Insurance-Linked Securities Market Update

Insurance-Linked Securities market update

Volume XXIX, August 2018 2 Swiss Re Insurance-Linked Securities market update – August 2018 Table of contents

Introduction 03

New issuance 06

Trading and relative value 11

Swiss Re Global Cat Bond Total Return Index 17

New sponsors 18

Deal Focus: Pacific Alliance 19

Sector data 20

Swiss Re Insurance-Linked Securities market update – August 2018 1 2 Swiss Re Insurance-Linked Securities market update – August 2018 Introduction The first half of 2018 demonstrated once again that the Insurance-Linked Securities (ILS) market is effective in providing re/insurance protection, even in years following frequent and sizeable catastrophic events. Estimates reported by Swiss Re Institute’s sigma placed insured losses for global natural catastrophe events at USD 136.06bn in 20171, an 186% increase from USD 47.56bn insured losses in 2016.

During 1Q, USD 3.28bn of 144A notes were issued across six transactions covering extreme morbidity, earthquake and US multi-peril. The historically strong 2Q saw USD 4.029bn notional issued across 14 separate transactions, mostly covering US multi-peril, or state-specific wind coverage, leaving 1H 2018 with a total of USD 7.309bn in new issuance.

As investors patiently awaited loss developments for the latter half of 2017’s catastrophic US hurricane and wildfire events, appetites were uninhibited by potential losses and investors continued to allocate capital to ILS at a relatively stable price during the first half of the year.

Along with seasoned sponsors, five new sponsors sought ILS coverage to help close the protection gap or complement traditional reinsurance in 1H 2018.

1As of June 30, 2018

Swiss Re Insurance-Linked Securities market update – August 2018 3 Figure 1 Deal name Settlement date Notional (m) Peril1,2 New issuance Vitality Re IX Series 2018 January 29, 2018 USD 140 Extreme Morbidity January 1, 2018–June 30, 2018 Class A Vitality Re IX Series 2018 January 29, 2018 USD 60 Extreme Morbidity Class B IBRD CAR 116 February 7, 2018 USD 500 Chile EQ IBRD CAR 117 February 7, 2018 USD 400 Colombia EQ IBRD CAR 118 Class A February 7, 2018 USD 160 MEX EQ IBRD CAR 119 Class B February 7, 2018 USD 100 MEX EQ IBRD CAR 120 February 7, 2018 USD 200 Peru EQ Nakama Re 2018-1 Class 1 March 1, 2018 USD 500 JP EQ Nakama Re 2018-1 Class 2 March 1, 2018 USD 200 JP EQ Kizuna Re 2018-1 Class A March 28, 2018 USD 150 JP EQ Kizuna Re 2018-1 Class B March 28, 2018 USD 50 JP EQ Akibare Re 2018-1 Class A March 28, 2018 USD 220 JP WS, JP EQ Akibare Re 2018-1 Class B March 28, 2018 USD 100 JP WS Sanders Re 2018-1 Class A March 29, 2018 USD 500 US WS, EQ, ST, Fire, Other Peril Manatee Re II 2018-1 Class A April 3, 2018 USD 160 US WS, US ST Manatee Re II 2018-1 Class B April 3, 2018 USD 40 US WS, US ST Armor Re II 2018-1 April 13, 2018 USD 100 US WS, EQ Integrity Re 2018-1 Class A April 23, 2018 USD 75 FL WS Integrity Re 2018-1 Class B April 23, 2018 USD 4 FL WS Kendall Re Series 2018-1 April 25, 2018 USD 225 US WS, US EQ, US WF, EU WS Pelican IV Re 2018-1 Class A April 27, 2018 USD 100 LA WS Kilimanjaro Re 2018-1 A-1 April 30, 2018 USD 62.5 US EQ, WS; CAN EQ, WS Kilimanjaro Re 2018-1 B-1 April 30, 2018 USD 200 US EQ, WS; CAN EQ, WS Kilimanjaro Re 2018-2 A-2 April 30, 2018 USD 62.5 US EQ, WS; CAN EQ, WS Kilimanjaro Re 2018-2 B-2 April 30, 2018 USD 200 US EQ, WS; CAN EQ, WS Caelus Re V 2018-1 Class A May 10, 2018 USD 125 US WS, EQ, ST, WT, WF, VE, MI and Other Peril Caelus Re V 2018-1 Class B May 10, 2018 USD 75 US WS, EQ, ST, WT, WF, VE, MI and Other Peril Caelus Re V 2018-1 Class C May 10, 2018 USD 175 US WS, EQ, ST, WT, WF, VE, MI and Other Peril Caelus Re V 2018-1 Class D May 10, 2018 USD 75 US WS, EQ, ST, WT, WF, VE, MI and Other Peril Residential Re Series 2018-1 May 14, 2018 USD 100 US WS, US EQ, US ST, Class 11 US WT, US WF, US MI, US VE, US Others

4 Swiss Re Insurance-Linked Securities market update – August 2018 Deal name Settlement date Notional (m) Peril1,2 Residential Re May 14, 2018 USD 200 US WS, US EQ, US ST, Series 2018-1 Class 13 US WT, US WF, US MI, US VE, US Others Everglades Re II Ltd. May 15, 2018 USD 250 FL WS Series 2018-1 Class A Bowline Re Ltd. 2018-1 May 16, 2018 USD 250 US WS, EQ, ST; CAN Class A WS, EQ, ST Long Point Re III Ltd. May 24, 2018 USD 500 US WS, EQ, ST, WS 2018-1 Class A Alamo Re Ltd. Series May 30, 2018 USD 400 TX WS 2018-1 Class A Atlas Capital UK 2018 PLC May 31, 2018 USD 300 US WS, US EQ, EU WS Frontline Re Ltd 2018-1 June 26, 2018 USD 250 FL WS, SC WS, NC WS, Class A AL WS Frontline Re Ltd 2018-1 June 26, 2018 USD 100 FL WS, SC WS, NC WS, Class B AL WS

