insurance linked securities : innovation in risk transfer · 2. cat bond structure: a story of two...
TRANSCRIPT
Insurance Linked Securities :
Innovation in Risk Transfer
Dr Pierre WiartSenior Underwriter, Insurance Australia Group
Email: [email protected]
AGENDA
1. ILS and Reinsurance Review – Plenty of Capital ?
2. Cat Bond Structure: A Story of Two Tales
3. ILS and Cat Modeling – the Road to Innovation
4. Recent Innovations and Potential for Australia
Disclaimer
This presentation has been prepared for the Reinsurance Discussion Group. The content of this presentation represents the sole opinion of the author, and does not illustrate, represent, preview any of IAG’s views.
Part 1
ILS and Reinsurance Review
Plenty of Capital ?
ILS & ALTERNATIVE CAPITAL
WHAT’S THE FUSS ?
• 2017 : $78 bn (AonBenfield Analytics)
• Alternative Capital represents 13% of reinsurance capacity
• As of 2017, Cat Bonds represent $26 bn, Collateralised $40 bn , ILWs $4bn and
Sidecars $8 bn
CAT BOND AND SECURITIES MARKET
• Cat Bonds are structured for 3 to 5 years.
• Securities exchanged on secondary market
• Better to look at the outstanding
• Cat Bonds currently $26 bn of which $8.57 bn will mature in 2017
TOP 10 ILS FUND MANAGERS
10.2
7.5
6.5
5.2 5.1
4.3 4.13.5
3 3
9
5.4
3.1
4.3
0.8
2.8
1.81.4
2
1.2
Jan-17
Jun-16
Jan-16
Jun-15
Jan-15
Jun-14
Jan-14
Jun-13
AuM more than 20bn June 2013 to Jan 201719971997
20032003
20012001
20012001 20122012
2010201020052005
2008200820062006 20092009
$52.4 bn
$32 bn
PLENTY OF CAPITAL ?
Potential loss distribution for 1-in-200-year US hurricane (USD bn) - Source Deutsche Bank 2016
According to these figures :
� $12bn ILS loss wipes out 45% of the outstanding $26bn Cat Bonds
� $20bn Alternative Capital wipes out 50% of the $40bn collateralised deals
Source: Deutsche Bank
USD bn
Part 2
Cat Bonds – a Story of Two Tales
MultiCat Mexico - Class C - 2012
MULTICAT MEXICO - CLASS C - 2012
• Issuer / SPV: MultiCat Mexico Ltd. (Series 2012-1)
• Cedent / Sponsor (Fronting): Fund for Natural Disasters of Mexico (FONDEN (Swiss Re)
• Placement / structuring agent/s: Swiss Re Capital Markets, Goldman Sachs and Munich Re are
co-lead structurers. Swiss Re Capital Markets and Goldman Sachs are joint bookrunners
• Risk modelling / calculation agents: AIR Worldwide
• Risks / Perils covered: Mexico hurricane
• Size: Class C $100m ($315m All Classes)
• Trigger type: Parametric
• Ratings: S&P: Class C - 'B-'
• Date of issue: Oct 2012
• Date of maturity : 04/12/2015
• Coupon / pricing yield Class C: 7.50%
• How does it work?
MultiCat Mexico Class C
Trigger Central Pressure
<932 mb and >920 mb < 920 mb
Principal Amount Payment 50% 100%
MULTICAT C VS. HURRICANE ODILE
• Hurricane Odile : September 10 - 19 , 2014 on the
Pacific Coast of Mexico hitting the Baja California
peninsula
• At its peak, on September 14, Hurricane Odile
reached Category 4 status with 220 km/h wind
speed (1-min sustained) and a bottom pressure of
918 mbar
• Hurricane Odile landed on September 15 on the
southern tip of Baja California near Cabo San
Lucas
• The MultiCat Mexico 2012 catastrophe bond
features a parametric trigger. Central pressure of
the storm within the parametric box must fall
between 932mb and 920mb to result in a 50%
loss of principal, or below 920mb to cause a 100%
loss.
