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BEYOND CONVERGENCE,TOWARDS INTEGRATION
- The next steps for the ILS Market
Morton Lane Ph.D. President , Lane Financial LLCSept 22nd 2008 Sydney
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
1
OUTLINE Beyond Convergence, towards Integration
Observations on the ILS Market - Motivation and Growth, - Price Trends, and Historic Returns
Investor Information on ILS- Remodeling and Scenarios/Event Sets
Ri k d E i th I d P tf li- Risk and Exposures in the Index Portfolio- Benefits, and Problems, with Progress
Optimizing with the Scenario SetsOptimizing with the Scenario Sets - ILS Portfolio Management subject to a Risk Profile- Adding OLWs or Traditional Treaties to the Portfolio- Other Applications
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
2
Other Applications
Concluding Remarks
175
Return Indices for
150
Return Indices for S&P 500and
Lane Financial Insurance Return Index
125
100
S&P500 ILS
50
75
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
3
50
Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08
8.00%
10.00%
Monthly Returns from the S&P 500vs.
i i l d
4.00%
6.00%
Lane Financial Insurance Return Index
ILS
0.00%
2.00%
vs.S&P 500
Correlation
‐4.00%
‐2.00%
Correlation
3% - 15%
‐8.00%
‐6.00%
S&P 500 "ILS TOTAL RETURN
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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‐10.00%
S&P 500 ILS TOTAL RETURN
$7,451
$7,000
$8,000
Total ILS Iss ance
$5,605$6,000
$7,000Total ILS Issuance Q1 to Q1
1998 to Q2/2008Red: Cat Bonds; Stripe: Life ILS
* "Sidecar" transactions and certain Life securitizations not included here could add a further estimated
$3 277
$4,000
$5,000included here, could add a further estimated
$4 billion to the combined 2006 and 3/2007 totals.
$1,894 $1,803
$3,277
$2,000
$3,000
$886
$1,367 $1,219 $1,126$827 $832
$0
$1,000
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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$01998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
175%
200%
350
400
U.S. CATASTROPHE REINSURANCE PRICE INDICES (Source 1984-2001: PARAGON, a former subsidiary of the Benfield Group
Source 2001-2007 Q1 : LFC averages based on Secondary Cat Bond prices and ILW Prices)
125%
150%
250
300
x pl
us
he P
rices
P t 75%
100%
150
200
ar C
hang
es i
n In
dex
ed C
hang
es i
n bl
ue
Inde
x of
Cat
astro
p h
PostAndrew
Post 9/11
PostKatrina
25%
50%
75%
50
100
150
% Y
ear
to Y
eade
-tren
de
Para
gon
and
LFC
0%
25%
0
50
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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-25%-501984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Q12008
175.0
200.060%
Synthetic Price Index
125.0
150.045%
es
Synthetic Price Indexand Q/Q % Changes
Average of Cat ILS, ILWs and Constant EL *
(*i.e. ArborI/SIIA/SHDVI series)
75.0
100.030%
ex o
f Pri
ces
Q/Q
Cha
nge
in P
rice
25.0
50.015%
Inde
Per
cent
age
Q
-25.0
0.00%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
-50.0-15%
$180
Current (Q2, 2008)Total Value of $100 Index Investment in
$167.42[CAGR8.25%]
$160
nt
Cat Bonds commencing 1/1/02
Total Return -(Insurance Return + Floating
Return i.e. LIBOR or EURIBOR) $136.94
[CAGR4 96%]
$140
ue o
f Inv
estm
en
Insurance Return
4.96%]$120
Dol
lar V
al
$100 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Total Return Insurance Return
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
$80 Time
High Total Return
2.0%
1.0%
hly)
0.0%Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
e R
etur
ns (M
onth
MonthlyAll CAT ILS-1.0%
Perc
enta
ge Monthly All CAT ILS Total Return Performance
2002 - Q2, 2007Total Return Avg 0.664% Std Dev 0.553%Insurance Return Avg 0.405% Std Dev 0.523%
Total Return
Insurance Return
