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Casualty Actuarial Society:Overview of Catastrophe Risk
Securitization
Presented by:
American Re Securities Corporation
March, 2000
March, 2000 2 of 27
Table of Contents
I. Transaction Structures
II. Transaction Costs
III. Transaction Timing
IV. Catastrophe Bond Investors
Appendix I Gold Eagle Capital Limited
Appendix II Other Transactions
This presentation has been prepared by American Re Securities Corporation on behalf of itself and associated companies, and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. Neither American Re Securities Corporation nor any affiliate has acted or will act as a fiduciary or financial, investment, commodity trading or other advisor of or for any recipient of this presentation and any investment, trading or hedging decision of a party will be based upon its own independent judgement after consultation with such tax, accounting, legal and other advisors as it deemed appropriate. Although the information in this presentation has been obtained from sources believed to be reliable, we make no representations as to its accuracy or completeness and it should not be relied upon as such. Any opinions expressed herein are subject to change. From time to time, American Re Securities Corporation, its associated companies and any of their officers, employees or directors may have a position, or otherwise be interested in, transactions in any securities directly or indirectly the subject of this presentation. American Re Securities Corporation, or its associated companies, may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this presentation.
The information contained herein is confidential and may not be copied or otherwise reproduced or quoted to any party other than the receiving party (including its directors, officers, employees, or professional advisors in whole or in part).
Transaction StructuresTransaction Structures
March, 2000 4 of 27
Insurance Intermediary provides retrocessional coverage for Sponsor Insurance Intermediary cedes risk to a Special Purpose Entity The Special Purpose Entity fully collateralizes the maximum recovery by issuing securities to the Capital Markets
SponsorSponsor InsuranceIntermediary
InsuranceIntermediary
InvestorsInvestors
Special Purpose
Entity
Special Purpose
Entity
CollateralTrust
CollateralTrust
Principal
Interest and remaining principal at maturity
Premium
Contingent Claims Payment
Contingent Claims Payment
Premium
Coupon on Principal Principal
Fundamental Transaction Structure
Optional
March, 2000 5 of 27
Indemnity CAT Bond
Linked to actual losses of Sponsor in excess of retention:
No basis risk
Co-insurance is required
Requires extensive disclosure
Detailed disclosure on underwriting, business practices and underlying exposures
Bond structure must allow for claims development period:
Investors have extension risk
No recovery for Sponsor until the end of the development period
Maximum Possible Exposure
Maximum Possible Exposure
Indemnity Cat Bond
Traditional Reinsurance
Retention
$ A
ctu
al L
oss
es
Insurer
Investors and Insurer
Insurer
Re-Insurers and Insurer
March, 2000 6 of 27
Parametric CAT Bond
Linked to physical event parameters
Location Magnitude for Earthquake Maximum windspeed or barometric pressure
for Windstorm (no precedent exists for Windstorm)
Introduces basis risk between parametric trigger and incurred losses
No Co-insurance
Requires minimal disclosure
No disclosure on underwriting, business practices or underlying exposures
No extension risk for Investors
Less elapsed time before Sponsor’s recovery than for an indemnity bond
Maximum Possible Exposure
Maximum Possible Exposure
Parametric Cat Bond
Traditional Reinsurance
Retention
Ma
gn
itud
e o
f e
ven
t
Insurer
Re-Insurers and Insurer
Investors
Insurer
March, 2000 7 of 27
Modeled Index CAT Bond
Modeled Index Linked Securities: e.g. ModILSSM
Linked to an Index:
Modeled Industry Losses Modeled Insurer Losses
Less basis risk than for a Parametric CAT Bond
No Co-insurance
Requires minimal disclosure
No disclosure on underwriting and business practices
If an industry index, no disclosure on Sponsor's exposures
No extension risk for Investors
Less elapsed time before Sponsor’s recovery than for an indemnity bond
Maximum Possible Exposure
