The catastrophe bond issued by Topiary Capital to protect Platinum Underwriters from natural catastrophe risks has been triggered by the Japanese earthquake, but investors will not lose money for now because of the way the bond is structured.
Credit rating agency Standard & Poor’s (S&P) said it had lowered its rating on the bond to CCC+ and removed it from CreditWatch after the official calculation agent, Risk Management Solutions (RMS), determined the March 11 earthquake was an ‘activation event’.
“As a result, the noteholders will be at risk for losses of principal and interest for any subsequent covered events that occur from March 11 through July 31,” S&P said in a statement on Wednesday.
Insurers and reinsurers use catastrophe bonds to transfer to capital market investor’s major risks on their books, such as for storms and earthquakes, freeing up capital to underwrite new insurance business.
Topiary Capital is structured as a second and subsequent event cover, which means the Japan earthquake alone could not trigger any losses to investors.
But risk assessor firm RMS 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.
“The deal is effectively now on risk,” Ben Brookes, director, RiskMarkets at RMS told Reuters.
The bond is due to mature in August 2011.
“The bond will be exposed to a small amount of the wind season, so a big hurricane early on could potentially threaten the bond,” Brookes said.
RMS used data from Japan’s seismic earthquake reporting network K-Net to calculate the value of a parametric index, which is used to determine any losses for the Topiary Capital bond.
This is the first bond to receive an official confirmation on the impact of the Japan quake. Other bonds are still exposed, but their fates have yet to be determined.
A further $647 million of the total $1.6 billion exposure is believed to still be vulnerable to losses, based on available data from K-Net, or has been placed on credit watch by rating agencies as a result of the earthquake.
Source : Reuters
