Insurance-linked securities (ILS) Market Update Q2 2012

Insurance-linked securities (ILS)
Market Update Q2 2012
ILS Market Update Q2 2012
4th ILS Round Table in Monte Carlo Hosted by Munich Re
SAVE THE DATE…
….to discuss the state and future of the ILS market
Participants
Frank Majors
Managing Partner, Nephila Capital
Dario Luna
Head of Insurance, Pension and Security,
Secretary of Finance and Public Credit
(SHCP) Mexico
Bryon Erhart
Chief Strategy Officer, Aon Benfield
Doris Herrera-Pol
Director and Global Head of Capital Markets,
World Bank Treasury
Steve Emmerson
ILS & Insurance Desk, Tullet Prebon
Ming Lee
President and CEO, AIR
Lutzi Hitz
CEO, PERILS
10 September 2012 – 11:00am
The Fairmont Hotel, Grand Prix B
Rendez-Vous de Septembre Monte Carlo
Peter Röder
Member of the Board of Management,
Munich Re
PANEL DISCUSSION
For this event, we invited major representatives from the ILS community to give their individual
views on

Issuance activity in 2012


Major developments in ILS structures, pricing,
cat modelling and ILS portfolio management
Alignment of interests among all participants to
generate a liquid and viable market

Outlook for 2013 and

Specific topics raised by the audience
Please visit the following Link to RSVP:
https://www.munichre.com/en/reinsurance/business/non-life/risk_trading/ILS-round-table/default.aspx
2
ILS Market Update Q2 2012
Q2 2012 Market Review
Capital inflows help to alleviate upward pressure on pricing as issuance volume exceeds maturities

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With US-insurers approaching the hurricane
season, 78% of Q2 issuance volume provided
cover for US hurricane (in both single-peril as well
as multi-peril transactions)
Citizen‘s transaction, Everglades Re, was upsized
significantly from $200m to $750m by offering an
above-market risk spread of 1775bps; this
accounts for the sudden upturn in US Wind
spreads at the end of April (see graph at right)
Greater disclosure of sponsors’ exposures within
the offering documents has gradually increased
the market receptivity for indemnity transactions,
with 63% of Q2 issuance being UNL-based
After a series of severe natcat events in 2011,
rising reinsurance rates were anticipated, which
led to an increase of spreads in the ILS market as
well
As for US hurricane pricing, current spread
widening is driven by the upcoming hurricane
season and its effect on secondary market trading

Nevertheless, spread widening was somewhat
alleviated by the crisis surrounding the Euro, as
the liquidity glut caused low yield levels in
mainstream debt markets and continued to draw
capital into the higher-yielding ILS space
Moreover, the ILS community saw this year‘s first
bond covering Japanese typhoon: Akibare II
provides sponsor Mitsui Sumitomo with coverage
of $130m at an attractive price level
2,095
~$1.5bn
Net
Capital
Inflow
from
Investors
1,493
12,777
14,282
1,374
709
End of
2011
Q1 2012
Outstanding
End of
Q2 2012
Q2 2012
Maturities
Issuances
Secondary Market Spreads (indexed)2
180%
US Wind
US Earthquake
Europe Wind
Japan Perils
160%
140%
120%
100%
80%
60%
Jan-12
Mar-12
May-12
Jul-12
“BB” Cat Bond vs. “BB” Corporate Bond Spreads3
"BB" US Corporate Bonds
1200
"BB" Cat Bonds
Risk Spread above
Swap Rate (bps)
1000
800
600
400
200
0
Excluding mortality transactions, including health transaction (Vitality Re series)
market spreads were adjusted for expected losses to exclude expected loss-driven changes in spreads
Source for “BB” Corporate Spreads: Bloomberg
2 Secondary
3
Market In-/Outflows 2012 YTD (in $m)1
Citizens Property Insurance Co. and Louisiana
Citizens Property Insurance Co., two legislativelycreated residual market carriers, tapped the ILS
market for the first time to lock in $750m and
$125m of Florida and Louisiana hurricane
capacity, respectively