Source: Swiss Re Capital Markets (See Risk factors on p. 23)

1 US = United States, CAN = Canada, EU = Europe, JP = Japan, AUS = Australia, NM = New Madrid, FL = Florida, HI = Hawaii, LA = Louisiana, NY = New York, TX = Texas, US VI = US Virgin Islands, PR = Puerto Rico, SC = South Carolina, NC = North Carolina, AL = Alabama, MEX = Mexico

2 WS = Wind storm, EQ = Earthquake, ST = Severe thunderstorm, WT = Winter storm, WF = Wildfire, VE = Volcanic eruption, MI = Meteor impact

Swiss Re Insurance-Linked Securities market update – August 2018 5 New issuance

While not quite reaching the issuance levels of 1H 2017’s USD 8.4bn, the first half of 2018’s new issuance closely trailed behind with USD 3.28bn and USD 4.029bn for 1Q and 2Q, respectively, bringing the 1H 2018 total to USD 7.309bn. Notably, 1Q 2018 was the largest issuance for any 1Q on record, and 2Q 2018 issuance was second only to 2Q 2017. That said, issuance for the first and second quarters are generally larger than the latter half of the year, with sponsors seeking coverage ahead of the US hurricane and severe thunderstorm season.

Figure 2 Historical quarterly issuance

12 000 in USD m

10 000 1351

780 8 000

2049 2075

1820 6 000 316 1525

1847 1888 6230 4029 650 1621 2115 2234 4 000 2395 803 4492 1989 925 855 2962 320 3525 1675 232 2095 800 2 000 3303 1024 694 1872 2074 411 3280 190 2100 742 810 2070 2170 1493 1410 1694 1268 1015 736 821 616 575 670 0 20 300 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

Q1 Q2 Q3 Q4

Source: Swiss Re Capital Markets; as of June 30, 2018

The ILS market saw 20 new deals priced across 38 different tranches during 1H, with an average deal size of roughly USD 365m, far surpassing the prior record set in 2014 of USD 329m. Overall, notional outstanding in the ILS market was USD 29.11bn at the end of 1H 2018, up 8.39% from the year-end total in 2017 of USD 26.85bn.

6 Swiss Re Insurance-Linked Securities market update – August 2018 Figure 3 Yearly issuance and outstanding ILS bonds

30 USD bn

29.11

26.9 Outstanding from previous years

25 24.1 23.9 24.1 Issued

20 20.2

16.3 21.2 16.0 15.8 15 15.1 14.1 17.4 18.2 14.0 13.9 13.7 12.8

9.8 10 10.4 8.5 8.9 10.5 9.3 4.7 11.1 6.6 10.5 5 4.84.8 4.1 2.2 8.2 7.31 2.8 7.4 2.4 3.7 6.6 6.3 6.5 1.9 5.7 5.0 5.9 0.91.0 0.8 1.4 1.8 3.5 4.4 0.7 0.2 0.2 2.6 2.5 3.0 0 0.7 0.7 0.8 1.1 1.0 1.0 1.1 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Issued Outstanding from previous years

Source: Swiss Re Capital Markets; as of June 30, 2018

New-issuance spreads stabilized after experiencing a short lived widening period in the aftermath of 2017’s catastrophe events. The weighted-average spread for cat bonds within the Swiss Re Global Cat Bond Index declined from 5.10% at the end of 2017 to 4.91% at the end of 1H 2018. Weighted average expected loss (EL) decreased slightly from year-end 2017’s 2.49% to 2.47% at the end of 1H 2018. While there were conversations about market prices hardening after last year’s events, the first half of 2018 proved that investors continue to find the ILS space attractive.

Swiss Re Insurance-Linked Securities market update – August 2018 7 New issuance

10 Figure 4 Historical EL’s and stated spreads of the Swiss Re Global Cat Bond Total Return by 8 component

0 2002 2004 2006 2008 2010 2012 2014 2016 2018

Stated Spread EL Source: Swiss Re Capital Markets; as of June 30, 2018

In 1Q 2018, there was a total of USD 200m of primary issuance covering extreme morbidity, USD 1.36 bn of Latin American earthquake (Pacific Alliance), USD 900 m of Japanese earthquake, USD 220m of Japanese multi-peril, USD 100m of Japanese wind storm, and USD 500m of US multi-peril.

2Q 2018 issuance continued strong with USD 1.775bn of US multi-peril, USD 329m of Florida wind storm, USD 100m of Louisiana wind storm, USD 1.075bn of multi-regional multi-peril, USD 400m of Texas wind storm, and USD 350m of pure US wind storm.

Figure 5 2500 Monthly issuance by peril 400 2000 550 1500 500 250 100 1000 220 525 1360 100 1250 500 900 79 525 0 200 350 Jan Feb Mar Apr May Jun US Wind Louisiana Wind JP Wind Latin America Extreme Morbidity JP Multiperil Florida Wind Texas Wind Texas Wind Florida Wind JP Multiperil Extreme Morbidity Latin America JP Wind Louisiana Wind US Wind Multiregional Multiperil US Multiperil JP Earthquake JP Earthquake US Multiperil Multiregional Multiperil

Source: Swiss Re Capital Markets; as of June 30, 2018

The extensive 1H 2018 pipeline and maturity schedule for 1Q and 2Q had investors keen on rebalancing their portfolios and quickly redeploying capital to the ILS market. This approach from investors continues to create favorable issuance conditions for new sponsors that are considering diversifying their reinsurance capacity with insurance- linked securities.

