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First Quarter Update2011Insurance-Linked Securities

Insurance-Linked Securities: First Quarter 2011 Update

First Quarter TransactionsAgain demonstrating the continued use of the insurance-linked securities market by the insurance industry, four catastrophe bond issuances closed in the first quarter of 2011, as compared to two issuances in the same period in 2010. In total, the first quarter of 2011 experienced $1 billion in issuance, versus $300 million over the same period in 2010.

Two sponsors, which were both active in the first quarter of 2010, returned to the market with additional issuances from existing programs. Swiss Re brought Successor X Ltd. Series 2011-2 in two classes, IV-E3 and IV-AL3, for a total of $305 million. This transaction covers U.S. Hurricane and California earthquake, and is the fourth issuance out of the Successor X Ltd. program. The transaction uses PCS index and parametric triggers for hurricane and earthquake perils, respectively, and offers a term of approximately three years. Class IV-E3, for $160 million and paying a 9.25 percent interest spread, is rated

“B” by Standard & Poor’s. The proceeds are invested in IBRD Puttable Notes. The Class IV-AL3, for $145 million and paying a 13 percent interest spread, is not rated and the proceeds are invested in U.S. Government Money Market Funds.

The second repeat issue in the quarter came from Hartford Fire Insurance Company with the $135 million Foundation Re III Ltd. Series 2011-1 Class A transaction. The deal covers U.S.

Hurricane risk and uses a PCS index trigger. Rated “BB+” by Standard & Poor’s, the bonds have a term of approximately four years and pay a five percent interest spread. The proceeds of the transaction are invested in U.S. Government Money Market Funds.

Also in the quarter, Chubb returned to the market following its East Lane Re III Ltd. issuance in 2009. The company’s $475 million East Lane Re IV Ltd. transaction includes two tranches and replaces capacity from maturing East Lane Re Ltd. and East Lane Re II Ltd. bonds. The covered perils include Northeast U.S. hurricane, earthquake, severe thunderstorm and winter storm, as well as inland flood arising from hurricanes in selected counties. East Lane Re IV Ltd. uses an indemnity structure with collateral invested in U.S. Government Money Market Funds. Class A, for $225 million and paying a 5.75 percent interest spread, is rated “BB+” by Standard & Poor’s, and has a tenor of approximately three years. Class B, for $250 million and paying a 6.65 percent interest spread, is rated “BB” by Standard & Poor’s and has a tenor of approximately four years.

The fourth transaction of the quarter came from Munich Re. The $100 million Queen Street II Capital Limited transaction replaced some capacity from the maturing €170 million Queen Street Capital transaction covering Europe windstorm. The bond pays a 7.50 percent interest spread, covers U.S. Hurricane and Europe Windstorm, and is rated “BB-” by Standard & Poor’s. The transaction uses industry triggers with PCS index and PERILS index for U.S. and Europe, respectively. The proceeds are invested in MEAG Queen Street II Fund, which invests in U.S. Treasury bills. MEAG Queen Street II Fund is managed by MEAG Asset Management, an affiliate of Munich Re. Rated “BB-” by Standard & Poor’s, the transaction has a term of approximately three years. Notably, the deal successfully closed within the initial price guidance, despite market disturbance from the Japan Earthquake several days prior.

RMS Model UpdateAt the end of February, Risk Management Solutions (RMS) released a major update to its U.S. Hurricane Model, incorporating new datasets and thousands of storm simulations into its model. Forensic analysis of claims data and the latest engineering research drove changes to vulnerability assessments in the new model. Climate factors such as high intensity ultraviolet irradiation, high humidity, and large annual variation in rainfall (which reduced the durability of certain roofing systems in Gulf States) also drove model changes.

13,14613,74712,21913,16713,20214,570

13,36013,24914,22514,38015,830$

Mill

ions

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Q1’11

Q4’10

Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

Q3’08

Nat Cat Outstanding Life/Health OutstandingCumulative Nat Cat Issuance Total Cumulative Issuance

Source: Aon Benfield Securities

Outstanding Catastrophe Bond Volume By Quarter

Catastrophe Bond Market Review

Aon Benfield Securities again presents a quarterly review of Insurance-Linked Securities (ILS), providing insight into this active market.

