Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Topiary Capital Ltd. catastrophe bond activated by Japan earthquake, rating downgraded


Finally the fate of one of the catastrophe bonds which was exposed to the 11th March earthquake and tsunami in Japan is made clear. Since the disaster re/insurers who have sponsored catastrophe bonds that had exposure to Japan quake have been waiting for risk modelling firms who act as calculation agents to report whether their deals have been triggered or activated by the quake. Now the fate for one such cat bond, Topiary Capital, is clear.

Topiary Capital Ltd. was issued in 2008 to provide reinsurer Platinum Underwriters with $200 million in second and subsequent event coverage for qualifying U.S. hurricane, U.S. earthquake, Europe windstorm and Japan earthquake.

As a cat bond providing second and subsequent event cover there was no way that any loss to investors principal would be caused by the event in Japan. However, we now know that the 11th March earthquake was sufficiently severe to count as a qualifying event for Topiary Capital and as a result the cat bond is now exposed to any subsequent qualifying events over the remainder of its term. The Topiary Capital deal runs until August so is now exposed to events that qualify to trigger the cat bond before 31st July 2011.

Risk Management Solutions are calculation agent for this deal and have now completed the required analysis and determined that the Japanese earthquake was an activation event for Topiary Capital. Standard & Poor’s have removed the deal from CreditWatch, where it was placed just after the disaster in March and have downgraded the ratings of the single tranche of Series 2008-1 notes to ‘CCC+’, as they suggested they would if the deal was activated.

The market has been expecting that some catastrophe bonds would be activated, as well as the expected total loss of another cat bond Muteki Ltd., so we don’t expect any major market reaction to this news (we wrote previously that it seemed that even Platinum Underwriters were expecting this outcome). It could cause some trading activity as investors seek to offload their position in Topiary Capital’s notes, but equally some investors of riskier persuasion may see the cheaper prices (which are bound to come with an activated cat bond) attractive and a risk worth holding on to.

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