-2.0%Annual Equivalents
Avg 7.972% Std Dev 1.916%Avg 4.862% Std Dev 1.811% Floating i.e. LIBOR
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
-3.0%
High Sharpe Ratio
30.0%
40.0%
Annual Average Return on Equity for Selected Reinsurers, Ordered by Average ROAE, 2002 to 2007
Ren Re
10.0%
20.0%Average
CMRe Arch
‐10.0%
0.0%
2006 2007 2003 2002 2004 2005
Ren Re
‐30.0%
‐20.0%Average IPC
RNR PRE
EVEREST ACE
XL ARCH
XL
‐50.0%
‐40.0%ASPEN AWAC
AXIS ENDURANCE
LANCASHIRE MAX RE
MONTPELIER PLATINUM
WHT MTN CMRe
IPC
Montpelier
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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‐60.0%
Leveraged vs. Unleveraged Historical Profiles
OUTLINE Beyond Convergence, towards Integration
Observations on the ILS Market - Motivation and Growth, - Price Trends, and Historic Returns
Investor Information on ILS- Remodeling and Scenarios/Event Sets
Ri k d E i th I d P tf li- Risk and Exposures in the Index Portfolio- Benefits, and Problems, with Progress
Optimizing with the Scenario SetsOptimizing with the Scenario Sets - ILS Portfolio Management subject to a Risk Profile- Adding OLWs or Traditional Treaties to the Portfolio- Other Applications
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Other Applications
Concluding Remarks
Issue MangroveClass B
Valais Re Class C
Residential Re Class 2
SponsorHomewise InsuranceGlacier, Swiss
Flagstone USAA
Modeler AIR RMS AIR
PFL(%) 6.62 / 7.62 4.50 4.32 / 5.08
EL(%) 3.70 / 4.30 3.52 2.85 / 3.32
PLL(%) 2.44 / 2.81 2.50 1.84 / 2.17
Spread (%) L+ 13.25 L+14.50 L+11.50
EL Multiple 3.1 4.1 3.5
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Coverages(All are occurrence
based)Florida
Hurricane
N. AmericanHurricane, EQJap Wind, EQ
Gulf, E. Coast HW Hurricane
US EQ
Questions
All are indemnity ILS, are all issuers equally good underwriters? Are all equally well aligned with investor interest?
Is 2% by RMS the exact equivalent of 2% by AIR? (Or EQECAT). Ditto PFL, PLL?
Would a repeat of Andrew (92) exhaust or attach all of theWould a repeat of Andrew (92) exhaust or attach all of the deals to the same extent?
How do various scenarios accumulate? Amongst each otherHow do various scenarios accumulate? Amongst each other, and with traditional treaties and ILWs?
What if all deals were evaluated on the same basis?
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Re-Modeled Scenario Sets
AIR, RMS and EQECAT all are now offering versions ofscenario sets
In what follows, AIR has provided 10,000 annual scenarios,based on a 35,000+ event set
An Example of Scenario Set Benefitsp
A Prospective View of the Market Index Portfolio
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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ILS Portfolio Annual Risk and Return Statistics"Insurance" Only LIBOR at 3.25% LIBOR at 5.00%
Portfolio Weighted average Coupon Spread 6.0%Portfoilo Expected Loss 1.6%Expected Returns 4.4% 7.7% 9.4%Standard Deviation 4.1%
Sharpe Ratio 1.08
Probability of First Insurance $ Loss 51 0% 51 0% 51 0%Probability of First Insurance $ Loss 51.0% 51.0% 51.0%Probability of Exceeding Expected Return 76.6%Probability of Positive Total Return 91.7% 95.1% 95.9%
"Insurance" Returns VAR Level 90.00% 95.00% 99.00% 99.60%VaR 0.88% -3.12% -16.67% -20.14%
TVaR -11.64% -16.60% -27.23% -32.09%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Peril Share of Expected LossPortfolio Exp Loss 1.59%
US EQ17%
JPN EQ6%
JPN Wind5%
Other4%
US Wind42%
EUR EQ3%
EUR Wind23%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
12.0%
Portfolio Diversification ‐Where Losses Come From
8.0%
10.0%Where Losses Come From
The chance of Principal losses exceeding 5% is over 10%, see bar. The peril source of losses at that level is shown as the bar breakdown.