8 Swiss Re Insurance-Linked Securities market update – August 2018 Figure 6 1H 2018 cat-bond maturities

Issuer Maturity Size (USD m) Peril Calypso Capital II Class B January 8, 2018 223 EU WS Galileo Re Ltd. Series 2015-1 Class A January 8, 2018 300 US WS,US EQ, CAN EQ,EU WS Loma Reinsurance 2013-1 Class A January 8, 2018 32 US WS, EQ, CS; CAN EQ; CR EQ, WS Loma Reinsurance 2013-1 Class B January 8, 2018 75 US WS, EQ, CS; CAN EQ; CR EQ, WS Tradewynd Re Ltd. 2014-1 Class 3-A January 8, 2018 100 US WS, US EQ Tradewynd Re Ltd. 2014-1 Class 3-B January 8, 2018 300 US WS, US EQ Vitality Re VI Limited Series 2015 Class A January 8, 2018 140 Extreme Morbidity Vitality Re VI Limited Series 2015 Class B January 8, 2018 60 Extreme Morbidity Residential Re 2013 Series 2013-II Class 1 March 6, 2018 40 US WS, EQ, CS, WT; CA WF East Lane Re VI Ltd. Class A March 14,2018 270 NE WS, EQ, CS, WT Kizuna Re II Ltd. Series 2014-1 Class A April 6, 2018 200 JP EQ Kizuna Re II Ltd. Series 2014-1 Class B April 6, 2018 45 JP EQ Citrus Re Ltd. Series 2015-1 Class A April 9, 2018 150 FL Wind Citrus Re Ltd. Series 2015-1 Class B April 9, 2018 98 FL Wind Citrus Re Ltd. Series 2015-1 Class C April 9, 2018 30 FL Wind Merna Re Ltd. Series 2015-1 Class A April 9, 2018 300 NM EQ Nakama Re Series 2014-1 Class 1 April 13, 2018 150 JP EQ Nakama Re Series 2014-1 Class 2 April 13, 2018 150 JP EQ Pelican III Re Ltd. Series 2015-1 April 16, 2018 100 LA WS Kilimanjaro Re 2014-1 Class A April 30, 2018 250 US WS Kilimanjaro Re 2014-1 Class B April 30, 2018 200 US WS, US EQ Long Point Re III Ltd. 2015-1 Class A May 23, 2018 300 US WS, US EQ, US TS, US WT Sanders Re Ltd. Series 2014-1 Class B May 25, 2018 330 US WS, US EQ Sanders Re Ltd. Series 2014-1 Class C May 26, 2018 115 US WS, US EQ Residential Re 2014 Series 2014-I Class 10 June 6, 2018 80 US WS, US EQ, US TS, US WF, US WS, US VE, US MI Residential Re 2014 Series 2014-I Class 13 June 6, 2018 50 US WS, US EQ, US TS, US WF, US WS, US VE, US MI Residential Re 2017-I Class 10 June 6, 2018 50 US WS, US EQ, US ST, US WT, US WF, US MI, US VE, US Others Alamo Re Ltd Series 2015-1 Class A June 7, 2018 300 TX WS Queen Street X Re Limited June 8, 2018 100 US WS, AU WS

Source: Swiss Re Capital Markets (See Risk factors on p. 23)

Elsewhere in the maturity calendar, the Loma Reinsurance 2013-1 Class C tranche is subject to a full extension of USD 65m with a new scheduled maturity date of October 9, 2018. USAA had elected a partial extension of USD 40m in notional for Residential Re 2013-2 Class 1, with a new scheduled maturity date of September 6, 2018; USAA also elected a full extension of USD 80m in notional for Residential Re 2014-1 Class 10, with a new scheduled maturity date of September 6, 2018.

Swiss Re Insurance-Linked Securities market update – August 2018 9 10 Swiss Re Insurance-Linked Securities market update – August 2018 Trading and relative value

Trading was fairly constant throughout the first half with the exception of an uptick in activity towards the end of June, a welcome departure from recent years of light, infrequent trading in early summer. At the start of the year, trading focused on short-dated bonds, but as the new issue pipeline continued to develop, there was an increase in trading across a wide variety of bonds; that included a particular focus on higher yielding US wind bonds, as well as diversifiers. We believe much of the increased trading activity was a result of the need to deploy large capital raises, which came on the heels of last year’s catastrophic loss events. More recently, however, we have seen a pickup in selling activity, especially in 2018 vintage bonds. Perhaps this is due to spreads on these bonds tightening to pre-Harvey, Irma and Maria (HIM) levels, leading to new capital pulling back from the space.

The first half of 2018 has seen cat-bond spreads steadily retreat to pre-HIM levels. Mild tightening has been consistent throughout the asset class. Meanwhile, in sharp contrast, High Yield (HY) spreads have been fairly volatile and trended wider due to, among other things, pressures of a rising interest-rate environment. It is fair to question whether the ILS market will succumb to similar pressures (we are already seeing some evidence of this). It is true that cat bonds are somewhat sheltered from interest-rate swings as a result of their floating-rate structures. However, end investors have choices when allocating to investment strategies, and should the relative attractiveness of the cat bond market diminish, investors could look to rebalance their exposures. On the other hand, the perceived increasing risk in the HY market might be enough to keep the supply of capital flowing into the ILS-bond market. One thing is certain, the aftermath of HIM has proven that cat is a core part of investor-portfolio construction. We will pay close attention to how this plays out in the second half.

