Chi H. Hum Swiss Re Capital Markets September 24, 2002 Presentation to: Casualty Loss Reserve...

Chi H. Hum

Swiss Re Capital Markets

September 24, 2002

Presentation to:

Casualty Loss Reserve SeminarRegarding:

Alternative Risk Markets

The Insurance-Linked Securities Market

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Proprietary and Confidential

This document is solely for your use ( “you”). The concepts and structures it contains are confidential and proprietary information, as well as business assets of Swiss Re Capital Markets Corporation and our affiliates (“SRCM”, “us” or “we”). They are shared with you for the exclusive purpose of allowing you to evaluate your interest in such structures. In particular, this information may not be used to discuss similar structures with any person SRCM could reasonably consider a competitor in this field. Unless otherwise agreed in writing, SRCM and its affiliates act solely in the capacity of an arm's length contractual counterparty and not as an adviser or fiduciary. Accordingly, you should not regard transaction proposals or other written or oral communications from us as a recommendation or advice that a transaction is appropriate for you or meets your financial objectives.

This material does not constitute an offer to enter into any transaction. Such material is believed by us to be reliable, but we make no representation as to its accuracy or completeness. This brief statement does not purport to describe all of the risks associated with financial transactions and should not be construed as advice to you. Structures similar to these typically are not registered under the Securities Act of 1933 or any state or foreign securities laws and may be offered only to certain institutional investors.




Table of Contents

• Insurance-Linked Securities Market• An Issuer’s perspective• Workers Compensation CAT

Insurance-Linked Securities Market



Proprietary and ConfidentialNote: U.S. dollars in millions.Source: Swiss Re Capital Markets.

ILS New Issue Volume

USD 683 mm

1997 1998 1999

Reliance

USAARes Re I

SR Earthquake

Fund

Parametric

Trinity

Pacific

USAARes Re II

Mosaic Re

Trinity Re II

Mosaic Re II

Domestic

Halyard

Concentric

USAARes Re III

Juno

Namazu

Golden Eagle

USD 754 mmUSD 725 mm

USD 825 mm

2000

Seismic

Atlas Re

Halyard

Alpha Wind

USAARes Re 2000

NeHi

Med Re

USD 1,139 mm

2001

USD 965 mm

Western

SR Wind

Redwood I

USAA Res Re 2001

Trinom

Gold Eagle2001

Atlas Re II

2002

Redwood II

St. Agatha

Fujiyama

USAARes Re 2002

PIONEER A

PIONEER BPIONEER CPIONEER DPIONEER EPIONEER F

Prime CalQuake& EuroWind

Prime Hurricane

Multiline

U.S. WindstormNew Madrid

California EQJapan Typhoon

Japan EQ

EU Windstorm




ILS Outstanding at Year End Since 1997

Note: U.S. dollars in millions, as of December 31 of each year.Source: Swiss Re Capital Markets.

While new issue volume growth has been choppy, total ILS supply has grown as multi-year deals have come to market.

$1,266

$1,031$1,158

$1,994

$2,403

$3,753

1997 1998 1999 2000 2001 2002

Issued

Outstanding

Estimated net new issues from now through the end of 2002



Proprietary and ConfidentialSource: Swiss Re Capital Markets.

ILS spreads increased after the September 11th attacks but in many instances are now even lower than before September 11.

Secondary Markets Spread Trends

365

415

465

515

565

615

665

715

6/18/01 8/18/01 10/18/01 12/18/01 2/18/02 4/18/02 6/18/02 8/18/02

Mediterranean Re B Namazu Re Parametric ReSR Wind A-1 SR Wind A-2 Western Capital



Proprietary and ConfidentialNote: Spreads at issuance.Source: Swiss Re Capital Markets.

