PCS Year-End 2012 Catastrophe Bond Report: Meeting Expectations

PCS Year-End 2012 Catastrophe Bond Report:

Meeting Expectations

By Gary KerneyAssistant Vice PresidentProperty Claim Services

PCS YE2012 Catastrophe Bond Report | 1

OVERVIEW

As expected, the global catastrophe bond market turned in a strong result last year. With

$5.9 billion in fresh capital raised through such bonds, 2012 finished second only to 2007,

when $7 billion came to market. In the fourth quarter, sponsors raised $1.9 billion in seven

transactions.

2012 CATASTROPHE BOND ISSUANCE

According to data from the Artemis.bm Deal Directory, insurers and reinsurers issuedapproximately $5.9 billion in catastrophe bonds in 2012, up 38 percent from the $4.2 billion

issued in 2011. Twenty-five catastrophe bond transactions closed last year, up from 22 in 2011.

A wide range of transactions came to market, covering natural catastrophe risks in the

United States, Canada, Mexico, Europe, and Japan. One — Mythen Re Ltd., sponsored by

Swiss Re — covered both U.S. hurricane (using the PCS Catastrophe Loss Index as a trigger)

and U.K. extreme mortality.

The average transaction size grew more than 20 percent, from approximately $191 million in

2011 to $234 million in 2012. Yet even with the increase in average size, a number of smaller

deals closed in 2012. Excluding private transactions, sponsors completed four deals with

limits of $100 million or less. While that figure is down from seven in 2011, it remains

evident that sponsors continue to explore smaller catastrophe bonds, a sign that the market

could open up to smaller carriers.

http://www.artemis.bm/deal_directory/


PCS ACTIVITY IN THE CATASTROPHE BOND MARKET

In 2012, insurers and reinsurers used data from Verisk’s Property Claim Services® (PCS®) in

15 transactions, up 15 percent from 13 transactions in 2011. Capital raised with catastrophe

bonds using PCS data was up 11 percent — $3.1 billion in 2012 compared with $2.7 billion

in 2011.

Approximately 52 percent of the catastrophe bonds issued worldwide used PCS data in

their triggers.

Global Catastrophe Bond Issuance2012 2011

PCS trigger use ($ billions) 3.1 2.7

PCS trigger use (number of transactions) 15 13

Total issuance ($ billions) 5.9 4.2

Total issuance (number of transactions) 25 22

Sources: PCS, Artemis Deal Directory

PCS continued to lead the trigger market for transactions exposed to North American natu-

ral catastrophe risk. In 2012, sponsors used data from PCS in the triggers for approximately

two-thirds of the of transactions for risks in the region, representing risk capital of approxi-

mately $3.1 billion.

Issuance of Bonds Exposed to North American Catastrophes2012 2011







Bonds sponsored by publicly managed entities do not have risk profiles appropriate for an

industry loss trigger, such as one using PCS data. Four such bonds —Everglades Re (spon-

sored by Citizens Property Insurance Corporation), Pelican Re (sponsored by Louisiana

Citizens Property Insurance Corporation), and two Embarcadero Re transactions (spon-

sored by the California Earthquake Authority) — together accounted for $1.3 billion of

issuance last year.

Excluding those four bonds issued by public entities, $3.6 billion in transactions exposed

to North American catastrophes came to market in 2012, and 86 percent of the bonds

(measured by capital raised) used PCS data in their triggers.

FOURTH-QUARTER 2012 CATASTROPHE BOND ISSUANCE

In the fourth quarter of 2012, sponsors completed seven transactions, raising $1.9 billion in

new capital. That figure is in line with the fourth quarter of 2011, when eight transactions

raised just under $1.8 billion. In the fourth quarter of 2012, five transactions, raising $1.3

billion, used data from PCS in the trigger. That’s a modest decline from six transactions, rais-

ing $1.4 billion, in the fourth quarter of 2011.

Fourth-Quarter Global Catastrophe Bond Issuance4Q 2012 4Q 2011






HOW PCS DEVELOPS CATASTROPHE LOSS ESTIMATES

When PCS believes an event will cause

more than $25 million in insured losses

and will affect a significant number of

policyholders and insurers, it designates

the event a catastrophe and issues a PCS

Catastrophe Serial Number. The PCS

team then works with the insurance

industry and other stakeholders to

estimate insured losses, catastrophe

reserves, and claim counts for each state

affected by the event.

First, PCS polls the insurers with

significant market share in each state,

gathering information on personal

property, vehicle, and commercial

property claims. In addition to reports

from affected carriers, PCS monitors

news sources, reviews third-party data,

and speaks with reinsurers, agents, bro-

kers, and other parties in the catastrophe

risk market. To arrive at its estimates,

PCS takes into account coverage limits,

coinsurance, deductible clauses, and

other factors that could affect the eligi-

bility for insurance coverage.

Based on an analysis of the reports from insurers, as well as other data, PCS calculates

insured loss and claim count estimates by state for personal property and vehicle lines.

Because commercial property losses tend to be large and involve a relatively small number of

claims, PCS adds them to the personal property and vehicle loss estimates for each state but

does not extrapolate total commercial property losses based on market share or other factors.

Usually within two weeks after a catastrophe, PCS publishes a catastrophe bulletin —

through the ISOnet® platform — with the preliminary insured loss estimates. The bulletin

also includes an estimated industrywide loss adjustment expense, but we do not apply it to

the overall loss estimates.

