Insurance-Linked Securities

Second Quarter Update 2012 -Linked Securities 2012: Second Quarter Update

Second Quarter 2012 Catastrophe Transaction Review

The second quarter of 2012 closed strongly with the successful issuance of USD2.1 billion of new catastrophe bonds. The first quarter was the most active on record and total issuance in the first half reached USD3.6 billion, just short of the all-time high of USD3.8 billion for the same period in 2007. Both seasoned and newer entrants to the ILS space continued to receive strong capital inflows. With a solid pipeline for the second half of the year, annual issuance is likely to reach USD6.0 billion.

The table below summarizes the terms of the deals that closed during the second quarter.

Q2 Catastrophe Bond Issuance

Size Covered Expected Interest Beneficiary Issuer Series Class (millions) Perils Trigger Rating Loss Spread

Louisiana Citizens Property Insurance Corporation Pelican Re Ltd. Series 2012-1 Class A $125 LA HU Indemnity Not Rated 3.54% 13.75%

Class A US HU, EQ; MX HU; BB+ (S&P) .59% 6.00% Argos 14 GmbH Blue Danube Ltd. Series 2012-1 $120 Industry Index Class B CAN EQ BB- (S&P) 1.77% 10.75%

Mitsui Sumitomo Insurance Co Akibare II Ltd. Series 2012-1 Class A $130 JP TY Modeled Loss BB (S&P) 1.04% 3.75%

Citizens Property Insurance Corporation Everglades Re Ltd. Series 2012-1 Class A $750 FL HU Indemnity B+ (S&P) 2.89% 17.75%

Ba3 Class A $50 US HU 1.23% 8.50% (Moody's)

Ba3 Swiss Company Mythen Ltd. Series 2012-1 Class E $100 US HU Industry Index .99% 8.00% (Moody's)

B2 Class H $250 US HU, EU W 2.44% 11.00% (Moody's)

Class 3 $50 BB- (S&P) 1.82% 10.00% Residential Reinsurance 2012 United Services Automobile Association Series 2012-1 Class 5 $110 US HU, EQ, ST, WS, WF Indemnity BB (S&P) .58% 8.00% Limited Class 7 $40 Not Rated 6.94% 22.00%

The Travelers Indemnity Company Long Point Re III Ltd. Series 2012-1 Class A $250 NE HU Indemnity BB+ (S&P) .88% 6.00% Total Closed During Q2 $2,095

Source: Benfield Securities, Inc. Legend CAN — Canada JP — Japan NE — Northeast ST — Severe Thunderstorm WF — Wildfire EU — Europe LA — Louisiana US — United States TY — Typhoon WS — Winter Storm FL — Florida MX — Mexico EQ — Earthquake W — Windstorm

Primary U.S. insurers are increasingly utilizing indemnity coverage Catastrophe Bond Issuance by Quarter in the catastrophe bond market. In the first quarter, Liberty Mutual Q1 6,000 Q2 Insurance Company successfully moved from an industry trigger Q3 Q4 to indemnity. The Travelers Indemnity Company (“Travelers”) 5,000 made a similar decision in the second quarter, moving to indemnity coverage with Long Point Re III Ltd., which was upsized from 4,000 2,395 USD150 million to USD250 million. 1,988

3,000 Both new and repeat sponsors closed transactions in the second 232 320 $ Millions 1,675 quarter. Two new market participants, Louisiana Citizens 2,095 853 Property Insurance Corporation and Citizens Property Insurance 2,000

411 Corporation, successfully upsized capacity for their regional deals 1,794 2,350 742 which closed within marketed price guidance. Repeat cedents 1,000 810 included Allianz Argos 14 GmbH with Blue Danube Ltd., which 1,493 1,015 716 575 expanded its coverage from the prior Blue Fin Ltd. transactions to 300 0 include Mexico hurricane and Canada earthquake. 2008 2009 2010 2011 2012

Source: Aon Benfield Securities, Inc.

