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Insurance-Linked Securities: First Quarter 2011 Update

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

Catastrophe Bond Market Review

First Quarter Transactions

Again 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.

Outstanding Catastrophe Bond Volume By Quarter

40,000

35,000

30,000

25,000

$ Millions

20,000

15,000

15,830

14,380

14,225

13,249

13,360

14,570

13,202

13,167

12,219

13,747

13,146

10,000

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.

5,000

Q3

Q4 Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

’08

’08 ’09

’09

’09

’09

’10

’10

’10

’10

’11

0

Nat Cat Outstanding Cumulative Nat Cat Issuance

Source: Aon Benfield Securities

Life/Health Outstanding Total Cumulative Issuance

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 oers 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.

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 aliate 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 Update

At 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.

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