ILS Annual Report 2020 Alternative Capital: Growth Potential and Resilience Table of Contents Foreword .................................................. 3 Aon Securities’ Annual Review of the Catastrophe Bond Market ...... 4 Overview . 4 Global Catastrophic Loss Activity in H2 2019 and H1 2020 . 6 Catastrophe Bond Transaction Review by Quarter ................. 7 Secondary Market Overview . .15 COVID-19 . 15 ILS Transaction Activity ...................................... 16 Capital Providers . 16 Capital Sources . 17 Aon ILS Indices . 18 ILS-Related Markets. 21 Collateralized Reinsurance Market Trends . 22 Sidecars . 23 Industry Loss Warranties (ILWs) . 24 Private Placements . 26 Growth Areas within ILS ..................................... 29 Cyber Risk . 29 Public Sector/Government . 31 Market Analysis by Region ................................... 32 North America . .. 32 Europe . 37 Asia Pacific . 38 Model Updates ............................................ 41 North America and Caribbean . 41 Europe . 41 Asia Pacific . 42 Collateral Solutions ......................................... 43 Additional Collateral Solution Offerings . 44 Market Participant Questionnaire ............................. 46 Foreword It is my pleasure to bring to you the thirteenth edition of Aon Securities’ annual Insurance-Linked Securities (ILS) report . The study aims to offer an authoritative review and analysis of the ILS asset class and related developments in the market . This report is intended to be an important and useful reference document, both for ILS market participants and those with an active interest in the sector . Unless otherwise stated, its analyses cover the 12-month period ending June 30, 2020 . The ILS market was tested by a number of events again this year across Asia Pacific, Europe, the US, and Australia (e g. Hagibis Faxai, Ampham, Sabine, Dorian, California wildfires & Australian bushfires), and the COVID-19 global pandemic . ILS markets have shown resilience, and record issuances in Q4, 2019 and Q1, 2020 in the period ending June 30, 2020 . In the period under review, $9 billion of catastrophe bond issuance was secured, an increase of $3 .5 billion year on year . During this interesting time in the market, ILS capital in place has decreased from $93 billion at this time last year to $91 billion . By June 30, 2020, catastrophe bonds outstanding were $28 .8 billion, 1 .5% less than June 30, 2019 . The period under review witnessed both new sponsors and repeat issuers come to market, along with new geographical coverages and innovations in the cat bond market . Following a market slowdown in April due to COVID-19, the primary market resumed busy activity in May and June respectively, with anticipated busy pipeline activity for Q3 and Q4 2020 . Aon's Weather, Climate & Catastrophe Insight: 2019 Annual report states over the last decade, natural catastrophes resulted in economic losses of $2 98. trillion and insured losses of $845 billion, creating a protection gap of 72% . 2019 was a fairly average year of catastrophic losses, with a few notable exceptions . In calendar year 2019, there were $232 billion in economic losses, and $71 billion in insured losses globally, leaving the protection gap – the portion of economic losses not covered by insurance – of 69% . This divergence of economic and insured losses continues to demonstrate the global protection gap . The half year 2020 has been a relatively calm period, with only $75 billion in economic losses, which is 23% below the average since 2000 . Though well below the average economic loss, total insured losses sit at $30 billion to date, approximately 8%, about the average since 2000 . The 2020 edition of this annual ILS report, Growth Potential and Resilience, covers a wide range of topics in the ILS market, including: • Aon Securities’ Annual Review of the Catastrophe Bond Market; • A review of ILS Transaction activity; • An overview of ILS-Related Markets, including trends in ILW, Sidecars, Private Placements, and Debt Offerings; • Growth Areas within ILS; • A review of North America, Europe, and Asia Pacific activity; • A dedicated section on Catastrophe Bond Collateral Solutions; and • Market Participant Questionnaire . We hope you will find this report useful and informative, and if you have any questions relating to the data herein, or any queries regarding any aspect of the ILS sector, please contact me or my colleagues . Paul Schultz, Chief Executive Officer, Aon Securities LLC ILS Annual Report 2020 3 Aon Securities’ Annual Review of the Catastrophe Bond Market Overview The July 1, 2019 to June 30, 2020 year in review saw a strong issuance size of this transaction, the largest in 2020 to date, return to growth in the catastrophe bond market after a has shown the resilience of the ILS markets . slightly below average prior year . Apart from no issuances in Q3, 2019, each quarter saw consistent, strong issuances . The Metropolitan Transportation Authority (“MTA”) returned For reference, there was a record Q4 issuance of $2 .2 billion to the catastrophe bond market purchasing protection to quickly followed by a record Q1 issuance of $4 billion 1. mitigate the impacts of storm surge and earthquakes affecting These preceded the strong issuance in Q2 2020 of $2 .8 New York City’s public transportation system . The $100 billion, which was dampened by the effects of COVID-19, million MetroCat Re Ltd . 