2 Aon Benfield Securities

Aon Benfield ILS Indices

The Aon Benfield ILS Indices are calculated by Thomson 12 months all indices posted gains. The Aon Benfield All Reuters using month-end price data provided by Aon Bond and BB-rated Bond indices posted returns of 5.45 Benfield Securities.1 While all bond indices posted negative percent and 6.14 percent while the U.S. Hurricane and U.S. returns in the quarter ending March 31, 2012 due to Earthquake Bond indices posted returns of 5.65 percent mark-to-market losses, ILS returns rebounded in the second and 2.96 percent, respectively. quarter driven by mark-to-market gains. The All Bond and Demand for ILS continues to outstrip available supply. At a BB-rated Bond Indices were up 2.74 percent and 2.49 time when primary issuance is historically light, we expect percent, respectively. At the same time, the U.S. Hurricane gains to continue into the third quarter as the market Bond and U.S. Earthquake Bond Indices increased 1.94 experiences strong inflows. percent and 2.32 percent, respectively. For the trailing

Aon Benfield ILS Indices

Return for Quarterly Period Return for Annual Period Index Title Index Value Ending June 30 Ending June 30

Aon Benfield ILS Indices 6/30/2012 3/31/2012 6/30/2011 3/31/2011 2012 2011 2012 2011

All Bond 246.82 240.25 234.08 231.17 2.74% 1.26% 5.45% 5.97% Bloomberg Ticker (AONCILS)

BB-rated Bond 235.08 229.36 221.48 218.24 2.49% 1.49% 6.14% 4.52% Bloomberg Ticker (AONCBB)

U.S. Hurricane Bond 244.20 239.56 231.13 231.35 1.94% -0.09% 5.65% 8.51% Bloomberg Ticker (AONCUSHU)

U.S. Earthquake Bond 208.07 203.35 202.08 197.73 2.32% 2.20% 2.96% 7.21% Bloomberg Ticker (AONCUSEQ)

Benchmarks

3-5 Year U.S. Treasury Notes 325.19 321.33 310.87 302.45 1.20% 2.78% 4.61% 3.53%

3-Year U.S. Corporate BB 429.97 425.74 404.60 400.04 0.99% 1.14% 6.27% 7.43%

S&P 500 1362.16 1408.47 1320.64 1325.83 -3.29% -0.39% 3.14% 28.13%

ABS 3-5 Year, Fixed Rate 357.07 350.94 337.20 329.35 1.75% 2.38% 5.89% 6.37%

CMBS Fixed Rate 3-5 Year 278.16 274.31 256.63 252.42 1.41% 1.67% 8.39% 8.87%

Source: Aon Benfield Securities Inc., Bloomberg

1 The 3-5 Year U.S. Treasury Notes Index is calculated by Bloomberg and simulates the performance of U.S. Treasury notes with maturities ranging from three to five years.

The 3-Year U.S. Corporate BB Index is calculated by Bloomberg and simulates the performance of corporate bonds rated BB on a zero basis. Zero coupon yields are derived by stripping the par coupon curve. The maturities of the BB rated bonds in this index are three years.

The S&P 500 is Standard & Poor's broad-based equity index representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price performance only, and does not include dividend reinvestments or advisory and trading costs.

The ABS 3-5 Year, Fixed Rate Index is calculated by Bank of America Merrill Lynch (BAML) and tracks the performance of U.S. dollar denominated investment grade fixed rate asset backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one year remaining term to final stated maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million.

The CMBS Fixed Rate 3-5 Year Index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, at least one year remaining term to final maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million. The performance of an index will vary based on the characteristics of, and risks inherent in, each of the various securities which comprise the index. As such, the relative performance of an index is likely to vary, often substantially, over time. Investors cannot invest directly in indices.

Past performance is no guarantee of future results

3 Insurance-Linked Securities 2012: Second Quarter Update

ILS Sales and Distribution

Secondary prices began the year under selling pressure Region / Peril Price Change Mar 31 to Jun 30 which caused investors to experience mark-to-market losses on their positions. There was also a general concern U.S. hurricane 0.85% regarding the availability of capacity in the primary U.S. earthquake 0.95% market. As cedents looked to attract interest, Europe 0.29% enhanced disclosures became more common. Prices Japan 0.87% started to stabilize toward the end of the first quarter and remained relatively flat through April. However, in May, U.S. hurricane bonds dominated new issuance in the second strong investor demand resulted in price increases, which quarter; however investors received some diversification impacted diversifying non-U.S. hurricane bonds first. By with Akibare II Ltd., which covered Japan typhoon. June, the increases had spread broadly across the market. Additional investors were able to diversify within the U.S. hurricane bucket, as several regional deals came to market Early in the second quarter, inflows were strong with both including: small and large investors alike having excess capital to deploy. Nearly USD2.1 billion of new issues closed while • Louisiana-exposed Pelican Re Ltd.; under USD1.4 billion matured in the quarter. Since the additional USD700 million of bonds was not enough to • Florida-exposed Everglades Re Ltd.; and satisfy the amount of new capital coming into the space, • Northeast-exposed Long Point Re III Ltd. investors looked to acquire bonds in the . Trading volumes were very strong, however there were As we enter the third quarter, earlier capacity concerns insufficient bonds to meet the increased demand. appear to have eased. Given the excess supply of capital, upcoming transactions are likely to be rewarded with lower Broadly speaking, the majority of investors did not want to spreads. We expect the narrowing of spreads to continue sell positions for fear that they would sit on cash without through the hurricane season. having other bonds to purchase. There were opportunities, however, to swap out positions. By the end of the second quarter, some investors, rather than waiting on the sidelines with uninvested funds, began to pay higher prices for bonds.

