Financial Enhancement Insurance in Exhausted or Unavailable Markets

1
The Insurance Institute of London

• Financial Enhancement Insurance in Exhausted or
  Unavailable Markets

Chris Fischer Hirs, Allianz Risk Transfer October
30, 2002 in London
2
Allianz Risk Transfer
Table of Contents

• 3 Underwriting Philosophy
• 6 Financial Enhancement
• 9 Illustrative Transaction Examples
• 15 Modeling and Risk Management at ART
• 18 Company Profile
• 24 How to Contact Us

3
Underwriting Philosophy
4
Is ART a Competitor?
ART Creates Custom Solutions for Problems Which
Can Not Be Solved By Standard Insurance or
Banking Products.
Traditional insurance and banking products can be
compared with purchasing furniture from a
furniture storemost often, you find what you are
looking for from the store.
However, sometimes what you are looking for is
not available from the furniture store. Then, you
might hire a carpenter to create just the piece
of furniture that suits your needs.
5
Underwriting Philosophy

• Business Focus in Niche Market Segment

• Underwrite Business for which No Traditional
  Solution or Capacity is Available
• Act as substitute where neither financial nor
  (re)insurance market offers capacity
• Provide quality underwriting capacity through
• Innovative structuring solutions
• Leading-edge risk management and analysis
• Catalyst of Innovative Solutions and Transaction
  Facilitator
• Emerging or exotic asset classes
• Novel transaction structures and approaches
• Transaction Partner in Special Situations
• Solutions are of strategic or critical importance
  to sponsors
• Traditional Capacity is Dried Out or
  Unavailable
• Capitalize on market dislocations

6
Financial Enhancement
Listen to the Clients Story

• A good story requires good homework to achieve a
  good result
• Be prepared to break fresh grounds and provide
  innovative solutions to the marketplace
• Create a small group of involved parties
• Transfer best practices to accomplish goals and
  realize the idea
• Create Shared Economics with Transaction Partners
• Alignment of risks and rewards
• Achieve target returns on risk based capital

7
Financial Enhancement
The Benefits

• Allows Client to tap Markets otherwise
  unavailable
• Facilitate transaction execution with single
  institutional counterparty
• Enhance financing / refinancing program
• Accelerate realization of cashflows and/or profit
• Work closely with rating agencies to achieve
  optimal result
• Tailor Structure to Needs of the Project / Client
• Apply a holistic view
• Create a win-win situations
• Keep solutions simple
• Adds Bells Whistles where necessary
• Accommodate interests of all parties involved

8
Financial Enhancement
The Pitfalls

• Reputation in Capital Markets
• Understand your own needs beyond the transaction
• Demonstrate your own story
• Treasure your own reputation
• Be prepared to pay on first demand
• Documentation
• Ensure easy execution
• Assure complete understanding of all parties
• Risk Monitoring
• Deviation from the expected triggers an action
• React before the market does

9
Film Finance
Smoothing Cashflow Volatility with a Portfolio
Approach

• The client wished to smooth the earnings
  volatility of its international film distribution
  business.
• ART and another reinsurer provided a USD 150m
  revenue protection policy to the client for of a
  slate of 20 films to be released outside the U.S.
  
• The insurance program specified eligibility
  criteria that each film has to meet in order to
  qualify for the slate.
• No claims are to be paid until the latter of 6
  years since policy inception or 2 years after
  completion of the 20th film.
• The insurance coverage acts as contingent equity
  for the client. In the event of poor performance
  across the entire 20 film slate, the insurance
  absorbs unrecouped film costs up to a limit of
  USD 150 million.

Situation
Solution
10
Film Finance
Smoothing Cashflow Volatility with Portfolio
Approach
Compelling Factors

• Mutualization of risks and rewards from
  blockbuster and flop movies was demonstrable
  based on good historic performance data.
• Strong sponsor with proven track record.
• Portfolio fit given non-cyclical nature of film
  revenues.
• Corporate is confronted with significant revenue
  volatility
• Losses from low or non-performing projects can be
  mutualized through out-performers and
• Performance volatility is supported by good
  statistical data.

