Monday, March 14, 2011

Updated: Catastrophe bonds exposed to the Japan earthquake

Among the generalists FT Alphaville had a couple Cat posts on Friday:
S&P says catastrophe has no impact on catastrophe bonds – yet
Japan update – energy and insurance
the latter linked to Artemis, which long time readers will recognize as our go-to for cat stats.
Here's the latest from Artemis:
Catastrophe bond indices dip after Friday’s earthquake in Japan
The Swiss Re Cat Bond Performance Indices dipped sharply at pricing late on Friday. It’s assumed that the dip is due to downward pressure caused by nervousness after the Japanese earthquake event which occurred earlier that day. Here’s our latest monthly look at the indices showing the downward movement.

The cat bond market has seen a healthy start to the year with a number of catastrophe bond transactions completing and upsizing significantly from their original values they were marketed at.
Friday’s earthquake and tsunami in Japan have put a number of cat bond deals at risk of losses. It’s very difficult to tell which bonds are likely to suffer a loss at this time but we’ve put together some information which makes it a little clearer....MORE
And a closer look:

Updated: Catastrophe bonds exposed to the Japan earthquake
We’ve performed some analysis on the catastrophe bond transactions which have exposure to Japanese earthquake risks to try to give our readers a better impression of the likelihood of any of them suffering a loss after Friday’s massive earthquake and tsunami. It’s proved difficult, as some of the cat bond transactions have minimal information available publicly, and it’s not possible for us to tell you which deals face losses but we hope you find this of interest.

Issuer $ Cedent Date of issue
Montana Re Ltd. (Series 2010-1) $210m Flagstone Re Dec 2010
This transaction utilised the RMS Japan Earthquake Model. The deal utilises the Risk Management Solutions (RMS) Paradex model and in index-trigger and index values are per prefecture in Japan.
The Japan earthquake risk is in the Class E notes.
Standard & Poor’s said about this deal:
RMS’s parametric-based index, Paradex, creates index values (reported on, or converted to, U.S. dollars for this transaction) based on event parameters spectral acceleration for earthquake (using data supplied from the U.S. Geological Survey monitors seismic activity and published in post-event hazard maps). These index values are used to estimate industry losses by line of business. As the event calculation agent, RMS will calculate an index value following a qualifying event. The index value is the sum of the products of Paradex index values and payout.
The Class E notes cover losses from second and subsequent events on an annual aggregate basis. The covered perils are U.S. hurricane and earthquake, Japan typhoon and earthquake, and European windstorm. The initial attachment level is $100 million, and the initial exhaustion level is $200 million. The Class E initial deductible amount for each event is for U.S. Hurricane, $125 million; U.S. Earthquake, $125 million; Japan Earthquake, $100 million; Japan Typhoon, $100 million; and Europe Windstorm, $100 million. The initial maximum loss amount related to any one event is $100 million. Therefore, it would take a minimum of two events to result in a loss on principal on the Class E notes.
So, on Montana Re it would seem unlikely that it will be triggered given that it takes a minimum of two events. However, the deal may have its rating cut as if this earthquake qualifies as one event then the deals risk of default is much higher as only one more event is required to trigger it.