corporations are actively seeking solutions to better manage the risk to infrastructure and revenue streams. These opportunities are large in scale and the cost of ILS capital is at a point where it makes sense for both sides to work out solutions which would provide for material ILS growth in the coming years.

2. What would you tell a new catastrophe bond sponsor considering a potential issuance?

We believe new sponsors to be well informed about the ILS proposition. Sponsors continue to access the market with regularity for many reasons—diversification of capital sources, multi-year stability of the cost of capital, and fully collateralized coverage for events that are expected to disrupt traditional reinsurance markets. We believe these are keys to the market’s appeal and staying power. The initial process can be surprisingly smooth when working with experienced partners and a relatively straight-forward bond structure is selected. We would tell a new catastrophe bond sponsor.

3. What does your typical day consist of as a leading ILS manager?

There are many things to focus on during a typical day. We are continuously looking to improve the portfolio for our clients through trading in the primary and secondary markets. Outside of our market-based activity, we focus on developing our modeling capabilities and delivering transparent real-time communication to clients. Of course, we’re always keeping an eye on the weather forecast as well!

4. Do you think the private market is ready to supplement TRIA and support terrorism risk generally?

The ILS market currently supports terrorism risk as a covered peril in extreme mortality bonds. In these cases, exposure is well defined and typically remote due to the structure of the notes, so investors have been able to gain comfort and invest due to their ability to put some boundaries on the risk. In the case of terrorism risk more broadly, exposures are less well defined and the nature of potential losses consists of known and unknown events. This reality makes assessment of premium adequacy a difficult and opaque process for terrorism exposures. We believe the cat bond market has a willingness to bear terrorism risks, however progress needs to be made in stages to define more specifically how a terrorism cat bond would provide coverage in order to allow investors to increase their comfort around terrorism coverage on a larger scale.

5. What would Fermat like to see from the ILS market in the medium and long term?

The ILS market provides an excellent framework for transfer of insurance risks to capital markets investors. The market would benefit greatly from reduced frictional costs associated with setting up these transactions. This would benefit issuers, investors and even service providers as transaction volumes would likely increase as a result. Further expansion in coverage provided to government pools and also adoption of different types of risk will further enhance the investment proposition for ILS by allowing managers to construct a wider range of portfolios tailored to their investors’ needs.

Contact

Paul SchultzChief Executive Officer, Aon Benfield [email protected]

Aon Benfield, a division of Aon plc (NYSE: AON), is the world‘s leading reinsurance intermediary and full-service capital advisor. We

empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all

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has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results,

please visit aonbenfield.com.

About Aon Benfield

© Aon Benfield Securities, Inc. 2015 | All Rights Reserved

Aon Benfield Securities, Inc. is providing this document, Insurance-Linked Securities: First Quarter 2015 Update, and all of its contents (collectively, the “Document”) for general informational and discussion purposes only, and this Document does not create any obligations on the part of Aon Benfield Securities, Inc., Aon Benfield Securities Limited and their affiliated companies (collectively, “Aon”). This Document is intended only for the designated recipient to whom it was originally delivered and any other recipient to whose delivery Aon consents (each, a “Recipient”). This Document is not intended and should not be construed as advice, opinions or statements with respect to any specific facts, situations or circumstances, and Recipients should not take any actions or refrain from taking any actions, make any decisions (including any business or investment decisions), or place any reliance on this Document (including without limitation on any forward-looking statements).

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Aon Benfield Securities, Inc. and Aon Benfield Securities Limited (collectively, “Aon Benfield Securities”) provide insurance and reinsurance clients with a full suite of insurance-linked securities products, including catastrophe bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties, and derivative products.

As one of the most experienced investment banking firms in this market, Aon Benfield Securities offers expert underwriting and placement of new debt and equity issues, financial and strategic advisory services, as well as a leading secondary trading desk. Aon Benfield Securities’ integration with Aon Benfield’s reinsurance operation expands its capability to provide distinctive analytics, modeling, rating agency, and other consultative services.

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

About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 69,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon’s global partnership with Manchester United.

© Aon plc 2015. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate profes-sional advice after a thorough examination of the particular situation.

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