Aon Benfield Securities

In its press release, RMS stated that “(a)s a result of the model changes, RMS expects to see wind risk increase for all hurricane states on an industry-wide basis. However, individual portfolios will differ considerably depending on the region and line of business. On a wind-only basis, portfolios concentrated along the coast will show the smallest increase in wind losses, and may even decrease in some regions. Portfolios consisting of non-coastal exposure and commercial or industrial business will generally show the largest increases.” 1

The press release continues, saying “(c)hanges in loss results in the market portfolios analyzed by RMS typically range between +20% to +100%. However, there are extreme cases above and below this; in particular, concentrated portfolios will see changes outside of the range, including some decreases. Storm surge impacts will vary considerably according to the geographic makeup, lines of business, and data resolution of each portfolio. However, risk could increase in coastal locations due to the combined impacts of wind and storm surge, especially for commercial and industrial lines, which often cover surge-driven flood losses. The impact of surge will typically be lower for residential lines, as policies are usually wind-only.” 2

The catastrophe bond market continues to digest the changes from RMS. While investors may regard the changes as justification for increased coupons, this potential impact has not yet been evident. Sponsors may continue to delay issues while the market assesses the impact of the change.

Additionally, secondary market pricing is still absorbing the model change.

OutlookAlthough we do believe that Q2 2011 ILS issuance will be down over the year earlier quarter, we do not expect a downward trend in ILS activity as a result of recent events. Aon Benfield Securities continues to see interest from both issuers and investors, particularly in light of the fact that a significant amount of ILS coverage will expire in the current quarter (please see “Catastrophe Bond Maturities, Second Quarter 2011” table).

$ M

illio

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0

500

1,000

1,500

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Q1’11

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Q3’10

Q2’10

Q1’10

Q4’09

Q3’09

Q2’09

Q1’09

Q4’08

Q3’08

1,015

2,393

232

2,350

300

1,600

411

810

650

0

320

Nat Cat Issuance Life/Health Issuance

Catastrophe Bond Issuance By Quarter


1 RMS press release, February 28, 2011.2 Ibid.

Catastrophe Bond Maturities, Second Quarter 2011 ($Millions)

Sponsor Issue Perils Maturity Amount Chubb Group East Lane Re II Ltd. Series 2008-1 Class A NE US All Natural Perils^ Apr-11 75.0Chubb Group East Lane Re II Ltd. Series 2008-1 Class B NE US All Natural Perils^ Apr-11 70.0Chubb Group East Lane Re II Ltd. Series 2008-1 Class C US/Canada All Natural Perils^ Apr-11 55.0Chubb Group East Lane Re Ltd. Series A 2007-I US HU May-11 135.0Chubb Group East Lane Re Ltd. Series B 2007-I US HU May-11 115.0North Carolina Wind Pool Parkton Re Ltd. Series 2009-1 NC Wind May-11 200.0Zenkyoren Muteki Ltd. Series 2008-1 Class A JP EQ May-11 300.0*USAA Residential Reinsurance 2008 Limited Class 1, Series 2008-I US HU, EQ Jun-11 125.0USAA Residential Reinsurance 2008 Limited Class 2, Series 2008-I US HU, EQ Jun-11 125.0USAA Residential Reinsurance 2008 Limited Class 4, Series 2008-I US HU, EQ, ST, WS, WF Jun-11 100.0Flagstone Valais Re Ltd. Series 2008-1 Class A US/EU/JP Wind, US/JP EQ Jun-11 64.0*Flagstone Valais Re Ltd. Series 2008-1 Class C US/EU/JP Wind, US/JP EQ Jun-11 40.0*Glacier Reinsurance AG Nelson Re Ltd. Class G Series 2008-I US HU, EQ Jun-11 67.5Glacier Reinsurance AG Nelson Re Ltd. Class H Series 2008-I EU Wind Jun-11 45.0Glacier Reinsurance AG Nelson Re Ltd. Class I Series 2008-I EU Wind Jun-11 67.5Liberty Mutual Ins Co Mystic Re II Ltd. Series 2007-1 US HU Jun-11 150.0Nationwide Mutual Ins. Co. Caelus Re Limited Series 2008-1 Class A US HU, EQ Jun-11 250.0Allstate Insurance Co Willow Re Ltd. Class D Series 2008-1 US HU Jun-11 250.0Swiss Re Vega Capital Ltd. Series 2008-1 Class A US/EU/JP Wind, US/JP EQ Jun-11 21.0*Swiss Re Vega Capital Ltd. Series 2008-1 Class B US/EU/JP Wind, US/JP EQ Jun-11 22.5* Swiss Re Vega Capital Ltd. Series 2008-1 Class C US/EU/JP Wind, US/JP EQ Jun-11 63.9* Swiss Re Vega Capital Ltd. Series 2008-1 Class D US/EU/JP Wind, US/JP EQ Jun-11 42.6*Source: Aon Benfield Securities TOTAL $ 2,384.0