To illustrate relative value, we have once again plotted spreads of the BofA Merrill Lynch High Yield Corporate Indices (BB-rated and B-rated) against the equivalent of BB-rated and B-rated cat-bond spreads. We chose to use the use the same methodology from the February 2018 report (which excludes bonds that widened by more than 20%) to eliminate the noise of bonds still affected by potential HIM losses and to provide a more reflective picture of the current spread environment. This process reflects a mild tightening in the ILS market, and shows BB-rated catastrophe bond comparables on average offering 0.74% additional spread over BB-rated corporate bonds, while B-rated catastrophe bonds comparables on average offer 1.21% more spread than similarly rated corporate bonds. This is a return to where the two markets were relative to each other before the catastrophic events of 2017.

Swiss Re Insurance-Linked Securities market update – August 2018 11 Trading and relative value

Figure 7 10% Bond Spread Comparative adjusted catastrophe bond and high-yield corporate-bond spreads 8% (as of June 30, 2018)

0% Jan. 2015 Jul. 2015 Jan. 2016 Jul. 2016 Jan. 2017 Jul. 2017 Jan. 2018 Cat Bond B Corp B Cat Bond BB Corp BB

BofA Merrill Lynch Insurance Linked Rating US High Yield Avg. OAS3 Securities Avg. Spread4, 5 BB 2.57% 3.31% B 3.82% 5.03%

Source: Swiss Re Capital Markets

3 BofA Merrill Lynch High Yield Option Adjusted Spread via the Federal Reserve Bank of St. Louis website. 4 Swiss Re Capital Markets pricing indications only; average seasonally adjusted spread of all ILS bonds with a US wind component and at least one year left to maturity. US Wind BB Comp = Bonds with EL between 15-180 bps (or that actually have a BB rating, regardless of EL) US Wind B Comp = Bonds with EL between 180-375 bps (or that actually have a B rating, regardless of EL) 5 Figure excludes bonds for which seasonally adjusted spread was 20% greater than issuance spread

The bonds in Figure 8 have insured industry loss triggers whereby losses for the respective bonds are determined by multiplying specific payout factors (which may be split by region and line of business) with the applicable insured industry loss, as reported by PCS. At the onset of 2017 HIM events, mid-level pricing for industry index bonds dipped significantly as Harvey approached South Texas in mid-August. Atlas Re IX 2015-1 Class A proved more difficult to price due to the complex nature of some of the payout factors. Texas, for instance has different payout factors per county, whereas other transactions feature payout factors by state, which was reflected in secondary pricing being written down over subsequent weeks. As more reports were released for Harvey, industry losses remained relatively stable, but it was the market’s perception of Irma (Late August–Mid-September) and Maria (Mid-September–Early October) that had the Atlas Re IX 2015-1 price drop to levels below 40. Pricing recovered in the following months and into the new year, reaching the low 90s, until loss reports indicated that the deal was unlikely to attach. Since the bonds depicted in Figure 8 are annual aggregate covers, mid-price levels slowly increase as they get closer to their effective reset date.

12 Swiss Re Insurance-Linked Securities market update – August 2018 Figure 8 Price rebounds of industry-index bonds post-2017 catastrophe events (as of June 30, 2018)

120

100

Jul 2017 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dez 2017 Jan 2018 Feb 2018 Apr 2018 Mar 2018Mai 2018 Jun 2018

Galilei Re 2016-1 A-1 Galilei Re 2017-1 A-2 Galilei Re 2016-1 B-1 Harvey PCS Reports Galilei Re 2016-1 D-1 Galilei Re 2017-1 D-2 Galilei Re 2016-1 E-1 Irma PCS Reports Kilimanjaro II Re 2017-1 A-1 Kilimanjaro II Re 2017-2 A-2 Kilimanjaro II Re 2017-1 B-1 Maria PCS Reports Galilei Re 2017-1 B-2 Galilei Re 2016-1 C-1 Galilei Re 2017-1 C-2 Galilei Re 2017-1 E-2 Atlas Re IX 2015-1 A Blue Halo Re 2016-1 B Kilimanjaro II Re 2017-2 B-2 Kilimanjaro II Re 2017-1 C-1 Kilimanjaro II Re 2017-2 C-2

Source: Swiss Re Capital Markets; as of June 30, 2018 SRCM Pricing indications only

Swiss Re Insurance-Linked Securities market update – August 2018 13 Trading and relative value

Figure 9 Summary table of industry index bonds price rebounds (as of June 30, 2018)

