The U.S. hurricane season is only just getting underway, but so far this year, insured damage from tornado activity and other global catastrophes is running well below the same time last year, according to Guy Carpenter.
A report the reinsurance intermediary published today put insured catastrophe losses for January-May at just $6 billion, or about one-twelth the estimated $75 billlion sustained in the first five months of 2011.
That's good news for investors in catastrophe bonds, who can lose their principal if specified trigger conditions, such as a certain amount of insured losses, are met. In general, the less insured losses there are, the less likely it is that these individual triggers will be met.
Although the lower-than-expected loss estimates don't directly impact they payout on CAT bonds, the data may have some impact on the performance of these securities in the secondary market by positively affecting sentiment, according to David Flandro, global head of business intelligence at Guy Carpenter.
Flandro said that the June-November hurricane season is likely to be foremost in investors minds, however. "It is important to observe that U.S. wind cat bond price return indices have been following their usual trend (seen in 2006, 2007, 2010, and 2011) of falling prior to hurricane season -- even though we've had low catastrophes so far in the year," he said.
The report also estimated the global reinsurance sector's capital position to be approximately $15 billion, which is greater than historical trends. All things being equal, that would tend to argue for less issuance of CAT bonds, which reinsurers use to offload risk.
However, "new issuance CAT bonds are not necessarily driven by the amount of cat losses, but also by the relative pricing of cat bonds to traditional reinsurance and supply of investment dollars available from investors," said Cory Anger, global head of ILS structuring at GC Securities.
As meteorologists predict that 2012’s remaining hurricane activity to be reduced this year due, there is still room for even further reinforcement of reinsurers’ balance sheets and plentiful capital.