Other Applications
11
Private Equity Finance
Innovative Securitization Leveraged Private
Equity CDO

• ART was approached by Deutsche Bank (placement
  agent) and Capital Dynamics (lead sponsor) to
  facilitate the placement of the first private
  equity CDO. Prime Edge Capital Plc. raised EUR
  175m, which proceeds will be invested in a
  diversified portfolio of private equity
  fund-of-funds.
• ART supported the transaction through the
  issuance of a EUR 122.5m financial guarantee and
  a EUR 35m liquidity facility.

Situation
Solution
12
Private Equity Finance
Innovative Securitization Leveraged Private
Equity CDO
Compelling Factors

• Facilitate capital market execution with a single
  institutional investor.
• Due diligence and risk analysis of new asset
  class.
• Build market acceptance of novel asset class.
• Attractive value proposition for equity holders
  and wrap provider.
• First mover advantage in terms of
• Negotiation and structuring of transaction, and
• Wider spread level given newness of asset class.
• Apply CDO or securitization technology beyond
  established asset classes.
• Portfolios of homogenous risks with cash flow or
  timing variability.
• Large portfolio diversity allows actuarial risk
  analysis.
• Other potential areas for example
• Franchise fees.

Other Applications
13
Real Estate Finance
Reduce Financing Cost through a Guarantee for a
Subordinated Debt Offering
Situation

• The client manages a private real estate
  opportunity fund pursuing opportunistic real
  estate related investment activities.
• The client required new debt financing to pay
  down existing senior bank debt and to amend the
  terms of the senior bank facility, including an
  interest rate reduction and term extension.
• ART facilitated a USD 150m senior subordinated
  debt offering by the client which was placed as a
  floating rate note issue in the capital markets.
  The financing is subordinated to the senior bank
  debt facility and all first mortgage debt.
• ART issued a financial guarantee for the benefit
  of the noteholders covering of all interest and
  principal payments.
• The transaction was rated by SP.

Solution
14
Real Estate Finance
Reduce Financing Cost through a Guarantee for a
Subordinated Debt Offering
Compelling Factors

• ART provided value to the client in a dislocated
  market while capturing attractive terms.
• Premier real estate portfolio with diversified
  asset mix managed by a successful manager.
• Good alignment of interest through significant
  equity cushion and other features (e.g., upside
  participations).
• Risk provider when traditional market capacity is
  unavailable
• Market pricing and terms are attractive relative
  to historic prices, and
• Collateral value, business position and industry
  outlook warrant support despite market
  dislocation.

Other Applications
15
Modeling and Risk Management at ART
16
Modeling and Risk Management at ART
Portfolio Philosophy of Allianz Risk Transfer
(ART)

• To build a portfolio of uncorrelated risk groups
  and benefit from portfolio diversification
• To understand the inherent risk of the portfolio
  on a probabilistic basis
• To model the development of risk over time and
  the probability of failure of ART
• To allocate such capital as is required to
  maintain the financial strength of ART at all
  times

17
Modeling and Risk Management at ART
ART Portfolio Method - Overview

• Portfolio Model
• Each model uses the same drivers for the same
  perils i.e. market events / market movements
• As each model is run with the same set of
  underlying perils, the cashflows of each
  iteration for each deal can be summed
  (simultaneous Monte Carlo simulation)
• Cashflows on a transaction basis are modeled
  monthly and each cashflow, across many
  iterations, is stored in a database
• RBC for the portfolio is the 99.8th percentile
  loss i.e. capital sufficient of a AA rated
  carrier to support all outcomes other than the
  worst 0.2
• Our approach provides us with
• Dynamic views of how todays portfolio were to
  run off over time until extinction
• Dynamic views of how our portfolio would release
  capital as the risk changes as time passes and
  the duration shortens
• Probabilistic views of future reported profit /
  loss and worst reported loss
• Probabilistic views of required liquidity on a
  month by month basis split by currency

