Handout 2

499 views
483 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
499
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • 12/05/10 12:24
  • 12/05/10 12:24 02/03/00 10:24 AM 9 rmg2000New Presentation MaterialsWorld Bank Slides.ppt
  • 1
  • 12/05/10 12:24
  • 12/05/10 12:24
  • Handout 2

    1. 1. Casualty Actuarial Society “ Risk Securitisation 101” Kymn Astwood, CA Arrow Reinsurance Company, Limited (A Goldman Sachs Group Company) 16 th October, 2000
    2. 2. Agenda <ul><li>Insurance and the Capital Markets are Converging </li></ul>1 2 4 Benefits of Risk-linked Securities Risk Transfer vs Risk Financing 3 Overview of the Risk-linked Securities Sector 5 6 Weather Derivatives and Other Alternatives Structure of Risk-linked Securities
    3. 3. Insurance and Capital Markets are Converging
    4. 4. Insurance and Capital Markets are Converging <ul><li>Pricing and volatility for insurance and reinsurance </li></ul><ul><li>1999 – second worst catastrophe year for the P&C industry </li></ul><ul><li>Weather hedging driven by utility deregulation </li></ul><ul><li>Portfolio credit hedging driven by BIS rules, cyclical considerations </li></ul><ul><li>Availability of coverage for high capacity/new exposures </li></ul><ul><li>Securities rulings and opinions </li></ul><ul><li>Standard documentation </li></ul><ul><li>SVO rating guidelines </li></ul><ul><li>Modeling firms </li></ul><ul><li>Academic and government-sponsored research </li></ul><ul><li>Internet-based data accessibility </li></ul><ul><li>Rating agency expertise </li></ul><ul><li>Concern over correlation – particularly in down markets </li></ul><ul><li>Desire for more concrete risk assessment </li></ul><ul><li>“ Alpha-driven” investing </li></ul>Corporations, Traditional Insurance and Reinsurance Markets Legal and Regulatory Infrastructure Risk Assessment Technology Capital Markets New Risk Instruments
    5. 5. Risk Markets Group Fixed Income Currency & Commodities Investment Banking Division Goldman, Sachs & Co. RISK MARKETS GROUP The Goldman Sachs Group, Inc. London New York Trading Arrow Re ( a Bermuda Reinsurer) GS Risk Advisors ( a Reinsurance Intermediary) Research
    6. 6. Accessing Multiple Markets for Risk Management – Past Example United States Automobile Association (“USAA”) Risk management program shown was designed for an optimal mix of coverage from reinsurance and capital markets
    7. 7. Accessing Multiple Markets for Risk Management – Past Example SCOR (a French Reinsurer) Risk management program shown was designed for an optimal mix of coverage from reinsurance and capital markets
    8. 8. Accessing Multiple Markets for Risk Management – Past Example XL Mid Ocean Re (a Bermuda Reinsurer) Risk management program shown was designed for an optimal mix of coverage from reinsurance and capital markets
    9. 9. Accessing Multiple Markets for Risk Management – Past Example State Farm Insurance Group (a US Insurer) Risk management program shown was designed for an optimal mix of coverage from reinsurance and capital markets
    10. 10. Risk Management Alternatives
    11. 11. Risk Management Alternatives Risk Financing Risk Transfer Reinsurance Derivatives Securities Banks Finite Reinsurance Securities Risk Intermediary FONDEN Retained Risk
