Introduction to Catastrophe Bond Issuance Jeff Boyd, CCM CONFIDENTIAL ©2016 AIR WORLDWIDE 1 Agenda Catastrophe Bond Fundamentals Selecting the Right Trigger The Issuance Process The Catastrophe Bond Market CONFIDENTIAL ©2016 AIR WORLDWIDE 2 Catastrophe Bond Fundamentals CONFIDENTIAL ©2016 AIR WORLDWIDE 3 Catastrophe Bond Fundamentals Resilient Liquidity Catastrophe Re/Development Risk Financing Liability Disaster Reduction Insurance Response Alternative & Recovery or Supplement Pandemic Balance Sheet Protection Prevention CONFIDENTIAL ©2016 AIR WORLDWIDE 4 Typical Structure of a Catastrophe Bond Re/Insurance Agreement Offering Circular Principal (at maturity) Recoveries Special- Sponsor Purpose Purchases Bond Investor Premium Payments Reinsurer Coupon Payments Risk-Free Return Investment Collateral Account CONFIDENTIAL ©2016 AIR WORLDWIDE 5 The Value Proposition of Catastrophe Bonds Diversification of reinsurance sources Diversifying asset class Competing capital sources & potential cost savings High coupons relative to similarly rated fixed- income products Sponsor Collateralized Investor Benefits protection Benefits Tradable, liquid notes Highly customizable Low-volatility instrument Multi-year coverage & price stability CONFIDENTIAL ©2016 AIR WORLDWIDE 6 Catastrophe Bonds Are Not Highly Correlated with Financial Markets Swiss Re Cat Bond Index Fidelity US Bond Index S&P 500 Source: Bloomberg CONFIDENTIAL ©2016 AIR WORLDWIDE 7 Catastrophe Bonds Have Become an Integral Strategic Risk-Transfer Tool Record Tornado Ike Losses Financial 7.777 8.0 Katrina 36 Crisis 7.5 Rita Sandy 7.092 34 6.821 7.0 Wilma 32 Tohoku and 6.5 6.267 30 Ivan Christchurch 5.853 28 6.0 26 5.5 24 5.0 4.690 4.593 22 4.5 20 3.835 4.0 3.665 18 3.396 3.5 16 3.0 2.726 14 12 Thousands 2.5 10 2.0 1.608 1.498 Number of Issuances 1.220 1.280 8 1.5 1.143 6 Annual Annual Issuance Amount (USD) 0.714 0.825 0.836 0.858 1.0 4 0.5 0.069 2 0.0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Annual Issuance Amount (USD Billions) Number of Issuances Sources: AIR, Artemis CONFIDENTIAL ©2016 AIR WORLDWIDE 8 Selecting the Right Trigger CONFIDENTIAL ©2016 AIR WORLDWIDE 9 Selecting the Right Trigger CONFIDENTIAL ©2016 AIR WORLDWIDE 10 Selecting the Right Trigger Parametric Industry Loss Index Indemnity Modeled Loss Hybrids CONFIDENTIAL ©2016 AIR WORLDWIDE 11 Defining and Dealing with Basis Risk Basis risk is the difference between the losses you wish to protect against and the recoveries from the transaction - Minimizing basis risk helps ensure you will receive a recovery when you really need it - Optimize your structure to maximize the fit between your loss potential and the transaction’s recoveries - Lower basis risk is preferred by sponsors - Speedier loss determination and more transparent triggers are preferred by investors (and sponsors) - There are trade-offs between time, transparency, and basis risk with each trigger option 12 CONFIDENTIAL ©2016 AIR WORLDWIDE AIR Can Model All Traditional Cat Bond Triggers as well as Customized Triggers Exposure Information HAZARD Policy Conditions Event Intensity Generation Calculation ENGINEERING Damage FINANCIAL Estimation Insured Magnitude & Ground Loss Epicenter Motion Calculations Insured Loss 1st Generation 2nd Generation Parametric Parametric Industry Loss Index Modeled Loss Indemnity (“Pure Parametric” (“Parametric Index”) or “Cat-in-a-Box”) CONFIDENTIAL ©2016 AIR WORLDWIDE 13 First-Generation Parametric Trigger: Pure Parametric or “Cat-in-a-Box” CONFIDENTIAL ©2016 AIR WORLDWIDE 14 Second-Generation Parametric Trigger: Parametric Index 1043 2 3 EventIndex Value mina j x j bj x j c j x j ,Cap j j1 x j max(0, PGAj 0.05) Where: aj, bj, cj, and Capj are the parameters at Location j PGAj is the Peak Ground Acceleration (“PGA”) at Location j Each j is one of the 1,043 Calculation Locations (the K-NET stations), which record PGA Calculation Location Peak Ground Calculation Location Latitude Longitude a b c Cap