18
Allianz Risk Transfer

• Company Profile

19
Company Profile
Center of Competence within the Allianz Group

• Strategic Position within the Allianz Group
• Wholly-owned subsidiary of Allianz AG
• Flagship company of Allianz with holding board
  members support
• Center of competence for the alternative risk
  transfer business of Allianz globally
• Mission Statement of ART
• Leading provider of non-traditional financial and
  insurance risk solutions
• Transaction facilitator offering innovative
  approaches on the convergence of insurance and
  finance through leadingedge structuring, risk
  analysis and portfolio management expertise
• Provide (re)insurance capacity in furtherance of
  Allianzs strategic business relationships
• Generate superior risk-adjusted returns in excess
  of the hurdle rate of return

20
Company Profile
Organizational Structure of ART Network
AGF IART Paris
Allianz Risk Transfer Zurich

• Insurance license
• Capital EUR 878m
• Staff 10 000

• Insurance license
• Capital EUR 595m
• Staff 17

AGF Assurances Financières, Paris
Allianz Risk Transfer (U.K.) Limited
Allianz Risk Transfer N.V. Amsterdam
Allianz Risk Transfer, Inc. New York
Allianz Risk Transfer (Bermuda) Ltd.

• EU insurance license
• Capital EUR 5m
• Parental guarantee by ART Zurich
• Shared staff

• Reinsurance intermediary and service company
• Capital USD 29m
• Staff 7 Transfer N.V.
• Amsterdam

• Service Company
• Capital GBP 1m
• Staff 2

• Service Company
• Capital EUR 7m
• Staff 6

• Class 3 insurer
• Capital USD 25m
• Parental guaranteeby ART Zurich
• Staff 6

Notes- Capitalization as of 31 December 2001-
Consolidated capital including ART Bermuda
21
Company Profile
Corporate Philosophy

• Partnership of Experienced Professionals
• Twenty professionals of varying backgrounds with
  an average of more than ten years of financial
  services experience per professional
• ART field
• Reinsurance and insurance
• Banking and finance
• Accounting, actuarial and legal
• The ART Group represents one Global Company
• Different locations with one corporate philosophy
  and one PL
• Global sharing of staff resources and know-how
• Long-term incentives for professionals
• Boutique Character of Operation
• Professionals manage marketing, execution and
  portfolio responsibilities from A to Z
• Institutionalized knowledge transfer of
  group-wide expertise
• Readiness to break fresh ground and to innovate
  the marketplace

22
Key Financial Highlights
Strong Levels of Capitalization
Net Earned Premiums
Net Profit
Total Assets
Total Shareholders Equity
23
Financial Highlights
Strong Ratings by Standard Poors

• Insurer Financial Strength and Counterparty
  Credit Rating by SP
• AA- rating assigned to ART Zurich
• AA- rating assigned to ART Netherlands and ART
  Bermuda based on ART Zurich parental guarantee
• Short Term Rating
• A-1 rating assigned to ART Zurich
• Financial Enhancement Rating (FER)
• FER rating assigned to ART Zurich

24
Allianz Risk Transfer

• How to Contact Us

25
Allianz Risk Transfer
How to Contact Us

• The Group
• www.art-allianz.com
• Offices in Zurich, London, Amsterdam, Paris, New
  York and Bermuda
• ART Contacts
• Zurich Chris Fischer Hirs, 41-1-285-18-11
• London Thomas Bründler, 44-20-7475-4854
• Paris Véronique Turinaz, 33-1-4486-3378
• New York Bill Scaldaferri, 1-646-840-5000
• Bermuda Bill Guffey, 1-441-295-4722
• Allianz Global Risks at Cornhill
• Horst Hanauer, 44-20-7264-1562