Isaac could be first storm to trigger a state-run insurer’s cat bond

WASHINGTON, D.C. (Aug. 29, 2012) – Hurricane Isaac, which made landfall as a Category 1 storm in Southeastern Louisiana late Aug. 28 and is expected to weaken as it moves into Arkansas over the next 24 hours, could become the first storm ever to trigger a catastrophe bond issued by a state-run insurer.

The $125 million Pelican Re bond, issued by the Louisiana Citizens Property Insurance Corp., would be triggered if the storm produces more than $200 million in losses for the residual market entity. According to its statutory filings, Louisiana Citizens had $100 million of cash resources as of June 30, as well as a $75 million line of credit and a primary reinsurance layer of $125 million once losses exceed $75 million.

Catastrophe modeling firm Eqecat estimated Aug. 29 that onshore insured losses from Isaac in Louisiana and neighboring states are likely to be between $500 million and $1.5 billion.  That is in addition to between $500 million and $1 billion of offshore economic losses to the energy sector.

As of Dec. 31, 2011, Citizens had 112,000 policies statewide, with $21.8 billion of total exposure, but it is especially concentrated in the coastal parishes that are expect to take the brunt of Isaac’s destruction. That includes $6.6 billion in Orleans Parish; $4.5 billion in Jefferson Parish; $1.8 billion in Terrebonne Parish; $1.3 billion in St. Tammany Parish; and $1.2 billion in Lafourche Parish.

The Pelican Re catastrophe bond closed in April, as Louisiana Citizens joined the California Earthquake Authority, California State Compensation Insurance Fund, the Massachusetts Property Insurance Underwriting Association, and the North Carolina Joint Underwriting Association and Insurance Underwriting Association as public or quasi-public insurance entities that have turned to the capital markets to place a portion of their reinsurance programs. More recently, Florida’s Citizens Property Insurance Corp. placed its $750 million Everglades Re cat bond, the largest single-peril offering in history.

Print and broadcast journalists working on stories related to Isaac, hurricane risk generally, state residual market property insurers, catastrophe bonds and other related issues should feel free to contact any of the following R Street Institute scholars for comment or an interview:

R Street is a non-profit public policy research organization that supports free markets; limited, effective government; and responsible environmental stewardship. It has headquarters in Washington, D.C. and branch offices in Tallahassee, Fla.; Austin,Texas; and Columbus, Ohio. Its website is www.redesign.rstreet.org.

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