2013 insurance linked-securities...coriolis capital limited spun out from societe generale 2003...

1

ConningJune 2013

2013 Insurance Linked-SecuritiesAs Alternative Risk Transfer Goes Mainstream, the Reinsurer Business Model Is Changing

2

Agenda

Overview of Insurance-Linked Securities

History and Development of the ILS Market

ILS Returns and Performance

ILS Investors

Considerations as an Asset Class

Growth Opportunities and Implications

3

Nontraditional Reinsurance Capacity, April 2013($ in billions)

Source: Guy Carpenter, Conning analysis

$6.0

$10.0

$13.0

$15.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Apr-13

USD

Bill

ions

Catastrophe Bonds

Collateralized Reinsurance

Retrocession/Sidecars

Industry Loss Warranties

Overview of ILS

4

Illustration of Reinsurance and ILS Products

Source: Conning analysis

Retention

Working Layers

High Layers Cat Bonds, ILWs

Traditional and Collateralized Reinsurance

Reinsurers, Sidecars

Typical RiskTransfer Product

Expected Loss/Rate-on-Line

Low

High

Overview of ILS

5

Example


Investors

Special Purpose Vehicle

Investors

Collateralized Reinsurer

Premium

Indemnity

Insurer

Premium

Indemnity

Catastrophe Bond Collateralized Reinsurance$100 (3-Year Bond) Limit $100 (Reinsurance Contract – 1 Year)

$8 (8%) Premium (ROL) $20 (20%)

$100 Investment $80

8% ROL + 0.5% Collateral (per year) Loss-Free Return $20

$100 Return of Principal / Release of Collateral

$80

8.5% (Premium + Interest on Collateral)

Return 25% ($20 / $80)

Cat BondCollateralizedReinsurance

Overview of ILS

6

Estimated Global Reinsurance Premiums and Occurrence Limits


All Other Property$82B

Property Cat

$18B

P&C Casualty$50B

Life$50B

• Property Cat Limits: $240B• ILS Capacity: $44B• ILS / Property Cat: 18%

Premiums: $200 Billion

Overview of ILS

7

Estimated Size of Property Catastrophe Market


Overview of ILS

8

Cumulative Cat Bond Issuances 1996-2012

Source: Aon Benfield Securities, Conning analysis

54%Insurers39%

5%2%

Government Entities

Corporates

Reinsurers

US Hurricane

20%

Japan Quake/

Typhoon6%

Rest of World:

Property2%

EU Wind, Quake,

MP9%

Extreme Mortality

6%Health

1%

Global Multiple Perils21%

US Multiple Perils22%

US Earthquake

13%

Catastrophe Bond Issuer by Type Catastrophe Bond Issuances by Peril

Overview of ILS

9

Catastrophe Bond Issuances($ in millions)

Source: Aon Benfield Securities, Artemis, Conning analysis

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Outstanding

Cat B

ondsCat

Bon

d Is

suan

ces

Cat Bond Issuance

Oustanding Cat Bonds

Market in Development Recovery and GrowthValidation• Resilience during

financial crisis• Investor demand driven

by efficiency and transparency

• Growth in issuance following Katrina

• Expansion of issuer base

• Infrequent one-off issuances• Many parametric bonds

History and Development

10

Sidecar Issuances by Year($ in millions)

Source: Aon Benfield Securities, Conning analysis

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

History and Development

11

ILS Index Performance

Note: Past performance is not a guarantee of future results

Source: Swiss Re, Conning analysis

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

100

120

140

160

180

200

220

240

Dec

-02

Jun-

03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Ann

ual I

LS In

dex

Perf

orm

ance

Cum

ulat

ive

Inde

x R

etur

nsCat Bond Index Annual Return

Cat Bond Index CumulativeReturnAverage Annual ILS IndexPerformance

HurricaneKatrina Financial Crisis

Tohoku / US

Tornadoes

HurricaneSandy


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ILS Index Return Components—All Cat Bonds

