future-proofing through ils and other reinsurance products · a monumental $1.4 billion cat bond on...

Aon Securities Inc. Proprietary & Confidential 1

INCON 2018

Future-proofing through ILS and Other Reinsurance Products

Risk. Reinsurance. Human Resources. 2

Introduction to Alternative Capital


Zach BreslinVice President, Investment Banking

Zach Breslin is a Vice President, Investment Banking at Aon Securities. In this role, Zach is responsible for the origination and structuring of various capital markets re/insurance solutions for Aon’s clients, along with assisting clients in third-party capital raising initiatives. Prior to joining Aon Securities, Zach was an Assistant Vice President and Canada Manager for Berkley Offshore Underwriting Managers, a wholly owned subsidiary of W.R. Berkley Corporation, an insurance holding company.

Zach earned a Bachelor of Science degree from Fordham University. Zach currently holds a Series 7 and Series 79 designation from FINRA and a Series 63 designation from NASAA.


17 22 19 22 24 28 44 50 64 72 81 89 95

385410

340

400

470 455

505540

575 565595 605 610

6%-17% 18%

18%-3% 11%

7%6% -2% 5%

2% 1%

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 2018

USD

(bill

ion)

Traditional capital Alternative capital Global reinsurer capital

Global reinsurance capital increased to USD $610 billion at the end of Q1 2018

While traditional capital was flat, alternative capital rose 7 percent

Global Alternative Capital Surge Continues

Source: Company financial statements, Aon Benfield Analytics, Aon Securities Inc.


Alternative Capital Fuels Competitive (Re)insurance Market

Source: Aon Securities Inc.

Alternative Capital Motivations

Cedents utilize both alternative and traditional capacity to create competition among markets- Catastrophe bonds help lower costs of capital and to diversify their reinsurance panel- Sidecars help expand footprints and grow key segments- Collateralized reinsurance works alongside traditional reinsurance placements- Third party capital management helps generate significant fee income

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2Q2018

USD

(bill

ion)

Collateralized Re

ILW

Sidecar

Cat Bond


S&P 500

REIT

Russell 1000

Small Stocks

Commodities

Non-US=EAFE

Cash

Bonds - Agg

High Yield

Emerging Mkts

US Treasuries

Aon ILS Index

-4%

-2%

0%

2%

4%

6%

8%

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12%

0% 5% 10% 15% 20% 25%

Ret

urn

Risk (Standard Deviation)

-50%

0%

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300%

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Aon ILS Index

3-5 Year BB US High Yield Index

3-5 Year U.S. Treasury Notes

S & P 500 Total Return Index

HFRX Global Hedge Fund Index

Strong, Stable Performance over TimeHigh Historical Returns with Relatively Low Volatility1

Investing in ILS has historically provided a high return per unit of risk taken compared to competing asset classes

The Aon ILS Index outperformed competing asset classes through stable performance over the past 18 years

Catastrophe Risk vs. Other Asset Classes

1Source: Bloomberg L.P., Aon Securities Inc.: Data from 12/31/2000 – 5/31/2018


Reinsurer Backed ILS ManagersSources risks through reinsurance partner and open reinsurance market

Manager Domicile AuM (USD M)

Markel / Cat Co Bermuda 6,100

Leadenhall UK 5,000

AlphaCat (Validus) Bermuda 3,660

RenRe Managers Bermuda 3,429

Aeolus Re Bermuda 3,000

SCOR Investment Partners France 1,445

Kiskadee (Hiscox) Bermuda 1,250

Mt. Logan Re (Everest) Bermuda 1,028

Pillar Capital (TransRe) Bermuda 643

Kinesis (Lancashire) Bermuda 400

Total 25,955

Top 10 ILS Funds by Manager Type

Independent ILS ManagersSources risks through open (re)insurance markets

Manager Domicile AuM (USD M)

Nephila Capital Bermuda 13,884

Credit Suisse Switzerland 9,000

Stone Ridge US 6,720

Securis UK 6,500

LGT Capital Management Switzerland 6,000

Fermat Capital Management US 5,828

Elementum Advisors US 3,397

Shroders Switzerland 3,040

Pioneer US 1,900

Twelve Capital Switzerland 1,800

Total 58,069

As of March 31, 2018

On Aug. 31, 2018, Markel announced that it will acquire Nephila Holdings Ltd. in an all-cash transaction. Subject to regulatory approvals and customary closing conditions, Markel expects the transaction to close in the fourth quarter of 2018

Source: Company financial statements, industry publications


Traditional Reinsurance

Retained Risk

Retained Risk

Collateralized Reinsurance

1-250 year(0.4%)

Cat Bonds

1-100 year(1.0%)

1-50 year(2.0%)

1-20 year(5.0%)

1-10 year(10.0%)

ILW

Side

car

Illustrative Reinsurance Tower Products and Typical Risks Covered

• Property

• Specialty (aviation, marine, etc.)

