Mariah Re 2010-1 catastrophe bond could be a total loss

When we last wrote about the stricken Mariah Re U.S. tornado catastrophe bonds we updated you to say that the Mariah Re 2010-2 tranche was a total loss and that the Mariah Re 2010-1 tranche had been triggered with investors facing a loss of principal of as much as $11.6m. The loss estimates were still expected to grow further and it was likely that the loss to investors could increase, but now it seems that the Mariah Re 2010-1 cat bond tranche could become a total loss like it’s 2010-2 counterpart.

This latest news about the Mariah Re cat bonds will come as a shock to many as it was widely expected that we had seen almost all of the movement in the loss estimates and that only small increases would be seen from now on. However, new information has been sent to investors in the cat bond over the last few days which shows that despite another small increase in losses, the amount payable by investors could increase dramatically.

Zurich based investment manager Plenum Investments has said this morning that contrary to all earlier reports, the tornadoes which struck on the 3rd and 5th April 2011 have also affected metropolitan areas in Kansas. This now leads to higher payout factors, cat bonds are often weighted with payout factors depending on the location of a disasters impact, and they expect that the Mariah Re 2010-1 bond will suffer a total loss as a result. Plenum says there was only a marginal increase in loss but the payout factor increase means that loss payments grow significantly.

This is a great demonstration of the development of losses impacting a catastrophe bond. At first the impact can seem minimal, but as more detail emerges and greater resolution of claims and impact data becomes available, the loss once fully understood can be much larger. Even Plenum had suggested a few weeks ago that all of the downside from Mariah Re had been priced into the secondary market, but that’s likely not true now and we suspect further price drops and dips in the cat bond indices will occur once this loss is confirmed one way or the other.

If indeed the Mariah Re Ltd. Series 2010-1 cat bond becomes a total loss, that will be three cat bonds fully exhausted this year. An unprecedented amount of loss for the cat bond sector but also a clear demonstration of the value of these instruments for the sponsors.

Plenum Investments said that if Mariah Re 2010-1 becomes a total loss they could see an additional impact of 0.5% to their ILS funds performance. They say that the total impact from Mariah Re to their fund’s performance now adds up to 2.5%.

We expect that rating agency Standard & Poor’s will report on this within the next day or two and will update you when the total loss of Mariah Re 2010-1 is confirmed (or otherwise).

Update: Dirk Schmelzer, Senior Portfolio Manager ILS at Plenum Investments, told us that an event report from calculation agent AIR Worldwide (dated 23rd November) showed that the change in payout factor due to the Kansas metropolitan impact has increased the aggregate loss amount by $117.4m. No payout has yet occurred but the increase in aggregate loss takes the total to almost $20m above the exhaustion point of Mariah Re 2010-1 suggesting that this layer of cover is a total loss.