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Catastrophe bonds may be triggered

LONDON (Reuters) - Eight catastrophe bond transactions totalling over a $1 billion could leave financial investors exposed to insured losses after a huge earthquake struck the northeast coast of Japan on Friday, triggering a 10-metre high tsunami.Catastrophe bonds transfer the risk of natural disasters to investors, who receive a yield in return for agreeing to cover claims up to a certain level when an event occurs.

The 8.9 magnitude quake will cause significant losses for the sponsors including Bermuda market operators Flagstone Re and Platinum Underwriters, as well as European giants Munich Re, Scor and Swiss Re. But cat bond investors are waiting for updates from sponsors and the modelling agencies before they will know if any bonds have been triggered.

The bonds are all based on parametric triggers - determined by the magnitude or location of the quake - which means that a cat bond may not be partially or fully triggered for covered disaster even when the sponsor of the bond has suffered a loss, according to investors.

Standard & Poor's said the ratings of six of the cat bonds that it rated will remain unchanged until it is clear if the earthquake was a triggering event. Munich Re has two bonds exposed to pure Japanese earthquake risk. The world's biggest reinsurer placed a $250 million catastrophe bond dubbed Midori Ltd in October 2007 for the East Japan Railway Company. It also arranged a $300 million Japanese quake transaction, Muteki Re, for sponsoring insurer Zenkyoren in May 2008.

“The current feeling is that these bonds are unlikely to get hit,” said one European-based broker, adding that the Midori and Muteki bonds may have escaped losses altogether because both bonds specified a quake must hit a precise location in Japan in order to be hit.

The quake off Japan's northeastern coast was the biggest in 140 years. It surpasses the Great Kanto quake of September 1, 1923, which had a magnitude of 7.9 and killed more than 140,000 people in the Tokyo area. Seismologists had said another such quake could strike the city any time.

The 1995 Kobe quake caused $100 billion in damage and was the most expensive natural disaster in history. Economic damage from the 2004 Indian Ocean tsunami was estimated at about $10 billion.

“This will be a very significant loss to the reinsurance market,” said Robert Muir-Wood, chief research officer at risk assessor firm Risk Management Solutions. The Northridge earthquake, which struck California in 1994 caused an estimated $20 billion in damage.

Disaster area: Smoke rises from an oil refinery on fire following a tsunami triggered by a strong earthquake in Tagajo, Miyagi Prefecture, northern Japan, on Sunday. (AP Photo/Koji Sasahara)

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Published March 14, 2011 at 10:00 am (Updated March 14, 2011 at 9:59 am)

Catastrophe bonds may be triggered

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