Catastrophe bond market lives on

The catastrophe bond market seems to have survived the Japanese earthquake, its biggest test since the Lehman Brothers bankruptcy, with investors still likely to consider the sector despite millions of dollars of losses.

The cat bond sector — in which insurers transfer risks associated with natural disasters to capital markets investors — has not experienced price drops or spread increases big enough to deter new issuances, say investors, brokers and analysts.

"Behind the scenes, both investors and sponsors are at peace with the results of his event," John Seo, co-founder and managing principal at Insurance Linked Securities-fund Fermat Capital Management, told Reuters.

Only one transaction is expected to experience a full loss from the ten catastrophe bonds valued at $1.7 billion that were exposed to the earthquake - a cat-astrophe bond issued by Muteki Limited, which was structured by Munich Re for Japanese carrier Zenk-yoren.

The world's biggest reinsurer confirmed the $300 million (Dh1.1 billion) bond would be a total loss to investors following Japan's devastating earthquake. Another bond — Topiary Capital, launched in 2008 to protect Platinum Underwriters from natural catastrophe risks — has also been triggered, but investors remain unscathed because of the structure of the bond.

Known as a ‘second' or ‘subsequent event' bond, the Japan earthquake alone could not trigger any losses to investors. Its calculation agent, Risk Management Solutions has confirmed the quake was large enough to qualify as an ‘activation event', which means the bond is now exposed to any subsequent qualifying events over the remainder of its term.

Bonds still at risk

Two additional cat bonds totalling $210 million remain at risk — but as ‘subsequent event' transactions.

The sponsors of both bonds have sent official event notices to the calculation agents — RMS and Eqecat respectively. The market is currently waiting for the event report from the calculation agent, Chi Hum, global head of ILS distribution at GC Securities, part of reinsurance broker Guy Carpenter, said. "It takes a bit of time because aftershocks within a certain radius are considered within 30 days of the initial loss date in the final loss calculation," he said.

— Reuters