* Potentially impacted by recent events^ Includes Hurricane, Earthquake, Severe Thunderstorm, Winter Storm, Wildfire, and other perils


Trading RecapSecondary trading began the year with several investors looking to deploy capital. Conversely, we observed investor interest in selling lower-coupon bonds as they sought to add more yield after a year in which most bonds were issued in the one to two percent expected loss band. This demand for higher yields also translated into strong demand for Successor X Ltd. Series 2011-2, which kicked-off the quarter’s new issuances with significant oversubscription and price tightening.

Trading volumes remained elevated as investors rebalanced their portfolios in anticipation of an active issuance environment. Foundation Re III Ltd. Series 2011-1 Class A was launched at $100 million; the deal ultimately closed at $135 million.

East Lane Re IV Ltd. gave secondary trading a boost as investors cleared room for a comparatively high-yield transaction. This spurred trading in both live catastrophe and dead catastrophe bonds (those with little to no risk remaining until maturity), pushing trading volumes at Aon Benfield Securities to levels not seen since 2008.

Trading Effects of Japan EventsActivity at the end of the first quarter was centered on the Tōhoku earthquake. Several ILS investors exited positions exposed to Japan Earthquake until the extent of the damage could be better understood. Although at the time of this publication it is still not clear as to the final loss to catastrophe bonds, it appears that only one bond will suffer a loss of principal, although all of the Japan earthquake bonds have suffered mark-to-market losses of some degree. The events in Japan also caused short term reduction in trading volumes of U.S.-based risks as investors focused on Japan. Interest around U.S. trading had begun to increase at press time.

For bonds exposed to Japan risk, pricing has moved from approximately par to levels resulting in a weighted average mark-to-market loss of approximately 30 percent at press time.

We expect the aggregation of recent major catastrophic events (including the Australian floods, New Zealand earthquakes and the Japan earthquake and tsunami) to minimally affect U.S. pricing of ILS. We also expect traditional reinsurance in peak zones in the U.S. and Europe to be unaffected by the reinsurance losses suffered thus far. And, while Australia, New Zealand and Japan have yet to experience major renewals since the catastrophic events, pricing could increase in these areas. Note that traditional reinsurance in Japan typically renews in April and, as a result of events in the region, most insurers are extending coverage while the impact is determined. While the ILS market has been largely uncompetitive in pricing these risks, there could be opportunities to gain momentum going forward.

Upcoming Maturities As noted above, investors will realize maturities of property/casualty catastrophe bonds totaling almost $2.4billion in the second quarter. As the primary market pipeline appears to be less active in Q2 2011 than it was the year prior, we expect downward pressure on ILS pricing as investors seek to reinvest the inflows from maturing bonds.

