C ATASTROPHE B ONDS A ND T HE I NSURANCE -L INKED S ECURITIES M ARKET : A R EINSURANCE C OVERAGE L AWYER ’ S V IEW O F T HE S ECURITIZATION M ODEL A IDA E UROPE C ONFERENCE R EINSURANCE W ORKING P ARTY 26 M AY 2011 David M. Greenwald The views expressed herein are not made on behalf of Jenner & Block LLP or any of its clients. Jenner & Block LLP © 2011

2David M. Greenwald Jenner & Block LLP © 2011 CAVEAT This presentation is not intended to be self-explanatory or to present the subject material in significant detail. It is, instead, a high level outline (often in shorthand form) intended to serve solely as a starting point for fuller explanation during live presentation.

3David M. Greenwald Jenner & Block LLP © 2011 THE ILS MARKET “Convergence” Of The Insurance Industry With Capital Markets Non-Correlated Investment For Capital Markets Additional Capital Available To Ceding Insurers –Multi-year coverage –Multi-peril coverage –Collateralized

4David M. Greenwald Jenner & Block LLP © 2011 CATASTROPHE BONDS Designed To Transfer Catastrophe Risk From Insurers And Reinsurers To Capital Market Investors. Types Of Catastrophe Bonds: –Indemnity –Modeled loss –Indexed to industry loss –Parametric Examples Of Perils Covered: –U.S. hurricane and earthquake –European wind –Japan earthquake and typhoon –Ceding insurer specific risk on book(s) of business

5David M. Greenwald Jenner & Block LLP © 2011 HISTORY OF INVESTMENT IN ILS MARKET CAPACITY ISSUED AND OUTSTANDING BY YEAR SOURCE: Willis Capital Markets & Advisory (ILS Market Update Q1 2011)/ WCMA Transaction Database

6David M. Greenwald Jenner & Block LLP © 2011 TRADITIONAL REINSURANCE Long-Term Relationship On-Going Business (Re)insurance Professionals Handle Claims Transparency In Claims Submissions (Or At Least Right To Demand Transparency) Potential Risks/Disadvantages To Cedant: − Credit Risk of Reinsurer − Lack of Multi-Year Cover − Lack of Capacity/Unfavorable Pricing Ceding Insurer Reinsurer Premium Claims Payments

7David M. Greenwald Jenner & Block LLP © 2011 Securitization Model Sponsor (Cedant) Claims Payment SPE (Reinsurer) CUSTODIAN/TRUSTEE (Collateral Account) SWAP PARTY INVESTORS (Often Multiple Tranches) Underwriter/ Initial Purchaser ADMIN LRVA LRRA CRVA Premium Securities Purchase Price Securities P&I on Securities Premium & Proceeds of Issuance P&I P&I on Collateral Scheduled P&I on Securities

8David M. Greenwald Jenner & Block LLP © 2011 Securitization Model SPE (Reinsurer) Sponsor (Cedant) CUSTODIAN/TRUSTEE (Collateral Account) INVESTORS ADMIN LRVA LRRA CRVA Reinsurance Agreement Indenture Notes Security Interest COVERAGE ISSUES: Is there a covered loss? To subject business?

9David M. Greenwald Jenner & Block LLP © 2011 (DIS)ADVANTAGES TO INDEMNITY TRIGGER From Cedant’s Perspective: –Minimizes “Basis” Risk –Closest To Traditional Reinsurance From Investor’s Perspective: –Decreased Transparency In Claims Process –Delayed Payout: Potential Extensions of Maturity Date While Claims Develop Both Parties Have Risk of Mismatch Between Maturity Date and Development of Claims

10David M. Greenwald Jenner & Block LLP © 2011 TRANSPARENCY / CLAIMS ADJUSTING Traditional Reinsurer Has Ready Access To Claims Professionals And Coverage Counsel SPE: “Atomization” of Reinsurer –No Agent Clearly Designated To Evaluate “Covered” and “Subject” –No Coverage Counsel Provided By Deal Structure (Issuer May Engage Counsel, But Funding May Be Lacking) Coverage Issues Minimal If Defined By Objectively Verifiable Trigger –Parametric –Index to Industry Experience Traditional Coverage Issues May Arise On Indemnity Coverage

11David M. Greenwald Jenner & Block LLP © 2011 OBSTACLES TO INVESTORS’ ABILITY TO PROTECT THEIR INTERESTS Indenture Typically Presents Several Hurdles: “Limitation of Suits” Clause Noteholders must Notify Trustee of Default Noteholders must Notify Trustee of Continuing Default At least 25% of Outstanding Notes may request Trustee to initiate Proceeding – Subject to satisfactory indemnification. Noteholders with at least 50% of Outstanding Notes may direct Trustee to act. Take-Aways: –May be difficult to organize 25% or 50% of Outstanding Notes –Time-consuming to jump each hurdle –May be onerous indemnification requirements

12David M. Greenwald Jenner & Block LLP © 2011 A PROPOSAL TO IMPROVE INDEMNITY CAT BOND STRUCTURE Identify Coverage Counsel in Deal Documents Provide Funding Mechanism For Coverage Counsel Provide Mechanism for Noteholders and Claims and Loss Reserve Agents to Request Issuer to Instruct Coverage Counsel to Review Claim(s). Provide Clarification of Roles of Claims and Loss Reserve Verification Agents regarding Claims Adjusting.

C ATASTROPHE B ONDS A ND T HE I NSURANCE -L INKED S ECURITIES M ARKET : A R EINSURANCE C OVERAGE L AWYER ’ S V IEW O F T HE S ECURITIZATION M ODEL A IDA E UROPE C ONFERENCE R EINSURANCE W ORKING P ARTY 26 M AY 2011 David M. Greenwald The views expressed herein are not made on behalf of Jenner & Block LLP or any of its clients. Jenner & Block LLP © 2011