Maximum Possible Exposure
ModILSSM
Cat Bond
Traditional Reinsurance
Retention
$ M
od
ele
d L
os s
es
Insurer
Re-Insurers and Insurer
Investors
Insurer
March, 2000 8 of 27
Coping with the Basis Differential
Basis differential can be placed or retained:
The Sponsor can retain the basis
No cost related to third party taking basis Positive value can be structured to equal or
exceed negative value May prevent transaction from being treated as
reinsurance for regulatory purposes
Through an Insurance Intermediary, the index or parametric bond can be transformed into an indemnity policy, and the Intermediary can place or retain the basis risk
An Intermediary can arrange for a cap on the basis differential, thereby ensuring performance within a collar range
L
oss
/Ga
in
Probability of Exceedance
0.X%
Transaction CostsTransaction Costs
March, 2000 10 of 27
Costs of Transaction
Initial transaction costs are constant for any transaction of $100 million in size or less:
Estimated One-Time Transaction CostsLegal Costs $500,000Modeling Costs $250,000Structuring and Underwriting Fee $3,000,000Rating Agencies $200,000Printing Costs $20,000Miscellaneous and Accounting $25,000Trustee Fee $30,000
Total One-Time Transaction Costs $4,025,000
Ongoing transaction costs depend on the maturity of the bond. The following estimates are the spread to LIBOR demanded by Capital Markets investors for a ModILSSM or Parametric bond of BB risk:
1 Year 3 Year 5 Year
400 bps 450 bps 500 bps
March, 2000 11 of 27
Annual Costs of Transaction
All-in, estimated transaction costs, expressed as an annual Rate-on-Line:
1 Year 3 Year 5 Year$50 Million 12.1% 7.2% 6.6%$100 Million 8.0% 5.8% 5.8%
Transaction TimingTransaction Timing
March, 2000 13 of 27
Time Frame
0 1 2 3 4 5 6 7 8
Closing
Marketing
Rating Agency
Documentation
Risk Modeling
Structural Design
Elapsed Time (in months)
Indemnity Bond
ModILS SM or Parametric Bond
Catastrophe Bond InvestorsCatastrophe Bond Investors
March, 2000 15 of 27
Some Previous Investors:
Bank of Montreal Bracebridge Capital Research and Trading Combined Insurance Company
of America Everest Re John Hancock Mutual Life Lazard Lincoln Re Lutheran Brotherhood Pacific Life PIMCO Renaissance Re TIAA Travelers US Fidelity & Guarantee
Investors in CAT bonds
Mutual FundsMutual Funds
Life InsurersLife Insurers
Hedge FundsHedge Funds
ReinsurersReinsurers
BanksBanks
Non-Life InsurersNon-Life Insurers
Gold Eagle Capital LimitedGold Eagle Capital Limited
Appendix I
March, 2000 17 of 27
Transaction Highlights
Gold Eagle Capital Notes offer diversified exposure to catastrophic risk:
East Coast/Gulf Hurricane New Madrid Earthquake California Earthquake
Modeled Index Linked Securities (ModILSSM), where performance is linked to an index reflecting modeled, rather than actual, insurance losses, avoid certain risks associated with indemnity CAT bonds:
Investors exposed solely to frequency of event occurrence, with no uncertainty as to severity of loss
No exposure to claims paying practice or changes in underlying policies Exposure data and associated attachment points are placed in escrow and
remain static No uncertainty from secondary perils Allows rapid post-event settlement period
Class A Notes were the first, fully principal-at-risk, investment grade CAT bond
March, 2000 18 of 27
Transaction Summary
Securities: $50 million of Class A Floating Rate Modeled Index Linked Notes $126.6 million of Class B Floating Rate Modeled Index Linked Notes
Issuer: Gold Eagle Capital Limited, a special purpose Bermuda company
Index Swap Counterparty: American Re Capital Markets, Inc. (“ARCM”), a wholly owned subsidiary of American Re Corporation (“ARC”)
Use of Proceeds: Invested in Permitted Investments to collateralize the Index Swap
Index SwapCalculation Agent: Risk Management Solutions, Inc. (“RMS”)
Maturity Date: April, 2001 (subject to a maximum extension of 2 months)
Risk Period: November 24, 1999 to March 31, 2001, excluding 1999 Hurricane
Coupon: Class A: US$ 3 month LIBOR +295 bpsClass B: US$ 3 month LIBOR +540 bps
Ratings: Class A: Baa3/BBB- Moody’s/FitchClass B: Ba2/BB Moody’s/Fitch
March, 2000 19 of 27
Gold Eagle Capital LimitedNovember 1999
Gold Eagle Capital Limited enters into a cash-collateralized, catastrophe Index Swap with ARCM.
