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PCS Second-Quarter 2013 Catastrophe Bond Report:

So Close

PCS 2Q2013 Catastrophe Bond Report | 1

OVERVIEW

Catastrophe bond issuance activity surged in the second quarter, giving 2013 the most active

first half in the history of the sector. Nearly $4 billion came to market, up approximately

8 percent from $3.6 billion in the first half of 2012. Sponsors completed more than $3 billion

in deals in the second quarter, many of which up-sized based on investor demand and spon-

sor appetite for cost-effective cover. While catastrophe bond issuance activity fell just short

of the $4 billion mark many anticipated, it came very close. One more up-sizing or small

transaction would have made the difference.

Q2 2013 CATASTROPHE BOND ISSUANCE

According to data from the Artemis.bm Deal Directory, insurers and reinsurers issued

approximately $4 billion in catastrophe bonds in the first half of 2013, up approximately

8 percent from the same period last year. The average transaction size was effectively flat year

over year, moving slightly from $225 million to $230 million, despite the fact that eight

smaller deals ($200 million or below) were completed. These were offset by two transactions

that, together, reached nearly $1 billion: Tar Heel Re ($500 million) and Bosphorous 1 Re

($400 million).

First-Half 2013 Issuance ActivityFirst-Half 2013 First-Half 2012

PCS trigger use ($ billions) 1.6 1.6

PCS trigger use (# of transactions) 7.0 9.0

North American issuance ($ billions) 3.1 3.3

North American issuance (# of transactions) 16.0 14.0

Total issuance ($ billions) 3.9 3.6

Total issuance (# of transactions) 17.0 16.0

Sources: PCS, Artemis Deal Directory

Sponsors used data from Property Claim Services® (PCS®) as the trigger in seven catastro-

phe bonds, representing approximately $1.6 billion in fresh capital, consistent with the first

half of 2012. Tar Heel Re, an indemnity-triggered catastrophe bond, uses PCS for indepen -

dent catastrophe designation, as does the latest Residential Re transaction.

Catastrophe bonds exposed to risks in North America continued to dominate issuance

activity. Only one transaction in the first half of 2013 did not cover any U.S. or Canadian

risk (Bosphorous 1 Re), with another being marketed through the end of the second quarter

to close in July (Green Fields II Capital). However, Queen Street VIII Re includes exposure to

Australian cyclone, and Blue Danube II has exposure to hurricane risk in Mexico, Central

America, and the Caribbean.

PCS 2Q2013 Catastrophe Bond Report | 2

Second-quarter issuance topped $3 billion, putting it close to first-half issuance levels

for some of the most active issuance years in the history of the catastrophe bond market.

PCS accounted for approximately 65 percent of transactions exposed to North American

risks (not including Pelican Re).

0

500

1000

1500

2000

2500

3000

3500

4000

20132012201120102009200820072006200520042003

Historical Q2 Issuance Activity

Sources: PCS, Guy Carpenter & Company, LLC

Issuance in the second quarter of 2013 surpassed the $3 billion level for only the second time

in the history of the catastrophe bond market. The $3.5 billion raised in the second quarter

of 2007, therefore, retains the record, due in large part to the $1.1 billion Merna Re transac-

tion, which accounted for nearly a third of second-quarter 2007 issuance. While there were

two large transactions in the second quarter of 2013, together they did not reach $1 billion.

Additionally, five smaller transactions ($200 million or below) came to market — several

from first-time sponsors — indicating the diversity of this quarter’s sponsor base and

issuance activity.

PCS 2Q2013 Catastrophe Bond Report | 3

SANDY: UPDATE AND NEXT STEPS

PCS continues to resurvey the U.S. property/casualty insurance industry on its results from

Sandy. Normally, PCS concludes the resurvey process when a resurvey’s estimated claim

counts and insured losses match those of the prior survey. Despite a stable overall estimate

for Sandy at our last resurvey in May 2013, PCS has elected to leave the process open

because:

• the event was complex, involving wind and surge in a densely populated part of

the United States

• many commercial claims remain open in New York and New Jersey, and we want to see

if there are any additional developments

• recovery took a long time, with some businesses reopening as recently as May

(and some not at all)

On average, PCS completes the survey process for a large hurricane in approximately

12 months; the expected publication date for the next estimate (July 2013) will come only

nine months after PCS assigned Sandy a catastrophe serial number.

