Insurance-Linked Securities - Aon

1 Insurance-Linked Securities Consistency and Con dence 2011. Aon Benfield Securities , Inc. and Aon Benfield Securities Limited (collectively, Aon Benfield Securities ) provide insurance and reinsurance clients with a full suite of Insurance-Linked Securities products, including catastrophe bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties, and derivative products. As one of the most experienced investment banking firms in this market, Aon Benfield Securities offers expert underwriting and placement of new debt and equity issues, financial and strategic advisory services, as well as a leading secondary trading desk.

2 Aon Benfield Securities ' integration with Aon Benfield's reinsurance operation expands its capability to provide distinctive analytics, modeling, rating agency, and other consultative services. Aon Benfield Inc., Aon Benfield Securities , Inc. and Aon Benfield Securities Limited are all wholly-owned subsidiaries of Aon Corporation. Securities advice, products and services described within this report are offered solely through Aon Benfield Securities , Inc. and/or Aon Benfield Securities Limited. Aon Ben eld Securities Foreword I am confident you will find the fourth annual Aon Benfield Securities review of the Insurance-Linked Securities (ILS) market to be of great value.

3 As with all our research, we offer an authoritative review and analysis of the asset class, and publish this and our quarterly reviews as a reference for the ILS market. In the year ending June 30, 2011, despite several events affecting the global reinsurance market generally, the ILS market proved resilient as a source of risk transfer capacity. Our report details the market activity in this 12-month period, the events affecting the market, an overall market perspective, and a positive outlook for the future. Specifically, this 2011 edition offers: Our comprehensive review of the catastrophe bond market and the drivers affecting the market.

4 Our exclusive Aon Benfield ILS Indices;. A review of investor activity;. The impact of natural and economic events on the ILS market;. A discussion with Risk Management Solutions; and Our perspective on diversifying perils. Inside, we also offer an initial update on the developing implications of the downgraded sovereign credit rating and global economic pressures. Based on events at the time this report is being prepared, we have included our assessment of the impact on collateral management in ILS transactions. At a time when we have experienced global catastrophes (as reported herein), we offer our heartfelt thoughts and prayers to those affected.

5 In our business, we work with the probabilities and effects of natural disasters on a daily basis, and our discussion is not intended in any way to minimize the personal impacts of these catastrophes. We appreciate the positive feedback our research has generated. As we continue to enhance the overall understanding of this important market, I welcome your thoughts and suggestions. Paul Schultz President, Aon Benfield Securities 3. Insurance-Linked Securities 2011. Contents 5 Aon Benfield Securities annual review of the Catastrophe Bond Market 14 The Aon Benfield ILS Indices 16 The Buy Side 21 ILS-Related Markets 24 Perils 32 Diversifying Perils 40 An Interview with Peter Nakada, Managing Director of RiskMarkets, Risk Management Solutions 44 Appendix I.

6 Catastrophe Bond Issuance Statistics 50 Appendix II. ILS Market Transaction Summary 68 Appendix III. Summary of Sidecar Issuance 4. Aon Ben eld Securities Aon Benfield Securities annual review of the Catastrophe Bond Market For the 12 months ended June 30, 2011, the Insurance-Linked Securities (ILS). market again demonstrated its consistent strength and provided sponsors with an attractive alternative to complement their traditional reinsurance purchases. Two stories emerged in the last 12 months: A healthy and growing market in the first nine months capped by a very active issuance calendar in the fourth quarter of 2010 and the first quarter of 2011, and A market interrupted by model changes and natural catastrophes in the second quarter of 2011.

7 Overview Despite the continued confidence of both sponsors and investors, along with steady issuance, outstanding bonds on risk declined over the 12 months ending June 30, 2011. The annual issuance volume was only marginally down at $ billion, from $ billion for the same period in 2010. The total bonds on risk as of June 30, 2011, however, finished at $ billion, down almost $ billion from the previous June 30. The overall decline was caused by the interruption of issuance in the second quarter of 2011, as well as large maturities of catastrophe bonds issued in 2007. and 2008. In all, the catastrophe bond market has seen $ billion of cumulative issuance since 1996, demonstrating its importance as a strategic and efficient risk management tool.

8 Outstanding Catastrophe Bond Volume, 2001-2011 (Years ending June 30). Property 40,000. Outstanding 35,000. Life / Health Outstanding 30,000. $ Millions Cumulative Property 25,000. Bonds 20,000. Total 16,155. Cumulative 15,000 13,249 13,167. 12,911. Bonds 11,504. 10,000. 6,608. 4,741. 3,876. 5,000 2,589 3,005. 2,075. 0. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011. Source: Aon Ben eld Securities 5. Insurance-Linked Securities 2011. Issuance in the 12 months ending June 30, 2011 was overshadowed by two major factors, which slowed the growth of the ILS market. First, in 2011, Risk Management Solutions (RMS) completed major updates of its Hurricane Model and Europe Windstorm Model in February and July, respectively.

9 Both updates are explained in more detail below (see Market Drivers RMS ). The RMS changes came after AIR. Worldwide Corporation (AIR) had updated its models for the same risks in the third quarter of 2010. Even at time of publication, nearly six months after RMS issued version of the Hurricane Model, sponsors and investors alike are still working to thoroughly understand the changes. Second, on March 11, 2011, a mega-earthquake and tsunami, known as the Great East Japan Earthquake, struck the northeastern coast of Japan. This and other natural events, described in detail below (see Natural Events Affecting the ILS Market ), led to a brief pause in the ILS market as both sponsors and investors assessed their impact.

10 During this period, some investors also took time to rebalance their portfolios. Transaction review Twenty-four transactions totaling $ billion of issuance (including four deals from the life and health sector) closed during the 12-month period ending June 30, 2011, compared to 21 transactions over the same period in the prior year. hurricane risk continued to dominate the market, with 53 percent of natural catastrophe issuance dedicated to this peril. The proportion of catastrophe bonds covering earthquake risk declined from 29 percent for the year ending June 30, 2010 to 17. percent for the same period in 2011. By comparison, Europe windstorm transactions increased from 9 percent of issuance in the 12-month period ending June 30, 2010 to 21 percent for the same period in 2011.