Reinsurance and the Capital Markets: Threat or Opportunity?

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Presentation to

May 15, 2012

FLORIDA HURRICANE CATASTROPHE FUND TWELFTH ANNUAL

PARTICIPATING INSURERS WORKSHOP

Reinsurance and the Capital Markets:

Threat or Opportunity?

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INTRODUCTION

John Forney, CFA

Managing Director, Public Finance

Raymond James & Associates, Inc. 880 Carillon Parkway

St. Petersburg, FL 33716 Ph: 727-567-7825

Email: John.Forney@RaymondJames.com

Financial Advisor, Florida Hurricane Catastrophe Fund

Financial Advisor, Citizens Property Insurance Corporation

Financial Advisor, Florida Insurance Guaranty Association

Financial Advisor, California Earthquake Authority

Financial Advisor, ProtectingAmerica.org

Member of Investment Banking Team: Louisiana Citizens Property

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100 Year Residential PML By State

Source: RMS, based on the RMS RiskLink hurricane model v.11 assuming near term view.

U.S. Hurricane Modeled Loss for Coastal States

TX $31 MS $6 AL $5 LA $21 FL $89 NY $7 NC $8 MA $6 NJ $6 SC $7 State 1 in 100 PML (Residential Lines) $ in Billions Alabama 5 Connecticut 4 Florida 89 Georgia 4 Louisiana 21 Massachusetts 6 Mississippi 6 North Carolina 8 New Jersey 6 New York 7 South Carolina 7 Texas 31 Virginia 4

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 _{Difficult pricing algorithm for companies trying to compete – and survive – in cat} space

 Catastrophe risk violates several key tenets of risk insurability  Law of large numbers difficult to apply when numbers are small

 Modelers must therefore make many assumptions not based on historical observation

 Rational operating model in response

 Gross up modeled output expected loss significantly to account for uncertainty  _{Go light on peak risk}

Insurance for Natural Catastrophe Risk

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Loss Models Suggest Dire Risks

Hurricane loss models show 250 different events that could cause over $100 billion in insured losses in Florida

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History Isn’t Quite as Scary

But history has no events that, even adjusted for today’s dollars, produce anything close to $100 billion in insured losses

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 _{Reinsurance stocks have low price:book ratios}

 _{Government participation in the property insurance market is growing}

 _{Total loss exposure in the residual markets in 2010 was $757.9 billion per}

the Insurance Information Institute

 _{At least five different states have sponsored entities with post-event}

bonding capabilities

Results of These Challenges

0% 50% 100% 150% 200% 250% 300% 350% 400%

Feb-95 Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11

Reinsurance 87.1%

Price / Book as of 2/28/2012

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 Traditional catastrophe reinsurance spreads risk geographically and charges premiums now to pay for unlikely losses later

 Pros: (1) spreads risk out of state; (2) payment upfront

 Cons: (1) expensive; (2) far-away events can impact cost; (3) sends premium dollars out of state; (4) uncertain capacity and pricing

 Bonding programs retain risk geographically but spread it over time, and pay for losses only when they occur

 _{Pros: (1) lower premiums; (2) used only when needed; (3) beneficial economic}

impact of keeping more dollars in state

 Cons: (1) limited capacity; (2) viewed as subsidy; (3) uncertain market access; (4) repayment can extend far into future

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Statewide Assessment Coastal Assessment

Statewide Risk Florida; California

Coastal Risk Louisiana;

North Carolina Texas

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Ask Me if I Care

Be careful what you ask for………..

"I am quite happy to see this business under government control."

--Jürgen Gräber, Executive Board Member, Hannover Re

“not all risks are amenable to private insurance……states will always

retain the position of insurer of last resort for large loss exposures

where private insurance capacity is insufficient.

”

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11 $633 $846 $934$1,140 $967 $1,220 $1,729 $1,143 $1,991 $4,683 $6,996 $2,687$3,392 $4,334$4,215 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ri sk ca pi ta l A m ou t ( US $, M ill io ns )

Risk Capital Issued and Outstanding

Risk Capital Issued Risk Capital Outstanding Year-End

Capital Markets – Threat or Opportunity?

All the cat bonds ever issued amount to about two weeks worth of issuance in the corporate bond market

Cat bonds represent less than 15% of the market for risk transfer,

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Capital Markets – Opportunity or Threat?

“Incremental demand for Western European and U.S. exposures

was shifted to the catastrophe bond market”

-- AonBenfield, January 2012

THE CHALLENGE

 _{Significant potential demand exists which is not being served by traditional} reinsurance markets

 _{The value of unambiguous diversification to investors has increased}  _{If capital markets can fill this gap………}

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Capital Markets – Opportunity or Threat?

THE OPPORTUNITY – small “o”

 _{Use ILS funds as a source of capital}

 _{In 2011 reinsurers accounted for more than half of all cat bond volume}  _{Establish ILS funds as a defensive measure}

THE OPPORTUNITY – Big “O”

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Presentation to

May 15, 2012

FLORIDA HURRICANE CATASTROPHE FUND TWELFTH ANNUAL

PARTICIPATING INSURERS WORKSHOP