PCS issued its preliminary loss estimate for Hurricane Sandy on November 21, 2012, only

three weeks after the storm made landfall in New Jersey. Since then, we have published three

catastrophe bulletins — on January 21, 2013; March 22, 2013; and May 24, 2013.

PCS catastrophe bulletins are available through our ISOnet® platform. To get access, please

contact Jeff Lamboy, Verisk Analytics, at +1 201 469 2407 or jlamboy@verisk.com.

PCS CANADA

In the second quarter of 2013, Tramline Re II was completed, providing natural catastrophe

cover to Amlin for catastrophe events in the United States and Canada, using the PCS

Catastrophe Loss Index for both and making it the fourth catastrophe bond to use PCS in

Canada. Additionally, interest in using PCS data for industry loss warranties (ILWs) exposed

to risks in Canada has increased recently.

PCS launched its core service in Canada in late 2009, marking our first operation estimating

catastrophe losses outside the United States, Puerto Rico, and the U.S. Virgin Islands.

Through 2012, PCS designated 27 catastrophe events in Canada; six of them came in 2012,

including Sandy. Two events have occurred so far in 2013.

PCS 2Q2013 Catastrophe Bond Report | 4

Bulletins for Canadian catastrophe events, including Hurricane Sandy, are available

exclusively to PCS Canada subscribers through the ISOnet platform. To learn more, please

visit www.pcs-canada.com.

CATASTROPHE DESIGNATION IN INDEMNITY TRIGGERS

In the second quarter of 2013, two indemnity-triggered catastrophe bonds used PCS

for independent catastrophe designation, representing $800 million in new limits and

indicating the importance placed on independent third-party data and analysis in

protecting investor capital.

For this type of indemnity transaction, only losses from an event with a PCS catastrophe

serial number are used. This helps prevent claims not related to a catastrophe from

contributing to a triggering event. PCS assigns catastrophe serial numbers to events with

insured losses of greater than $25 million. To learn more about our methodology, please

download “Everything You Need to Know about the PCS Catastrophe Loss Index”.

CATASTROPHE BOND TREND TRACKING

PCS has been tracking five major trends in the catastrophe bond market since the end of

2012. The optimism with which 2013 began has resulted in a record-setting first half, with

the expectation that this year may surpass 2007 as the most active in the catastrophe bond

market’s history. We have updated some of the trends, given the first-quarter focus of our

last report.

1. 2013 market momentum1

From our 2012 annual catastrophe bond market update: In the first quarter of 2012,

$1.3 billion came to market, up 18 percent year over year. With the bar set even higher

for 2013, it seems that a strong start would be necessary for the 2012 momentum

to continue.

Second-quarter 2013 assessment: At the end of the first quarter, several large transactions

were in the pipeline, including Tar Heel Re (which ultimately closed at $500 million) and

Bosphorous Re 1 (at $400 million). Together, these two deals exceeded total first-quarter

issuance. The second quarter of 2013 was more than four times larger than the first quarter,

leading to a first-half issuance record.

1Originally “A big first quarter”

PCS 2Q2013 Catastrophe Bond Report | 5

2. Publicly managed entitiesFrom our 2012 annual catastrophe bond market update:While Pelican Re provides only one

year of cover, Everglades Re has a two-year tenor. The California Earthquake Authority’s

(CEA) two Embarcadero Re bonds have tenors of three years. Last year was the CEA’s

second year in the catastrophe bond market, and it was the first for Citizens Property

Insurance Corporation (CPIC) and Louisiana Citizens. Those three entities together raised

more than $1.3 billion through catastrophe bonds in 2012. Whether they plan to return to

the capital markets in 2013 remains to be seen. If they do, the effect on issuance levels could

be substantial.

Second-quarter 2013 assessment: As expected, Louisiana Citizens returned to the capital mar-

kets with another Pelican Re catastrophe bond. The transaction provides $140 million in

protection, making it 12 percent larger than its predecessor. This follows Florida Citizens’

first-quarter Everglades Re transaction, which raised $250 million. The trend continues.

3. Investor needsFrom our 2012 annual catastrophe bond market update: The prevailing low interest rates have

made catastrophe bond yields particularly attractive to investors. Even if broader financial

market conditions change, though, many believe that investor interest in catastrophe bonds

will continue, as they do not correlate with broader financial markets.