For large catastrophes (more than $250 million in insured losses) or those with some

unusual characteristics, PCS resurveys the industry and issues an updated bulletin about

60 days later. As carriers gain a better understanding of the losses they face, they report their

updates to PCS. Such updates help to clarify the financial effects of an event. PCS issues the

preliminary estimates to help carriers refine their catastrophe reserves and optimize the

deployment of adjusters, and the resurvey process helps to refine the estimates.


The PCS loss estimate does notinclude:

• flood losses covered by the NationalFlood Insurance Program (NFIP) orthe “Write Your Own” program

• reinsurance, catastrophe bond, andindustry loss warranty (ILW) lossesof any kind

• uninsured property damage of anykind (including damage to publiclyowned property and utilities)

• losses involving agriculture

• losses involving aircraft

• certain specialty lines (such as oceanmarine and offshore drilling/energy)


Catastrophe losses can change during the resurvey process, especially for larger events. In

many cases, physical barriers impede adjuster access to damage sites, limiting the data that

insurers can submit to PCS for inclusion in the initial estimate. Following Hurricane Sandy,

for example, local authorities did not permit adjusters to access some of the hardest-hit areas

of New York and New Jersey for several weeks. That prevented carriers from ascertaining the

full extent of the damage.

In addition to updates on personal property and vehicle losses, the resurvey process results

in improved commercial property loss estimates. Settling large commercial losses can require

the involvement of accountants, attorneys, and other professional service providers, neces-

sarily lengthening the process.

PCS repeats the resurveys every 60 days until two consecutive resurveys yield approximately

the same insured loss and claim count estimates. When that happens, PCS considers the

process complete.

There is no fixed time for the resurveys. PCS completes the process for most large catastro-

phes in six months, although hurricanes tend to take up to a year. PCS completed the

Hurricane Irene survey/resurvey process in only four months. Hurricane Katrina took nearly

two years. (For Katrina, PCS opted to keep the estimate open longer than usual because of

pending class action litigation that could have affected carrier losses.)

HURRICANE SANDY: NEXT STEPS

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

then, we have actively pursued the resurvey process, and we plan to issue the next bulletin in

late January 2013. The two key factors that we believe may affect the resurvey results are

demand surge and business interruption, both of which take time to manifest following a

catastrophic event.

PCS develops and publishes all estimates and bulletins for the benefit of our ISOnet sub-

scribers. We discourage use of the estimates by noncustomers, as we cannot guarantee that

reports obtained from other sources are authentic, complete, and accurate. Furthermore,

there is no assurance that noncustomers will have access to final bulletins or estimates

through sources other than ISOnet.

If you have questions about the process PCS uses to develop industry loss estimates, we encourage you tocontact Gary Kerney, assistant vice president, PCS,

at +1 201 469 3107 or [email protected]. You can learn more at www.verisk.com/pcs.


DEVELOPMENTS IN THE CANADIAN ILS MARKET

In the fourth quarter of 2012, a new catastrophe bond with exposure to Canadian earth-

quake risk came to market. Issued by Zurich, it is a $225 million indemnity-triggered trans-

action that also covers U.S. earthquake risk. Although this bond did not use PCS data, the

previous one with Canadian natural catastrophe exposure — Blue Danube, a $240 million

transaction completed in April 2012 — did. So far, three transactions covering Canadian

risks have closed. The first was Merna Reinsurance III Ltd., a $250 million indemnity-

triggered bond issued in 2010. It also covers a number of U.S. perils.

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. Since

then, PCS has designated 17 events as catastrophes in Canada. Six of them occurred in 2012,

including Hurricane Sandy, which we designated as a catastrophe in both Canada and the

United States.

The issuance of a new catastrophe bond exposed to Canadian natural catastrophe risk is an

important development for the market, showing that investors are willing to assume such

risks. PCS will continue to monitor the market for further progress.

Estimates for Canadian catastrophe events, including Hurricane Sandy, are available exclu-

sively to PCS subscribers through the ISOnet platform.

FIVE CONSIDERATIONS FOR 2013

The new year may have only just begun, but that is unlikely to slow speculation as to what

lies ahead. Will 2013 rival 2012, or will we see a post-spike dip, as we did in 2011? Several

factors are poised to influence catastrophe bond issuance in 2013.

1. A big first quarter: 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.

2. Publicly managed entities:While Pelican Re provides only one year of cover, Everglades

Re has a two-year tenor. The California Earthquake Authority’s two Embarcadero Re bonds

have tenors of three years. Last year was the CEA’s second year in the catastrophe bond mar-

ket, and it was the first for Citizens 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.


3. Investor needs: The prevailing low interest rate environment has 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.

4. The January reinsurance renewal: 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.

5. Cost of catastrophe bond capital: 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.

Despite those factors, one thing is clear: The insurance and reinsurance industry remains

committed to catastrophe bonds as a form of risk transfer. The next challenge will be to find

a way to make the bonds available to the broader industry.

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© 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 ServicesOffice, Inc. Property Claim Services and PCS are registered trademarks of ISO Services, Inc. AIR Worldwide and the AIRWorldwide logo are registered trademarks of AIR Worldwide Corporation. Xactware is a registered trademark of XactwareSolutions, Inc. All other product or corporate names are trademarks or registered trademarks of their respective companies.

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PCS Year-End 2012 Catastrophe Bond Report: Meeting Expectations