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Avalon Re A Casualty Cat Bond

Avalon Re A Casualty Cat Bond. Cat Bond Definition. Cat Bond is short for Catastrophe Bond: A corporate bond with special language that requires the bondholders to forgive or defer some or all payments of interest or principal if actual Catastrophe losses surpass a specified amount, or trigger.

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Avalon Re A Casualty Cat Bond

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  1. Avalon ReA Casualty Cat Bond

  2. Cat Bond Definition • Cat Bond is short for Catastrophe Bond: • A corporate bond with special language that requires the bondholders to forgive or defer some or all payments of interest or principal if actual Catastrophe losses surpass a specified amount, or trigger. • Cat Bonds were originally developed by insurance companies in the early to mid 1990’s who were looking for additional capacity to reinsure natural Catastrophes, ie: earthquakes, wind storms, hurricanes. • Historically, Cat bonds have provided risk securitization for purely Catastrophic events – Avalon Re, Ltd. was the FIRST company to issue a Casualty Catastrophe Bond Oil Causalty Insurance, Ltd.

  3. Is it Similar to a Corporate Bond? • How is it different from any other type of Corporate Bond? • When a Corporate Bond matures, the investor receives the principal amount at maturity…a Cat Bond investor may not: • The principal is repaid only IF the Cat Bond has not been ‘triggered’ • The investor receives back only that portion of principal that has not been ‘triggered’, and the relevant interest • If the Cat Bonds have been ‘triggered; the reinsurer (ie. Avalon Re, Ltd.) that issued the bond can pay claims with the funds that would otherwise have gone back to the bondholders Oil Causalty Insurance, Ltd.

  4. Key Benefits of New Capital Protection Program • Repositioning Commercial Reinsurance • This will be evident in the case of a Paid Loss, as Cat Bond “drops down” • Increased bargaining power over next three years • Reinsurance Costs should decrease further in future • Increased Protection • At least maintain S&P rating of A-/Stable outlook, if not increase the rating • Fixed Costs on three layers of protection Oil Causalty Insurance, Ltd.

  5. Why did OCIL pursue the Capital Markets? • Capital Management Objectives lead the path: • Reduce the reliance on commercial reinsurance • Introduce a securitized reinsurance program to further diversify the capital sources and lower the capital costs overall • Design a capital structure around the six loss scenario. Oil Causalty Insurance, Ltd.

  6. $900M Commercial Reinsurance 6th Loss 8th Loss $750M Avalon Re, Ltd. 5th Loss $600M Avalon Re, Ltd. 4th Loss $450M Avalon Re, Ltd. 3rd Loss $300M Commercial Reinsurance 2nd Loss $150M Commercial Reinsurance 1st Loss Integration with Traditional Reinsurance = OCIL Retention Oil Causalty Insurance, Ltd.

  7. Example of the ‘Drop Down’ Potential Reinsurance Program after Two Full Limit Losses: Current Reinsurance Program: $900M $900M Commercial Reinsurance Commercial Reinsurance $750M $750M Commercial Reinsurance Avalon Re, Ltd. $600M $600M Commercial Reinsurance Avalon Re, Ltd. $450M $450M Avalon Re, Ltd. Avalon Re, Ltd. $300M $300M Commercial Reinsurance Avalon Re, Ltd. $150M $150M Commercial Reinsurance Avalon Re, Ltd. = OCIL Retention Oil Causalty Insurance, Ltd.

  8. Summary of Differences in the Two Types of Reinsurance Oil Causalty Insurance, Ltd.

  9. What/Who is Avalon Re, Ltd.? Special Purpose Vehicle “SPV” Reinsurance Contract OIL Casualty Insurance, Ltd Investors Securities Avalon Re, Ltd. Premium Cash Oil Causalty Insurance, Ltd.

  10. Who are the Investors? Oil Causalty Insurance, Ltd.

  11. Why do they Invest? • Various types of investors, however, for the most part, the Hedge Funds and Mutual Funds are the largest investors • The high interest rates, which reflect the higher risk they are assuming have made Cat Bonds attractive to the multi strategy hedge funds in particular. • The Cat Bonds have added diversification, due to their non-correlated risk, to the various Mutual and Hedge Funds that have invested in them Oil Causalty Insurance, Ltd.

  12. Cat Bond: Annual Reset The interest rate on a given tranche will be reset annually to reflect changes in underlying risk and expected loss: Attachments Membership Assets Limits Actuarial Model New Expected Losses New Interest Rates Oil Causalty Insurance, Ltd.

  13. Thank you!

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