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BREAKING NEWS!

CAT BONDS IN A NUTSHELL: GEORGE TOWN RE –THE GRANDDADDY OF CAT BONDS 2015 AIDA REINSURANCE WORKING PARTY (C) ANDY DOUGLASS 2015. BREAKING NEWS!. () LONDON TO SET UP A CATASTROPHE BOND TASK FORCE (BI, 26/5/15) () WHY??? (1) EXCELLENT RETURNS ON CAPITAL, IF ALL GOES WELL

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BREAKING NEWS!

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  1. CAT BONDS IN A NUTSHELL: GEORGE TOWN RE –THE GRANDDADDY OF CAT BONDS 2015 AIDA REINSURANCE WORKING PARTY (C) ANDY DOUGLASS 2015

  2. BREAKING NEWS! • () LONDON TO SET UP A CATASTROPHE BOND TASK FORCE (BI, 26/5/15) • () WHY??? • (1) EXCELLENT RETURNS ON CAPITAL, IF ALL GOES WELL • (2) MORE RISK, MORE REWARD • (3) (COMPARE TO BRKA) • (4) GEORGE TOWN RE, CIRCA 1997, A SIMPLE MODEL • (5) WAS EXPECTED TO LAUNCH SECOND, NOT FIRST –CAL EARTHQUAKE AUTHORITY WAS SUPPOSED TO GO FIRST – BUT AT THE LAST MINUTE BERKSHIRE HATHAWAY WROTE THE WHOLE RISK

  3. CAT BOND FEATURES FOR INVESTORS: • () POTENTIAL SUPRA-NORMAL PROFIT* • () LIMITED LIABILITY • () FOR LIFE COMPANIES, A CHEAP WAY TO LEARN THE P&C BUSINESS FOR INSUREDS/CEDANTS:** • () ANOTHER MARKET • () LOW OVERHEAD MAY MAKE IT A LESS EXPENSIVE MARKET • () NOT A CAPTIVE • ___________________________________ • *(IF THE RISKS HAVE FEW LARGE CLAIMS). ALSO, PREFERENCE SHARES GIVE THE INVESTMENT LEVERAGE IN THE SAME WAY THAT THEY DO IN CLOSED-END INVESTMENT COMPANIES • **NO REASON WHY PRIMARY INSURERS CAN’T DO THE SAME

  4. 1. ST PAUL RE UK: • () CEDES A QUOTA SHARE OF ITS XL PROPERTY TREATY TO GTR • () ATTACHMENT POINT: 170% OF RISK’S PRIMARY COVERAGE LIMIT • () RISKS ARE IN FIVE BUSINESS LINES, EACH A LOW FREQUENCY/HIGH SEVERITY RISK • () $10MM CEDED LIMIT PER PROGRAM • () PERCENTAGE OF PREMIUM CEDED IDENTICAL TO PERCENTAGE OF LIABILITY CEDED • () HAS A SECURITY INTEREST IN THE COLLATERAL PUT UP BY GTR

  5. 2. GEORGE TOWN RE (GTR): • () MANAGED BY A BROKER WHO’S INDEPENDENT OF ALL OTHER PARTIES • () JUST ONE OF SEVERAL ST PAUL RE RETROCESSIONAIRES ON THE SAME PROGRAM OF RISKS • () PRE-SET GEOGRAPHIC LIMITS FOR THE RISK PORTFOLIO • () SELLS 89 $500,000 UNITS CONSISTING OF $500K DEBT PLUS A RIGHT TO ACQUIRE 1 CLASS B ORDINARY SHARE

  6. GEORGE TOWN RE (PART II) • (NOTE THAT ORDINARY SHARE COULD BE EXTREMELY VALUABLE ONCE THE RISK BOOK IS CLOSED OUT!) • () ALSO SELLS $24MM OF PREFERENCE SHARES PAYING A MODEST PREFERRED DIVIDEND, THEREBY INCREASING THE INVESTORS’ LEVERAGE IN MUCH THE WAY THAT CLOSED-END EQUITY FUNDS DO • () COLLECTED $66.8MM AT CLOSING (NET OF FEES); $23.2MM INTO ZERO-COUPON TREASURIES, $43.6 MM IN COLLATERAL ACCOUNT TO PAY CLAIMS FROM ST PAUL RE UK (GIVING GTR A “AAA” RATING) • () INVESTS HALF OF PROCEEDS IN ZERO COUPON TREASURIES (THUS GUARANTEEING THAT EVENTUALLY THE INVESTORS WILL GET ALL THEIR MONEY BACK)

  7. 3. BANK OF NY MELLON (CUSTODIAN) • () MANAGES THE $45.1MM COLLATERAL ACCOUNT ($43.6MM FROM CLOSING; $1.5MM YIELD FROM SWAPS) • () ENTERS INTO INTEREST RATE SWAPS TO INCREASE THE YIELD • () PAYS CLAIMS TO ST PAUL RE UK AS INSTRUCTED BY GTR

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