2020-1 catastrophe bond was driving a temporary pause in primary issuances across the structured on a parametric basis . Insurance-Linked Securities market . In total, $9 billion was Government sponsors like FONDEN who have gone from their placed in the year in review including life and health .2 first issuance of $160 million in 20063 are now consistently The year in review brought new sponsors along with repeat bringing large transactions to the market, like the $485 million 4 issuers, and the expansion of perils and geographies . IBRD CAR transaction that is described in further detail below . Given that US hurricane risk is readily available in the ILS There is a shift in placement timing from the traditional flow market, investors have focused on diversifying perils at any of issuances where most capacity centers around Q2, with opportunity, offering much tighter margins to modeled losses repeat sponsors like Allstate, State Farm and USAA leading on non-US risk . the quarter and a number of domestic insurers specializing in A selection of a new sponsor and one new transaction during Florida seeking capacity to aid with 6/1 placements to end the the period was: quarter . This timing shift is representative of the increasing value of the catastrophe bond market outside of the typical Herbie Re’s first issuance by Fidelis secured $125 million of insurance and reinsurance sponsors . second event cover for both named storms and earthquake, a four-year transaction structured to resemble a second event We are now beginning to see innovation in our market to Industry Loss Warranty (ILW) . broaden the investment opportunities for investors . One such example being the Sierra Re Ltd . transaction, which provides The World Bank’s Philippines $225 million earthquake and Bayview Asset Management in-time capital in the event of a cyclone first transaction . The Philippines was a previously large Earthquake on the west coast or South Carolina . unavailable region to the ILS market, so investors were interested at the opportunity to take on both typhoon and Another important highlight of the year was the earthquake risk on a modeled loss basis . resilience of the ILS market throughout the first few months of the COVID-19 pandemic . After a record first We expect similar innovation to continue in the ILS market quarter, the catastrophe bond market paused with no issuances as the years progress, with perils like business interruption from the end of March until the end of April . The volatility in or cyber in the short to medium term . the equity and traditional debt markets drove capital providers’ portfolio allocations away from their desired positions . A selection of repeat sponsors during the period were, The strong performance of the uncorrelated assets made this the California Earthquake Authority (CEA) with a new vehicle, market a source of fresh capital to take advantage of distressed Sutter Re Ltd ,. which raised $700 million in its debut to cover asset valuations . The ILS market reacted positively, with capital the Class A and Class F tranches, providing 3 and 4-year meeting selling pressure, driving only modest price earthquake cover . Marketing of this transaction along with a movements, even at the very worst of the market . This has few others helped to re-open the market after a brief pause been especially promising, in comparison to the traditional due to the start of the coronavirus in the US . The large markets, which did see more than modest hardening . 1 Aon Securities ILS Database 2 Aon Securities ILS Database 3 Artemis: Cat-Mex Ltd. 4 Artemis: IBRD / FONDEN 2020 4 The movements in this market as compared to other asset There is still considerable uncertainty across the globe to classes have re-demonstrated the value in this market that was date, but we see the catastrophe bond market in a strong proven in the 2008 Financial Crisis and 2010 - 2012 European position . Hardening in the traditional market will drive ILS Debt Crisis . The fundamentals of this asset class have not issuance on a case by case basis as we move forward . changed and the characteristics