U.S. Earthquake

U.S. Hurricane

U.S. Other

Europe Windstorm

Japan

Rest of World

Life/Health

13%

8%

7%

18%

49%

2%

3%

Catastrophe Bonds Outstanding Amount By Peril (As af 03/31/2011)


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Q2’12

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Q1’11

1,245

371

2,384

0

400

0 0 0

711

329

1,372

0

Nat Cat Maturities Life/Health Maturities

Catastrophe Bond Maturities By Quarter


ILS Investors Contribute To Market Strength, Activity


The Aon Benfield ILS Indices are calculated by Thomson Reuters using month-end price data provided by Aon Benfield Securities. The ILS indices posted mixed results for the first quarter of 2011. Both the Aon Benfield All Bond and BB-rated Bond indices dipped into negative territory, driven down by mark-to-market losses on Japan Earthquake exposed bonds. The All Bond index posted a negative two percent return for the three months ending March 31, 2011 compared to a 3.4 percent return for the same period in 2010, while the BB-rated Bond index posted a negative 3.2 percent return for the most recent three month period versus 3.5 for the same period in 2010.

The U.S. Hurricane Bond and U.S. Earthquake Bond indices remained in positive territory gaining 0.9 percent and 1.2 percent respectively. The positive performance of the U.S. Hurricane Bond index was due to coupon returns despite slight mark-to-market losses.

We expect that spreads, and therefore prices, will remain relatively stable as we head into U.S. hurricane season. In the absence of any further significant global catastrophes, we expect strong performance from the index for the remainder of the year.

Aon Benfield ILS Indices

Index Title Index Value Return for Quarterly Period Ended March 31

Return for Annual Period Ended March 31

Aon Benfield ILS Indices 3/31/2011 12/31/2010 3/31/2010 12/31/2009 2011 2010 2011 2010

All Bond 231.17 235.98 219.96 212.81 -2.04% 3.36% 5.10% 14.59%

BB-rated Bond 218.24 225.47 211.05 203.95 -3.21% 3.48% 3.41% 14.48%

U.S. Hurricane Bond 231.35 229.29 214.71 207.99 0.89% 3.23% 7.75% 17.16%

U.S. Earthquake Bond 197.73 195.36 185.27 181.48 1.21% 2.09% 6.72% 7.21%

Benchmarks

3-5 Year U.S. Treasury Notes 302.45 302.72 289.94 286.22 --0.09% 1.30% 4.32% 0.61%

3-Year U.S. Corporate BB+ 375.72 370.34 348.93 335.82 1.45% 3.91% 7.68% 22.57%

S&P 500 1325.83 1257.64 1169.43 1115.10 5.42% 4.87% 13.37% 46.57%

ABS 3-5 Year, Fixed Rate 329.35 325.81 305.82 294.68 1.09% 3.78% 7.69% 24.63%

CMBS Fixed Rate 3-5 Year 252.42 247.44 226.29 212.99 2.01% 6.25% 11.54% 31.65%

January renewals proceeded smoothly within the collateralized reinsurance market. The Darfield New Zealand earthquake in September 2010 proved to have limited impact on covers due to exclusion or limits on contribution to aggregate covers. For similar reasons, other events — Australian flooding at the end of 2010 and into the early days of 2011, Tropical Cyclone Yasi and the February 22, 2011 Christchurch earthquake — are estimated to only marginally impact the sector. However, it remains unclear how the recent earthquake in Japan will affect the collateralized reinsurance market.

In cases where collateral is being held due to the encroachment of losses, collateralized reinsurers may attempt to negotiate a “roll-over” of the same assets into the next year’s collateral accounts. Depending on the level of adverse development risk, cedants may accept this in order to secure renewal capacity. However, if a further event or sequence of events occurs with sufficient size to increase cedants’ need to hold collateral against adverse development, there is an increased risk that these negotiations may be more difficult, possibly leading to future capacity constraints in this market.

