Industry Triggers Make Catastrophe Bond Headway

This story was updated July 12 to reflect the accurate relationship of Verisk Analytics and PCS in the fourth paragraph.

The number of catastrophe bonds being issued with an industry index triggers is rising, although indemnity triggers (based actual losses) remain dominant force for the largest issuers, according to a report released by Verisk Insurance Solutions on Monday.

Issuers used a Property Claims Services (PCS) index as a trigger for nine catastrophe bonds during the first half of 2012, an increase of 22 percent over the same period in 2011, the report states.

“The catastrophe bond market has evolved, along with investor appetite,” the report states. “Tenors are increasing, and the perils covered are broadening. The array of triggers available is expanding, yet a core set of triggers appears to appeal to many issuers.”

PCS and Verisk Insurance Solutions are business units of Verisk Analytics.

The report adds that PCS index use in terms of transaction volume grew 33 percent, from $1.2 billion to $1.6 billion, with the average value of a PCS-triggered bond growing from $171 million for the first half of 2011 to $178 million for the first half of 2012.

Despite the increased use to industry loss triggers like PCS, indemnity triggers for catastrophe bonds remain the most popular for the largest issuers, the report states.

PCS points out that of the five largest cat bonds issued in 2012 three have indemnity triggers, including Florida Citizen Insurance’s Everglades Re Ltd. ($750 million), Liberty Mutual’ s Mystic Re III Ltd. ($275 million) and Traveler’s. Long Point Re III Ltd. ($250 million).

PCS adds, however, that the dominance of indemnity triggers in terms of volume is unlikely to continue in 2012 since the large structures that rely on the mechanism are unlikely to be repeated.

“Everglades Re is the only catastrophe bond in the past five years to push above $500 million in limits. Long Point Re II Ltd. ($500 million) was twice the size of Long Point Re III Ltd., suggesting that such large transactions are unlikely to become the norm,” the report says “Furthermore, the increasing use of shelf offerings beginning in 2008 generally reduces the need for larger catastrophe bonds. Because issuers can pull down capital as needed for the life of the shelf, they can take smaller bites at any one time.”

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