Harvey Irma Maria Total Until Reset Bond Covered States Attach Exhaust Losses1 Losses1 Losses1 Losses Attachment Effective Date Atlas Re IX 2015-1 A CONT. US, CAN 650 Index 850 Index Jul-2018 Points Points Blue Halo Class AL,FL,GA,LA,MS, USD USD USD USD – USD USD Jun-2018 2016-1 B NC,TN,TX,SC 750 1,300 290.6 400 697.5 52.5 Galilei Re 2016-1 A-1 AL,FL,GA,LA,MS, USD USD USD USD – USD USD Jan-2018 NC,TN,TX,SC 200 400 87.5 34.7 124.7 75.3 Galilei Re 2017-1 A-2 AL,FL,GA,LA,MS, USD USD USD USD – USD USD Jan-2018 NC,TN,TX,SC 200 400 87.5 34.7 124.7 75.3 Galilei Re 2016-1 B-1 AL,FL,GA,LA,MS, USD USD USD USD – USD USD Jan-2018 NC,TN,TX,SC 400 600 87.5 34.7 124.7 275.3 Galilei Re 2017-1 B-2 AL,FL,GA,LA,MS,NC, USD USD USD USD – USD USD Jan-2018 TN,TX,SC 400 600 87.5 34.7 124.7 275.3 Galilei Re 2016-1 C-1 AL,FL,GA,LA,MS,NC, USD USD USD USD – USD USD Jan-2018 TN,TX,SC 600 800 87.5 34.7 124.7 475.3 Galilei Re 2017-1 C-2 AL,FL,GA,LA,MS,NC, USD USD USD USD – USD USD Jan-2018 TN,TX,SC 600 800 87.5 34.7 124.7 475.3 Galilei Re 2016-1 D-1 AL,FL,GA,LA,MS,NC, USD USD USD USD – USD USD Jan-2018 TN,TX,SC 800 1,000 87.5 34.7 124.7 675.3 Galilei Re 2017-1 D-2 AL,FL,GA,LA,MS,NC, USD USD USD USD – USD USD Jan-2018 TN,TX,SC 800 1,000 87.5 34.7 124.7 675.3 Galilei Re 2016-1 E-1 AL,FL,GA,LA,MS,NC, USD USD USD USD – USD USD Jan-2018 TN,TX,SC 1,000 1,200 87.5 34.7 124.7 875.3 Galilei Re 2017-1 E-2 AL,FL,GA,LA,MS, USD USD USD USD – USD USD Jan-2018 NC,TN,TX,SC 1,000 1,200 87.5 34.7 124.7 875.3 Galileo Re 2017-1 B AL,FL,GA,LA,MS,NC, USD USD USD – USD USD USD Nov-2018 TN,TX,PR,SC,USVI 160 360 75.4 103.3 202.5 157.5 Galileo Re 2017-1 A AL,FL,GA,LA,MS,NC, USD USD USD – USD USD USD Nov-2018 TN,TX,PR,SC,USVI 360 560 754 103.3 202.5 357.5 Kilimanjaro II Re US, CAN USD USD USD USD USD USD USD Apr-2018 2017-1 A-1 2,156 2,597 611.7 467 538.6 1,617.3 538.6 Kilimanjaro II Re US, CAN USD USD USD USD USD USD USD Apr-2018 2017-1 A-2 2,156 2,597 611.7 467 538.6 1,617.3 538.6 Kilimanjaro II Re US, CAN USD USD USD USD USD USD USD Apr-2018 2017-1 B-1 2,597 3,663 611.7 467 538.6 1,617.3 979.6 Kilimanjaro II Re US, CAN USD USD USD USD USD USD USD Apr-2018 2017-1 B-2 2,597 3,663 611.7 467 538.6 1,617.3 979.6 Kilimanjaro II Re US, CAN USD USD USD USD USD USD USD Apr-2018 2017-1 C-1 3,663 4,235 611.7 467 538.6 1,617.3 2,075.6 Kilimanjaro II Re US, CAN USD USD USD USD USD USD USD Apr-2018 2017-1 C-2 3,663 4,235 611.7 467 538.6 1,617.3 2,075.6

1Data Source: Property Claim Services (PCS) Source: Swiss Re Capital Markets; as of June 30, 2018

14 Swiss Re Insurance-Linked Securities market update – August 2018 120.00

Residential Re (Sponsored by USAA)

There were write-downs across multiple series and classes for USAA’s Residential Re bonds as losses were accumulated for the Harvey and Irma events, followed by the Tubbs, Atlas, and Thomas wildfires. These events alone contributed to most of the bonds represented in Figure 10 being marked down during Q3 and Q4 2017, but it was Winter Storm Riley, Texas hailstorms in March 2018, and spring storms in May 2018 that ultimately exhausted the Residential Re 2014-1 Class 10 and Residential Re 2017- 1 Class 10 bonds. Loss reports estimated that layers for Residential Re 2015-1 Class 10 and Residential Re 2016-1 Class 10 had been eroded by 27% and 55%, respectively, leading to subsequent markdowns below the 60 mid-price level.

In the follow-up to Winter Storm Riley and spring storms, USAA returned to the market with another Residential Re transaction. The new Residential Re 2018-1 deal expanded the existing coverage to include flood and auto physical damage. These additions were well received by investors with the notional being upsized from USD 175m to USD 300m and pricing settling below its initial guidance levels.

Figure 10 Residential Re mid-prices post-2017 events (as of June 30, 2018)

120 Harvey, Irma, Maria Tubbs, Atlas Wildﬁres Thomas Wildﬁre Winter Storm Riley, Spring Storms May Aug-Sept 2017 Oct 2018 Dec 2018 Texas Hail Storms 2018 Mar 2018 100

0 07.07.2017 07.08.2017 07.09.2017 07.10.2017 07.11.2017 07.12.2017 07.01.2018 07.02.2018 07.03.2018 07.04.2018 07.05.2018 07.06.2018

Residential Re 2014-1 10 Residential Re 2015 -1 10 Residential Re 2016 -1 10 Residential Re 2016-1 11 Residential Re 2016-1 13 Residential Re 2017 -1 10 Residential Re 2017-1 11 Residential Re 2017 -1 13

Source: Swiss Re Capital Markets SRCM Pricing indications only Citrus Re (Sponsored by Heritage P&C)

The Citrus Re 2016-1 E-50 Notes had dropped to a low of 18.46 mid-price at the end of June. Losses for Citrus Re 2016-1 E-50 are estimated at USD 532.63m, with the price dropping to a low of 18.46 mid-price at the end of June.