Asia and Pacific Region

Japan sponsors continue to utilize catastrophe bonds as part On the traditional reinsurance side, many Asia ex-Japan and of their overall risk transfer program. In 2012, two Japanese Australasia insurers’ programs renewed in June and July. cedents, Zenkyoren and Mitsui Sumitomo Insurance Co., Even though 2011 ranked first for reinsured catastrophe Ltd. (“MSI”) have returned to the markets. Zenkyoren losses, insurers in New Zealand, Japan, Thailand and successfully secured USD300 million in earthquake capacity Australia, which have been extensive users of reinsurance, in the first quarter through Kibou Ltd., following the full were able to protect their earnings and capital from very recovery on Muteki Ltd. in 2011. MSI successfully replaced material direct losses.2 typhoon coverage from the matured Akibare Ltd. through Akibare II Ltd., which closed in April and provides USD130 In the second quarter, the reinsurance market continued million of typhoon coverage on a modeled loss basis. to provide the required capacity at accretive terms and conditions for these insurers. The size of the 2011 ceded losses caused many reinsurers to fundamentally re-evaluate their risk assuming strategies in the affected regions.2 Insurance companies in these regions continue to evaluate 2 Source: Aon Benfield Reinsurance Market Outlook June and July 2012 Update the use of ILS as part of their overall risk transfer programs.

4 Aon Benfield Securities

Europe

The continued uncertainty resulting from the Eurozone According to law firm Mayer Brown, a Eurozone breakup crisis has had a negative impact on the insurance industry. could also impact catastrophe bond structures that insure A number of large European insurance and reinsurance on an indemnity or indexed basis and are associated with companies have been downgraded due to their direct losses in an existing Eurozone country. A PERILS-based exposure to sovereign and concerns about the implied index that tracks property losses in Europe and in countries weaknesses in the wider macro economy. Recent sovereign such as Denmark, the United Kingdom and Switzerland, downgrades have also indirectly affected insurance and that are outside the currency union, can report losses reinsurance companies, with Spanish insurers and reinsurers in local currency and convert losses to Euros using the being notable victims. conversion rate at the time of the commencement of the loss event. Indexed-based catastrophe bond transactions This high level of uncertainty has increased concern among will typically utilize a fixed conversion factor for these many cedents about the of traditional reinsurance countries established at the outset of the transaction. and the potential for a shortfall on recoveries following Some recently issued catastrophe bonds have included a major catastrophe. Although the overall probability of a provision to allow for the contingency of a departing a failure to pay is very small, risk managers and sponsors country. Under the provision, losses can be determined in alike are increasingly taking a more prudent approach to the new local currency and then converted into Euros at counterparty credit risk. In addition, the increased focus on the rate established at the time of departure. PERILS have credit risk under Solvency II requirements is accelerating also indicated that they would apply a conversion rate this trend. As a consequence, more sponsors are now for any new currency of a departing state at the time of considering collateralized solutions such as ILS due to the the loss event. Consideration is now being given in other reduced failure-to-pay risk associated with these products. transactions for determining the conversion rate consistent with this PERILS methodology. Some market commentators believe that a potential Greek exit, severely unsettling for the whole area, could be a The above development does add a degree of currency risk forerunner to a partial or full break-up of the Eurozone. In for investors. Modeled risk analysis for catastrophe bonds this instance, the catastrophe bond market will no longer during this uncertain time will not be able to adjust for the be immune to the effects of a break-up. This may lead to impact of currency changes, except upon future resets. It is the introduction of an additional early redemption event, still not clear if this impact will be positive or negative. allowing the cedent to terminate the transaction if the Euro Clearly, if the Eurozone crisis is not resolved soon, both the no longer exists as a currency. catastrophe bond market and the wider capital markets will be affected.