MultiCat Mexico Class C
Trigger Central Pressure
<932 mb and >920 mb < 920 mb
Principal Amount Payment 50% 100%
HURRICANE ODILE VS. MULTICAT MEXICO
941 mb
Class C Zone
? 930 mb
Hurricane Cat 3 Year (since 1842) Wind spead (at landfall) Landfall
Olivia 1967 205 km/h La Paz (North)
Kiko 1989 195 km/h San Jose del Cabo (North)
Odile 2014 200 km/h Cabo San Lucas
MULTICAT C VS. HURRICANE ODILE
HU ODILE September 15, 2014
• On September 19, the price felt to 52.38 (its
lowest price)
• For three months the outcome of the bond was
unclear as
• On December 23, AIR (the calculation agent)
reported that the hurricane’s central pressure
was not low enough to trigger the notes when
Odile moved into the parametric trigger zone
• Mark-to-Market impact
• Reduction of 50% of the price (anticipating a
reduction of 50% of the principal)
• On December 24, price back to 100.99
A YEAR LATER …..
Price Evolution after HU Odile
(Source Swiss Re)
30
40
50
60
70
80
90
100
110
Ask
Bid
HURRICANE PATRICIA VS. MULTICAT MEXICO
In contrast:
• A year later, in mid October, the 24th
named storm of the season, HU Patricia, developed South of Mexico
• Patricia grew from a tropical storm to a Category 5 hurricane in just 24 hours—a near-record pace
• On October 23, the hurricane achieved its record peak intensity with maximum sustained winds of 215 mph (345 km/h)
• Later the HU Patricia made landfall near Cuixmala, Jalisco, with winds of 150 mph (240 km/h), becoming the strongest landfalling HU on record on the Pacific Coast of Mexico
HU PATRICIA: A FREAK EVENT ?
Pierre Wiart - Convergence Partners Pty LtdImage credit: Patrick Marsh, @pmarshwx.
image credit: Michael Lowry, The
Weather Channel
Puerto Vallacarta
Manzanillo
NOAA Report issued on 04 Feb 2015
“Patricia made landfall around 2300 UTC along the coast of the Mexican state of Jalisco near Playa Cuixmala, about 45 n mi west-northwest of Manzanillo. Operationally, Patricia was assessed to have been of category 5 intensity with a landfall pressure of 920 mb, but a post analysis of additional data obtained later suggests that the hurricane had weakened more rapidly . . . A minimum central pressure of 932 mb at landfall is inferred from these data, with the uncertainty of this value likely on the order of 2-3 mb.”
-> 50% loss on MultiCat C
• According to Swiss Re Sigma 2014, HU Odile insured losses were USD 1.7 billion,
making Odile the second largest insured loss event ever in Mexico, after
Hurricane Wilma 2005 (USD 2.1 billion).
• In contrast, HU Patricia insured loss is around $200m if not less
MULTICAT PRICE EVOLUTION NOV 2015
Traded
26/10/2015 1MM+ @ 4.30
05/11/2015 1MM+ @ 9.50
06/11/2015 1MM+ @ 20.25
10/11/2015 1MM+ @20.25
Source: Trade Reporting and Compliance Engine (TRACE) – http://www.finra.org/
CAT BONDS TRIGGERED
Page 17/15
� Since 1996, hundreds of cat bond deals, natural disasters have triggered fewer than six and only two have produced litigation or arbitration
� Over $80bn of cumulative risk have been issue– Muteki Ltd., sponsored by Japanese agricultural insurance cooperative Zenkyoren Ltd., which
paid a $300 million total loss after the March 2011 Tohoku earthquake and tsunami
– Mariah Re Ltd., sponsored by American Family Mutual Insurance Co. of Madison, Wisconsin, which suffered total losses on two $100 million bond issues after severe Hail Storms struck the Midwest in 2011
– Kamp Re 2005 Ltd, sponsored by Zurich American Insurance Corp., which paid $144 million of its $190 million in principal on losses from Hurricane Katrina
– Avalon Re Ltd., sponsored by Bermuda-based Oil Casualty Insurance Ltd., which lost $12.7 million of the $135 million in principal on a junior tranche of notes after the 2007 Consolidated Edison steam pipe explosion in New York
– MultiCat Re 2012, sponsored by Fonden Mexico, paid $50m as 50% of 100m Class C tranche
– Gator Re 2014, sponsored by American Strategic Insurance Group, aggregate indemnity, paid $35m out of $200m note.
