Insurers, reinsurers and catastrophe bonds threatened by hurricane Isaac

Hurricane Isaac has begun to come ashore in southeast Louisiana, read our latest article on the storms impacts and progress here. We’ve discussed the potential weather impacts extensively in that article but here we’re going to look at the potential reinsurance, insurance and also catastrophe bond impacts that could result from the first hurricane to really threaten the re/insurance sector this year.

The U.S. has not seen a storm quite like Isaac, threatening prolonged storm surge, rainfall as well as high winds since last years Irene threatened the north east of the country. For the state of Louisiana Isaac comes close to the anniversary of hurricane Katrina and is the first test of strengthened levees and new storm surge protection. For insurers and reinsurers the storm provides a test of their risk management and transfer arrangements as well as likely testing their claims processes.

The Insurance Insider publication has a useful list of who is exposed from an insurer perspective. State Farm has a 20% market share in the area where Isaac is threatening, Allstate has close to 10%, Liberty Mutual 5% and Louisiana Citizens (the state insurer of last resort) has just over 4%. Other exposed insurers include Progressive, USAA, AIG, LA Farm Bureau and Farmers Insurance.

From a reinsurer perspective it is likely that all of the major reinsurers will have a certain level of exposure in the area, so we can expect the likes of Swiss Re, Munich Re, Hannover Re, Scor and Lloyd’s of London to all have exposure of some severity to hurricane Isaac.

Given that the last time a hurricane came ashore in this area it created the largest insured loss on record, hurricane Katrina, reinsurers will be hoping that the work to shore up the cities defences has been sufficient to prevent extensive damage from Isaac. At this time it looks like they will be but there are some hours to go before the extent of damage to New Orleans and other areas becomes apparent. It will likely be a number of days before we understand the extent of economic and insured losses and we don’t expect to have any re/insured loss estimates to share for a number of days. The extent of losses from this storm will be hard to total as it is forecast to impact far inland with heavy rainfall.

Fitch Ratings has said that they expect primary insurers to take the brunt of the losses from hurricane Isaac. Risk modeller AIR Worldwide gave a very broad estimate of insured losses which they said could range from $300m to $7.5 billion. If the insured loss is in the upper half of that range then we will see an impact to reinsurers and potentially to cat bonds.

A number of catastrophe bonds are exposed to hurricane Isaac because they provide protection to re/insurers operating in Louisiana state.  In no particular order, here are some cat bonds with exposure in Louisiana and potential exposure to hurricane Isaac:

– Pelican Re Ltd. (Series 2012-1)
– Residential Reinsurance 2012 Ltd. (Series 2012-1)
– Queen Street VI Re Ltd.
– Queen Street V Re Ltd.
– Queen Street IV Capital Ltd.
– East Lane Re V Ltd. (Series 2012-1)
– Ibis Re II Ltd. (Series 2012-1)
– Mystic Re III Ltd. (Series 2012-1)
– Mythen Ltd. (Series 2012-1)
– Blue Danube Ltd. (Series 2012-1)
– Combine Re Ltd. (Series 2012-1)
– Successor X Ltd. (Series 2012-1)
– Loma Reinsurance Ltd. (Series 2011-2) – we cannot confirm that this covers Louisiana, but we believe it to
– Tramline Re Ltd. (Series 2011-1)
– Atlas VI Capital Ltd.
– Residential Reinsurance 2011 Ltd. (Series 2011-2) – we cannot confirm that this covers Louisiana, but we believe it to

Now the list of cat bonds above is by no means extensive, there are others which could have some exposure to hurricanes striking the state of Louisiana, however it demonstrates just how much potential exposure the cat bond market has to a single storm.

Most of these cat bonds will not be a concern due to the way they are structured, the fact that most would require a major category 3 or higher storm impact to cause sufficient losses to trigger them. However there are a few that warrant a closer look.

The first, of course, is Pelican Re Ltd. (Series 2012-1). This provides cover to Louisiana Citizens and, as we wrote when it was issued, it’s a riskier indemnity cat bond which triggers at a relatively low amount of losses. The trigger for Pelican Re is just $200m of losses and the exhaustion is at just $400m of UNL to LA Citizens. That puts this cat bond at risk even from a Category 1 storm like hurricane Isaac. Pelican Re does not cover pure flood damage so that is in its favour, however we believe storm surge caused by hurricane is covered and wind damage most certainly is. Louisiana Citizens has a great amount of exposure in the coastal areas where hurricane Isaac is currently making the greatest impact. As Pelican Re is an indemnity cat bond it is unlikely we will understand whether there has been an impact for some time as claims come in and losses to Louisiana Citizens are quantified.

Other cat bonds of notes which could be at risk from hurricane Isaac are the two USAA cat bonds, Residential Reinsurance 2011 Ltd. (Series 2011-1)  and Residential Reinsurance 2012 Ltd. (Series 2012-1). Both of these cat bonds have been downgraded recently due to qualifying losses from severe thunderstorms and as they are both indemnity cat bonds we suspect that there is a chance that additional qualifying losses to add to the aggregate totals from hurricane Isaac. USAA have a bout 3% market share in the area so there is definitely a chance that the annual aggregate trigger will get a little closer for these two cat bonds. Swiss Re’s Combine Re Ltd. (Series 2012-1) cat bond has also had a downgrade due to severe thunderstorm losses and is exposed to hurricane risk in Louisiana, so that is also potentially at risk.

What this list demonstrates is the extent of the exposure that the catastrophe bond market has to U.S. hurricane risks. Whenever a hurricane threatens the coastline there can be anywhere from five to twenty cat bonds (or even more) cat bonds with potential exposure. The cat bond market is still more than 70% exposed to U.S. hurricanes and so this risk of a single event threatening the market is always an issue. Of course, it is very unlikely that a single hurricane event would trigger mutliple cat bonds unless it was an extremely severe storm, which hurricane Isaac is not.

At the moment it does not seem likely that hurricane Isaac could cause the default of any cat bond except possibly for Pelican Re due to the exposure of Louisiana Citizens in the coastal area. Should Pelican Re be triggered, while it would be a blow to some investors, it would demonstrate the effectiveness of cat bonds at providing reinsurance coverage for these extreme and infrequent events.

We will update you on the impact to insurers, reinsurers and to the catastrophe bond market (if there is one) as and when details of losses become available. You can view the details of all of these cat bonds and others which may have exposure in our Deal Directory.