The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Capital market reinsurers may have contributed up to $2bn-$2.5bn to help pay claims from natural disasters in 2011, representing the largest losses in the $30bn sector's relatively short history.

The losses were recorded across the public catastrophe bond market as well as private deals in the derivative industry loss warranty (ILW) and collateralised reinsurance and retro sectors. And it was the public catastrophe bond market that provided the most visible benefits of capital markets reinsurance support after the 11 March Japanese earthquake.

The $300mn Muteki bond swiftly paid out in full to sponsor Munich Re - for the ultimate benefit of Japanese mutual insurer Zenkyoren - as its trigger was linked to ground shaking from the quake.

Later it emerged that global reinsurer Swiss Re also claimed $15.93mn from its Vega Capital 2010 cat bond.

It is more difficult to gauge losses from the private sector than in the public cat bond market, but sister publication Trading Risk has calculated some general estimates.

Capital markets investors are believed to contribute around 70 percent of the $5bn ILW market, which equates to $3.5bn capacity, according to Willis Re. About $500mn in ILW products would pay out on the Japanese earthquake, BMS broker Stefano Nicolini estimates.

This indicates a capital market loss of around $350mn. Another $170mn of capacity existed in the "cold spot" ILW market, where many products are thought to have paid out on the New Zealand earthquakes. However, cat funds are thought to only have had around a 20 percent market share in this niche - worth around $35mn.

Click to enlarge On the collateralised reinsurance/retro side, Trading Risk understands that collateralised reinsurers provide around 5 to 6 percent of global reinsurance capacity. Willis Re has put reinsured losses for disasters over the past 16 months at $48bn, which would put collateralised reinsurance losses at around $2.6bn. However, counting only H1 losses and taking into consideration their geographic distribution in largely non-peak zones, sources suggest the figure will more likely be in the region of $1bn-$1.5bn.

Significant retro hits for capital markets investors include the $153mn Q1 loss reported by RenaissanceRe for its DaVinci Re sidecar vehicle and losses on a significant portion of Hannover Re's $329mn K6 vehicle. DaVinci Re went on to report a $38.7mn Q2 profit despite taking claims of $61.9mn, including at least $29mn of tornado losses.

Bermudian (re)insurer Arch's financial reports also provided insight into losses at collateralised reinsurer Aeolus. Arch posted a $4.8mn loss from its 4 percent share of the firm's first-quarter returns. At face value this suggests Aeolus posted a quarterly loss of roughly $120mn, although actual losses may vary depending on the ownership split.

Listed start-up retrocessionaire Catco has set aside $18mn of its funds that are exposed to New Zealand and Japanese earthquake payouts. It said it did not expect to pay out on Japanese claims but noted it was carefully monitoring loss notifications from New Zealand clients.

So what does this mean for investors? ILS funds took an average hit of about 5 to 6 percent on their net asset value (NAV) in the wake of the Japanese disaster, sources estimated. The Swiss Re cat bond index (see chart) provides a good proxy for their fortunes, given that cat bonds make up a large part of most managers' holdings.

The price index, which tracks cat bond resale values, fell more than 5 percent in the wake of the Japanese earthquake and has languished since then.