Catastrophe bonds bear Katrina’s brunt

Although industry insured losses resulting from damages left in Katrina’s wake are estimated at a substantial US$15 – US$25 billion, outstanding hurricane-related catastrophe bonds are expected to remain safe.

“Nevertheless, based on a preliminary analysis, it appears that the damage caused by Hurricane Katrina will not result in any of the outstanding hurricane-related catastrophe bonds hitting their respective attachment points,” James Doona, Standard & Poor’s Ratings Services credit analyst, says. “Therefore, we have not placed any catastrophe bond ratings on CreditWatch.”

Of the US$1.61 billion North American hurricanes accounted for by Standard & Poor’s rated natural peril catastrophe bonds (US$4.25 billion in total), $630 million is parametric – dependent only on measurements of wind speed or storm intensity, as provided by the National Hurricane Center of the National Oceanic and Atmospheric Association.

Standard & Poor’s says Katrina is not likely to cause the parametric notes any principal loss. The companies protected by the indemnity notes are still assessing the effects of Katrina. At this point, none of the notes seems likely to attach.

However, indemnity-based notes are another matter. Unlike parametric notes – where the payouts depend only on measured wind speeds – indemnified notes (the majority of all notes at US$975 million) are directly linked to their level of insured losses. Currently, insured losses are in the assessment phase so the losses from severe water damage are unknown and will be allocated between the federal flood program and the private insurance sector. Standard & Poor’s says that because the current loss estimates are far from final, and continually mounting, catastrophe bonds have not yet been utilized for clean-up costs. These bonds may however be tapped into if future and final loss data proves cat bonds are necessary.