Source: Lane Financial, Conning analysis

Insurance-Related ReturnYield on

Insurance Price Total Collateral TotalYear Premium Change Insurance (Floating) Return2002 5.63% 1.23% 6.86% 1.93% 8.91%2003 5.26% 0.83% 6.09% 1.25% 7.41%2004 4.85% -0.59% 4.26% 1.50% 5.82%2005 4.78% -6.22% -1.44% 3.31% 1.84%2006 6.81% -0.68% 6.13% 5.27% 11.69%2007 7.11% 1.80% 8.91% 5.50% 14.86%2008 8.06% -6.78% 1.28% 1.35% 2.65%2009 7.20% 4.45% 11.65% 1.43% 13.22%2010 7.25% 3.26% 10.51% 1.18% 11.81%2011 7.71% -4.67% 3.04% 0.57% 3.63%2012 9.04% 0.59% 9.63% 0.60% 10.28%

Post-loss event pricing Price impact

from defaults and crisis

Total Return Swaps – no longer utilized


13

Catastrophe Bond Defaults

Catastrophe Bond Defaults—Significant or Total Loss of Principal

Catastrophe Bond: Muteki Ltd. Mariah Re Ltd. (Series 2010-1 / 2010-2) KAMP Re 2005

Issuer: Zenkyoren American Family Mutual Insurance Co. Zurich American

Covered Peril(s): Japan earthquake U.S. severe thunderstorm U.S. hurricane and U.S. earthquake

Size (MM): $300 $200 $190

Initial Rating: Ba2 (Moody's) B (S&P) / NR BB+ (S&P)

Date of Loss: Mar-11 Nov - 11 / Nov - 11 Aug-05

Cause of Loss: Tohoku Earthquake U.S. tornados (Joplin) Hurricane Katrina

Percentage of Investment Lost: 100% 100% 75%

Catastrophe Bond Defaults—Partial Loss of Principal

Transaction Year Issued Sponsor

$ Size

(millions) Loss Percentage Reason for Default

Kelvin Ltd. 1999 Koch Energy Trading $50 NA Temperatures

Avalon Re 2005 Oil Casualty Ins. Ltd. $405 9% in Class C Explosions

Carillon Ltd. 2006 Munich Re $84.5 NA Lehman failure

Ajax Re Ltd. 2007 Aspen Insurance $100 NA Lehman failure

Newton Re 2008 Catlin $150 Received collateral Lehman failure

Willow Re 2008 Allstate $250 NA Lehman failure

Source: Artemis, National Association of Insurance Commissioners, Conning analysis


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Historical Catastrophe Bond Performance


Source: Bloomberg, Conning analysis

40

90

140

190

240

290

1/1/

2002

5/1/

2002

9/1/

2002

1/1/

2003

5/1/

2003

9/1/

2003

1/1/

2004

5/1/

2004

9/1/

2004

1/1/

2005

5/1/

2005

9/1/

2005

1/1/

2006

5/1/

2006

9/1/

2006

1/1/

2007

5/1/

2007

9/1/

2007

1/1/

2008

5/1/

2008

9/1/

2008

1/1/

2009

5/1/

2009

9/1/

2009

1/1/

2010

5/1/

2010

9/1/

2010

1/1/

2011

5/1/

2011

9/1/

2011

1/1/

2012

5/1/

2012

9/1/

2012

1/1/

2013

S&P 500 Total Return Index

A.M. Best Reinsurance Total Return

Swiss Re Total Return Cat Bond Index

80

130

180

230

280

1/1/

2002

5/1/

2002

9/1/

2002

1/1/

2003

5/1/

2003

9/1/

2003

1/1/

2004

5/1/

2004

9/1/

2004

1/1/

2005

5/1/

2005

9/1/

2005

1/1/

2006

5/1/

2006

9/1/

2006

1/1/

2007

5/1/

2007

9/1/

2007

1/1/

2008

5/1/

2008

9/1/

2008

1/1/

2009

5/1/

2009

9/1/

2009

1/1/

2010

5/1/

2010

9/1/

2010

1/1/

2011

5/1/

2011

9/1/

2011

1/1/

2012

5/1/

2012

9/1/

2012

1/1/

2013

Barclays US Corporate High Yield Total ReturnIndexBarclays US Secruitized Total Return Index:MBS/ABS/CMBSSwiss Re Total Return Cat Bond Index