Second-quarter 2013 assessment: Investor interest in insurance-linked securities (ILS)

remains high around the world. The increase in catastrophe bond issuance activity helps

address this demand, but there is more capital eager to enter this market. Increased

conversation about capital market alternatives ahead of the Florida reinsurance renewal

(June 1, 2013) may have contributed to future opportunities (particularly for 2014),

especially given the two Florida transactions — Armor Re and Sunshine Re — that closed

in May.

4. Traditional versus capital markets capacity2

From our 2012 annual catastrophe bond market update: Some sponsors have shown that they

will return to the capital markets even when reinsurance rates are favorable. If Hurricane

Sandy affects the renewal, it could influence carrier appetites for capital market capacity. At

the same time, the exposure of outstanding catastrophe bonds to areas affected by the storm

could affect future issuance.

Second-quarter 2013 assessment: Insurers and reinsurers have continued to evaluate the

capital markets relative to traditional reinsurance, as evidenced during the Florida renewal

cycle. In addition to the two new Florida transactions, Allstate returned to the catastrophe

bond market for the first time since 2008. Sanders Re, a $350 million catastrophe bond, uses

PCS loss estimates by state and line of business (specifically, personal property and auto)

in its trigger. This approach, an alternative to using the overall loss estimate, allows sponsors

to secure more targeted cover. Insurers and reinsurers can also use it in ILWs and other

ILS transactions.

2Originally “The January reinsurance renewal”

PCS 2Q2013 Catastrophe Bond Report | 6

5. Cost of catastrophe bond capitalFrom our 2012 annual catastrophe bond market update: Innovation in the catastrophe bond

market has lowered frictional costs significantly over the past decade. If the trend continues,

catastrophe bond capital may become accessible to smaller insurers.

Second-quarter 2013 assessment: The cost of catastrophe bond capital continues to decline,

with many second-quarter deals closing at the low end of initial price ranges (or below),

according to data from Artemis. PCS has maintained its commitment to the management of

frictional costs throughout the process, contributing to this important development.

NEW PCS LEADERSHIP

PCS welcomes Joe Louwagie, CPCU, SCLA, AIC, AIM, to the team. Joe joined us as assistant

vice president on May 6, 2013, and has begun to transition into his new role as head of the

organization. Joe will replace Gary Kerney upon his retirement (October 7, 2013).

Joe has more than 20 years of experience in the insurance industry, after graduating from St.

Cloud State University with a degree in risk management and insurance. Joe most recently

was with USAA, where he spent 11 years primarily in auto and property claims operations

management. He received the Chairman’s Award of The St. Paul Companies for his work as

catastrophe coordinator, directing the claims response of 13 catastrophes in one year. Before

entering the property/casualty insurance industry, Joe served as a U.S. Peace Corps volunteer

on a two-year assignment in Paraguay.

Joe will attend Rendez-Vous de Septembre in Monte Carlo, where he will share his vision

and strategy for PCS, and is eager to spend more time with the ILS community. If you would

like to meet with Joe in Monte Carlo, please contact Tom Johansmeyer at +1 201 469 3140 or tjohansmeyer@iso.com.

CONTACT PCS

For more information about PCS, please use the contacts below:

ILS transactions and the PCS methodology

Joe Louwagie

Assistant Vice President, PCS

+1 201 469 3107

jlouwagie@iso.com

PCS data for internal use

Jeff Lamboy

Account Executive – Sales

+1 201 469 2407

jlamboy@iso.com

Rendez-Vous scheduling

Tom Johansmeyer

Director of Marketing

+1 201 469 3140

tjohansmeyer@iso.com

© Insurance Services Office, Inc., 2013. ISO, the ISO logo, Verisk Analytics, and the Verisk Analytics logo are registered trademarks and Verisk, Verisk Insurance Solutions, and the Verisk Insurance Solutions logo are trademarks of Insurance Services Office, Inc. Property Claim Services and PCS are registered trademarks of ISO Services, Inc. AIR Worldwide and the AIR Worldwide logo are registered trademarks of AIR Worldwide Corporation. Xactware is a registered trademark of Xactware Solutions, Inc. All other product or corporate names are trademarks or registered trademarks of their respective companies. z1

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