Catastrophe bonds, used by investors to bet against natural disasters, have slumped the most since 2008 as forecasters predict a busier-than-usual Atlantic hurricane season.

The Swiss Re Cat Bond Price Return Index fell 0.6 percent on June 18, the biggest drop in 20 months for the benchmark, which prices every Friday. The index has declined five straight weeks and is at the lowest since October. Colorado State University and Weather Services International boosted predictions this month for the 2010 season on higher Atlantic temperatures, which increase the chance a storm will develop.

“Investors have gotten spooked by these forecasts of a very active hurricane season,” said Peter Nakada, managing director at Risk Management Solutions Inc., which builds models estimating storm damage. “They’re saying, ‘I’d rather take European wind risk than U.S. hurricane risk.’”

Insurers including American International Group Inc. and Assurant Inc. sell the bonds as an alternative to reinsurance for hurricanes and earthquakes. The U.S. National Oceanic and Atmospheric Administration said last month the season may be “active to extremely active” with 14 to 23 named storms. The year’s first Atlantic tropical storm may form in the Gulf of Mexico by June 27, forecasters said this week.

“Atlantic sea surface temperatures are currently at record warm levels for June, even warmer than the freakishly active season of 2005,” when Hurricane Katrina struck Louisiana, Todd Crawford, chief meteorologist of WSI, said yesterday in a statement. “So it’s no surprise we’re seeing historically unusual tropical wave development in the eastern Atlantic so early in the season.”

Record Year

This year’s hurricane season may be the most active since 2005, which was the worst on record with more than 1,500 U.S. deaths and $115 billion in damage, Moody’s Investors Service said this month. The season begins June 1 and ends Nov. 30.

Investors may have found prices for the securities less attractive after they posted a record 5.2 percent gain in 2009 on a mild season that didn’t produce a named storm until Aug. 15, said Brett Houghton, a fixed-income trader at Rochdale Securities LLC. The Swiss Re index fell 7.3 percent in 2008 as Hurricanes Ike and Gustav struck and Lehman Brothers Holdings Inc. failed.

Lehman had sold contracts to protect four catastrophe bonds through so-called total return swaps, and the firm’s 2008 collapse spurred underwriters to back subsequent securities with safer assets, contributing to last year’s rebound. There are about $14 billion of the securities outstanding, according to Swiss Reinsurance Co.

AIG, Swiss Re

“There’s been quite a bit of new-issue supply over the last six weeks,” pressuring prices, Houghton said.

Swiss Re, Allianz SE and AIG’s Chartis property-casualty unit were among sellers of a total of about $2.4 billion in cat bonds this year through early June, a 70 percent increase from the same period in 2009.

Chartis issued $425 million in catastrophe bonds last month to mitigate hurricane and earthquake risk. The bond’s $250 million slice will pay 8.25 percentage points more than three- month Treasury bills. The second slice yields 6.25 points above the benchmark. Fixed-income investors earn more than benchmark rates for taking the risk they could lose their principal in the event of a disaster that meets pre-defined conditions.

U.S. Microbics, Inc. (Public, OTC:BUGS)

U.S. Microbics Inc. is a business development and holding company that acquires, develops, and deploys environmental technologies for remediation of contaminated soil and groundwater; reduction of air and water pollution; reactivation of carbon-filtration systems, and microbial-based approaches to agriculture enhancement. The Company provides engineering solutions to reduce pollution, improve water quality, and increase agricultural output. U.S. Microbics, Inc., along with its subsidiaries provides products and services, which include Environmental Remediation Services, which helps in the assessment, remediation planning, and/or operation of remediation sites, and Microbial Remediation Expertise, which focuses on licensing, training, and transfer of know-how to government and non-government agencies, as well as to the private sector for reducing pollution, improving water quality, and enhancing crop yield.

TOMI Environmental Solutions, Inc. (OTC:TOMZ)

TOMI Environmental Solutions, Inc. (TOMI) provides global green environmental technology solutions for indoor air pollution and infectious disease control. The company’s technicians and/or its licensees’ technicians provide indoor air decontamination remediation and surface disinfection of all commercial and residential structures, including medical facilities, hotel and motel rooms, prisons, airports, cruise ships and schools, including both single family homes and multi-unit residences. The Company has solutions for decontamination of air and surface disinfection of all indoor and enclosed structures. In June 2010, the Company formed a subsidiary, Tomi Environmental Solutions-Singapore Pte. Ltd.

