Cat Bonds See Slight Drop In 1Q

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

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

In its May report on the catastrophe-bond market, Guy Carpenter, the reinsurance brokerage arm of Marsh & McLennan Cos., says first-quarter risk capital declined from year-end 2010 from $12.19 billion to $11.97 billion. This decline occurred despite a record $1.02 billion in new and renewal catastrophe bonds.

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

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

The first quarter also saw $1.24 billion of catastrophe-bond risk capital mature with $553 million dedicated to European windstorm and $685 million to California earthquake, U.S. hurricane exposures, European wind and Japan earthquake.

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

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

The report says that after the Tohoku earthquake, U.S. wind risk increased 20 percent, primarily because of catastrophe-model concerns with the revised RMS model. U.S. earthquake risk increased 15 percent.

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

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

As for the cat-bond exposure to the Tohoku earthquake, Guy Carpenter notes that $1.43 billion has exposure to the event. This amounts to a 12 percent share of the $11.97 billion of natural-catastrophe risk bonds.

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