Kamp Re 2005, a catastrophe bond that protects Zurich Financial Services against heavy hurricane and earthquake insurance losses, has plummeted to 3 1/2 points on the increasing likelihood that it will default. If this happens, it will be the first time that a cat bond has ever defaulted.
Zurich issued the $190 million cat bond in August. The bond is triggered when the insurer makes more than $1 billion of insurance losses net of reinsurance. Zurich estimates its losses from Hurricane Katrina are $725 million net of reinsurance, but warned that estimating losses at this stage relies on considerable judgment calls. Analysts say it is increasingly likely that its losses will exceed this amount. Standard & Poor's has lowered the notes to CC from BB+. "There is every indication that Zurich's losses will be more than $1 billion," said James Doona, an analyst at Standard & Poor's. A Zurich spokesman declined to comment.
If the cat bond is triggered, investors will receive no principal or interest payments. After the hurricane hit in August, the bond fell to 90. It had plunged to 20 by the end of the September. In the last week and a half it has fallen to 3 1/2. The event has caused similar cat bonds, such as Residential Reinsurance, which is issued by insurer USAA, to fall to 90 from par, where they normally trade. Their value has since stabilized to the mid-90s range. A trader said these securities are not expected to take a loss. Despite the Kamp Re loss, the trader expects Hurricane Katrina to trigger an upsurge in cat bond issuance and said a new cat bond deal is currently in the market.