Related Markets Update


3 Source: Aon Benfield Impact Forecasting and Aon Benfield Securities

The Event On March 11, a mega-earthquake and tsunami struck the northeastern coast of Japan, killing at least 12,300 people, injuring nearly 3,000 more and causing damage to at least 203,000 homes and other structures. The magnitude 9.0 earthquake struck with an epicenter 130 kilometers (80 miles) east of Sendai, Japan and 373 kilometers (231 miles) northeast of Tokyo at a depth of 24 kilometers (15 miles). Ground shaking from the temblor reportedly lasted for two full minutes. Following the main tremor, more than 830 aftershocks rattled the region with at least 57 shocks registering above magnitude 6.0. The Japanese government estimated total economic losses to range between JPY16 to 25 trillion (USD198 to 309 billion); while the World Bank estimated insured losses to fall between JPY1 to 3 trillion (USD14 to 33 billion).

In addition to relief and recovery, additional focus was placed on efforts to cool down fuel rods inside two damaged nuclear reactors at the Fukushima Daiichi plant facility. After the earthquake and subsequent tsunami, the facility lost electricity and back-up generators also failed. This caused the essential cooling systems to shut down, rendering them unable to cool the reactors.

Following the initial jolt, a tsunami with waves reaching heights in excess of 10 meters (32 feet) swept away thousands of homes, boats, cars and buildings, leaving excessive amounts of debris. The waves rushed several kilometers inland and flattened nearly everything in their path. One of the hardest hit coastal locations was in Sendai, where a nearly 10-meter (32 foot) wave of water submerged a large part of the city. Widespread damage to commercial facilities (including manufacturing sites for companies such as Toyota, Nissan, Honda and Sony) forced a stop in production. The earthquake also triggered multiple fires throughout Honshu. Many sections of the Tohoku Expressway serving northern Japan were severely damaged and all roads out of Tokyo towards quake-damaged areas were closed to all but emergency vehicles. Tokyo’s main Narita International Airport and its secondary Haneda Airport were both closed — leaving a combined 25,000 passengers stranded. Underground subway trains and bullet train service were also halted throughout the country, but have since been restored.

According to the Japan Meteorological Agency (jma), the earthquake may have ruptured the fault zone from Iwate to Ibaraki with a length of 400 kilometers (250 miles) and a width of 200 kilometers (120 miles). The agency noted that this event may have had the same mechanism as another large tremor that struck in 1869, which also spawned a large tsunami. It should be noted that Japan has a rigorous earthquake building code in direct response to being located on the Pacific Ocean ‘Ring of Fire’ — a highly seismic region where earthquakes and volcanoes are regularly recorded. Nearly 90 percent of the world’s earthquakes occur on this arc.

In recent global history, the current earthquake is the fifth strongest since 1900 and one of the strongest tremors ever recorded. The temblor was the largest since a magnitude 9.1 earthquake triggered a tsunami off northern Sumatra, Indonesia in December 2004 that left about 220,000 people dead or missing in 12 countries around the Indian Ocean. The earthquake was even stronger than the February 27, 2010 magnitude 8.8 tremor that struck Chile. The largest recorded earthquake in world history is the magnitude 9.5 earthquake that hit Chile on May 22, 1960.

Insurance Industry EffectsIn the wake of the earthquake and tsunami, there are many uncertainties ahead for the Japanese insurance industry. These uncertainties are dominated by the difficulty of securing reinsurance capacity, since the catastrophe occurred in the midst of its annual renewal process of treaty covers. It is too early to assess the ultimate outcome of the event, but debates continue over its impact on Japanese insurers, including whether or not the total insured losses (including those from the New Zealand earthquake) are significant enough to reverse the recent trend of falling prices for catastrophe cover.

Impact to the Catastrophe Bond MarketAt the time of publication, several catastrophe bonds with exposure to Japan earthquake may be impacted by the March 11 earthquake, including Montana Re Ltd.’s Class E and Topiary Capital Ltd.’s Series 2008-1, each of which have been placed on credit watch. Muteki Ltd.’s Series 2008-1 Class A has been downgraded. All these bonds, along with some of the other bonds exposed to Japan earthquake, depend on data from K-Net to determine losses. 693 K-Net stations have become available, and losses on Muteki Series 2008-1 Class A bonds appear to have reached the exhaustion level which will likely put investors at the risk of losing the principal on the bond. Two catastrophe bonds sponsored by Japanese insurers expiring in 2011 were expected to be renewed, but these renewals now remain unclear.