Gold Eagle Capital Limited collateralizes this swap by issuing $176.6 million of Modeled Index Linked Notes to investors.
Gold Eagle Capital Limited enters into an Interest Rate Swap to smooth investment income.
Index SwapCounterparty
(ARCM)
Index SwapCounterparty
(ARCM)
CIBC, LondonCIBC, London
CollateralAccount
CollateralAccount
Gold EagleCapital Limited
Gold EagleCapital Limited
ModILSSM
Investors
ModILSSM
Investors
Principal Repayment & Interest
Cash Proceeds
Fixed Payment
Qualifying Event Settlement Amount
Cash Proceeds from Sale of Notes
Return on permitted investments
LIBOR -[XX]
Return on Permitted Investments
DescriptionAmount($MM)
Coupon MaturityMoody’sRating
Class A 50.0 LIBOR+295 17 mo Baa3
Class B 126.6 LIBOR+540 17 mo Ba2
March, 2000 20 of 27
Determination of the Index Value RMS determines if a given Hurricane or Earthquake is a Qualifying Event.
Within 60 days:
RMS parameterizes (quantifies the characteristics of) the Qualifying Event RMS calculates an Index Value utilizing those parameters and the escrowed
Exposure Dataset
If the final Index Value results in a write down of principal, such write down will occur on the Interest Payment Date following the determination of the Index Value
Any Index Value resulting in a principal write-down must be supported by an Agreed Upon Procedures Letter from KPMG to verify the correct application of the RMS model
Generic event and write-down timing example:September, 2000Trigger Event
October, 200030 day PreliminaryIndex Value
November, 200060 day final Index Value
January, 2001Determination Date>60 days after event
January, 2001Interest Payment Datewrite-down of principal
~30 days variable~30 days 5 days
March, 2000 21 of 27
Modeled Risk Profile
Class A NotesAttachment Probability (17 month) 0.24%Exhaustion Probability (17 month) 0.24%Expected Loss (17 month) 0.24%Expected Loss (annualized) 0.17%
Class B NotesAttachment Probability (17 month) 1.10%Exhaustion Probability (17 month) 0.70%Expected Loss (17 month) 0.89%Expected Loss (annualized) 0.63%
Events Qualifying for Calculation:• A Hurricane of category 1 or higher,
occurring in the Eastern Hurricane Region on or after January 1, 2000
• An Earthquake in the New Madrid Seismic Zone or California exceeding magnitude 5.0 at its epicenter
$42 million
$177 million
$127 million
$84 million
Class A
Entire Class B
2/3 Class B
1/3 Class B
0.24%
0.70%
0.86%
1.10%
Principal Reduction
17 monthExceedance
Probability
March, 2000 22 of 27
New Madrid Modeled Risk Profile
Events Qualifying for Calculation:• An Earthquake exceeding certain magnitude
thresholds at its epicenter, in the New Madrid Region:
Mw Mb Ms
5.0 5.0 5.0
400
620
470
435
Class A
Entire Class B
2/3 Class B
1/3 Class B
0.11%
0.18%
0.22%
0.24%
RMS CAT Index Value
17 monthExceedance
Probability
Boundaries for Qualifying New Madrid Earthquake Events
March, 2000 23 of 27
California Modeled Risk Profile
Boundaries for Qualifying California Earthquake Events
Events Qualifying for Calculation:• An Earthquake exceeding certain magnitude
thresholds at its epicenter, in the California Region:
Mw Mb Ms
5.0 5.0 5.0
245
620
291
260
Class A
Entire Class B
2/3 Class B
1/3 Class B
<0.03%
<0.03%
0.05%
0.17%
RMS CAT Index Value
17 monthExceedance
Probability
March, 2000 24 of 27
East Coast/Gulf Modeled Risk Profile
Events Qualifying for Calculation:• A Hurricane occurring in the Eastern Hurricane
Region of category 1 or higher. Any named tropical storm or hurricane that is designated as such by the NHC prior to January 1, 2000 shall be excluded as a Qualifying Event.
