Catastrophe Bonds Attract Scrutiny in Wake of Hurricane

(August 29, 2011) — The catastrophe bond sector — in which insurers transfer risks associated with natural disasters to capital markets investors — has attracted heightened attention in the wake of Hurricane Irene.

AIR Worldwide, a catastrophe-risk modeling firm, estimated that insured losses in the Caribbean from Irene have already reached between $500 million and $1.1 billion, the Wall Street Journal reported.

On Friday, as the storm was approaching the East Coast, ratings agency Standard & Poor’s said in a statement: “Given the uncertainty of where the hurricane ultimately makes landfall, its subsequent course, and the resulting covered losses, we will not take any rating actions until after the event has passed through the US.”

According to Willis Capital Markets & Advisory, the cat bond sector is exposed to nearly 70% of US hurricane risk, Reuters reported. Bill Dubinsky, managing director of the firm, said last week that as reports from weather forecasters emerged on Hurricane Irene’s intensity, some investors are attempting to “trade in and out of bonds as well as using the parallel Live Cat market to rebalance their positions.”

Catastrophe bonds have also attracted heightened interest from pension funds, exemplified by Europe’s second-biggest insurer revealing in March that its funds investing in catastrophic bonds may more than triple. Axa said that its funds investing in cat bonds and other insurance-linked securities may balloon as insurers manage their exposure to natural disasters by transferring potential losses to investment funds. Christophe Fritsch, head of insurance-linked securities at Axa Investment Managers, the asset-management unit of Paris-based Axa, told Global Pensions that he has witnessed a spike in the number of meetings he has had with chief investment officers of pension funds, which will likely result in higher investments from those funds. Fritsch said he expects demand from pension funds will drive new issuance of cat bonds up to $7 billion this year.

In February, Swiss Re said it obtained $350 million in protection through the Successor X Ltd. catastrophe bond program, representing the fourth time the reinsurer has used the program to transfer risks covering North Atlantic hurricane and California earthquakes. Swiss Re noted that the transaction adds an additional $305 million of notes to cover itself against hurricane losses in some US. states and Puerto Rico and California earthquakes until December 2014.