Swiss Re Insurance-Linked Securities market update – August 2018 15 Trading and relative value

120 Figure 11 Citrus Re mid-price levels 100 July 7, 2017 – June 30, 2018

17 17 17 17 17 17 18 18 18 18 18 18 20 20 20 20 20 20 20 20 20 7. 9.20 0. 1. 2.20 1. 2.20 3. .0 .08. .0 .1 .1 .1 .0 .0 .0 .04. .05. .06. 07 07 07 07 07 07 07 07 07 07 07 07

Citrus Re 2015-1 B Citrus Re 2016-1 D-50 Citrus Re 2016-1 E-50 Citrus Re 2017-1 A Citrus Re 2017-2 B Source: Swiss Re Capital Markets SRCM Pricing indications only

Caelus Re (Sponsored by Nationwide) The Tubbs and Atlas wildfires contributed to the first major write-down for the Caelus Re V 2017-1 Class C and Caelus Re V 2017-1 Class D tranches as their loss estimates were released. Following large markdowns in late 2017, three of the four Caelus Re V 2017-1 tranches continued to be priced lower into the new year as losses from the Thomas Fire developed from late December to mid-January, with Winter Storm Riley and Texas hailstorms in the spring of 2018 contributing to further potential losses.

Figure 12 120 Harvey, Irma, Maria Tubbs, Atlas Thomas Wildfire WinterStorm Riley, Aug- Sept 2017 Wildfires Dec 2018 Texas Hail Storms Caelus Re mid-price levels Oct 2018 Mar 2018 July 7, 2017 – June 30, 2018 100

18 17 17 17 17 17 17 18 18 18 18 18 20 20 20 20 20 20 20 20 20 7. 9.20 0. 1. 2.20 1. 2.20 3. .0 .08. .0 .1 .1 .1 .0 .0 .0 .04. .05. .06. 07 07 07 07 07 07 07 07 07 07 07 07

Caelus Re V 2017-1 A Caelus Re V 2017-1 B Caelus Re V 2017-1 C Caelus Re V 2017-1 D

Source: Swiss Re Capital Markets SRCM Pricing indications only

16 Swiss Re Insurance-Linked Securities market update – August 2018 Swiss Re Global Cat Bond Total Return Index

Recovering from last year’s natural catastrophe events, the Swiss Re Cat Bond Global Total Return Index (SRGLTRR) finished 1H 2018 with a total return of 3.223%, bouncing back to levels above the previous year.

The return of the SRGLTRR can be broken down into a price and coupon component. The coupon return of the Global Index for 1H 2018 was 2.95%, which is up from 2.79% for 1H 2017.

Following an active year for natural catastrophes, the main driver of the SRGLTRR performance was, predictably, the price component. Overall, in 1H 2018, the price return of the SRGLTRR increased 0.2613%, compared with a -0.84% decrease in 1H 2017 (reflecting secondary-market tightening seen over that period). Figure 13 4 000 Comparative index returns (as of June 30, 2018) 3 500 3 000

2 500

2 000

1 500

1 000

500

3 5 2 4 10 11 15 16 17 18 Jan-02 Jan-0 Jan-04 Jan-0 Jan-06 Jan-07 Jan-08 Jan-09 Jan- Jan- Jan-1 Jan-13 Jan-1 Jan- Jan- Jan- Jan- Swiss Re Global Cat Bond Index Total Return Barclays US High Yield S&P 500 Total Return

Source: Swiss Re Capital Markets; Swiss Re Capital Markets pricing indications only; underlying data for Barclays US High Yield is Barclays US Ba High Yield Index via Barclays Live website; underlying data for S&P 500 Total Return is S&P 500 Total Return Index via Bloomberg website.

Figure 14 3 400 Comparative index returns December 29, 2017 – June 30, 2018 3 350

3 300

3 250

3 200

3 150

3 100

3 050 29.12.2017 29.01.201828.02.2018 31.03.2018 30.04.2018 31.05.2018

Swiss Re Global Cat Bond Index Total Return S&P 500 Total Return Barclays US High Yield

Swiss Re Insurance-Linked Securities market update – August 2018 17 New sponsors

As the ILS market proved to withstand the volatile second half of 2017, new sponsors have continued to pursue protection provided through the capital markets. 1Q 2018 saw three new sponsors enter the market. Latin American countries Chile, Colombia, and Peru sought earthquake protection on a per-occurrence parametric trigger. 2Q 2018 saw two new sponsors enter the market, with Transatlantic Reinsurance Co. seeking US- and Canadian-named storm, earthquake and severe thunderstorm protection on an annual aggregate basis, and Frontline Insurance seeking named storm coverage in Florida, South Carolina, North Carolina, and Alabama. Figure 15 New sponsors 1H 2018

Deal Size (m) Spread Cover Trigger Republic of Chile IBRD CAR 116 USD 500 2.50% Per Occurrence Parametric Republic of Colombia IBRD CAR 117 USD 400 3.00% Per Occurrence Parametric Republic of Peru IBRD CAR 120 USD 200 6.00% Per Occurrence Parametric Trans Re Bowline Re Ltd. 2018-1 Class A USD 250 4.50% Annual Aggregate Industry Index Frontline Re Ltd 2018-1 Class A USD 250 7.00% Per Occurrence Indemnity Frontline Frontline Re Ltd 2018-1 Class B USD 100 11.75% Per Occurrence Indemnity

In addition to new sponsors, new innovative trigger structures were introduced in the Frontline Re 2018-1 transaction. Frontline Re utilized an event-adjusted attachment point that is ranked by the size of events that occur during an annual risk period. The USD 350M Frontline Re Ltd. transaction represented the largest cat bond of a Florida- based (non-governmental entity) insurance company.