6.0%
Losses from Combined EventsOtherJPN WindJPN EQ
4.0%
EUR WindEUR EQUS EQUS Wind
0 0%
2.0%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
0.0%
5% Loss Level 10% Loss Level 15% Loss Level 20% Loss Level 25% Loss Level 50% Loss Level
Selected Sample Transactions Re-Modeled By AIR.
DEAL AJAX Redwood X Class B Akibare A Foundation
Re D
Residential Re 2007 Class
3
Residential Re 2007 Class
5 US Wind US US Wind US US Wind US Principal Perils US Quake US Quake Japan Wind US Wind US
QuakeUS Wind US
QuakeUS Wind US
QuakeOriginal OC Modeler EqeCat EqeCat RMS RMS AIR AIR
Q1 Secondary Mkt Yield 5.48% 3.18% 2.62% 3.55% 10.75% 6.47%
Re-Modeled EL 1.96% 0.65% 3.59% 2.44% 2.49% 1.03%
Stand Alone Risk StatisticsStd Dev 13.69% 7.67% 18.43% 14.85% 14.02% 9.76%VaR 99 100 00% 0 00% 99 56% 100 00% 100 00% 55 22%VaR 99 100.00% 0.00% 99.56% 100.00% 100.00% 55.22%TVaR 99 100.00% 64.50% 99.56% 100.00% 100.00% 96.53%
Data Courtesy of AIR, from Early AIR Model Versions.
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
21Other Benefits – More Risk Measures
Some surprises (perhaps)
R d l d EL’ d t l l i i l PPM EL’Re-modeled EL’s do not always equal original PPM EL’s
Not all ILS appear to be re-model-able based on PPM datapp
Notwithstanding, it is extremely valuable to have all ILS on the same basisthe same basis
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Selected Sample Transactions Re Modeled By AIRSelected Sample Transactions Re-Modeled By AIR.
DEAL AJAX Redwood X Class B Akibare A Foundation
Re D
Residential Re 2007 Class
3
Residential Re 2007 Class
5
Principal Perils US Quake US Quake Japan Wind US Wind US Q k
US Wind US Q k
US Wind US Q k Principal Perils US Quake US Quake Japan Wind Quake Quake Quake
Original OC Modeler EqeCat EqeCat RMS RMS AIR AIR
Issue Spread 6.25% 3.60% 2.95% 7.25% 12.25% 7.75%Q1 S d Mk Yi ld 48% 3 18% 2 62% 3 % 10 % 6 4 %Q1 Secondary Mkt Yield 5.48% 3.18% 2.62% 3.55% 10.75% 6.47%
OC EL 1.94% 0.68% 1.04% 1.21% 2.74% 0.77%Re-Modeled EL 1.96% 0.65% 3.59% 2.44% 2.49% 1.03%AIR Conservatism bps 2 3 255 123 25 26
Data Courtesy of AIR, from Early AIR Model Versions.