    12. 12. Overview of Coverage Types <ul><li>Types of Coverage </li></ul><ul><li>Premiums paid at levels exceeding the market price of risk. Excess builds up in a fund which is returned if there is no loss </li></ul>Pre-Funded Coverage <ul><li>Payout determined and paid post-event. It is repaid over time. There may be a small option premium paid in advance </li></ul>Post-Funded Coverage <ul><li>A premium is paid in advance equaling the market price of risk </li></ul>Risk Transfer Coverage ——————— Risk Financing Options ——————
    13. 13. Impact of Market Forces <ul><li>Securitization will become increasingly cost competitive with reinsurance because of the forces driving both the markets </li></ul>9 <ul><li>Reinsurance </li></ul><ul><li>Hardening of retrocessional markets </li></ul><ul><li>Problems in Australian insurance market </li></ul><ul><li>Earthquakes in Turkey, Taiwan, Greece, Mexico </li></ul><ul><li>Hurricanes in U.S. and Central America </li></ul><ul><li>Higher satellite and aviation losses </li></ul><ul><li>Problems with workers compensation market due to Unicover-managed pool </li></ul><ul><li>Pressure to increase premiums to restore investor confidence in insurance/reinsurance stocks </li></ul><ul><li>Industry consolidation </li></ul><ul><li>Securitization </li></ul><ul><li>Stable spreads with respect to BB corporate bonds </li></ul><ul><li>Lower transaction costs </li></ul><ul><li>Increased investor comfort with the asset class </li></ul>
    14. 14. Overview of the Risk-Linked Securities Sector
    15. 15. Overview of Risk-Linked Securities <ul><li>Securities whose returns are linked on the occurrence of events </li></ul><ul><li>Ratings based on the probability of event occurrence </li></ul><ul><li>Credit risk (as opposed to event), is generally minor </li></ul><ul><ul><li>High grade investment trust account </li></ul></ul><ul><ul><li>Additional credit support </li></ul></ul><ul><li>Most bonds floating rate, 1-5 years </li></ul>1996-1997 First Property Risk Securitisation 1998-1999 Issuance Volume Grows to over 1bn Catastrophe per Year 2000 Issuance Increasing, Secondary Trade Volume Tops $1bn
    16. 16. Evaluating Risk-Linked Securities Quantifying Default Risk Probability in % Losses in USD Risk-linked securities typically transfer risk in the extreme “tail” of the probability curve - low frequency but high severity 0 100 75 50 25 Shown on next page
    17. 17. Evaluating Risk-Linked Securities Typical Structure Retention Securitized Risk Layer 0.2% 1.0% Exhaustion Point Attachment Point Expected Loss 0.2% 1.0% Probability (cumulative) Coinsurance Losses ($)
    18. 18. Sectors of the Risk Securitisation Market Catastrophe $3,880 MM Residential Re Swap 1.0% Juno Re 2. 3 % George Town Re 1. 3 % Gemini Re 4. 3 % Domestic Inc. 2.8% Trinity Re 2.0% Residential Re III 5. 7 % Pacific Re 2. 3 % Trinity Re 1999 1.5% XL MidOcean Swap 2.8% AIG Combined Risk 0.3% Axa Risk Transfer Option 0. 9 % Halyard Re 0.5% Gold Eagle 5. 2 % Soc Gen 2.8% Circle Maihama Ltd 2.8% Winterthur 0.2% SR Earthquake Fund 3. 2 % SLF I - IV 1. 6 % MMC New Madrid Swap 1.4% Mitsui Risk Transfer Option 0. 9 % Hedge Financial Swap 2. 6 % Basis Risk Securitization 0.3% Concentric Ltd 2.8% Residential Re II 12. 8 % Residential Re I 11.4 % Parametric Re 2. 6 % Namazu Re 2.8% Mosaic Re II 1. 3 % Mosaic Re 1. 3 % Atlas Re 5. 7 % Hannover I 2.4% Hannover II 2.8% Hannover III 1.4% Seismic Re 4. 3 %
