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Bermuda:Re+ILS Spring 2016

50 Spring 2016 Bermuda:Re/insurance+ILS “The most significant transaction of the fourth quarter was the successful placement of $275 million of Principal At-Risk Variable Rate Notes issued from the newly formed PennUnion Re.” based on key intensity measurements of the physical parameters for each respective peril captured at specified measurement locations. Depending upon the peril, the measurements are taken from inland and offshore locations ranging from the Washington, DC to Providence, Rhode Island regions. Storm surge water height measurements are captured at seven tidal gauge stations in the Long Island Sound, East River, Lower New York Bay and Delaware River. Wind measurements are captured and interpolated for 60 zip codes along Amtrak’s Northeast Corridor railways from Washington, DC to near Providence. Earthquake intensity is interpolated to 21 zip codes within the states of Delaware, New Jersey, New York, Pennsylvania and Rhode Island. The underlying exposure was modelled by RMS and the Series 2015-1 Notes carry a one-year expected loss of 1.97 percent, corresponding to an interest spread of 4.50 percent per annum (which was the low end of an initial price guidance quoted as 4.50 percent to 5 percent). Private catastrophe bond placements in 2015 In the private market 20 private cat bond transactions were made in 2015, representing $903.94 million of risk capital transferred to capital market investors (see Chart 4). Pricing Pricing dynamics in the fourth quarter of 2015 were mixed, with bonds trading in different directions based on the risk level, peril exposure and relative market size rather than the market shifting categorically in one direction across all names. The typical fourth quarter ‘Dead Cat’ market (in which bonds prior to their scheduled redemption date that have little to no remaining modelled risk exposure remaining are still paying their full scheduled coupon) was active. Notably however, the required return for Dead Cat liquidity providers in the fourth quarter of 2015 averaged 255 basis points per annum, whereas in the fourth quarter of 2014 the required return averaged closer to 220 basis points. Looking towards 2016, absent a major market disruption, our expectation is that risk spreads in the 144A P&C catastrophe bond and private cat bond marketplace will remain flat to slightly down depending on investors’ perception of available forward supply of investment opportunities relative to the market’s redemption schedule. We expect the 144A P&C catastrophe bond market issuance to be similar to that of the last several years with further growth in the private cat bond market (relative to 2015) as new sponsors incorporate alternative capital. In addition, particularly in a compressed rate environment where the margin for error is low, investors will likely look to overweight their books toward ‘quality’ risks, all else being equal. This preference set is relevant for indemnity trigger transactions for which we would expect a widening of the pricing gap between offerings for portfolios deemed to have a high degree of data capture, transparent modelling and established performance track records relative to those with a less verifiable exposure set. The composition of risk metrics rather than the risk metrics themselves will become all the more relevant to investor decision-making. Overall, we view these patterns as a long-term net positive for the stability and reliability of the 144A and private cat bond marketplaces. �� Securities or investments, as applicable, are offered in the US through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the EU by GC Securities, a division of MMC Securities (Europe) Ltd (MMCSEL), which is authorised and regulated by the Financial Conduct Authority. Main office: 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. CHART 4: PRIVATE CATASTROPHE BONDS: RISK CAPITAL ISSUED 1,000 900 800 700 600 500 400 300 200 100 0 103.6 22.8 181.2 561.5 903.9 2011 2012 2013 2014 2015 Source: GC Securities Proprietary Database (2 DEALS) (6 DEALS) (17 DEALS) (20 DEALS) (1 DEAL) Risk Capital Issued Note:Private catastrophe bonds as of December 31, 2015 excluding deals currently being marketed Risk Capital Amount (USD Millions)


Bermuda:Re+ILS Spring 2016
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