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Showing Increasing Capital Requirements for Incremental Amounts of Different Peril ILWs
CMRe 08Q1 Cal Quake $20 Billion
ILW Premium 6.50%Total Limit or Face Value of ILS Securities $12,132,404,584 + $250,000,000
Original Portfolio Expected Loss 2.18% 2.13%Re-modeled Portfolio Expected Loss 2.33% 2.33%
Standard Deviation $599,481,642 2.92%
Portfolio TVaR99 $3,708,564,018 1.21%
ILW Expected Loss 2.41%
Expected Return on Capital Standards, Including Premium in the CapitalPortfolio TVaR99 17.90% 18.07%
Limit 4.29% 4.28%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Note, all ILWs are added individually in exposure amounts of $250,000,000. All ILWs have an EL of 2.5% + or - 0.5%
Comparative Statics
Showing Increasing Capital Requirements for Incremental Amounts of Different Peril ILWs
CMRe 08Q1US All Natural
Perils $70 Billion
ILW Premium 8.50%Total Limit or Face Value of ILS Securities $12 132 404 584 + $250 000 000Total Limit or Face Value of ILS Securities $12,132,404,584 + $250,000,000
Original Portfolio Expected Loss 2.18% 2.13%Re-modeled Portfolio Expected Loss 2.33% 2.33%
Standard Deviation $599,481,642 4.29%
Portfolio TVaR99 $3,708,564,018 5.93%
ILW Expected Loss 2.32%
Expected Return on Capital Standards, Including Premium in the CapitalPortfolio TVaR99 17.90% 17.25%
Limit 4.29% 4.33%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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Note, all ILWs are added individually in exposure amounts of $250,000,000. All ILWs have an EL of 2.5% + or - 0.5%
Comparative Statics
Showing Increasing Capital Requirements for Incremental Amounts of Different Peril ILWs
CMRe 08Q1 Japan Quake $12.5 Billion
ILW Premium 6.50%Total Limit or Face Value of ILS Securities $12 132 404 584 + $250 000 000Total Limit or Face Value of ILS Securities $12,132,404,584 + $250,000,000
Original Portfolio Expected Loss 2.18% 2.13%Re-modeled Portfolio Expected Loss 2.33% 2.33%
Standard Deviation $599,481,642 1.15%, ,
Portfolio TVaR99 $3,708,564,018 0.20%
ILW Expected Loss 2.37%
Expected Return on Capital Standards, Including Premium in the CapitalPortfolio TVaR99 17.90% 18.31%
Limit 4.29% 4.28%
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
26
Note, all ILWs are added individually in exposure amounts of $250,000,000. All ILWs have an EL of 2.5% + or - 0.5%
Comparative Statics
OUTLINE Beyond Convergence, towards Integration
Observations on the ILS Market - Motivation and Growth, - Price Trends, and Historic Returns
Investor Information on ILS- Remodeling and Scenarios/Event Sets
Ri k d E i th I d P tf li- Risk and Exposures in the Index Portfolio- Benefits, and Problems, with Progress
Optimizing with the Scenario SetsOptimizing with the Scenario Sets - ILS Portfolio Management subject to a Risk Profile- Adding OLWs or Traditional Treaties to the Portfolio- Other Applications
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
27
Other Applications
Concluding Remarks
ReA/L RisKontroller™
Combining ReA/L RisKontroller and the AIR Worldwide Catastrophe Scenario Set to Optimize ILS Portfolios
ReAL1 RisKontroller Optimizer – joint venture ofReAL RisKontroller Optimizer joint venture of Lane Financial LLC and RisKontroll Group GhmB
Maximize expected return of 10,000 year scenario set
Choose among all outstanding ILS
Allow writing or ceding of OLWsg g
Scenario set available for ILS and OLWs or Traditional Treaties
Construct a portfolio such that it satisfies a multi layered
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
28
Construct a portfolio such that it satisfies a multi-layeredset of CVaR (a.k.a. TVaR) or VaR constraints
1 ReAL is Re-insurance Asset Liability Optimizer
Comment – AIR Worldwide or any re-modeler may have less information on those ILS that it did not originally model (Ditto RMS or Eqecat).
Re-modelers therefore tend to be more conservative in their loss estimates on remodeled deals (i e higher than PPMloss estimates on remodeled deals (i.e. higher than PPM provided expected losses) but not always so.
ReA/L RisKontroller can be used with scenario sets from RMS E i h d i d bi i fRMS or Eqecat, or with a custom designed or combination of scenario sets.