� Less than $1bn have been paid
Part 3
ILS and Cat Modeling:
the Road to Innovation
ILS AND CAT MODELING
• Pricing traditional reinsurance contracts relies often on multi
models and actuarial approach
• Cat Bonds (144a) are priced on one model …
• Cat bond lite (Reg D) and private placement are priced on
discretionary evaluation …
• Collaterised placement are a mix of the above…
• 3 Main Firms but a lot a new independent companies
CAT BOND ISSUANCES VS. MODELING AGENT
Modeling undisclosed as not required: Reg D, Private Deals,
Club Cat Bond, Securitization of ILWs etc
CAT BOND ISSUANCES VS. MODELLING AGENT
AIR Issuances e.g.
US Hurricane Risk And US All perils� Single State (Florida, Northeast, Gulf)
� Combined US Wind / EQ (ex New Madrid)
• Cranberry Re (MA Winds), Long point Re (Northeast WS)
• Pelican Re series (LA Hurricane)
• Citrus Re Series, Everglades Re Series, Armor (FL
Hurricane)
• Residential Re Series (USAA US All perils), Caelus Re
(Nationwide AP), Sanders Re series (Allstate US AP ex FL)
Combined WW regions� Combined US and EU Wind
� Japan TY and/or EQ
• Successor Series , Queens Street Series (Munich Re US
Wind EU Wind) Galileo Re (Catlin US wind Can EQ EU
Wind) …
• Kizuna Re series (TokioMarine JP EQ), Nakama Re series
(Zenkyoren JP EQ), Azora Re (Sompo JP TY) …
RMS Issuances e.g.
All NA perils bundled� US EQ (New Madrid)
� North America bundle
• Merna Re Series (State Farm US EQ New Madrid)
• Tradewynd Re (AIG US, CB, MX, Can All perils)
• East Lane Re Series (Chubb US All perils)
• VenTerra Re (QBE US EQ AU EQ AU CY) …
New perils� Turkey EQ
� UK Flood
� Storm Surge (NY)
• Bosphorus 1 Re (Turkish EQ Pool)
• Blue Wings Ltd (Allianz UK Flood)
• MetroCat Re (MTA surge NY) …
Other than Cat� Extreme mortality (US, UK, FR, JP)
� Worker Compensation
• Benu Capital (Axa Global Life) - Atlas IX Capital (Scor
Global Life) - Mythen Re and Vita Capital (Swiss Re)
extreme mortality US, UK, FR, JP
• Golden State Re Series (CA State Workers Compensation)
STUDY BY TRADING RISK ON SYNTHETIC ‘FLORIDA RE’
PORTFOLIO
Expected loss by Peril by Model
All graphs: source Trading Risk
0
1
2
3
4
5
6
7
8
AIR Eqecat RMS
Wind Storm Leakage
Demand Surge Sensitivity
0
2
4
6
8
10
12
14
16
AIR
(base)
AIR
(sensitivity)
Eqecat
(base)
Eqecat
(sensitivity)
RMS
(base)
RMS
(sensitivity)
Exhaustion probability Expected Loss Attachment probability
Range of Expected Loss by Model
1.7x
2.2x
Theoretical ‘Florida Re’ cat bond based on annual aggregate structure (to emphasize)
$10bn bond
Part 4
Recent Innovations and
Potential for Australia
INNOVATION - NEW PERIL CAT BONDS 2012 & 2015
� Metropolitan Transport Authority (MTA) suffered a $4.8 Billion Loss from
Sandy
� MTA has a $500 million insurance protection for Wind and Fire (no Surge) –
cost $46 million
� "For New York City, it's once every 175 years for a major hurricane and once
every 25 years for a hurricane.” James Franklin, NHC, NOAA