1
After the strongest first quarter in the market‘s
history, momentum stayed high, with a total
volume of $2.1bn mainly placed in April and May,
thereby lifting outstanding volume in the non-life
ILS market to a new all-time high of $14.3bn
3
ILS Market Update Q2 2012
Market Outlook
Cat bonds with regionally limited exposure benefit from investors’ risk bucket-based pricing

Investor portfolios remain over-weighted in US hurricane, particularly Florida, and the need to balance portfolios has
consistently led to higher return requirements for hurricane transactions

Similar to reinsurers, dedicated cat funds pursue a risk bucket-based investment approach, with a certain
investment budget being allocated to every risk bucket, e.g., Florida hurricane, Texas hurricane, a.o.

Within this investment framework, return targets for cat bonds affecting only one risk bucket are considerably lower
than for bonds that affect several buckets; therefore, risk spreads for cat bonds covering hurricane on a nationwide
basis have widened more than regionally-exposed cat bonds

We expect pricing for single-peril cat bonds covering limited regions to continue achieving a considerable discount in
the near future, as compared to cat bonds with broader coverage, as seen in secondary market pricing for hurricane
cat bonds (illustrated in the graph at right below); moreover, US earthquake and Non-US perils will continue to
benefit from investors’ diversification targets

That being said, with the bulk of exposure within cat bond portfolios coming from Florida and US Southeast
hurricane, pricing advantages from a limited coverage scope should not apply to these areas
Outstanding Cat Bond Capacity Split into Perils4
100%
Secondary Market Pricing (as per 6/30/2012)5
1400
13%
13%
16%
17%
80%
60%
24%
16%
9%
9%
16%
19%
15%
18%
5%
9%
17%
12%
20%
18%
Risk Spread (bps)
1200
1000
800
600
40%
20%
40%
49%
55%
48%
50%
53%
400
200
0%
Expected Loss (%)
0
2007
2008
US Wind
Japan Perils
2009
2010
US Earthquake
Health
2011
2012 YTD
Europe Wind
Other
0
1
2
3
Regional Hurricane
Europe Windstorm
4
US-Wide Hurricane
US Earthquake
Oversubscription in bookbuilding could help to offset transaction costs in smaller-sized cat bonds
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