Japanese corporations in various sectors are suffering from Business Interruption and Contingent Business Interruption losses due to the continued power shortages resulting from the accident at the damaged nuclear plants. Catastrophe bonds can potentially provide viable options for such companies to mitigate their exposures in future earthquakes. Catastrophe bonds may also become a more realistic and relatively attractive option as an alternative to traditional cover if the capital markets can fully assess and absorb the impact of the March 11 event.

The Japan Earthquake and the Asia ILS Market 3


Catastrophe Bonds Exposed to Japan Earthquake Risk as of March 31, 2011 ($Millions)

Sponsor Issue Perils MaturityZenkyoren Muteki Ltd. Series 2008-1 Class A JP EQ May-11Flagstone Valais Re Ltd. Series 2008-1 Class A US/EU/JP Wind, US/JP EQ Jun-11Flagstone Valais Re Ltd. Series 2008-1 Class C US/EU/JP Wind, US/JP EQ Jun-11Swiss Re Vega Capital Ltd. Series 2008-1 Class A US/EU/JP Wind, US/JP EQ Jun-11Swiss Re Vega Capital Ltd. Series 2008-1 Class B US/EU/JP Wind, US/JP EQ Jun-11Swiss Re Vega Capital Ltd. Series 2008-1 Class C US/EU/JP Wind, US/JP EQ Jun-11Swiss Re Vega Capital Ltd. Series 2008-1 Class D US/EU/JP Wind, US/JP EQ Jun-11Platinum Underwriters Ltd. Topiary Capital Limited Series 2008-1 Class A US/EU W, US/JP EQ Aug-11Japan Railway East MIDORI Ltd. JP EQ Oct-12Swiss Re Successor X Ltd. Series 2010-1 Class II-BY3 US HU, EQ EU Wind, JP EQ Apr-13Scor Atlas VI Capital Limited Series 2009-1 Class A * EU Wind, JP EQ Apr-13Swiss Re Vega Capital Ltd. Series 2010-1 Class C US/EU/JP Wind, US/JP EQ Dec-13Swiss Re Vega Capital Ltd. Series 2010-1 Class D US/EU/JP Wind, US/JP EQ Dec-13Flagstone Montana Re Ltd. Series 2010-1 Class E US HU, EQ/EU Wind, JP HU, JP EQ Jan-14SCOR Global P&C SE Atlas VI Capital Limited Series 2010-1 Class A * EU Wind, JP EQ Apr-14


*Issued at €75 MM

The Events Beginning in December 2010, persistent heavy rains brought major flooding across eastern Australia which continued throughout the month of January. At least 36 people died and dozens more were injured in what became, in economic terms, “the costliest natural disaster in Australian history.” The most affected areas were Queensland, Victoria and New South Wales, though Queensland bore the brunt of the damage. More than 2.1 million people were affected by flash flooding from dozens of major rivers and tributaries overflowing their banks. Hundreds of cities, towns and villages were affected, including the Queensland capital, Brisbane. There was extensive damage to property, the transportation infrastructure, the coal mining industry and agriculture. Preliminary economic damages were listed at AUD5.6 billion (USD5.6 billion) by the government, though economists estimate that total economic losses could reach AUD20.0 billion (USD20.2 billion). The Insurance Council of Australia (“ICA”) declared four separate catastrophes during the floods, with more than 38,460 claims being filed in Queensland (including Brisbane, Lockyer Valley and Toowoomba) with an estimated value of AUD1.5 billion (USD1.5 billion). For Victoria, the ICA reported 4,780 claims with payouts totaling AUD69.0 million (USD69.5 million).

A magnitude 6.3 earthquake struck New Zealand’s South Island on February 22, causing widespread damage, fatalities and injuries. At least 161 people were killed, more than 2,000 were injured and dozens more remain missing. The epicenter was near the suburb of Lyttleton in Christchurch, at a shallow depth of 5.0 kilometers (3.1 miles). Extensive damage occurred throughout Christchurch as buildings collapsed into

roads, parked cars were buried under rubble, water, sewer and gas lines ruptured, streets and sidewalks split, bridges collapsed and fires burned in the city. Churches, government buildings, historic buildings, businesses in the central business district, homes and schools all sustained severe damage or were destroyed. According to the New Zealand government, total economic impact from the event is estimated between NZD10 to 15 billion (USD7.5 to 11.3 billion).