• Life/Health

• Mortgage Credit

• Lottery Winnings

• Property

• Specialty (aviation, marine, etc.)

• Agriculture

• Property

• Terrorism

• Workers’ Compensation

Cat Bonds

Sidecars and Collateralized Reinsurance

ILW

Alternative Capital Solutions in the Reinsurance Tower


Reinsurers Insurers Other

As of August 31, 2018

ILS Issuance remains robust

In total, just below $3.4 billion of bonds were issued during Q1 of 2018, a new high-water mark for first quarter issuance tallies, and far exceeds the 2016 and 2017 first quarter issuance volumes with each at approximately $2 billion

The second quarter of 2018 more than matched first quarter issuance volume, as both new and repeat sponsors continue to look toward the capital markets for capacity

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itize

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MA

MA

Pro

perty

Sta

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ion

LA C

itize

ns

2018

2017

2016

2015

2014


Outstanding Property Bonds by Sponsor


Process

An off balance sheet Special Purpose vehicle (“SPV”) is created to issue the notes

Proceeds from the issuance are placed into a collateral account or reinsurance trust account for the benefit of the sponsor

Proceeds in the collateral trust are invested to earn an investment yield less spread/expenses

The SPV enters into a reinsurance agreement/contract with the sponsor

The sponsor pays a premium to investors as consideration for the risk transfer capacity

If the bond’s recovery mechanism is triggered, the SPV foregoes the obligation to pay the interest or principal amount

Payment Amount

Note Proceeds

NoteProceeds

Collateral Account /Reinsurance Trust

Account

Investment Yield

Outstanding Principal Amount at Redemption

Issuer: Special Purpose

Entity (SPV)Sponsor

Investors(Principal At-Risk

Variable Rate Notes)

Investment Yield + Risk Interest Spread

(Re)insurance Agreement1

(Re)insurance Premium2

1 Risk Transfer Contract if utilizing a derivative structure2 Risk Transfer Premium if utilizing a derivative structure

Typical Catastrophe Bond Structure


Min Max

Slo

wFa

st

Rec

over

y S

peed

Basis Risk

Minimal basis risk (similar to traditional insurance)

Requires significant disclosure of underlying book of business

Price maybe dependent on quality of underlying exposure data

Recast modeled losses for historical events should be aligned with the sponsor’s actual losses

Full development of losses may delay recovery

Indemnity

Industry Index

Modeled Loss

Pure ParametricParametric

Index

Weighted Industry IndexBlended

Indemnity & Weighted

Industry Index

Indemnity

Catastrophe Bond Recovery Mechanism Options

Sponsor retains basis risk

No disclosure of underlying book of business

Accelerated claims payment following an event that triggers the recovery

Basis risk can be reduced with specific weight factors based on sponsor’s exposures

Parametric / Parametric Index

Sponsor retains basis risk

No disclosure of underlying book of business

PCS (US) industry loss estimates well accepted by investors; many bonds have now been based on PERILS (Europe)

Full development of losses may delay recovery

Basis risk can be reduced with weighting based on sponsor’s exposures

Industry Index / Weighted Industry Index Basis risk can be minimized

Limited disclosure of underlying book of business

Flexibility to change notional portfolio to reflect changes in underlying exposures over time

Accelerated claims payment following an event that triggers the recovery

Modeled Loss


Issuance Considerations from a Sponsor’s Perspective

Provides multi-year fixed-price protection

Collateralized limit to minimize counter-party credit risk

Additional / diversifying source of risk transfer capacity

Creates competition of risk transfer capacity

May lower the cost of risk transfer over time

Ability to use non-indemnity recovery structures

Benefits

Lack of reinstatement

Basis risk present if non-indemnity recovery mechanics used

Coverage limited to specified perils

Upfront transaction costs

Final commutation - long term development tail risk

Considerations

Risk. Reinsurance. Human Resources. 13

ILS and Florida


2018 began with an exciting first quarter marked by record level issuance volume, new entrants to markets and strong support from investors