The fixed costs to set up a cat bond have been a
roadblock for smaller, regional companies targeting
lower coverage volumes to tap the ILS market
Meanwhile, the broadening of the ILS investor base
over the last few years has enabled insurers to create
excess demand during a bond’s bookbuilding and to
upsize their initially planned volumes without having to
raise risk spreads above price guidance
Yet, instead of upsizing a transaction at a given price,
oversubscription could also be used to decrease the
risk spread at a lower issuance volume
Smaller insurers could use this procedure to help offset
the relatively high fixed transaction costs in smallersized transactions; we will lay out this concept in more
detail in the upcoming edition of our ILS Market Update
4 Excluding
Q1 / Q2 Non-Life ILS Issuance (in $m)
+41%
Initial Volume
Guidance
Issued Volume
+17%
+32%
3,588
+12%
2,600
2,543
2,220
1,757
1,239 1,385
2009
1,335
2010
2011
2012
mortality transactions, including health transaction (Vitality Re series); Multi-Peril bonds were split into single perils according to their contribution to Expected Loss
adjusted (for Europe Windstorm and hurricane) risk spreads based on traded bond prices in secondary markets
5 Seasonality
4
ILS Market Update Q2 2012
Market Factsheet
Upcoming Maturities (in $m)
US Multi-Peril
10
US Wind
US Earthquake
Multi-Peril Multi-Region
Japan Earthquake
Japan Wind
Other
Expected Loss (%)
8
6
4
2
0
Q3 2012
Q4 2012
Q1 2013
US Wind
US Multi-Peril
Multi-Peril Multi-Reg.
Japan Earthquake
Other
Total
0
Total
350
75
100
260
290
1,075
Q2 2013
Q3 2013
US Wind
US Earthquake
40
245
US Wind
US Multi-Peril
US Earthquake
Multi-Peril Multi-Reg.
455
1,505
350
230
US Wind
US Multi-Peril
96
250
Total
285
Total
2,540
Total
346
Non-Life ILS Secondary Market Spreads (Indexed)6
2009
2010
2011
2012 YTD
120%
Cat Bond
Market Total
US Wind
100%
80%
US
Earthquake
US Multi-Peril
60%
Multi-Peril
Multi-Region
Europe Wind
40%
20%
Japan Perils
0%
Non-Life ILS Issuance 2012 – Trigger/Peril Split7
Indemnity
Modeled Loss
PCS
Parametric
PERILS
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
7
AIR
100%
Issuance
Volume
(in $m)
6
Share of Modeling Agencies in Non-Life ILS
US Wind
US
Earthquake
Europe
Wind
2,276
327
264
Japan Perils
430
Other
141
0%
Issuance
Volume
(in $m)
RMS
EQECAT
Club Deals
Own Model
2007
2008
2009
2010
2011
2012 YTD
6,791
2,725
3,398
4,836
4,271
3,438
Secondary Market Spreads were adjusted for Expected Losses to exclude Expected Loss-Driven changes in spreads
Multi-peril bonds were split into single perils according to their contribution to Expected Loss; Others are Winterstorm, Severe Thunderstorm and Wildfire
5
ILS Market Update Q2 2012
Non-Life ILS Issuances 2012 YTD
Transaction
Cedent
Series 2012-1
Class A
Vitality Re III Ltd.
Series 2012-1
Class V-AA3
0.23
Medical
Benefit
Ratio
Pricing
(bps)
MMF +
420
MMF +
620
40
US Hurricane
2.91
PCS
MMF +
1100
23
US Hurricane/ Europe Windstorm
5.59
PCS/PERILS
MMF +
1650
100
Assurant
Series 2012-1
Class B
Kibou Re Ltd.
Q1 2012
0.01
Trigger
Swiss Re
Series 2012-1
Class A
Series 2012-I
Class A
Mystic Re III Ltd.
US MMF
January
2015
US MMF
February
2015
US MMF
0.79
Parametric
MMF +
525
February
2015
US MMF
CEA
150
US Earthquake
2.25
Indemnity
MMF +
725
February
2015
US MMF
March
2015
US MMF
March
2015
US MMF
March
2016
US MMF
January
2015
US MMF
April
2015
US MMF
100
Munich Re
US Hurricane/ US Earthquake
75
Class A
Country Mutual
&
North Carolina
Farm
Bureau
Class C
US Hurricane/ Europe Windstorm
MMF +
1200
PCS/PERILS
MMF +
850
MMF +
900
1.54
Indemnity
50
2.13
MMF +
1075
100
0.01
MMF +
450
50
US Hurricane/ US Earthquake/
Thunderstorm/ Winterstorm
0.62
Indemnity
MMF +
600
0.59
US Hurricane/ US Earthquake/
Caribbean/Mexican hurricane
120
MMF +
1000
MMF +
1775
2.45
120
Allianz
Class B
1.95
US Hurricane/ Severe
Thunderstorm
50
Class A
Indemnity
2.37
75
Series 2012
Class B
MMF +
900
1.49
175
Chubb
Blue Danube Ltd.
January
2015
Japan Earthquake
Series 2012
Class A
Class B
MMF +
1350
4.95
Collateral
Solution
300
Liberty Mutual
East Lane Re V Ltd.
PCS
Maturity
Zenkyoren
Series 2012-1
Class B