contribution to Event Index j j j j Acceleration (PGA ) j Value 1 35.297 136.750 0 0 0 0 0.17 0.00 2 35.297 136.915 0 0 20,993 459.7 0.14 13.16 … … … … … … … … … 1043 … … … … … … … … CONFIDENTIAL ©2016 AIR WORLDWIDE 15 Industry Loss Index: Using Market Share of Insurance Industry CONFIDENTIAL ©2016 AIR WORLDWIDE 16 Modeled Loss Trigger: Using Actual Event Characteristics Exposure Information HAZARD Policy Event Intensity Conditions Generation Calculation ENGINEERING FINANCIAL Damage Insured Central Pressure & Wind Estimation Landfall Location Speed Loss Calculations Loss to Catastrophe Bond CONFIDENTIAL ©2016 AIR WORLDWIDE 17 Modeled Loss Trigger: Using Actual Event Characteristics Exposure Exposure Information Information HAZARD Policy Event Intensity Conditions Generation Calculation ENGINEERING FINANCIAL Damage Insured Central Pressure & Wind Estimation Landfall Location Speed Loss Calculations Loss to Catastrophe Bond CONFIDENTIAL ©2016 AIR WORLDWIDE 18 Indemnity Loss Trigger: Ultimate Net Loss Retained Cat Bond A Cat Bond B Layer 2 Retained Layer 1 1st Event Cat Coverage Program Retained CONFIDENTIAL ©2016 AIR WORLDWIDE 19 Hybrid Cat Bond Triggers: Creative Terms 1043 2 3 Event Index Value mina j x j bj x j c j x j ,Cap j j1 x j max(0, PGAj 0.05) CONFIDENTIAL ©2016 AIR WORLDWIDE 20 The Issuance Process CONFIDENTIAL ©2016 AIR WORLDWIDE 21 The Issuance Process Origination Structuring Reporting Agency (Months – Years) (8 – 16 weeks) Loss Reserve Specialist Risk Escrow Agent Structurer & Bookrunner Modeling Claims Reviewer Trustee Bank Detailed Risk Modeler Structuring Legal Counsel Offering Marketing Rating Agency Materials (2 – 4 weeks) CONFIDENTIAL ©2016 AIR WORLDWIDE 22 Risk Modeling - Common Trigger Types Parametric Modeled Loss Industry Loss Index Transparency Indemnity Basis Risk CONFIDENTIAL ©2016 AIR WORLDWIDE 23 Catastrophe Bonds Are Highly Customizable Parametric Industry Loss Index Modeled Loss Indemnity Hybrids Occurrence Aggregate 3 years Single Issuance 1 year 5 years Note Program CONFIDENTIAL ©2016 AIR WORLDWIDE 24 Catastrophe Bonds Complement Traditional Reinsurance & Risk Financing Occurrence Aggregate Retained Cat Bond A-1 Cat Bond A-2 Aggregate Cat Bond A-3 Cat Bond X-3 3 6 1 - - 5 2 - - - 4 Cat Bond B-1 - Cat Bond C Bond Cat Cat Bond C Bond Cat Cat Bond C Bond Cat Cat Bond C Bond Cat Cat Bond C Bond Cat Cat Bond B-2 C Bond Cat Aggregate Cat Bond B-3 Cat Bond Y-2 Collateralized Cat Layer 1 Layer 3 Layer 1 Layer Layer 2 Layer Aggregate 1st Event Cat Cat Bond Z-1 Private Reinsurance Private Reinsurance Private Coverage Program Reinsurance Private Retained Retained CONFIDENTIAL ©2016 AIR WORLDWIDE 25 The Catastrophe Bond Market CONFIDENTIAL ©2016 AIR WORLDWIDE 26 Catastrophe Bond Issuance by Region and Peril % of Total Outstanding Principal by Peril* 7.5% 7.7% 5.3% Sum of U.S. Hurricane Sum of U.S. Earthquake Sum of European Wind/Quake Sum of Japan Wind/Quake 15.3% Sum of Other 64.2% *Multi-peril cat bonds were split into single perils based on their contribution to expected loss CONFIDENTIAL ©2016 AIR WORLDWIDE 27 Trends among Triggers and Sponsors Trigger Type Ceding Sector by Issuance Amount by Share of Issued Limit 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Indemnity Industry Loss Parametric Hybrid Modeled Loss Private Public CONFIDENTIAL ©2016 AIR WORLDWIDE 28 AIR Is the Leading Modeler of Catastrophe Bond Issuances Modeling Agent Distribution by Issuance Amount ($ million) 8,000 5,949 7,500 4,195 7,000 6,500 5,583 4,442 6,000 5,500 5,000 1,641 AIR 4,500 3,068 4,000 RMS 1,706 3,365 3,500 1,859 EQE 3,000 None 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 CONFIDENTIAL ©2016 AIR WORLDWIDE 29 AIR’s Team Has a Proven Track Record of Outstanding Service AIR has been the risk modeler of choice for close to USD 40 billion of issuance since the inception of the ILS market CONFIDENTIAL ©2016 AIR WORLDWIDE 30 Thank you! [email protected] CONFIDENTIAL ©2016 AIR WORLDWIDE 31 .