    19. 19. Sectors of the Risk Securitisation Market Weather Derivatives/ Securitisations $4,550 MM Weather Derivatives $4,500M (est.) Kelvin Ltd $50M
    20. 20. Sectors of the Risk Securitisation Market Default $743 MM Gerling &quot;SECTRS&quot; $500M Freddie Mac &quot;MODERNs&quot; $243M
    21. 21. Sectors of the Risk Securitisation Market Hard Asset Value $566 MM Gramercy Place (Toyota Motor Credit) 100%
    22. 22. Sectors of the Risk Securitisation Market Life $855 MM ASLAC l 5 % Mutual Securitisation p.l.c. 50 % Hannover III 6 % Hannover II 14 % Hannover I 7 % ASLAC Il-IV 18 %
    23. 23. League Table As of September 2000 Number of Issues 24 5 5 3 5 1 3 3 3 1
    24. 24. Market Profile of Risk-linked Securities RATING
    25. 25. Market Profile of Risk-linked Securities RISK
    26. 26. Market Profile of Risk-linked Securities TERM
    27. 27. Current Investor Profile Catastrophe Transactions Total (Risk Capital) Distribution Geographic Sector by Sales Office Chicago 8.5% San Francisco 23.8% Vancouver 0.2% New York 51.0% Boston 2.9% London 5.2% Frankfurt 3.4% Milan 0.2% Paris 1.0% Toronto 2.7% Tokyo 1.6% Proprietary/ Hedge Funds 21.9% Reinsurers/ Intermediaries 21.0% Banks 8.2% Mutual Fund/ Investment Advisor 28.9% Life Insurers 16.6% Non-Life Insurers 3.9% 118 Institutional Investors
    28. 28. Benefits of Risk-Linked Securities
    29. 29. Benefits of Risk Securitization Issuer Perspective <ul><li>Diversification of sources of risk protection </li></ul><ul><li>Additional capacity for certain risks / geographic areas </li></ul><ul><li>No credit risk due to full-collateralization of securities </li></ul><ul><li>Prompt claims payment following a loss event </li></ul><ul><li>Clearly defined trigger reduces disputes regarding covered claims </li></ul><ul><li>Multi-year coverage at a fixed cost may be locked in at inception </li></ul><ul><li>Market perception as an innovator and industry leader </li></ul>
    30. 30. Benefits of Risk Securitization Investor Perspective <ul><li>Uncorrelated Diversification can be achieved due to low correlation with equity and fixed income investments </li></ul>
    31. 31. Risk -Linked Securities Pricing and Market Spreads fjjephson: rmgeurope00/investors/spreads 01.xls (Cat Spreads PPT) 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 02/06/1997 13/08/1997 27/10/1997 12/01/1998 26/03/1998 09/06/1998 20/08/1998 02/11/1998 19/01/1999 01/04/1999 15/06/1999 26/08/1999 09/11/1999 Spread over LIBOR (bp) Argentina Brazil Mexico Russia Venezuela BB Catastrophe BB Corporates BB Hard Asset Value Residential Re 576 SR Earthquake Fund 475 Parametric Re 430 Trinity Re 367 HF Re 375 Residential Re II 400 Pacific Re 370 Mosaic Re Class A 440 Gramercy Place Class C-1 325 (3,500-5,900+) XL Mid Ocean Re Tranche A 412 Trinity Re 1999 417 Mosaic Re II 400 Domestic Inc (Ba2/BB+) 369 Concentric Ltd (BB+) 310 Residential Re III 366 Juno Re 420 3Q1998 30/9 /1998 5/7 /1998 Namazu Re 450 Gold Eagle 540
    32. 32. Risk-Linked Securities Non-Correlation and Outperformance in Turbulent Markets Returns: 1998 Third Quarter (%) (a) Trinity Re, Residential Re, Mosaic Re, Pacific Re, Parametric Re