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
29
Sample Problem Maximize Expected Return on Capital (over the 10,000 year scenario set)
Subject to,
a) for the worst 4% of scenarios (400), the expected loss should not exceed 10%) ( ), p(i.e. 96% TVAR <= 10% Loss)
b) for the worst 1% of scenarios (100), the expected loss should not exceed 20%(i.e. 99% TVaR <= 20% loss)
c) for the worst 0.1% of scenarios (10), the expected loss should not exceed 40%(i.e. 99.9% TVaR <= 40% loss)
d) Limits on purchasing and selling activity of ILS, writing or retroceding of ILWs
e) Financing restrictions if any. . . . . .
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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ThThe Opportunity Set
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
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20%
0%
10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Retu
E d P b bilit
‐10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%rn
on
Exceedence Probability
Portfolio Improvement Strategieswith/without ILWs and Shorting Possibilities
‐30%
‐20% Capit
with/without ILWs and Shorting Possibilities
‐40%
a
l
Initial Portfolio
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
32
‐50%(Note, some optimization restrictions are lifted for graphical effect)
20%
0%
10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Retu
E d P b bilit
‐10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%rn
on
Exceedence Probability
Portfolio Improvement Strategieswith/without ILWs and Shorting Possibilities
‐30%
‐20% Capit
with/without ILWs and Shorting Possibilities
‐40%
a
l
Initial Portfolio ILS Only
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
33
‐50%
y
(Note, some optimization restrictions are lifted for graphical effect)
20%
0%
10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Retu
E d P b bilit
‐10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%rn
on
Exceedence Probability
Portfolio Improvement Strategieswith/without ILWs and Shorting Possibilities
(Note, some optimization restrictions are lifted for graphical effect)
‐30%
‐20% Capit
with/without ILWs and Shorting Possibilities
Initial Portfolio Rearranging ILS ILS and ILW
Buy & Sell Write/Cede ILWsExpected Profit 5.93% 10.16% 12.03%Marginal Return 5 81% 4 56%
‐40%
a
l
Initial Portfolio ILS Only ILW Long/Short
on Capital 5.81% 4.56%
90.00% 2.77% 3.16% 5.78%99.50% -2.20% -2.79% -0.54%99.00% -24.23% -12.14% -13.05%99.60% -29.23% -22.50% -19.59%
Max -43.23% -37.60% -45.25%
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‐50%
y g/
(Some optimization restrictions are lifted for graphical effect)
ASpecificExample
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
1% of every ILS Double Initial H ldi d/ ll
Double Initial H ldi d/ Sh t
Double initial H ldi d/ h t
BASE CASE CASE II CASE III CASE IV
Comparison of Four O ti i i S l ti
Expected Ending Income Statement (Millions $US)I
Holdings and/or sell initial Holdings