850

Retu

rnS

pre

ad

over

LIB

OR

(b

ps)

Risk: Expected Loss

150

250

350

450

550

650

750

0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40%

Redwood Capital II

Fujiyama

Pioneer (TC Atl, Cal EQ)

Pioneer (EU Wind)

Pioneer (Central U.S. EQ)

Pioneer (Japan EQ)

Pioneer (Multi)

Redwood Capital I

Western Capital

Mitsui Swap

SR Earthquake FundParametric Re

SR Wind A-1

SR Wind A-2

Swiss Re Capital Markets Transactions

Selected Insurance-Linked Securities and Swaps

Residential Re 2002



Proprietary and ConfidentialNote: Estimate from Swiss Re Capital Markets.

ILS Investor Segmentation

Capital market investors now dominate non-life insurers in the ILS investor base.

Banks5% Non-life

Insurers15%

Non-life Reinsurers

25%

Mutual Fund/Investment

Advisor30%

Life Insurers15%

Proprietary Funds10%

1999

Banks5%

Non-life Insurers

5%

Non-life Reinsurers

15%

Mutual Fund/Investment

Advisor40%

Life Insurers10%

Proprietary Funds25%

2002

•Mutual Fund/Investment Advisor segment has increased from 30% to 40%.•Proprietary Funds segment has increased from 10% to 25%

An Issuer’s Perspective




An Issuer’s Perspective

•Insurance linked-securities offer an attractive way to manage peak catastrophe exposures

•Traditional management techniques include reinsurance, increased surplus (equity), and reduced risk taking

•Counterparty risk inherent in reinsurance increases for peak exposures

•An issuer can also obtain fixed priced multi-year capacity through the capital markets

Basic ROL for Single A Cover

“Apples to Apples” Comparison of ROL for Peak Exposures

TraditionalRetro

ILSCover

Basic ROL

Collateralization*Fixed Pricing

Adjustments

*Value of collateralization depends on reinsurer’s financial strength.




Securitization Creates Value

Worldwide peak risks are an issue for the reinsurance industry

TC Atlantic (*)

EQ California (*)

WS UK

TC Japan

EQ Japan

EQ New Madrid (*)

EQ Canada

WS France

EQ Australia

EQ Italy

EQ Mexico

WS Germany

EQ Portugal

EQ Columbia

EQ Israel

WS Netherlands

EQ South Africa

WS Belgium

World wide coverage(*) Estimated split based on SR book

Ideal level reinsurance would take for optimal diversification

Peak risks would ideally be ceded to capital markets, which are better able to diversify these risks

Source: Swiss Re.




SPVReinsured Investors

Investments

Swap Counterpar

ty

Principal& interest

Cash proceeds

Reinsurancepremium

Contingentclaim payment

Cash proceeds

Investmentearnings

Scheduledinterest

Investmentearnings

1 2

3

4

Basic Structure

1 Reinsured enters into a reinsurance contract with a Special Purpose Vehicle (SPV).

2 The SPV hedges the reinsurance contract by issuing Notes and Preference Shares to investors in the capital markets

3 Proceeds from the securities offering are invested in high quality securities and held in a collateral trust.

4 Investment returns are swapped to a LIBOR -based rate by the Swap Counterparty




Structuring Elements

• Multi-Year Transaction– Allows amortizing up front transactional costs

over several years.– Lock in spreads for long term capacity in a

market where reinsurance prices are increasing– Investors prefer maturities of 2 to 4 years.

• Size – Minimum meaningful size is USD 70 mm - USD

100 mm– Increased size allows amortizing up front

transactional costs over a larger amount of cover




PIONEER 2002 Ltd. SummarySummary:

Initial Offering: $2 billion Insurance-Linked Note Issuance Facility

$85 million Class A Notes: North Atlantic hurricane $50 million Class B Notes: Europe windstorm $30 million Class C Notes: California earthquake $40 million Class D Notes: Central U.S. earthquake $25 million Class E Notes: Japan earthquake $25 million Class F Notes: North Atlantic hurricane, Europe

windstorm, California earthquake, Central U.S. earthquake, Japanearthquake

Reinsured: Swiss Reinsurance Company, Zurich

Purpose: Establish a platform to allow Reinsured to obtain fully collateralizedcapacity on an opportunistic basis

Risk Period: June 26, 2002 to June 15, 2006

Trigger Mechanism: Indexed trigger based on physical parameters

Expected Rating: BB+/Ba3 for all except BBB- for Class C Notes

Highlights:

•Allows Swiss Re to expedite issuance in response to risk appetite from the capital markets

•First ILS securitization program containing five classes of Notes with uncorrelated risks based on parametric indices, and one class of Notes with a combination of the five risks

•A set of newly defined parametric indices which can be used for future issuances

•First ILS transaction where investor can choose between single or multi-peril tranches




Issuance Structure

Swiss RePIONEER 2002 Ltd.

