One of the unknowns that we have been left to ponder after hurricane Isaac’s assault on Louisiana and the surrounding states is the fate, or otherwise, of the Pelican Re Ltd. (Series 2012-1) catastrophe bond. Pelican Re, issued in April 2012, provides the Louisiana state property insurer of last resort, Louisiana Citizens, with a source of indemnity cover for losses from hurricanes. Pelican Re is a much riskier cat bond than most so it has been the subject of a lot of discussion and conjecture as to whether Isaac would trigger it.
Pelican Re covers Louisiana Citizens for losses above an indemnity trigger set at an ultimate net loss to the sponsor of $200m. The $125m of cover it provides is exhausted at $400m. LA Citizens are said to have a $75m line of credit to erode, followed by a $125m reinsurance policy, after which Pelican Re investors would begin to lose their invested principal. As catastrophe bonds go, Pelican Re is one of the more risky due to its low attachment point. It has a high probability of attachment at 4.74% and a high expected loss of 3.25%.
We know for a fact that LA Citizens will have been quite hard hit by Isaac, as one of the most exposed property insurers in the coastal region and having a market share in Louisiana of around 4%, but that percentage is much higher if you look at the coastal parishes alone. As a result we expect LA Citizens to face a reasonable proportion of the insured loss in Louisiana state. The unknown factor is just how big that loss will be and whether it will erode their reinsurance policy and mean they need to lean on Pelican Re investors.
A report from the Times-Picayune newspaper contains some comments, made last Friday, by Richard Robertson, the chief executive of Louisiana Citizens on the impact of Isaac. On the extent of the damage caused by Isaac, Robertson said; “I think it’s going to be a fairly significant event, but the reality is, it’s way too early to assess the impact.”
Robertson explained that LA Citizens has about $125m in cash on hand so can afford the $75m retention that they have to pay before any reinsurance cover kicks in. After the retention has been eroded Citizens has a reinsurance policy which will pay their claims between $75m and $200m.
After that another layer of risk transfer covers claims from $200m to $450m, with part of that being made up of the Pelican Re cat bond and more private reinsurance cover. The Pelican Re cat bond triggers at $200m of losses to Louisiana Citizens and provides $125m of cover up to an exhaustion point of $400m.
Robertson refers specifically to the cover above $200m when he said; “This storm is not going to touch that — at least that’s the indication from our reinsurance broker”.
So, as of Friday, Louisiana Citizens were pretty confident that the level of claims they were facing from hurricane Isaac was going to be manageable and would not hit the Pelican Re catastrophe bond. Given that damage from Isaac is focusing more on flood than on wind damage to properties it is likely that this assessment won’t have changed much over the weekend, although Robertson himself said it was too early to assess the impact.
We’ll update you during the course of the week if any more information is made available by Louisiana Citizens on the fate of Pelican Re.