In light of the recent Japanese earthquake we wanted to update you with our analysis of this and give you a first insight on the reactions of the market to this event. First important information is that the CAT bonds in question are priced and that the market is functioning. The available pricing reflects a higher uncertainty around valuation, i.e. wider bid/offer spreads, and volatility of Japan exposed bonds is anticipated to be higher in the coming weeks.
As mentioned in our email from Friday last week, we anticipate no loss to the notional values of the bonds in our portfolio from this magnitude 8.9 earthquake, which was the largest earthquake to affect Japan since records began. The price movements of our exposure to Japan earthquake have a negative contribution of 20-25 basis points. We are still waiting for the K-Net network measurement station readings to be made available on the Internet.
The biggest position in our fund is a bond called Midori. This bond will not be affected because the earthquake did not happen within the specified region around the Tokyo metropolitan area. Hence the market reaction was minimal; bid/offer spreads widened a little bit. According to our valuation, which is based on independent pricing sources, the bond lost 0.77%.
The second position Muteki is based on the readings of the K-Net network. Given the concentration of index weights in around Tokyo and the information that is available at the moment, it is very unlikely that this bond will be hit. Prices of this bond reflect the somewhat higher uncertainty; the position is marked down by 2.9%.
Both bonds provide the sponsors with coverage on a parametric basis. The payout of these bonds is therefore only dependent on the measured physical parameters like magnitude or peak ground acceleration. These bonds are therefore not affected by the actual damages resulting from the earthquake, be it quake, tsunami, fire or other damages.
While the first two bonds cover Japan earthquake on a single peril basis, the last position, Valais, in our fund is exposed to multiple perils, Japan quake being one of them. Flagstone Re sponsored this bond and gets indemnity coverage - the payout of the bond is linked to the actual losses of Flagstone - against Japanese quakes. It is very unlikely but cannot be ruled out completely that claims reach the necessary amounts to trigger this bond. The bond is marked down by 5.3%.
The last two bonds are scheduled to come to maturity end of May and beginning of June of this year, hence we anticipate that the positions should move back to par relatively quickly.
We will continue to monitor this event closely and will send further updates as more information becomes available.