Queen Street V Re Ltd.
MMF +
835
2.33
US Hurricane
30
Series 2012-1
Class A
Combine Re Ltd.
Expected Loss
(%)
Health
45
Series 2012-1
Class V-D3
Ibis Re II Ltd.
Embarcadero Ltd.
Covered Perils
105
Aetna
Series 2012-1
Class B
Successor X
Ltd.
Size
($m)
PCS
MMF +
1075
1.77
Akibare II Ltd.
Series 2012-1
Class A
MSI
130
Japan Typhoon
1.04
Modeled
Loss
MMF +
375
March
2016
US MMF
Pelican Re Ltd.
Series 2012-1
Louisiana
Citizens Prop.
Ins.
125
US Hurricane
3.54
Indemnity
MMF +
1375
April
2015
US MMF
Everglades Re Ltd.
Series 2012-1
Citizens
750
US Hurricane
2.53
Indemnity
MMF +
1775
April
2015
US MMF
May
2015
IBRD
Puttable Notes
June
2016
US MMF
June
2015
US MMF
Q2 2012
Series 2012-1
Class A
50
LIBOR +
850
1.23
US Hurricane
Mythen Ltd.
Residential Re 2012
Ltd.
Series 2012-1
Class E
Swiss Re
Series 2012-1
Class H
250
Series 2012-I
Class 7
40
Series 2012-I
Class 5
USAA
Series 2012-I
Class 3
Long Point Re III Ltd.
100
Series 2012-1
Class A
110
0.9
US Hurricane/ Europe Windstorm
US Hurricane/ US Earthquake/
Thunderstorm/ Winterstorm/
Wildfire
50
Travelers
250
PCS
2.44
LIBOR +
1100
6.94
MMF +
2200
0.58
Indemnity
0.88
MMF +
800
MMF +
1000
1.82
US Hurricane
LIBOR +
800
Indemnity
MMF +
600
6
ILS Market Update Q2 2012
Disclaimer
Munich Re Group is not a legal, tax or accounting advisor and makes no representations as to the accuracy of any data or
information gathered or prepared by Munich Re Group or advisors hereunder. Your company should therefore consult
with its own tax, legal or other advisors and make its own independent analysis and investigation of the proposed
transaction, as well as the financial, legal, accounting and tax consequences thereof, the creditworthiness of the parties
involved and all other matters to the transaction prior to its own independent decision whether or not to enter into any
agreements in connection with the transaction. This analysis and proposal contains indicative terms for discussion
purposes only. Munich Re Group gives no assurance that any transaction will be consummated on the basis of these
indicative terms and no specific issuer is obliged to issue any security or instrument on such indicative terms. This
presentation does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to
enter into any transaction on such indicative terms. The data and analysis does not assure that securities can be issued at
certain terms and conditions. All terms and conditions are subject to a mutually agreed engagement letter. This document
is not intended to provide the sole basis for any evaluation by you of a transaction, security or instrument and you agree
that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently
determined by you including consideration of the legal, tax accounting, regulatory, financial and other related aspects
thereof. In particular, Munich Re Group owes no duty to you to exercise any judgment on your behalf as to the merits or
suitability of any transaction, security or instrument. The information contained herein is provided to you on a strictly
confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you (other than to your
professional advisors) without prior written consent.
Risk Trading Unit
Munich Reinsurance Company
Königinstraße 107
80802 München, Germany
Dr. Andreas Müller
Head of Origination | Distribution | ILS Investments
+49 89 3891 9294 anmueller@munichre.com
Marion von Achten
Manager Origination
+49 89 3891 2430 machten@munichre.com
Dr. Steffen Hinss
Manager Origination
+49 89 3891 4919 shinss@munichre.com
Natalie Kraus
Manager Origination
+49 89 3891 9497 nkraus@munichre.com
Daniel Stadtmüller
Manager Origination
+49 89 3891 4703 dstadtmueller@munichre.com
Dr. Robert Herde
Manager Distribution
+49 89 3891 5119 rherde@munichre.com
Dr. Christian Heigl
Chief Actuary
+49 89 3891 9519 cheigl@munichre.com
Bernd Günther
Actuary
+49 89 3891 5224 bguenther@munichre.com
Marius Müller
Manager ILS Investments
+49 89 3891 3564 mmueller@munichre.com
Sebastian Vogel
Analyst
+49 89 3891 2983 sevogel@munichre.com
7
© 2012
Münchener Rückversicherungs-Gesellschaft
Königinstrasse 107, 80802 München, Germany