    33. 33. Risk-Linked Securities Non-Correlation and Outperformance in Turbulent Markets Returns: 1999 Third Quarter (%) (a) Trinity Re, Residential Re, Mosaic Re, Pacific Re, Parametric Re
    34. 34. Benefits of Risk Securitization Investor Perspective <ul><li>Uncorrelated Diversification can be achieved due to low correlation with equity and fixed income investments </li></ul><ul><li>Attractive Risk/Return Profile compared with similarly rated corporate bonds </li></ul>
    35. 35. RLS Offer Higher Returns Than Similarly-Rated Securities Summary of Risk-Linked Securitisation Transactions <ul><li>Portfolio of Risk </li></ul><ul><li>US Hurricane </li></ul><ul><li>US Quake and Wind </li></ul><ul><li>Japanese Earthquake </li></ul><ul><li>US Quake </li></ul><ul><li>Typhoon </li></ul><ul><li>Weather </li></ul>Expected Loss (%) Spread to LIBOR (%)
    36. 36. Benefits of Risk Securitization Investor Perspective <ul><li>Uncorrelated Diversification can be achieved due to low correlation with equity and fixed income investments </li></ul><ul><li>Attractive Risk/Return Profile compared with similarly rated corporate bonds </li></ul><ul><li>Sophisticated Risk Analysis is performed by independent catastrophe-modeling firms </li></ul>
    37. 37. The Role of the Expert Modeling Firm Providing a Level Playing Field for Investors Expertisation of Analysis Objective 3rd-party quantification Due diligence No “black box” models Multi-dimensional technical support Education for all constituents Proven catastrophe modeling technology Rating Agencies
    38. 38. Benefits of Risk Securitization Investor Perspective <ul><li>Uncorrelated Diversification can be achieved due to low correlation with equity and fixed income investments </li></ul><ul><li>Attractive Risk/Return Profile compared with similarly rated corporate bonds </li></ul><ul><li>Sophisticated Risk Analysis is performed by independent catastrophe-modeling firms </li></ul><ul><li>Liquidity is provided by the growing secondary market trading of risk-linked securities </li></ul>
    39. 39. RLS – Market Liquidity Secondary Trading Volume Goldman Sachs’ Secondary Trading Volume
    40. 40. Hurricane Bonds Trade Actively Through Storm Events MGCharles: Rmg99/hurricane map_2.cdr Hurricane Floyd: Residential Re Prices Tropical Depression Storm Category Tropical Storm 1 (74-95 mph) 2 (96-110 mph) 3 (111-130 mph) 4 (131-155 mph) 5 (>155 mph)
    41. 41. Basic Structure of Risk-Linked Securities
    42. 42. Risk Securiti s ation Basic Structure Transaction: (risk capital of €500 million) Premium € 500 Reinsurance Contract LIBOR + Premium Issuing Vehicle Insurer Investors Event Happens Up to € 500 Insurer Event Doesn’t Happen Potential Outcomes: Up to € 500 Investors Issuing Vehicle
    43. 43. Case Study Alpha Wind 2000-A Ltd. Hurricane Risk Securitization (State Farm Insurance Group)
    44. 44. Summary Structure At Issuance Alpha Wind A Bermuda SPV Trust Arrow Re 18 Investors Notes $52.5 m Equity $37.5 m Premium Retro Contract Proceeds Securities State Farm Reinsurance Contract Premium
    45. 45. Case Study Concentric / Circle Maihama Earthquake Risk Securitization (Oriental Land Co. Ltd.)