Insurance Industry Effects Determining insured losses from this event will be extremely difficult and complex given the intermingled damage with the Darfield earthquake of September 2010, which also impacted Christchurch. Despite the significant human impact of this event, as well as the impact to traditional insurers and reinsurers, it did not cause a principal loss to any outstanding catastrophe bonds.

Australia Flooding and New Zealand Earthquake


An Interview with Mr. David Lalonde, Senior Vice President of AIR WorldwideAon Benfield Securities recently spoke with David Lalonde of AIR Worldwide. Mr. Lalonde provided insight into the role of independent modeling in the Insurance-Linked Securities market.

1. WhatisyourfirmdoingtostaycurrentwiththeILSmarket?

AIR has been involved in the ILS market since its beginning in 1996. Over the years we have been intimately involved with the industry in expanding perils and triggers available for securitization.

Issuers are constantly seeking ways to reduce their overall basis risk and, to support them, AIR is committed to developing innovative, standardized trigger mechanisms that provide a transparent view of risk. To that end, we are supporting the Verisk Catastrophe Index, a standardized structure that uses AIR’s models and PCS’s state-level loss estimates to provide a more granular view of insured losses resulting from US hurricanes and earthquakes and help both issuers and investors minimize their basis risk.

Investors, on the other hand, expect software to analyze their portfolios that is both sophisticated and easy to use. They need to model the risk associated with their entire portfolio of ILS investments — in combination with traditional reinsurance contracts — both of which can span multiple regions and encompass many different perils. To help meet investors’ needs, AIR has added software functionality and services to allow investors in this market to better assess their risk. This included enhancing CATRADER’s portfolio management functionality to enable investors to easily perform sensitivity analyses and evaluate the marginal impact of changing the makeup of their portfolios. AIR has also built a Data Cube to provide additional reporting capabilities specifically designed to meet the reporting needs of the ILS market. This functionality provides a straightforward way for investors to obtain aggregate views of their risk by region, peril or trigger type.

2. Arethereextensionstothecurrentmodels,orotherupdatesthatarebeingconsideredtoday?

Over the course of the last two years, AIR has significantly updated many of the key models used in the ILS market including the Earthquake and Hurricane Models for the US, the Earthquake and Typhoon Models for Japan and the European Wind Storm Model.

In addition, AIR has continued to expand the scope of its modeling efforts to provide risk estimates for even more territories. In an update scheduled for later this year, we are significantly expanding the coverage of some key models including extending our Atlantic Tropical Cyclone Models to additional Caribbean islands and providing model coverage for Central America for the first time. AIR is also extending its model coverage in Europe for both winter storms and earthquakes to make these models truly pan-European in scope. Providing comprehensive coverage provides

issuers with more options for ILS offerings and allows them to include previously non-modeled territories in their catastrophe bonds.

Finally, AIR continues to explore models for other types of exposure and has developed models to help quantify the risk from extreme mortality events resulting from both earthquakes and terrorism. We also continue to research the role of models in capturing longevity risk largely driven by interest from the ILS market.

3. HowhasyourbusinessmodelchangedtomaintainyourcontributiontotheILSmarket?

We have always invested substantial resources throughout the enterprise to keep our models up-to-date, particularly those used most frequently for securitizations. We have also seen our ILS team grow substantially to handle the increasing volume of transactions in the marketplace. Finally, AIR has recently established a dedicated Decision Analytics team that is focused on developing advanced analytics solutions to leverage risk model output and support our clients’ decision making processes.

More and more, we expect to leverage AIR’s integration with other areas of Verisk Analytics to better serve our customers. Verisk also has substantial exposure information and claims data for both natural catastrophes and extreme mortality events, which AIR can leverage to improve our models and allow more types of risk to be securitized.