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Investment Options


Security Type Investment VehicleIllustrative Investor

Type

Debt • Cat Bond • Alternative Asset Fixed Income

Equity• ILS Fund• Public Reinsurer• Sidecars

• Hedge Fund• Institutional

Investor• Private Equity

Derivative • ILW• Insurer• Non-Insurer

Counterparty

ILS Investors

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Selected ILS Managers

Source: Company websites, Conning analysis

YearILS Fund / Company Sponsor(s) / Investor(s) Founded

Aeolus Capital Management Warburg Pincus, Merrill Lynch Private Equity, Arch Capital, Allied World 2006

CatCo Investment Management Qatar Insurance Co., J.P. Morgan Asset Mgmt., Henderson Global Investors, Baillie Gifford, Co-operative Insurance Society

2010

Coriolis Capital Limited Spun out from Societe Generale 2003

Credit Suisse Insurance Limited Strategies

Credit Suisse NA

D.E. Shaw & Co. NA 2006

Elementum Advisors, LLC NA 2009

Eskatos Capital Management NA 2008

Fermat Capital Management NA 2001

ILS Capital Management NA 2012

Iris Reinsurance Ltd. Joint Venture - Cartesian Capital and Aspen Insurance 2009

Leadenhall Capital Partners Amlin Group 2008

Leine Investment General Partner Hannover Re 2008

LGT Capital Management (1) NA 2012

Nephila Capital Originally Willis Group, now partnered with Man Investments, KKR 1997

Pentelia Capital Management White Mountains, Nataxis 2007

Pillar Capital Management Aquiline Capital Partners, Marsh & McLennan, management, Transatlantic Re

2008

Plenum Investments Ltd. NA 2001

Securis Investment Partners Northill Capital (2012), replaced Swiss Re and Stone Point Capital 2006

Traymar Capital Stategic relationship with The Coventry Group 2010

Twelve Capital Management owned 2010

ILS Investors

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Reinsurers—Participation in ILS

Source: Company websites, Conning analysis

ReinsurerSponsor /

IssuerILS

InvestorAllied World

Alterra Capital

Amlin

Arch Capital

Argo Group

Aspen

AXIS

Beazley

Catlin

Endurance

Everest Re

Greenlight Re

Hannover Re

Hiscox

Lancashire

ReinsurerSponsor /

IssuerILS

InvestorMontpelier Re

Munich Re

PaCRe

Partner Re

Platinum

Renaissance Re

S.A.C Re

SCOR

Swiss Re

Third Point

Tokio Marine

Transatlantic

Validus Re

White Mountains

XL Group

ILS Investors

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Correlation to Catastrophe Bonds: 5-Year Average Projected Simulations

0%5%

10%15%20%25%30%35%40%45%

U.S

. Mun

i (3-

5 Y)

U.S

. MB

S

U.S

. CM

BS

U.S

. Gov

(3-5

Y)

U.S

. Cor

p (3

-5 Y

)

U.S

. AB

S

U.S

. HY

PE

EM

D

EA

FE

HFR

X G

loba

l HF

Inde

x

U.S

. Lar

ge C

ap

Col

late

raliz

ed R

eins

uran

ce

Cor

rela

tion

to C

at B

onds

(%)

Source: Bloomberg, Pillar Capital Management Ltd., Conning analysis


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Historical Average Total Return and Standard Deviation—Selected Asset Classes

Swiss Re Cat Bond

Barclays US Corporate High Yield

S&P 500

Barclays US Aggregate

S&P Private Equity

MSCI EAFE

Barclays Global Emerging Markets

HFRI

3 Month Treasuries

2%

4%

6%

8%

10%

12%

14%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Ave

rage

Tot

al R

etur

ns

Standard Deviation


Source: Bloomberg, New York University, Conning analysis


20

Loss Probabilities and Return Distributions

Note: Past performance is not a guarantee of future resultsSource: Bloomberg, Pillar Capital Management Ltd., Conning analysis

0%

10%

20%

30%

40%

MSCI EAFE S&P PE MSCI EM CollateralizedReinsurance

Global HedgeFund Index

S&P 500 Barclays USCorp HY

Barclays USAgg Index

Historical Loss Probabilities for Various Asset Classes


21

Total Return Efficient Frontier

Source: Conning’s ADVISE® model

Disclosure: The efficient frontier does not reflect the deduction of investment management and transaction fees that the client may incur. All dividends and other earnings are assumed to be reinvested annually.