Holdings and/or Short 1%
Holdings and/or short 1%, and/or Write
ILWs
Optimizing Solutions
Income Written Premium $4.62 $6.48 $7.13 $8.96 Ceded Premium $0.00 $0.00 -$0.75 -$0.86 Net written Premium $4.62 $6.48 $6.38 $8.09 Investment Income $0.00 $0.00 $0.00 $0.00
$4 62 $6 48 $6 38 $8 09 $4.62 $6.48 $6.38 $8.09 Expenses Expected Losses -$1.18 -$1.50 -$1.65 -$2.19 Expected Recoveries $0.00 $0.00 $0.64 $0.67
Expected Net Losses -$1.18 -$1.50 -$1.01 -$1.52 Expected Net Losses $1.18 $1.50 $1.01 $1.52 Brokerage & Acquisition expense $0.00 $0.00 $0.00 $0.00 General & Administrative $0.00 $0.00 $0.00 $0.00 Expected Profit $3.44 $4.98 $5.37 $6.58
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
Expected Rate on Equity
3.44% 4.98% 5.37% 6.58%
1% of every ILS Double Initial Double Initial Double initial
BASE CASE CASE II CASE III CASE IV
Comparison of Four
Exposure ReportTotal Net Exposure 48 2340 44 45 26 51 90
Holdings and/or sell initial Holdings
Holdings and/or Short 1%
Holdings and/or short 1%, and/or Write
ILWs
Optimizing Solutions
Total Net ExposureNet Premium to Net CoverLeverage: Exposure/Capital Underwriting ReportPremiums Written
40.44%
48.2313.22%
40.4411.42%
4.62
45.2614.32%45.26%
6.48
48.23%
7.13
51.9015.59%51.90%
8.96Premiums CededExpected LossesExpected RecoveriesExpected Underwriting Profit
0.00-1.180.00
0.00-1.50
5.370.00
3.44 4.98
-0.86-2.190.67
-0.75-1.650.64
6.58
Portfolio Loss Ratios Net Written Premiums Expected Net Losses Expected Net Loss Ratio
4.621.18
25.59%
6.481.50
23.21% 18.74%
6.381.01
15.81%
8.091.52
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
Double Initial Holdings and/or
Short 1%
Double Initial Holdings and/or short 1%, and/or
Write ILWsDetails of Solutions in
Four Optimization
Base Case 1% of every ILS
Double Initial Holdings and/or sell
Initial Holdings
Written Premium
(Mil)
Ceded Premium
(Mil)
Written Premium
(Mil)
Ceded Premium
(Mil)
Written Premium
(Mil)
Ceded Premium
(Mil)
Written Premium
(Mil)
Ceded Premium
(Mil)Aiolos $0.0886 $0.0886 $0.0886 $0.0886 AJAX $0.0548 $0.0234
Four Optimization Runs
Akibare A $0.0235 $0.0235Akibare B $0.0082 $0.0082Australis $0.0294 $0.0588 $0.0588 $0.0588 Blue Fin Ltd A $0.1176 $0.1176Blue Fin Ltd B $0.0295 $0.0295Calabash A-1 $0.0590 $0.0571Calabash Re II A 1 $0 0681 $0 1362 $0 1362 $0 1362Calabash Re II A-1 $0.0681 $0.1362 $0.1362 $0.1362Calabash Re II D-1 $0.0279 $0.0557 $0.0557 $0.0557 Calabash Re II E-1 $0.0881 $0.0000 $0.1762 $0.1012 Carillon 1 A-1 $0.0464 $0.0928 $0.0928 $0.0928 Carillon 2 $0.2052 $0.4104 $0.4104 $0.4104 Cascadia $0.0876 $0.1510 $0.1752 $0.1752 Cascadia II $0.0918 $0.1836 $0.1836 $0.1836 CAT-Mex A $0.0510 $0.1020 $0.1020 $0.1020CAT-Mex B $0.0032 $0.0063 $0.0063 $0.0063 Champlain A $0.0769 $0.0163 $0.0641 Champlain B $0.0203 $0.0405 $0.0405 $0.0405 East Lane Re A $0.0740 $0.0901 $0.1480 $0.1480 East Lane Re B $0.0731 $0.1462 $0.1462 $0.1462 East Lane II A $0 0467 $0 0240 $0 0933
LANE FINANCIAL L.L.C.LANE FINANCIAL L.L.C.