4. Lookingforward,whatissuesintheILSmarketwillneedtobeaddressed?

Certainly, there is still a great deal of room in the market to standardize around an established set of trigger types. In today’s market, many bonds feature customized structures for each transaction, and while there is still an appetite for customization, standardization may be a catalyst that ignites the growth of the ILS market. For issuers, more standardization means lower issuance costs, as each and every document would not be customized for each deal. For investors, simplified and standardized materials means less time spent investigating every component of every deal.

AIR is committed to increasing transparency in the ILS market and has participated in the development of standardized structures for ILS transactions. Going forward, AIR plans to develop other standardized indices for regions outside of the US providing issuers with solutions that help minimize basis risk. This includes expanding the marketplace to bring in multi-strategy investors who may not have the time or expertise to dedicate resources to understanding all of the intricacies of this market.


Aon Benfield Securities is providing this Insurance-Linked Securities First Quarter Update 2011 (ILS-1Q 2011) for informational purposes only. ILS-1Q 2011 is not intended as advice with respect to any specific situation, and should not be relied upon as such. In addition, readers should not place undue reliance on any forward-looking statements. Aon Benfield Securities undertakes no obligation to review or update any such statements based on changes, new developments or otherwise.

ILS-1Q 2011 is intended only for designated recipients, and it is not to be considered (1) an offer to sell any security, loan, or other financial product, (2) a solicitation or basis for any contract for purchase of any securities, loan, or other financial product, (3) an official confirmation, or (4) a statement of Aon Benfield Securities or its affiliates. With respect to indicative values, no representation is made that any transaction can be effected at the values provided and the values provided are not necessarily the value carried on Aon Benfield Securities’ books and records.

Discussions of tax, accounting, legal or actuarial matters are intended as general observations only based on Aon Benfield Securities’ experience, and should not be relied upon as tax, accounting, legal or actuarial advice. Readers should consult their own professional advisors on these matters as Aon Benfield Securities does not provide such advice.

Aon Benfield Securities makes no representation or warranty, whether express or implied that the products or services described in ILS-1Q 2011 are suitable or appropriate for any issuer, investor or participant, or in any location or jurisdiction. The products and services described in ILS-1Q 2011 are complex and speculative, and are intended for sophisticated issuers, investors, or participants capable of assessing the significant risks involved.

Except as otherwise noted, the information in the ILS-1Q 2011 was compiled by Aon Benfield Securities from sources it believes to be reliable. However, Aon Benfield Securities makes no representation or warranty as to the accuracy, reliability or completeness of such information, and the information should not be relied upon in making business, investment or other decisions.

Aon Benfield Securities and/or its affiliates may have independent business relationships with, and may have been or in the future will be compensated for services provided to, companies mentioned in the ILS-1Q 2011.

200 E. Randolph Street, Chicago, Illinois 60601 t: +1 312 381 5300 | f: +1 312 381 0160 | www.aonbenfield.com

Copyright Aon Benfield Inc. 2011 | #5900 - 04/2011

About Aon Benfield Securities

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, collateralized reinsurance, industry loss warranties, sidecars and derivative products. As a recognized leader in this investment banking market, Aon Benfield Securities is helping to redefine capital by offering underwriting and placement of new issues, financial advisory services, as well as securities trading in the secondary market. Aon Benfield Securities’ integration with Aon Benfield Inc.’s reinsurance operation expands its capability to provide 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 Corporation. Securities advice, products and services are offered solely though Aon Benfield Securities, Inc. and/or Aon Benfield Securities Limited.

About Aon Benfield

Aon Benfield is redefining the role of the reinsurance intermediary and capital advisor. Aon Benfield offers unbiased capital advice and customized access to reinsurance and alternative markets around the globe. As a trusted advocate, we provide local reach to the world’s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial, and rating agency advisory, and the right professionals to advise clients in making the optimal capital choice for their business. With an international network of more than 80 offices in 50 countries, our worldwide client base is able to access the broadest portfolio of integrated capital solutions and services.

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