AB

CD

EF

GH

I J

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Ave

rage

Standard Deviation

With ILS

Without ILS

ABCD

EF

GH

IJ

K

-10%

-5%

0%

5%

10%

15%

-80% -30% 20% 70% 120% 170%

Cha

nge

in E

cono

mic

Val

ue fr

om

Cur

rent

Indu

stry

Change in Standard Deviation from Current Industry

Without ILS

W/ILS ConstrainedCurrent Industry

Constraints include CML and Private Placements capped at 15% each, High yield capped at 5%, US equities capped at 2%, Private Equity and EMD capped at 1% each, and ILS capped at 10%.

Economic Value of Illustrative Life Insurer

Asset Only


22

Catastrophe Bonds Held by Insurers (2011)($ in millions)

Data source: © A.M. Best Company — used by permission, Conning analysis

Number of CarryingCompany Bonds ValueGenworth 19 $76.9Protective Life 10 13.3Nuclear Electric 9 13.1Reassure America Life 5 25.0Pacific Life 4 34.0United of Omaha Life 1 20.0TIAA-CREF 1 5.0Thrivent Financial 1 5.0Texas Life 1 2.0Wilton Re 1 1.9New York Life 1 0.75Total 53 $197.0


23

U.S. Property Catastrophe Rate on Line Index

0

50

100

150

200

250

300

‐20%

0%

20%

40%

60%

80%

100%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Cumulative RO

L Inde

x (Base 1990

= 100)

Year over Y

ear C

hange in Rate on

Line

(Base 1990)

YoYChange CumulativeROLIndex



24

Global Property Catastrophe Rate on Line Index



25

ILS—Diversification for Issuers and Investors

Re/Insurer(Issuers)

Capital Markets(Investors)

Diversification ILS Investments(cat risk)

Removal of Peak Risks /

Alternative Capital Source



26

Traditional Reinsurance vs. Capital Markets—the Cultural Differences Can Be Stark

Traditional Reinsurance ILS Market

“All risks are covered, except those specifically excluded…”

“All risks are excluded, except those specifically included…”


27

Conning & Company is the parent of Conning, Inc., Goodwin Capital Advisers, Inc. and Conning Investment Products, Inc., a FINRA-registered broker dealer,and an affiliate of Conning Asset Management Limited, and Cathay Conning Asset Management Limited (CCAM) (together, “Conning”). Conning is a portfoliocompany of the funds managed by Aquiline Capital Partners LLC (a New York-based private equity firm,) with offices in Hartford, Purchase, London, Cologne,and Hong Kong.

Conning, Inc. and Goodwin Capital Advisers, Inc. are registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of1940. Conning, Inc. is also registered with the Ontario Securities Commission. Conning Asset Management Limited is authorized and regulated by the UnitedKingdom's Financial Services Authority and Cathay Conning Asset Management Limited is regulated by Hong Kong’s Securities and Futures Commission.Conning primarily provides asset management services for third-party assets. Conning predominantly invests client portfolios in fixed income strategies inaccordance with guidelines supplied by its institutional clients.

Conning, Inc. is registered as an Investment Adviser with the SEC and has noticed other jurisdictions it is conducting securities advisory business when requiredby law. In any other jurisdictions where it has not provided notice and is not exempt or excluded from those laws, it cannot transact business as an investmentadviser and may not be able to respond to individual inquiries if the response could potentially lead to a transaction in securities.

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Disclosure

28

About Conning

Conning (www.conning.com) is a leading investment management company for the global insurance industry, with more than $91 billion in assets under management as of December 31, 2012 through

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management solutions, and insurance research helps clients achieve their financial goals through customized business and investment strategies. Founded in 1912, Conning is focused on the future,

providing clients with innovative solutions, leveraging its global capabilities, investment experience, and proprietary research. The company is headquartered in Hartford, Connecticut, with additional offices in

Purchase, London, Cologne, and Hong Kong.

Insurance Research

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company of the funds managed by Aquiline Capital Partners LLC (“Aquiline”), a New York‐based private equity firm.

2013 insurance linked-securities...coriolis capital limited spun out from societe generale 2003...

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