NU Online News Service, June 10, 3:03 p.m.EDT

The total risk capital ofinsurance-linked securities dropped by $223 million despite thesecond highest two-quarter issuance of catastrophe bonds in thehistory of the market, says Guy Carpenter Securities.

In its May report on the catastrophe-bond market, GuyCarpenter, the reinsurance brokerage arm of Marsh & McLennanCos., says first-quarter risk capital declined from year-end 2010from $12.19 billion to $11.97 billion. This decline occurreddespite a record $1.02 billion in new and renewal catastrophebonds.

The decline was blamed on the drop in value of some bonds due tothe Tohoku earthquake earlier in the year, as bonds affected by theevent take mark-to-market losses.

Despite the losses, Guy Carpenter notes that the bond marketcontinued to “trade in an orderly and disciplined fashion.”

The first quarter also saw $1.24 billion of catastrophe-bondrisk capital mature with $553 million dedicated to Europeanwindstorm and $685 million to California earthquake, U.S. hurricaneexposures, European wind and Japan earthquake.

The Japan-exposed catastrophe bond of $235 million was fromAtlas Reinsurance IV Ltd. It matured in January, well before theTohoku earthquake in mid-March.

The industry loss warranty (ILW) market “hardened significantly”in the wake of catastrophes in New Zealand, Australia and Japan anddemand increased for additional protections for the rest of thisyear.

The report says that after the Tohoku earthquake, U.S. wind riskincreased 20 percent, primarily because of catastrophe-modelconcerns with the revised RMS model. U.S. earthquake risk increased15 percent.

However, after the increases taking place during the final weeksof the first quarter, new capacity has crept into the market “in anattempt to take advantage of rate increases.” This new capacity and“an abatement of protection buyer interest” have led to moderationin pricing.

The ILW market is “showing signs” of stability at currentlevels.

As for the cat-bond exposure to the Tohoku earthquake, GuyCarpenter notes that $1.43 billion has exposure to the event. Thisamounts to a 12 percent share of the $11.97 billion ofnatural-catastrophe risk bonds.

Guy Carpenter says that the principal risk of the bonds variesbecause the trigger design for each, and other structural features,“differs significantly.”