18 Swiss Re Insurance-Linked Securities market update – August 2018 Deal Focus: Pacific Alliance

Figure 16 Summary of Pacific Alliance transaction

Issuer: Republic of Chile, Republic of Colombia, FONDEN, Republic of Peru Offering: IBRD CAR 116, IBRD CAR 117, IBRD CAR 118 Class A, IBRD CAR 119 Class B, IBRD CAR 120 Format: 144A only Covered Events: Earthquake Covered Area: Chile, Colombia, Mexico, Peru Trigger: Parametric, Per Occurrence Modeling Firm: AIR Worldwide Corporation ("AIR") Total Size: USD 1.36bn Joint Structurers & Bookrunners Swiss Re Capital Markets, Aon Securities, Inc. and Citigroup

Early in the year, the second-largest cat bond since the market’s inception was issued, covering parametric earthquake on a per-occurrence basis for four member nations of the Pacific Alliance trade bloc, Chile, Colombia, Peru, and Mexico. The deal was the largest parametric transaction ever and the largest sovereign- sponsored cat bond in the market’s history. The total issuance of USD 1.36bn was split across five separate floating-rate earthquake-linked capital-at-risk notes. Figure 17 Summary of risk metrics

Bond Sponsor Notional (m) EL Risk Spread Peril IBRD CAR 116 Republic of Chile USD 500 0.86% 2.50% Chile EQ IBRD CAR 117 Republic of Colombia USD 400 1.56% 3.00% Colombia EQ IBRD CAR 118 A USD 160 0.79% 2.50% FONDEN Mexico EQ IBRD CAR 119 B USD 100 6.54% 8.25% IBRD CAR 120 Republic of Peru USD 200 5.00% 6.00% Peru EQ

Swiss Re Insurance-Linked Securities market update – August 2018 19 Sector data

Indemnity triggers continue to dominate with USD 4.649bn primary issuance in 1H 2018. While parametric triggers represent a large portion of the notional issued, this is mainly due to the use of a parametric trigger in the Pacific Alliance transaction.

Figure 18 Current trigger breakdown for 1H 2018 new issuance (as of June 30, 2018) Indemnity

Industry Index

Parametric

Indemnity USD 4 649m Industry Index USD 1 300m Parametric USD 1 360m Total USD 7 309m Source: Swiss Re Capital Markets

Source: Swiss Re Capital Markets Figure 19 Current trigger breakdown for 1H 2018 100% new issuance (as of June 30, 2018) 80%

60%

40%

20%

0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Indemnity Parametric Other¹ Industry Index Combination

1 “Other” group includes deals triggered by modeled loss

20 Swiss Re Insurance-Linked Securities market update – August 2018 Figure 20 70% Outstanding cat bonds, by peril 60% (as of June 30, 2018) 50%

40%

30%

20%

10%

0% r ² orm rils US EQ US ST Pe AU EQ US Wind Gulf Wind fornia EQ US Othe Japan EQ heast Wind Canada EQ rt Florida Wind Cali aciﬁc NW EQ w Madrid EQ Other P No Southeast Wind Ne pean Windst Euro

As issuance spreads continue to tighten, the ILS market has seen a persistent increase in the use of structured notes as collateral. 2017 was the first time structured notes surpassed US Treasury Money Market Funds as a collateral solution since 2010, with a 53.85% market share in 2017. With 49.38% of notional issued in 1H 2018 invested in structured notes, it seems this trend is set to continue.

Figure 21 120% Collateral solutions used by new-issue cat bonds (as of June 30, 2018) 100%

80%

60%

40%

20%

0% 2010 2011 2012 2013 2014 2015 2016 2017 H1 2018 Tri-Party Repo TMM Structured Notes

2010 2011 2012 2013 2014 2015 2016 2017 1H 2018 Tri-Party Repo 843 464 – – – – – – – TMM 3,396 3,052 4,808 6,220 7,964 5,346 3,085 4,860 3,700 Structured Notes 788 924 1,471 1,194 263 1,185 2,825 5,670 3,609

Source: Swiss Re Capital Markets; in USD (m)

Swiss Re Insurance-Linked Securities market update – August 2018 21 For more information Specialists throughout Swiss Re Capital Markets are available for consultation on bespoke ILS solutions, and they invite a dialogue on the subject with sponsors and investors alike. For more information, please contact any of the individuals listed below.

Distribution and Trading – New York Judy Klugman Swiss Re Capital Markets Corp +1 212 317 5573 [email protected]

Origination and Structuring Jean Louis Monnier – London Swiss Re Capital Markets Ltd +44 20 7933 4184 [email protected]

Andy Palmer – London Swiss Re Capital Markets Ltd +44 20 7933 4151 [email protected]

Philippe Kremer – New York Swiss Re Capital Markets Corp +1 917 368 4820 [email protected]

