LONDON Dec 4 Two catastrophe bonds totalling $165 million will pay out in full to issuer Swiss Re if insured losses from superstorm Sandy reach $25 billion, risk modelling firm RMS said on Tuesday.
Risk Management Solutions said it expects insured losses from the Category 1 storm which slammed into the east coast of the United States on Oct. 30 to reach $20 billion-$25 billion.
The higher figure would trigger payouts on two cat bonds and erode layers of protection within 15 additional bonds that would leave investors exposed to future losses from natural disasters, RMS said in a webinar on Tuesday.
Cat bonds transfer insurers' potential losses from the worst natural disasters to capital markets investors, who receive generous coupon payments but risk losing all or part of their principal if an event such as a hurricane or earthquake occurs.
RMS's loss estimate for Sandy exceeds those of peers AIR and Eqecat, whose top estimates are $15 billion and $20 billion, respectively.
Swiss Re would use any payout on its cat bonds to cover insurance claims made on it as a result of Sandy. Successor X and GlobeCat were sold to investors to cover the world's second biggest reinsurer against losses from U.S. hurricanes.
The tranches of the bond that are exposed to losses are the $80 million F4 tranche of Successor X Ltd's Series 2011-3 bond and $85 million of the AI tranche of GlobeCat USW, say RMS.
Investors eager to sell their exposure to Sandy were selling the bonds for 70 and 80 cents on the dollar, said Peter Nakada, managing director at RMS.
A further $250 million of class H notes issued by Mythen Ltd, again to protect Swiss Re from reinsurance losses from U.S. hurricanes, may also be at risk from superstorm Sandy, investors and brokers said.
Swiss Re declined to comment.
It is rare for a catastrophe bonds to pay out, with only eight of some 210 property cat bonds issued since 1997 having been triggered.
- For more details on cat bond transactions, see the Thomson Reuters Insurance Linked Securities Community, click here. (Reporting by Sarah Mortimer; Editing by Catherine Evans)