MetroCat Re 2012-1A
(SPI Bermuda)
PennUnion Re 2015-1A
(SPI Bermuda)
Maturity 3 years 3 years
Sponsor MTA Amtrak
Coupon MMY+ 450bps MMY+ 450bps
Expected Loss 171 bps 197 bps
Perils Covered Storm Surge NYC Storm Surge NYC + DE
Wind + EQ Northeast
Calculating Agent RMS RMS
Trigger Type Parametric Parametric
Principal Offer/Placed $125 m / $200m $200m / $275m
Horse Capital I DAC (Ireland) � Sponsor : Assicurazioni Generali
� Placed by Willis Capital Market & Securities
� First ever 144A Insurance Linked Security (ILS) placement on MTPL loss ratio (‘CTP’)
� Risk Modeling Agency: Milliman
� Structure as Indemnity based on Loss Ratio by Countries including Austria, Czech Republic, France, Germany, Italy, Spain and Switzerland
� 3 tranches of notes, each in the amount of €85 million - total amount of €255 million (up <40% than initial €180 million).
INNOVATION - HORSE CAPITAL 1 DAC 2016
Operational Re Ltd.� Sponsor : Credit Suisse via Zurich Insurance (fronting)
� First ever 144A Insurance Linked Security (ILS) placement on Operational Risk including:� BI due to IT failure
� Compliance issues
� Accounting and documentary errors
� Fraudulent behaviour of employees and third-parties
� Unauthorised employee activity (e.g. rogue trading)
� Risk Modeling Agency: Milliman
� Aggregate cover
� Modeling remained the biggest hurdle for investors
� Targeted CHF 630 million, placed CHF 220 million
� PB of modelling and correlation with CS ‘s stock
INNOVATION - OPERATIONAL RE 2016
AUSTRALIA - POTENTIAL FOR ILS ?
Securities (144A, Reg D, Private Cat Bonds) that involved Australia:
� Australis Ltd 1&2 (2006 & 2007) - $100m & $50m
� Vita Capital VI Ltd (2015-1)– AUS, CAN, UK mortality index - $100m
� VenTerra Re Ltd (Series 2013-1) - $250m
� ? Resilience Re (Series 1712) Willis Re “Club Cat Bond” - $187m
� Queens Street IX Re Ltd (2014-1) - $100m
� Queens Street X Re (2015) - $100m
� Queens Street XI Re dac (2015) - $100m
� Private note (zero-coupon) – Rewire (2015 & 2016) - $25m
� Galilei Re Ltd (2016-1) & (2017-1) - 2x $ 500m
� First used of PERILS index losses for Australia
6%
22%
10%
16%
15%
30%
Past Industry Losses (1967-
2014)
$0m $50m $100m $150m $200m $250m $300m $350m $400m $450m
0-1
1-3
3-10
10-20
20-50
50-100
100-200
200-250
250-500
500+
Average Annual Loss (AUD)
Re
turn
Pe
rio
d o
f La
yer
(Ye
ars
)
Australia Industry Modelled Losses (1/1/2015)
Source : COMBUS
AUSTRALIA: POTENTIAL FOR ILS ?
% Total Loss
ILS INVESTORS FROM AUSTRALIA
• Mostly SuperAnnuation Funds
• MLC switch from Nephila to AlphaCat >50m in 2015
• NZ Super - $53m to Elementum & 210m Leadenhall Capital
Partners (tot 2.4 % of NZ$30.1bn)
• Future Fund $100m Elementum 2015 + $? Kiskadee Hiscox
• QIC large amount but not public …
• AMP with Nephila $50m
• First State Super with Nephila
• Probably >2bn from Australian/NZ investors
ILS PERFORMANCE FOR INVESTORS