    46. 46. April 1999 Circle Maihama, Ltd. Floating Rate Extendible Notes (FRENs) Concentric, Ltd. Floating Rate Principal-at-Risk Notes
    47. 47. Case Study: Circle and Concentric <ul><li>To provide Oriental Land Co., Ltd., owner and operator of Tokyo Disneyland®, with: </li></ul><ul><ul><li>Fully collateralised multi-year risk transfer earthquake protection </li></ul></ul><ul><ul><li>Fully collateralised post-earthquake stand-by financing facility </li></ul></ul>Purpose Highlights <ul><li>First direct access of capital markets by corporate for catastrophe risk transfer </li></ul><ul><li>First catastrophe contingent financing facility in Japan </li></ul><ul><li>Parametric triggers </li></ul>
    48. 48. Case Study: Circle and Concentric Summary of Terms Use of Proceeds Term Coupon Ratings Payout Structure Size <ul><li>US$ LIBOR + 310bps </li></ul><ul><li>BB+/Ba1/BB+ </li></ul><ul><li>Principal Reduction at Various Magnitudes </li></ul><ul><li>5 years (due May 2004) </li></ul>Concentric, Ltd. <ul><li>Invested in AAA/Aaa rated Directed Investments to collateralised Financial Contract </li></ul><ul><li>US $100 million </li></ul><ul><li>Initially: Invested in AAA/Aaa rated Directed Investments </li></ul><ul><li>After event: Purchase Bonds issued by Oriental Land </li></ul>Circle Maihama, Ltd. <ul><li>US$ LIBOR + 75bps </li></ul><ul><li>A/A </li></ul><ul><li>Scheduled May 2004 (if no Trigger Event Earthquake) </li></ul><ul><li>US $100 million </li></ul>
    49. 49. Case Study: Circle and Concentric Underlying Earthquake Exposure Izu Peninsula Inner Circle Inner Ring Outer Ring Pacific Ocean Tokyo Yokohama Narita Chiba Boso Peninsula Maihama and Tokyo Disneyland Central Point Coordinates Longitude: 139 o 53’ 03’’E Latitude: 35 o 37’ 47’’N Radii Inner Circle: 10 km Inner Ring: 50 km Outer Ring: 75 km Trigger Structure Epicentre of Earthquake must be located within inner circle, inner ring or outer ring Frequency of Trigger 62.4bps 100% 25% 37.5% 62.5% 100% 6.7 6.9 7.1 7.3 7.5 7.7 7.9 25% 75% Inner Ring Outer Ring 6.5 100% 50% 87.5% 25% 40% 32.5% 47.5% 55% 62.5% 70% 77.5% 85% 92.5% Inner Circle 50% 75% Japan Meteorological Agency Magnitude
    50. 50. Weather Risk Hedging
    51. 51. Weather Risk Management <ul><li>First weather derivative traded in 1996 </li></ul><ul><li>$5 billion of weather derivatives executed to date </li></ul><ul><li>Estimated market growth $70 to $100 billion </li></ul><ul><li>Estimated that $1 trillion of $7 trillion U.S. economy subject to weather risk </li></ul>
    52. 52. Impact of Weather on Business Weather Utilities Municipalities Beverage Producers Agricultural Industry Energy Industry Resorts Volumetric Exposures
    53. 53. Impact of Active Risk Management Investment Research on Peoples Energy Corp. “ We are initiating coverage of Peoples Energy with a Market Performer Rating ” 9/14/1999 10/28/1999 1/20/2000 2/15/2000 4/24/2000 “ Strong FY1Q despite warm weather … $0.05 positive EPS impact of weather insurance … We continue to rate PGL shares Market Outperformer ” “ Strong FY2Q despite warm weather because of weather insurance … This weather insurance to date has already paid significant dividends – earnings would have been hurt an additional $0.17 year to date if no weather insurance had been purchased … Market Outperformer ” “ We are raising our rating on PGL to Market Outperformer … Peoples recently announced it purchased a weather insurance policy that would limit the company’s annual EPS risk from warmer than normal weather to about $0.25 … while retaining all of the upside” “ Reducing FY00 estimates due to weather … Although weather has once again proved disappointing, we continue to view the purchase of insurance favorably because it does limit the downside risk … Maintain Market Outperformer Rating ”
    54. 54. Weather Risk Hydro Power Historical Hydro Dam Filling Levels in Norway Hydropower Electricity Generation in Norway Probability Distribution of Annual Rainfall Securitisation of Extreme Drought Risk Securitisation of Extreme Drought Risk Traditional Insurance Cover for Moderate Drought Risk Drought Mean Annual Rainfall
    55. 55. Case Study Kelvin Ltd. Weather Risk Securitization (Koch Energy Trading, Inc.)
