introduction to catastrophe bond issuance

1 CONFIDENTIAL ©2016 AIR WORLDWIDE

Introduction to

Catastrophe Bond

Issuance

Jeff Boyd, CCM


Catastrophe Bond Fundamentals

Selecting the Right Trigger

The Issuance Process

The Catastrophe Bond Market

Agenda



Insurance

Alternative

or Supplement

Balance Sheet Protection

Catastrophe

Risk Financing

Liability

Reduction

Liquidity Resilient

Re/Development

Disaster Response

& Recovery

Pandemic Prevention


Typical Structure of a Catastrophe Bond

Sponsor

Special-

Purpose

Reinsurer

Re/Insurance Agreement

Recoveries

Premium Payments

Investor

Offering Circular

Principal (at maturity)

Coupon Payments

Purchases Bond

Collateral

Account

Investment

Risk-Free Return


The Value Proposition of Catastrophe Bonds

Sponsor Benefits

Diversification of reinsurance sources

Competing capital sources & potential

cost savings

Collateralized protection

Highly customizable

Multi-year coverage & price stability

Investor Benefits

Diversifying asset class

High coupons relative to similarly rated fixed-

income products

Tradable, liquid notes

Low-volatility instrument


Catastrophe Bonds Are Not Highly Correlated with Financial Markets

Source: Bloomberg

Swiss Re

Cat Bond Index

Fidelity

US Bond Index

S&P 500


0.069

0.714

1.220 0.825 0.836

1.280 0.858

1.608

1.143 1.498

4.690

6.821

2.726

3.396

4.593

3.835

5.853

7.092

7.777

6.267

3.665

024681012141618202224262830323436

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Nu

mb

er

of

Issu

an

ces

An

nu

al

Issu

an

ce A

mo

un

t (U

SD

)

Th

ou

san

ds

Annual Issuance Amount (USD Billions) Number of Issuances

Catastrophe Bonds Have Become an Integral Strategic Risk-Transfer Tool

Sources: AIR, Artemis

Katrina

Rita

Wilma

Record

Tornado

Losses

Sandy

Financial

Crisis

Tohoku and

Christchurch

Ike

Ivan



Indemnity

Modeled Loss

Industry Loss Index Parametric

Hybrids


Defining and Dealing with Basis Risk

Basis risk is the difference between the losses you wish to protect against and the recoveries from the transaction

- Minimizing basis risk helps ensure you will receive a recovery when

you really need it - Optimize your structure to maximize the fit between your loss potential

and the transaction’s recoveries

- Lower basis risk is preferred by sponsors - Speedier loss determination and more transparent triggers are

preferred by investors (and sponsors) - There are trade-offs between time, transparency, and basis risk with

each trigger option


1st Generation

Parametric

(“Pure Parametric”

or “Cat-in-a-Box”)

2nd Generation

Parametric

(“Parametric Index”) Indemnity Modeled Loss Industry Loss Index

AIR Can Model All Traditional Cat Bond Triggers as well as Customized Triggers

HAZARD

ENGINEERING

FINANCIAL

Intensity

Calculation

Exposure

Information

Damage

Estimation

Event

Generation

Policy

Conditions

Magnitude &

Epicenter Ground

Motion

Insured

Loss

Insured

Loss

Calculations


First-Generation Parametric Trigger: Pure Parametric or “Cat-in-a-Box”


Second-Generation Parametric Trigger: Parametric Index

)05.0,0max(

,min 1043

1

32

jj

j

jjjjjjj

PGAx

CapxcxbxaValueEventIndex

Calculation Location Latitude Longitude aj bj cj Capj Peak Ground

Acceleration (PGAj)

Calculation Location contribution to Event Index

Value 1 35.297 136.750 0 0 0 0 0.17 0.00 2 35.297 136.915 0 0 20,993 459.7 0.14 13.16 … … … … … … … … …