Catastrophe bond issuance in 2018 YTD stands at $8.9 billion across 24 transactions – including a new record for a first quarter issuance of $3.4 billion that easily surpassed the 2016 and 2017 issuance volumes of approximately $2.2 billion

2018 Cat Bond Market Update

Competitive Market

Environment

Maturing property catastrophe bonds, totaling $4.37 billion during Q1 & Q2, were not only easily replaced, but also significantly expanded, bringing the market to a new high of $28.9 billion of catastrophe bonds on-risk as of August 4, 2018

With approximately $3.15 billion of property cat notional amount maturing from Q3 2018 through Q1 2019, Aon Securities believes investors will continue to redeploy this capital, along with additional capital raised, leading to the continued availability of capacity at competitive rates and terms

Continued Capital

Redeployment

A monumental $1.4 billion cat bond on behalf of the World Bank, brought emergency funding and disaster support following an earthquake to four Latin American countries – Chile, Colombia, Mexico, and Peru

Allstate secured terms among the broadest in the cat bond market, covering not only peak perils, but also severe weather, fires, and other perils, consistent with their traditional placement

FloodSmart Re Ltd. 2018-1 brought a new beneficiary to the market, in FEMA/NFIP, along with coverage for a new stand-alone peril, being flood resulting from Named Storms

Select Transaction Highlights


Property Cat Bond Maturities by Quarter

Property Cat Bond Issuance by QuarterProperty Cat Bond Issuance and Outstanding by Year

As of August 31, 2018

Total: $1,075M $430M $1,645M $1,515M

300 1,015 1,343520 1,210 1,494 2,015 1,970

3,3802,300 592

2,095 3,303

4,4922,652 800

6,378 4,029

232674

5291,441

250

650

925

4601,300

2,0181,990

1,888

1,8772,075

1,4251,850

1,353

0

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

$ M

illio

ns

Q1 Q2 Q3 Q4

225175

100

550250

300

345

400

425

430

150 715

500 100

Q3 2018 Q4 2018 Q1 2019 Q2 2019

EU JP Other US EQ US HU US MP WW MP

Property Cat Bond Metrics

2018

CompletedIssuances Sponsors Issuance

VolumeAverage Deal

Size

24 29 $8.9 $363

2017

CompletedIssuances Sponsors Issuance

Volume (B)Average Deal

Size (M)

35 30 $10.7 $305

* Denotes Aon Securities Inc. transactions

28,809

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,00022,00024,00026,00028,00030,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$ M

illio

ns

Property Cat Issuance Property Cat Outstanding


Property Cat Bond Market Review


Florida Private Market Update

2011 2017

Top Nationwide Insurers

Citizens

Florida-driven Insurers

Other

More than 75 percent of Citizens market share has been returned to the private market for homeowners insurance since 2011

Florida-driven companies (those with 80 percent of premium in Florida homeowners residential) have increased market share from nearly 36 percent to 47 percent in 2017

At the same time, PHS for the like for like group increased by over 150 percent to dramatically improve the financial position of those insurers

Source: Company financial statements, Aon Benfield Analytics, Aon Securities Inc.


30%

19%

24%

4%

3%

12%

7%

Rest of N. America HU

Florida HU

N. America EQ

N. America Other Perils

EU Wind and EQ

Japan EQ & Typhoon

R. of World Other Perils

Region / Peril Contribution of Outstanding Property Cat Bonds


The comparatively localized peril of Florida hurricane comprises a significant amount of the overall contribution to expected loss to all outstanding cat bonds

1

2

NOTE: Figures may not add to 100% due to roundingIncludes Australia EQ and Tropical Cyclone Includes Severe Thunderstorm, Winter Storm & Wildfire 2

1


Indemnity LAE

Cascading Structures

Top and DropMid-Year Risk

Spread Adjustments

Covered Area Adjustments

Dedicated“Second Event”

Cover

The catastrophe bond market continues to witness a further convergence of terms and conditions between traditional reinsurance and catastrophe bond capacity, leading to more uniform (re)insurance programs

While catastrophe bond’s multi-year, fully collateralized nature continues to offer a diversifying capacity source and a reduction in annual reinsurance program pricing volatility, sponsors have recently further customized cat bonds to fit the needs of a Florida-driven insurance company

