Extreme catastrophe exposures are the capital markets the answer
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Extreme Catastrophe Exposures Are the Capital Markets the Answer?. Grahame Chilton, CEO, Benfield. Overview. Top 10 Most Costly Hurricanes in US History (Insured Losses). Source: Swiss Re sigma No 2/2006, losses indexed to 2005.

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Extreme Catastrophe Exposures Are the Capital Markets the Answer?

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Extreme Catastrophe ExposuresAre the Capital Markets the Answer?

Grahame Chilton, CEO, Benfield


Overview


Top 10 Most Costly Hurricanes in US History (Insured Losses)

Source: Swiss Re sigma No 2/2006, losses indexed to 2005


Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade

1930s – mid-1960s:

Period of Intense Tropical Cyclone Activity

Mid-1990s – 2030s?

New Period of Intense Tropical Cyclone Activity

10

Est.

Tropical cyclone activity in the mid-1990s entered the active phase of the “multi-decadal signal” that could last into the 2030s

Already as many major storms in 2000-2005 as in all of the 1990s

*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) &

Katrina, Rita, Wilma (2005)).

Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.


Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006

Forecast US land falling hurricane activity

30% above the 1950 -2005 norm in 2006

(Forecast 4th August 2006)

Professor Mark Saunders, Dr. Adam Lea, Tropical Storm Risk Consortium


Comparing 2004 to Past Years

All Years (1899-2004) With 3 or More Hurricanes MakingLandfall Between Mobile Bay & Jacksonville, FL

Only 2004 Has Had 4 Hurricanes Making Landfall in this Region


Katrina & Rita: storm tracks

Source : Rigzone – 26/9/2005


Hurricanes Katrina/Rita: Damage to Oil Platforms and Rigs in Gulf of Mexico

No. of Platforms/Rigs Destroyed, Damaged or Adrift, as of October 4, 2005.

Source: Minerals Management Service (MMS), US Department of the Interior.


Estimated Energy Losses 2004/2005

$18.8B Total Losses

OIL, Assureds Retentions Uncovered Claims

$10.2B Total

Losses

OIL, Assureds Retentions Uncovered Claims

Commercial Market Losses

Commercial Market Losses

CAT Losses

$9.1B

$12.9B

CAT Losses

$5.1B

$7.7B

$3.8B

Operational Losses

Estimated Premium

$2.8B

$2.6B

Estimated Premium

$2.8B

Operational Losses

2005

2004


2004-2005 Combined

$18.0B

Global Commercial Energy Market Insured Losses

$5.6B

Global Commercial Market Premium

Global Commercial Market Premium

Estimated Combined Loss Ratio (2004/2005) = 321%


Post Ivan, Katrina and Rita


2005 Hurricane Season

Source: WeatherUnderground.com, January 18, 2006.


Reinsurance market overview


Largest insured catastrophe losses

Source: Swiss Re


Post-KRW new capital 2005-6


The new market spectrum

Retro

Hedge fund

SPVs

Hybrid capital

Property Cat

Reinsurance

ART

Cat bonds

Capital markets


Many Programs Partially Placed

US Property Catastrophe Reinsurance: June 06

June 2006 Renewals

2005 BOUND PROGRAMS VS 2006 MARKET QUOTES

2005 Bound

2006 Quotes

Rate On Line

Price Increases Outstrip Risk

Probability of Attachment1

1 Based on Benfield analysis using RMS v5.0


Gulf Exposed/Loss Sensitive Programs Hit Hardest

AVERAGE ROL CHANGE FOR TOTAL BENFIELD LIMIT PLACED ( Percent )

Region2006 ROL2005 ROLChange

Southeast13.605.65140.45

Nationwide12.606.07108.29

Florida20.209.97102.45

Northeast4.303.4525.93

California6.705.9611.94

Midwest6.205.984.38

Other*6.325.6311.38

Total10.706.1174.57

Source: Benfield analysis of Jan – June placements.

Other includes four companies with Puerto Rico and Texas exposure.

PRICE IMPACT BY RENEWAL DATE

(Percent Increase)

With Ceded Loss

HILOAVG

January 1121045

June23674154

July16465104

Without Ceded Loss

HILOAVG

January 40013

June35620

July573647

Source: Benfield analysis of Jan – July placements.

*Other includes four companies with Puerto Rico and Texas exposure


US Property Catastrophe: Limit purchased

AVERAGE PROGRAMME LIMIT INCREASES VERSUS 2005 ( Percent Change )


Cat Bonds

Risk Transfer to Capital Markets

Sidecars

Startups

Risk Financing from Capital Markets

Capital Raising

Benefits of Increased Pricing & Improved Risk Management

Retained Earnings

Solutions for Current Dislocation

RMS Estimate of New Capital Required

$124 billion


Cat Bonds

Risk Transfer to Capital Markets

Sidecars

Startups

Risk Financing from Capital Markets

Capital Raising

Benefits of Increased Pricing & Improved Risk Management

Retained Earnings

Solutions for Current Dislocation

RMS Estimate of New Capital Required

Merrill Lynch JV

Starbound Re

Montpelier, Glacier, Lancashire

$124 billion


A Benfield Solution: Starbound Re

  • A sidecar (dedicated underwriting vehicle) created by Benfield and Renaissance Re in May/June 2006

  • Specifically structured for the Florida exposures of Benfield customers using detailed portfolio data

  • Created US$285 million of additional Florida catastrophe capacity exclusive to Benfield

  • No other broker was able to respond to the Florida capacity crunch in this way

  • Numerous Benfield customers with Florida exposures benefited and were able to complete their renewal programmes as a result


Alternative Capacity Will Become More Significant

  • Bermuda sidecars, start-ups and recapitalization offset some reduction in other region capacity / additional limit for 2006 property cat renewals

Traditional Catastrophe Coverage

Alternative Catastrophe Coverage

  • ILW placements expected to double this year

    • 2005 limit placed approx. $2bn

    • 2006 limit expected: $3bn - $4bn

  • Considerable activity in Cat Bond market following Katrina

    • Record number of first time sponsors in 2005 (AXA, Zurich, FM Global, Montpelier Re)

  • Capital Markets appetite may better serve as stabilizing force for large events

    • 2004 global reinsurance surplus = approx. $377bn

    • 2004 global securities and bank assets = approx. $144trillion

SAMPLE 6/1 PROPERTY CAT LIMIT DISTRIBUTION

( Percent )


The new market spectrum

Retro

Hedge fund

SPVs

Hybrid capital

Property Cat

Reinsurance

ART

Cat bonds

Capital markets


Benfield Capabilities

Retro

Hedge fund

SPVs

Hybrid capital

Property Cat

Analytics

Reinsurance

ART

Cat bonds

Capital markets


Questions


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