1043 … … … … … … … …

Where:

aj, bj, cj, and Capj are the parameters at Location j

PGAj is the Peak Ground Acceleration (“PGA”) at Location j

Each j is one of the 1,043 Calculation Locations (the K-NET

stations), which record PGA


Industry Loss Index: Using Market Share of Insurance Industry


Modeled Loss Trigger: Using Actual Event Characteristics

HAZARD

ENGINEERING FINANCIAL

Intensity

Calculation

Exposure

Information

Damage

Estimation

Event

Generation

Policy

Conditions

Central Pressure &

Landfall Location Wind

Speed

Loss to

Catastrophe

Bond

Insured

Loss

Calculations


Modeled Loss Trigger: Using Actual Event Characteristics

HAZARD

ENGINEERING FINANCIAL

Intensity

Calculation

Exposure

Information

Damage

Estimation

Event

Generation

Policy

Conditions

Central Pressure &

Landfall Location Wind

Speed

Loss to

Catastrophe

Bond

Insured

Loss

Calculations

Exposure Information


Indemnity Loss Trigger: Ultimate Net Loss

Retained

Retained

Cat Bond A

Cat Bond B

Layer 2

Re

tain

ed

Layer 1

1st Event Cat

Coverage Program


Hybrid Cat Bond Triggers: Creative Terms

)05.0,0max(

,min 1043

1

32

jj

j

jjjjjjj

PGAx

CapxcxbxaValueIndexEvent



Origination

(Months – Years)

Structuring

(8 – 16 weeks)

Risk Modeling

Detailed Structuring

Offering Materials

Marketing

(2 – 4 weeks)

Structurer & Bookrunner

Trustee Bank

Risk Modeler

Legal Counsel

Rating Agency

Reporting Agency

Loss Reserve Specialist

Escrow Agent

Claims Reviewer


Risk Modeling - Common Trigger Types

Basis Risk

Tra

ns

pa

ren

cy

Indemnity

Parametric

Modeled

Loss Industry

Loss

Index


1 year

3 years

5 years

Occurrence Single

Issuance

Note

Program

Catastrophe Bonds Are Highly Customizable

Indemnity Modeled Loss Industry Loss Index Parametric Hybrids

Aggregate


Catastrophe Bonds Complement Traditional Reinsurance & Risk Financing

Retained

Retained

Collateralized Cat

Layer 1

Cat Bond A-1

Cat Bond B-1

1st Event Cat

Coverage Program

Cat Bond B-3

Pri

va

te R

ein

su

ran

ce

La

ye

r 3

Pri

vate

Rein

su

ran

ce

La

ye

r 2

Pri

va

te R

ein

su

ran

ce

La

ye

r 1

Cat

Bo

nd

C

-1

Cat Bond A-2

Cat Bond A-3

Cat Bond B-2 Cat

Bo

nd

C

-2

Cat

Bo

nd

C

-3

Cat

Bo

nd

C-5

Cat

Bo

nd

C-4

Cat

Bo

nd

C

-6

Aggregate

Cat Bond Y-2

Aggregate

Cat Bond X-3

Aggregate

Cat Bond Z-1

Retained

Occurrence Aggregate


The Catastrophe Bond Market


Catastrophe Bond Issuance by Region and Peril

*Multi-peril cat bonds were split into single perils based on their contribution to expected loss

64.2%

15.3%

5.3%

7.7%

7.5%

% of Total Outstanding Principal by Peril*

Sum of U.S. Hurricane

Sum of U.S. Earthquake

Sum of European Wind/Quake

Sum of Japan Wind/Quake

Sum of Other


Trends among Triggers and Sponsors

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Trigger Type by Issuance Amount

Indemnity Industry Loss Parametric Hybrid Modeled Loss

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Ceding Sector by Share of Issued Limit

Private Public


AIR Is the Leading Modeler of Catastrophe Bond Issuances

1,859

1,706

1,641

3,068

5,583

4,195

5,949

4,442

3,365

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Modeling Agent Distribution by Issuance Amount ($ million)

AIR

RMS

EQE

None


AIR’s Team Has a Proven Track Record of Outstanding Service

AIR has been the risk modeler of choice for close to USD 40 billion

of issuance since the inception of the ILS market


Thank you!

[email protected]

introduction to catastrophe bond issuance

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