Recent Coverage Enhancements

Continued Evolution of Florida-Driven Catastrophe Bonds


Size ($m)

Price at Aug 31 ‘17

Price at Sept 15 ‘17

Price at Oct. 6 ‘17

Price at Oct. 20 '17

Price at Nov 3 ‘17

Price at Nov 17 ‘17

Price at Dec. 1 ‘17

Price at Dec. 29 ’17

Price at Jan. 12 ’18

Price at Mar 29 ’18

Price at June 29 ’18

Change in Price Aug. 31

to Sep 15


to Oct 6


toOct 20


to Nov 3


to Nov 17


toDec 1


to Dec 29


to Jan 12


toMar 29


to Jun 29

Everglades Re II 2017 300 102.27 75 85 89.19 93.35 97.12 97.23 98.85 99.41 100.13 100.27 27% 17% 13% 9% 5% 5% 3% 3% 2% 2%

Casablanca Re 2017-1 A 66.95 100.65 97.5 97.52 98.78 99.14 99.13 99.07 100.11 100.56 99.83 100.12 3% 3% 2% 2% 2% 2% 1% 0% 1% 1%

Casablanca Re 2017-1 B 26.3 100.77 85 85 95.19 95.76 95.78 95.72 99.89 100.62 100.6 99.92 16% 16% 6% 5% 5% 5% 1% 0% 0% 1%

Casablanca Re 2017-1 C 6.75 102.08 5 20 50 50 50 60 70.16 70.44 67.5 45 95% 80% 51% 51% 51% 41% 31% 31% 34% 56%

Manatee Re 2016-1 A 75 99.78 97.5 97.59 98.49 99.1 99.13 99.05 100.57 100.68 99.74 99.87 2% 2% 1% 1% 1% 1% -1% -1% 0% 0%

Manatee Re 2016-1 C 20 100.82 20 0 0 0 0 0 0 0 0 0 80% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Citrus Re 2017-2 B 35 101.3 25 80 80 85 85 85 85 85.13 0 0 75% 21% 21% 16% 16% 16% 16% 16% 100% 100%Citrus Re 2017-1 A 125 100.89 80 96.04 96.31 96.5 96.5 96.42 96.2 99.32 90 75 21% 5% 5% 4% 4% 4% 5% 2% 11% 26%Citrus Re 2016-1 E 100 102.7 30 70 70 70 70 70 80 80.34 25 0 71% 32% 32% 32% 32% 32% 22% 22% 76% 100%Citrus Re 2016-1 D 150 102.93 75 92.5 96.5 99.18 99.16 99.03 100.25 100.21 100.41 85 27% 10% 6% 4% 4% 4% 3% 3% 2% 17%Citrus Re 2015-1 B 97.5 101.44 75 92.5 97 99.89 101.28 101.12 101.2 101.03 100 70 26% 9% 4% 2% 0% 0% 0% 0% 1% 31%

Citrus Re 2015-1 C 30 100.89 30 70 70 70 70 70 85 86.33 Extended Maturity 70% 31% 31% 31% 31% 31% 16% 14% Extended

MaturityIntegrity Re 2017-1 A 72 100.98 75 75 80 80 80 95.35 98.21 99.29 99.22 99.84 26% 26% 21% 21% 21% 6% 3% 2% 2% 1%Integrity Re 2017-1 B 3 102.06 50 50 50 50 50 85.01 92.5 92.59 93.69 97.8 51% 51% 51% 51% 51% 17% 9% 9% 8% 4%Integrity Re 2017-1 C 100 101.1 92.5 99.01 98.2 98.34 98.34 99.5 99.32 99.7 98.93 99.67 9% 2% 3% 3% 3% 2% 2% 1% 2% 1%Integrity Re 2017-1 D 35 101.77 90 97.5 98.12 98.27 98.27 99.33 99.14 99.69 98.87 99.44 12% 4% 4% 3% 3% 2% 3% 2% 3% 2%First Coast Re 2016 75 101.08 97.5 97.58 98.9 99.08 99.11 99.06 100.55 100.66 99.89 100.61 4% 3% 2% 2% 2% 2% 1% 0% 1% 0%First Coast Re 2017 175 100.66 95 95.07 96 96.14 96.15 96.67 98.6 98.8 98.09 100.01 6% 6% 5% 4% 4% 4% 2% 2% 3% 1%Sanders 2017-2 200 100.43 95 98.01 100.28 100.34 100.32 99.88 100.3 100.66 #N/A #N/A 5% 2% 0% 0% 0% 1% 0% 0% 0% #N/A

To date, $248 million of catastrophe bond notional amount has been paid out due to losses from Irma

Currently, $304 million is estimated to be the total catastrophe bond payout across all notes as losses continue to develop

Effect of Hurricane Irma on Florida-Driven Cat Bond Market

Source: Bloomberg L.P., Aon Securities Inc.