Initial out of $2 billion

Notes

Return of Outstanding

Amount

LIBOR + Spread

North Atlantic Hurricane

Europe Windstorm

California Earthquake

Central U.S. Earthquake

Japan Earthquake

Combined 5 perils

$255 million (initial takedown)

Investors

Totalreturn on

investments

LIBOR – X

Swap Counter-

party




New Risks

• So far, the majority of insurance-linked securities issued have been for natural perils. Reasons for this include– Risk is relatively easy to isolate and understand– Availability of historical data, scientific research and

risk models• Swiss Re continues to analyze portfolios of risk, looking

for ways to optimize capital utilization. We think that there are areas outside of cat risk, where securitization could be a useful tool for capital management.

• As securitization technology and investor sophistication progress, other risk classes will join natural perils. In several areas substantial statistical information is already available. These new risk classes could include– Life insurance related risks– Auto insurance related risks– Workers Compensation CAT

Workers Compensation CATa work in progress




Potential Opportunities

• Considerations for an issuer – ILS investors are looking for new issues,

diversifying risks and transactions, and transparent triggers

– Workers’ compensation catastrophe reinsurance rates high relative to pre 9/11 levels

– Limited availability of traditional reinsurance– Cost of Capital to support additional exposure

may be a drag on ROE– Potential to aggregate other portfolio risks, e.g.,

property catastrophe risks– Modeling firms creating risk models for WC Cat,

have database of housing stock, location and cat risk data

– Terrorism…with or without…segregating the risk




What Is Possible as an Issuer? An Illustrative Transaction

Issuer XYZ Ltd., a Cayman Islands special purposeexempted company

Transaction Size $100 million single limit, no reinstatement

Risk Catastrophe workers’ compensation lossesarising from earthquakes in California and inthe Northwest

Attachment Point 1.00%, with 0.70% expected loss

Trigger Modeled loss with annual reset*

Term 3-4 years

Time to Market 3-4 months from receiving the mandate

Indicative Risk Premium 5.00% to 5.50% (varies by peril)

*Secondary trigger: One or more actual losses to cedent.




Trigger: Transparency vs. Basis Risk

Basis Risk

Tra

nsp

are

ncy

Physical

Indemnity

Modeled Loss

Industry Index

Cat bonds can use one of several trigger mechanisms that are trade-offs between basis risk and loss trigger transparency to the investors

ParametricIndex




Trigger: Modeled Loss

After an event, the modeling firm inputs physical parameters from the earthquake into the escrow model and the model calculates the loss.

Event

•Seismicity and Attenuation

EarthquakeIntensity

•Attenuation and Ground Motion

EconomicLosses

•Subject Business

“Insured”Losses

$

A modeled loss trigger may help balance the twin goals of best execution and minimization of basis risk

• Hybrid of parametric and indemnity based coverage• Payments related to performance of notional

portfolio of insured risks designed to closely reflect portfolio

• How does it work– Modeling firm analyzes actual portfolio

• Creates a hypothetical portfolio of risks closely correlated with actual exposures




Issues to Consider

• Basis risk resulting from modeled loss trigger• Potential size and term of deal

– $75 million 2-year deal is the minimum size to effectively spread costs

– or, 4-year shelf program amortizes costs with variable issuance capability

• Stability of book of business, ie., will current origination opportunity continue

• Revisions to FASB SPE consolidation rules

Chi H. Hum Swiss Re Capital Markets September 24, 2002 Presentation to: Casualty Loss Reserve...

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