Selected European Insurer and Reinsurer Financial Strength Ratings

Company A.M. Best S&P

January 1, 2011 June 28, 2012 January 1, 2011 June 28, 2012

Allianz A+ Stable A+ Negative AA Stable AA Negative

Aviva A Positive A Negative AA- Negative AA- Watch (-ve)

AXA A Stable A Negative AA- Stable AA- Negative

Caisse Centrale A++ Stable A++ Negative AAA Stable AA+ Negative

Flagstone A- Stable A- Negative NR - NR -

Generali A+ Stable A+ Negative AA- Stable A Watch (-ve)

Groupama - - - - A- Stable BB Negative

Mapfre Re A Stable A Negative AA Negative A- Negative

Source: A.M. Best, Standard & Poor's as of June 28, 2012

5 Insurance-Linked Securities 2012: Second Quarter Update

An Interview With Elaine Caprio Brady, Vice President and Manager of Ceded Reinsurance, Liberty Mutual Insurance

1. What was the rationale for the 5. In your opinion, what factors will help grow Mystic Re III transaction? the ILS market? The rationale was to structure and design sustainable The ILS market for property catastrophe would grow nationwide multi-year indemnity Catastrophe Bond further if the market could offer the same types of protection and embed it into our nationwide Excess of coverage as traditional reinsurers, including but not Loss reinsurance tower. The transaction also provided limited to reinstatements and indemnity protection for Liberty Mutual Insurance with access to a valuable complex commercial business. Creative ways could be alternative source of reinsurance security. developed for ILS markets so they can be utilized more often for casualty catastrophe protection. Lastly, the ILS market would grow if the transactional fees associated 2. As a repeat sponsor, what made you return to with the transaction and claims collection process were the market after a three-year absence? reduced, or at least effectively managed and capped. While Liberty Mutual Insurance is committed to the ILS market, we carefully weigh all the alternatives to 6. What would be the ideal split for Liberty Mutual ensure that the protection purchased helps us achieve Insurance between traditional and ILS coverage our goals. This year, we felt that the traditional reinsurance market offered less value than in previous given capacity? years, so we returned to the ILS market. There is no ideal split in mind. As Manager of Ceded Reinsurance for Liberty, my paramount goal is to utilize financially secure reinsurers or fully collateralized 3. What made you decide to move from a PCS index reinsurers on our programs who pay our claims promptly to an indemnity structure? in the event of a loss. Our view is that ILS and traditional Indemnity protection better reflects our ability to reinsurance coverage have desirable attributes and measure, manage and mitigate our peak risk and that both are valuable types of coverage to utilize for allows the protection to sit side by side with our our property catastrophe program. In addition, Liberty traditional program. An indemnity structure is more Mutual Insurance is committed to the traditional market. appealing from a long-term perspective. We value the longstanding trading relationships with these partners, their history of paying claims, their service, expertise and knowledge. 4. How important is the ILS market to Liberty Mutual Insurance going forward? The fully collateralized, multi-year aspect of an ILS market transaction is attractive to Liberty Mutual Insurance. The ability to obtain nationwide indemnity protection through Mystic Re III means that the 2012 issue is of significantly greater value to Liberty Mutual Insurance than previous deals and will encourage us to continue to explore opportunities in this market.

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Aon Benfield Securities, Inc. and Aon Benfield Securities Limited (collectively, “Aon Benfield Securities”) provide insurance and reinsurance clients with a full suite of insurance-linked securities products, including catastrophe bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties, and products.

As one of the most experienced firms in this market, Aon Benfield Securities offers expert underwriting and placement of new debt and equity issues, financial and strategic advisory services, as well as a leading secondary trading desk. Aon Benfield Securities’ integration with Aon Benfield’s reinsurance operation expands its capability to provide distinctive analytics, modeling, rating agency, and other consultative services.

Aon Benfield Inc., Aon Benfield Securities, Inc. and Aon Benfield Securities Limited are all wholly-owned subsidiaries of Aon plc. Securities advice, products and services described within this report are offered solely through Aon Benfield Securities, Inc. and/ or Aon Benfield Securities Limited.

© Aon Benfield Inc., 2012. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document. #9944 - 7/2012