East Lane II A $0.0467 $0.0240 $0.0933East Lane II B $0.0505 $0.1011 $0.1011 $0.1011 East Lane II C $0.0795 $0.0795 $0.0795Eurus $0.0592 $0.1184 $0.1184 $0.1184 Fhu-Jin B $0.0595 $0.1190 $0.1190 $0.1190 Foundation Re A $0.1291 $0.0477 $0.1291
Double Initial Holdings and/or
Short 1%
Double Initial Holdings and/or short 1%, and/or
Write ILWsDetails of Solutions in
Base Case 1% of every ILS
Double Initial Holdings and/or sell
Initial Holdings
Successor Japan Quake Class A- $0.0309 $0.0619 $0.0619 $0.0619Successor Japan Quake Class B- $0.0105 $0.0209 $0.0209 $0.0209 Successor Japan Quake Class C- $0.0498 $0.0996 $0.0996 $0.0996
Written Premium
(Mil)
Ceded Premium
(Mil)
Written Premium
(Mil)
Ceded Premium
(Mil)
Written Premium
(Mil)
Ceded Premium
(Mil)
Written Premium
(Mil)
Ceded Premium
(Mil)
Write ILWsFour Optimization Runs
Successor Japan Quake Class C $0.0498 $0.0996 $0.0996 $0.0996Successor Euro Wind Class A-I $0.0175 $0.0010 $0.0350 $0.0350 Successor Euro Wind Class A-III $0.0308 $0.0616 $0.0616 $0.0616 Successor Euro Wind Class C-III $0.0080 $0.0160 $0.0160 $0.0160 Successor I Class B-II $0.0708 $0.1416 $0.1416 $0.1416 Successor II Class C-III $0.0249 Successor II Class E-III $0.1248 $0.2497 $0.2497 $0.2497 Willow Re $0.1035 $0.0682 $0.0363ILW California Quake 10B $0 1100ILW California Quake 10B $0.1100ILW California Quake 12.5B $0.9500 ILW California Quake 15B ILW California Quake 20B ILW California Quake 25B ILW California Quake 30B ILW California Quake 40B ILW California Quake 50B $0.0350
$ILW California Quake 5B $0.1575ILW California Quake 60B $0.0300 ILW California Quake 70B $0.0275 ILW Florida Wind 10B $0.2275 ILW Florida Wind 12.5B $0.1950 ILW Florida Wind 15B $0.1750 ILW Florida Wind 20B $0.1450 ILW Florida Wind 25B $0.1275
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$ILW Florida Wind 30B ILW Florida Wind 40B ILW Florida Wind 50B ILW Florida Wind 60B ILW Florida Wind 70B
The Optimal Solution Reports,a) The ILS in the optimal portfolio
b) The set of buy sell transactions to effect the optimum
c) The rank ordering of the deals to buy (B-T-W) and deals to sell
d) Marginal prices at which non-optimal deals can be bought or sold
e) Sets of Risk-adjusted pricese) Sets of Risk adjusted prices
f) Reports showing risk profile, marginal return on capital
) I li d P b bili ig) Implied Probabilities
h) Problematic scenario ranking
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i) Expected Balance sheets, Income Statements
j) Expected Underwriting and leverage reports
OUTLINE Beyond Convergence, towards Integration
Observations on the ILS Market - Motivation and Growth, - Price Trends, and Historic Returns
Investor Information on ILS- Remodeling and Scenarios/Event Sets
Ri k d E i th I d P tf li- Risk and Exposures in the Index Portfolio- Benefits, and Problems, with Progress
Optimizing with the Scenario SetsOptimizing with the Scenario Sets - ILS Portfolio Management subject to a Risk Profile- Adding OLWs or Traditional Treaties to the Portfolio- Other Applications
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Other Applications
Concluding Remarks
Implied Probabilities – Worst 2% of scenarios
I li it b bilit i hti f li it f i tImplicit probability weighting of explicit preference requirements
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Other Applications of OptimizationPortfolio Selection
Traditional Reinsurers’ Portfolio (including ILS, ILWs)
Simultaneously Ceding and Pricing Retrocessional cover
Replication strategies Best ILWs to represent particular ILS
Mi i i i b i i kMinimizing basis risk
Capital StructureOptimal capital structure for Insurance CDO’sp p
Capital allocation Rules
Insurance
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InsuranceInsurance company allocation of sales efforts
END
Contact
mlane@LaneFinancialLLC.com
rbeckwith@LaneFinancialLLC.com
Web site
www.LaneFinancialLLC.com
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