    56. 56. Case Study: Kelvin, Ltd Weather Risk Securitization <ul><li>Koch Energy and Trading, Inc, a subsidiary of Koch Industries, Inc. </li></ul><ul><li>One of the largest privately held corporations in the United States </li></ul><ul><li>Based in Wichita, Kansas with more than 16,000 employees worldwide </li></ul><ul><li>A diversified company involved in oil and gas, chemicals, plastics, energy services, chemical and environmental technology products, asphalt products, metal and mineral services, agriculture and financial services </li></ul><ul><li>To manage weather risk embedded in Koch’s energy and agricultural businesses </li></ul><ul><li>To create capacity in order to offer customer solutions </li></ul><ul><li>To broaden investor participation in the weather market </li></ul>Purpose Sponsor
    57. 57. Case Study: Kelvin, Ltd Weather Risk Securitization Defined Portfolio Notional Amount and Risks 40 25 25 25 25 Sioux Falls Milwaukee Columbus Baltimore New York Covington Sault Ste. Marie Chicago Oklahoma City 4 10 Indianapolis 10 35 10 San Francisco Bismarck Covington Portland Cleveland Green Bay Sault Ste. Marie 15 15 Charlotte Oklahoma City 15 Columbus Sioux Falls Oklahoma City Philadelphia 10 3 Tampa San Francisco 4 2 5 2 15 $140MM Warm Winter Swaps $94MM Cold Winter Swaps $66.5MM Cool Summer Swaps $41MM Other Contracts Investor risk is cold winter Investor risk is warm winter Investor risk is hot summer Investor risk is cool summer, warm winter and cold winter (freeze) Birmingham 2 3 .5 3 .5 3 4 3 .5 2
    58. 58. Case Study: Kelvin, Ltd Weather Risk Securitization <ul><li>Kelvin, Ltd </li></ul><ul><li>First Event Weather-Linked Fixed Rate Senior Notes </li></ul><ul><li>$22 million </li></ul><ul><li>February 14, 2003 </li></ul><ul><li>15.80% (at risk) </li></ul><ul><li>B- (DCR) </li></ul><ul><li>Coupon Reduction: 12.1% First Dollar: 9.2% Full Reduction: 0.5% </li></ul><ul><li>4.45% </li></ul><ul><li>Kelvin, Ltd </li></ul><ul><li>Second Event Weather-Linked Fixed Rate Senior Notes </li></ul><ul><li>$23 million </li></ul><ul><li>February 14, 2003 </li></ul><ul><li>8.70% (at risk) </li></ul><ul><li>BBB-/BB+/BB (DCR/Fitch/S&P) </li></ul><ul><li>0.60% </li></ul>Summary of Terms Kelvin, Ltd. First Event Senior Notes Kelvin, Ltd. Second Event Senior Notes Issuer Description Risk Capital Maturity Coupon Ratings Annual Probability of: Annual Expected Reduction Issuer Description Risk Capital Maturity Coupon Ratings 3 Year Expected Reduction
    59. 59. Derivative Transactions Accessing Reinsurance from Investors -- Selected Examples <ul><li>State Farm/Tokio Marine Swaps (April 2000) </li></ul><ul><ul><li>Traded $200m of Japanese earthquake exposure for Midwest earthquake directly </li></ul></ul><ul><li>Oriental Land Currency Swaps (May 1999) </li></ul><ul><ul><li>Ability to pay premium and receive compensation in Japanese yen for a $USD risk-linked security </li></ul></ul><ul><li>CAT Ltd. Hurricane Swap (July 1997) </li></ul><ul><ul><li>$35m of East Coast U.S. wind coverage linked to terms of Residential Re securities </li></ul></ul>Derivative transactions offer the ease of execution of reinsurance, and permit investors in the capital markets to supplement a reinsurance program
    60. 60. Arrow Reinsurance Company, Limited (A Goldman Sachs Group Company) 16 th October, 2000 For additional information regarding this presentation, please contact: Kymn Astwood 441 296 8107 [email_address]

    ×