Hurricane Irene Increases Trading Of Catastrophe Bonds As Traders' Views Differ

Aug 26, 2011 | Updated Oct 26, 2011

The market for catastrophe bonds has seen a flurry of activity in recent days as traders express different views about the likely damage from Hurricane Irene now barreling its way up the U.S. eastern seaboard.

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.

Catastrophe bonds, known in the insurance industry as “cat” bonds, are structured securities that allow reinsurers to transfer their own risks to capital-market investors. Investors in cat bonds earn regular payments in exchange for providing coverage on a predetermined range of natural disasters for a set period of time.

Several traders said the most-actively traded hurricane-related securities this week are ones issued by Johnston Re Ltd., which provide coverage to the North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association, insurers of last resort in the state for those unable to get coverage in the standard insurance markets. A spokesman for these entities didn’t immediately return a call.

Johnston sold about $200 million of bonds in May–$70 million of Class A notes and $131.8 million of Class B bonds–that are 100% exposed to North Carolina windstorms on a per-occurrence basis.

Standard & Poor’s rated the series 2011-1 bonds, which mature in May 2014, at BB-minus. A separate batch of Johnston bonds sold in 2010, rated BB-minus, were also seeing activity. That issue was split between $200 million of class A and $105 million of class B notes all maturing in May 2013.

“Most of the attention is focused on Johnston, where there is interest at moving [the bonds] below par,” where they were marked at the start of the week, one cat-bond trader in Bermuda said.

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