[380]
[620]
[410]
[395]
Class A
Entire Class B
2/3 Class B
1/3 Class B
[0.11%]
[0.49%]
[0.59%]
[0.70%]
RMS CAT Index Value
15 monthExceedance
Probability
Boundaries for Qualifying Hurricane Events
March, 2000 25 of 27
Historical Events
EventMagnitude(1)
/ Cat Intensity(2)
LocationModeled
Index Value
Loss to Class B
Loss to Class A
New Madrid EarthquakeNew Madrid 1811-1812 8.2 New Madrid 846 100% 100%Charleston, MO 1895 6.2 New Madrid 43 0 0California EarthquakeSan Francisco 1906 8.3 San Francisco Area 291 100% 0Northridge 1994 (3) 6.8 Los Angeles 39 0 0U.S. HurricaneNot Named 1926 4 Florida 364 0 0Andrew 1992 4 Florida 209 0 0Not Named 1938 3 New England 126 0 0Donna 1960 4 Florida, East Coast 76 0 0Camille 1969 5 Louisiana, Mississippi 49 0 0(1) Magnitudes for New Madrid events are moment magnitudes (Mw). Magnitudes for California events are surface wave magnitudes (Ms).(2) The highest Saffir-Simpson category as assigned by the NHC.(3) The Modeled Index Value for the Northridge earthquake of 1994 is reflective of the policy structures that were in place as of 1997 and is subsequently lower than estimates of the actual Northridge loss.
Other TransactionsOther Transactions
Appendix II
March, 2000 27 of 27
Some Comparable Transactions
Parametric Re (Parametric) 11/97 Tokyo Marine & Fire $100.0 10 0.70% L+430 Ba2Concentric, Ltd (Parametric) 5/99 Tokyo Disneyland $100.0 5 0.42% L+310 Ba1Namazu Re 11/99 GKG (Gerling) $100.0 5 0.75% L+450 BB(S&P)
Pacific Re 6/98 Yasuda Fire & Marine $80.0 5 0.96% L+370 Ba3(Includes Modeled elements)
SR Earthquake Ltd 8/97 Swiss Re $137.0 2 0.68% 10.49% Ba1Domestic Inc. 3/99 Kemper Insurance $100.0 3 0.50% L+369 Ba2Seismic Limited 3/00 Lehman Re $150.0 1.83 0.73% L+450 Ba2
Residential Re 6/97 USAA $477.0 1 0.70% L+582 Ba2Trinity Re 2/98 Centre Solutions $83.5 1 0.83% L+367 Ba3Residential Re 6/98 USAA $450.0 1 0.60% L+404 Ba2Trinity Re 12/98 Centre Solutions $56.6 1 0.77% L+417 Ba3Residential Re 6/99 USAA $200.0 1 0.43% L+366 Ba2Juno Re, Ltd 6/99 GKG (Gerling) $80.0 3 0.45% L+420 Ba2
Mosaic Re 7/98 F&G Re $54.0 1 0.61% L+440 BB(S&P)Mosaic Re II 2/99 F&G Re $45.7 1 0.43% L+400 BB(S&P)Gold Eagle Capital (Class A) 11/99 American Re $50.0 1.42 0.17% L+295 Baa3Gold Eagle Capital (Class B) 11/99 American Re $126.6 1.42 0.63% L+540 Ba2
Diversified US Risk
Japan Earthquake
Japan Windstorm
US Earthquake
US Windstorm