22 Swiss Re Insurance-Linked Securities market update – August 2018 Risk factors An investment in Insurance-Linked Securities involves potentially significant risks for an investor. In summary, these risks include (but aren’t limited to): ̤̤ Investors may lose all or a portion of their investment in Insurance-Linked Securities if a natural catastrophe or other event triggers a payment by the issuer of the Insurance-Linked Securities under the underlying risk-transfer agreement to which the Insurance-Linked Securities relate. ̤̤ The maturity of the Insurance-Linked Securities may be extended without the prior consent of the investor. ̤̤ The Insurance-Linked Securities may be redeemed before their maturity date (including before any extension of such maturity date by the issuer). ̤̤ If the Insurance-Linked Securities are redeemed before maturity, the interest rate payable to you under the Insurance-Linked Securities will be reduced. ̤̤ Investors have limited recourse to assets of the issuer of the Insurance-Linked Securities and no recourse to assets of the counterparties to the underlying risk-transfer agreements to which the Insurance-Linked Securities relate. ̤̤ If the issuer of the Insurance-Linked Securities becomes insolvent, investors may lose some or all of their investment. ̤̤ Investors may be required to consolidate the issuer for accounting purposes under certain circumstances. ̤̤ An investment in the Insurance-Linked Securities may have adverse tax consequences for investors. ̤̤ Any claim you have against the issuer in the event of the issuer’s insolvency will rank below any claim a counterparty to the underlying risk-transfer agreements, to which the Insurance-Linked Securities relate, has against the issuer. ̤̤ Enforcement of security interest granted to a Trustee for the benefit of the investors may be limited. ̤̤ The Insurance-Linked Securities may not have a secondary market or the secondary market for the Insurance-Linked Securities may have limited liquidity and the market and market price of the Insurance-Linked Securities in the secondary market may be highly volatile. ̤̤ The Rating Agenc(y)(ies) (if any) may change any rating assigned to the Insurance- Linked Securities. Any credit rating given in respect of the Insurance-Linked Securities may not reflect the potential impact of all risks related to the Insurance- Linked Securities. A credit rating is not a recommendation to buy, sell or hold the Insurance-Linked Securities and may be revised or withdrawn by the rating agency at any time.

The risk factors relating to an investment in Insurance-Linked Securities are set out in detail in the offering circular for the relevant Insurance-Linked Securities. You should consult this information when considering any investment activity.

Swiss Re Insurance-Linked Securities market update – August 2018 23 Disclaimer

This information is issued by Swiss Re Capital Markets Corporation (“SRCM Corp.”) and Swiss Re Capital Markets Limited (“SRCML”), together Swiss Re Capital Markets (“SRCM”). SRCM Corp. is a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”), and is regulated by the FINRA. SRCML (Financial Services Register Number 187863) of 30 St Mary Axe, London, EC3A 8EP, is a company authorised and regulated in the conduct of its investment business in the UK by the Financial Conduct Authority (“FCA”) and entered in the Financial Services Register. The FCA’s website http://www.fca.org.uk/ contains a wide range of information of specific relevance to UK clients and provides access to the Financial Services Register. This information is only intended for eligible counterparties or, in the case of persons based in the USA, institutional investors. Persons who receive this communication who are not eligible counterparties or, in the case of persons based in the USA, institutional investors, should not reply or act upon its contents. Persons dealing with SRCML outside the UK are not covered by all the rules and regulations made for the protection of investors in the UK, and may not have the right to claim through the UK’s Financial Services Compensation Scheme. More generally you are reminded that this material has been delivered to you on the basis that you are a person into whose possession this material may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located or other applicable jurisdictions and you may not, nor are you authorised to, deliver this material to any other person. The information is confidential and proprietary to us and is solely for your use. By receipt of this information, you acknowledge and agree that the information contained herein may not be reproduced or circulated without our written permission and may not be distributed in any jurisdiction where such distribution is restricted by law or regulation. SRCM is providing these materials solely for the purpose of providing information that may be useful in analyzing the markets and products discussed herein; however, the information should not be construed as legal, tax or investment advice nor interpreted as recommending any investment in any particular product, instrument or security and should not be relied on as the sole source of information upon which to base an investment decision. Neither SRCM nor any of its affiliates can accept responsibility for the tax treatment of any investment product, whether or not the investment is purchased by a trust or company administered by SRCM or an affiliate. SRCM assumes that, before making a commitment to invest, the investor (and where applicable) its beneficial owners have taken whatever tax, legal or other advice the investors/beneficial owners consider necessary and have arranged to account for any tax lawfully due on the income or gains arising from any investment product provided by SRCM. No representation is given to any investor regarding the legality of an investment or service. Unless otherwise agreed in writing, SRCM is not acting as your financial adviser or fiduciary and the solutions described herein, are only one way in which you may want to transfer risk. There may be other financing alternatives available to you by other Swiss Re Group companies. The information contained in these materials was obtained from sources believed to be reliable and any discussions reflect the views and judgment (including illustrations, estimates, opinions, forecasts and projections), of the party or parties that prepared it as of the date hereof, and is subject to change. No representation is made as to the accuracy or completeness of such information or that all assumptions relating to them have been considered or stated or that such projections or returns will be realised. The returns or performance results may be lower than estimated herein. This material might have been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently SRCM does not accept any liability or responsibility whatsoever in respect of any difference between this material distributed to you in electronic format and the hard copy versions available to you on request. Any opinions expressed in this material are subject to change without notice and SRCM is not under any obligation to update or keep current the information contained herein. You hereby unconditionally agree that SRCM is not responsible to you for any of the information or content herein and that any use you make of this information is totally your own responsibility and at your own risk. Any decisions you make to invest in the securities, instruments or services discussed in these materials will be based solely on your own evaluation of your financial circumstances, investment objectives, risk tolerance, liquidity needs and any other factors that you deem relevant. Any distribution of securities arising out of the solutions described herein is intended to be marketed and placed to sophisticated investors who, from the perspective of the United States Securities Act of 1933, would meet the definition of Qualified Institutional Buyers.

Title: Insurance-Linked Securities Market update Volume XXIX, August 2018

Contributors: Christopher Cote, Edward Barton and Liam Martens

Graphic design and production: Corporate Real Estate & Services/ Media Production, Zurich Swiss Re 1301 Avenue of the Americas New York, NY 10019

Visit us at www.swissre.com