0 100 200 300 400 500

Safepoint

Avatar

Allstate

Security First

American Integrity

Heritage

Citizens Property

Integrity Re

2018-1 A, B

$ millions

2018 Issuance

2017 Issuance

2016 Issuance

Citrus Re 2017-1 A

Everglades Re II Ltd. 2017-1 A Everglades Re II Ltd. 2018-1 A

Integrity Re 2017-1 A, B

Integrity Re 2017-1 C

Integrity Re

2017-1 D

First Coast Re 2016-1 A

First Coast Re 2017-1 A

Sanders Re Ltd.2017-2 A

Casablanca Re Ltd. 2017-1 A, B, C

By total outstanding limit, these bonds with Florida as the primary covered area represent 6.92% of the property catastrophe bond market

– This percent decreases, however, when looking at the percent of the dollar value of expected loss from these bonds as compared to the entire market at 6.33%, showing the desire of investors to diversify their portfolios away from peak peril exposure

Manatee 2016-1 A, C

2015 Issuance

Citrus Re 2016-1 D-50

Citrus Re 2015-1 B

Outstanding Florida Catastrophe Bonds

Source: Bloomberg L.P., Aon Securities Inc.


The ILS Market in Florida: Going Forward

As the ILS market digested the implications from Irma and other 2017 events, ILS continued to demonstrate value to both sponsors and investors alike, with strong demand for more cat bond issuance on both sides

Florida hurricane coverage continues to be one of the cornerstones offered by the ILS market, placing it at the forefront of competitive terms & pricing

The ILS market continues to converge with traditional capacity sources in coverage terms and conditions, leaving Florida-driven sponsors well positioned to continue to customize issuances to the unique dynamics of the Florida insurance market

ILS capacity & market fundamentals remain robust, indicating alternative capital will continue to be a source of competitively priced and innovative reinsurance coverage in the Florida market for the foreseeable future


Contact ListZach Breslin

Vice President, Investment Banking

[email protected]


Disclaimer

This document or presentation and all of its contents (collectively, the “Document”) were intended for general informational purposes only. This Document is intended only for the designated recipient to whom it was originally delivered by Aon Securities Inc., Aon Securities Limited or its affiliates (collectively, “Aon”) and any other recipient to whose delivery Aon consents in writing (each, a “Recipient”). This Document is strictly confidential and no Recipient shall reproduce this Document (in whole or part) or disclose, provide or make available this Document, or any portion or summary hereof, to any third party without the express written consent of Aon. This Document is made available on an “as is” basis, and Aon makes no representation or warranty of any kind (whether express or implied), including without limitation in respect of the accuracy, completeness, timeliness, or sufficiency of the Document. This Document is not intended, nor shall it be considered, construed or deemed, as (1) an offer to sell or a solicitation of an offer to buy any security or any other financial product or asset, (2) an offer, solicitation, confirmation or any other basis to engage or effect in any transaction or contract (in respect of a security, financial product or otherwise), or (3) a statement of fact, advice or opinion by Aon or its directors, officers, employees, or representatives (collectively, the “Representatives”). Any potential transaction will be made or entered into only through definitive agreements and such other documentation as may be necessary, including, as applicable, any disclosure or offering materials provided by Aon Securities Inc. or its appropriately licensed affiliate(s). No representation, warranty or guarantee is made that any transaction can be effected at the values provided or assumed in this Document (or any values similar thereto) or that any transaction would result in the structures or outcomes provided or assumed in this Document (or any structures or outcomes similar thereto). Actual results may differ substantially from those indicated or assumed in this Document. Aon and its Representatives shall have no liability to any party for any claim, loss, damage or liability in any way arising from or relating to the use or review of this Document (including without limitation any actions or inactions, reliance or decisions based upon this Document), any errors in or omissions from this Document, or otherwise in connection with this Document. Aon does not provide and this Document does not constitute any form of legal, accounting, taxation, regulatory, or actuarial advice.

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