As Hurricane Isabel hit land Thursday, it appeared unlikely that any catastrophe bonds would suffer damage.

About $1.29 billion in outstanding CAT bonds are subject to risk from Isabel, said James Doona, a director in the insurance group at Standard & Poor's. Most are rated BB or BB+, and the probability of a storm coming along that is significant enough to impact those bondholders is roughly 1%, or once in 100 years, he said.

But beyond calculating the probabilities, predicting the outcome is as iffy as ... well, the weather. "That's the nature of CAT bonds," Doona said. "You never know,"

So far, no rated CAT bond has ever suffered a loss, S&P and Fitch Ratings analysts said.

Different triggers in every deal

Don Thorpe, a director in the insurance group at Fitch, said CAT bonds are structured with different triggers - for example, indemnity or parametric - which affect how losses are calculated.

In an indemnity structure, bondholders generally share the loss after the sponsor hits a certain dollar amount in claims. Those are less attractive to some investors because sorting out claims can take years, Thorpe said.

The indemnity structure is used for a series of Residential Re deals sponsored by USAA, $150 million in 2001, $125 million in 2002 and $160 million in 2003, which all have exposure to hurricane risk on the East Coast. The 2003 deal, issued in May, packages in U.S. earthquake risk as well.

With a parametric structure, the event is measured by specific criteria; for a hurricane, that might include the category size of the storm, for example.

The parametric structure is used in a handful of deals sponsored by Swiss Re this year, including its most recent, the $60 million Arbor I Ltd. in mid-September, which contains some North Atlantic hurricane risk.

Isabel weakened Wednesday before reaching land - getting downgraded from a Category 5 hurricane, with 160 mph winds, to Category 2, with 105 mph winds. But Thorpe said the downgrade alone would be unlikely to ensure safety for any CAT bonds, even though some of them include triggers such as storm intensity. Too many other criteria are also involved. "A nonscientist would have a hard time calculating whether the trigger was reached or not," he said.

He also cautioned that Category 2 is still strong enough for a powerful wallop. Hurricane Floyd, a 1999 Category 2 storm with a path similar to the one projected for Isabel, would generate approximately $2.1 billion of insured losses, if it occurred today, according to Fitch estimates (which were based on 2002 dollars).

Although hurricanes generally lose strength after landfall, forecasts indicated that cities as far north as New York might be lashed by winds in excess of 50 miles per hour because of Isabel, Thorpe said.

Slow and steady

Issuance in the CAT bond sector keeps a steady pace of about $1 billion annually, analysts said. Since the bonds are privately placed, few are picked up by the press.

But one of the more interesting deals recently involved earthquake risk in Taiwan - so far, the only Asian country, other than Japan, to use CAT bonds as an alternative to reinsurance. The $100 million, 3-year deal sold in New York in late August, according to a published report.

And in Europe, Federation Internationale de Football Association (FIFA) is generating buzz with a $262.5 million deal linked to the cancellation risk of the 2006 World Cup in Germany.

Still, some once-promising talk of more insurance-related securitizations has mostly fizzled. Talk abounded several years ago about the possibility of securitizing terrorism risk. But Doona said assigning ratings hinges on being able to measure the severity of a risk and the frequency of occurrence, and he has no faith that the frequency of terrorism can be gauged with any accuracy. "Terrorism relies on human agency, and that agency is fraught with inestimation," Doona said.

After the first CAT bond hit the market in 1997, rating agencies predicted volume would take off. But the boom never happened, and many are now saying they are doubtful it ever will.

"It was believed in the 90s that securitization would be the wave of the future. That has not panned out," said Bob Hartwig, chief economist at the Insurance Information Institute, based in New York. "Securitization is a time-consuming and relatively expensive process. Obtaining a reinsurance policy can be done with a phone call. To the extent that traditional reinsurers enjoy that advantage, it's difficult for securitization to compete."

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