SMF Energy Corporations (NASDAQ:FUEL)

SMF Energy Corporation (SMF) is a provider of petroleum product distribution services, transportation logistics and emergency response services to the trucking, manufacturing, construction, shipping, utility, energy, chemical, telecommunication and government services industries. It provides services and products through 31 service locations in the eleven states of Alabama, California, Florida, Georgia, Louisiana, Mississippi, Nevada, North Carolina, South Carolina, Tennessee and Texas. The range of services offered to its customers includes commercial mobile and bulk fueling; the packaging, distribution and sale of lubricants; integrated out-sourced fuel management; transportation logistics and emergency response services.

The Goldfield Corporation (AMEX:GV)

The Goldfield Corporation is engaged in electrical construction, including the placement of fiber optic cable, and real estate development. The Company’s customers include Florida Power & Light Company, M & A Electric Power Cooperative, Duke Energy Corporation, Georgia Transmission Corporation, Orlando Utilities Commission, Central Electric Power Cooperative, AT&T, City of Vero Beach, Florida, Kissimmee Utilities Authority and Santee Cooper (South Carolina Public Service Authority). The Company operates in two sectors: Electrical Construction and Real Estate. Through the Company’s subsidiary, Southeast Power Corporation (Southeast Power), it is engaged in the construction and maintenance of electrical facilities for utilities and industrial customers. Through the Company’s subsidiary Bayswater Development Corporation and its various subsidiaries (Bayswater), it is engaged in the acquisition, development, management, and disposition of land and improved properties.

Beacon Power Corp. (NASDAQ:BCON)

Beacon Power Corporation is a development stage company. The Company along with its subsidiaries, designs, manufactures and operates flywheel-based energy storage systems. The focus of its research and development has been to establish flywheel-based energy storage technologies that can provide energy solutions for the worldwide electricity grid.

Cat Bonds

Insurers are issuing catastrophe bonds again to complement traditional and cheaper reinsurance and to spread the risks in buying protection against events that could cost them tens of billions of dollars in claims.

The nascent cat bond market froze for several months after the late 2008 collapse of investment bank Lehman Brothers, which had played a counterparty role in several of the early bonds.

But already this year 12 new cat bonds have been issued, transferring risks associated with natural disasters to capital market investors rather than traditional reinsurers.

A hurricane or earthquake can wipe out profits across the traditional insurance and reinsurance market, often driving up prices for cover and limiting the amount available for insuring against certain perils. Hurricane Katrina, the industry’s most costly natural disaster, cost $40 billion in claims.

“Cat bonds help to diversify our group protection capacity and supplement traditional reinsurance — especially for peak risk, such as European wind and U.S. perils like hurricane and quake,” said Georg Rindermann, senior project manager at Allianz(ALVG.DE).

Allianz is one of seven primary insurers that have issued cat bonds this year rather than relying solely on the reinsurance industry. The others are USAA, Assurant(AIZ.N), Nationwide MutualNMUIC.UL, State Farm, The Hartford and first time issuer Chartis.

Reinsurance companies, such as Munich Re and Swiss Re, also issue cat bonds to transfer major risks and thus free up capital to underwrite new business. They initially dominated issuance, but this year they have lagged primary insurers, issuing just five cat bonds so far.

Swiss Re issued two of these to cover against extreme mortality, Atlantic hurricane, European windstorm, California and Japan earthquake, while Munich Re issued the other three, against U.S. hurricane and European windstorm.

Catastrophe bonds are no longer seen as standalone transactions to cover peak natural perils, say market participants in the Insurance-Linked Securities (ILS) sector.

Just as a prudent corporation would not finance their company only from the banking sector, insurers are using the bonds to diversify their sourcing of reinsurance, said Chi Hum, global head of distribution at GC Securities, part of reinsurance broker Guy Carpenter.

“From a risk management perspective, primary companies cannot afford to be exposed to the reinsurance cycle,” he said.

QUAKE AND WINDSTORM

The bonds also tie in the pricing for the duration of the maturity and protect the insurer against the reinsurance industry’s reaction to major loss events.

“There is … the risk that if a cat event were large enough, there could be a strain on the claims paying ability of some reinsurers,” said Gary Martucci, director at Standard & Poor’s Insurance Ratings.

Prices the reinsurance industry can charge primary insurers in premiums to cover their risks have not increased, but may do so after a significant natural catastrophe — for example, property and casualty reinsurance rates after Katrina in 2005.

Allianz issued the third bond in its catastrophe reinsurance program, Blue Fin Ltd, in May to protect itself against $150 million of U.S hurricane and European windstorm.

The reinsurance industry has already been exposed to extreme events this year — even before the start of the U.S. hurricane season on June 1, which is predicted to be more severe than average.

Private weather forecaster Commodity Weather Group raised its 2010 Atlantic hurricane forecast to 15 named storms, of which nine will become hurricanes and four become major category 3 or higher.

Loss claims such as those from the Chile quake, European windstorm Xynthia and flooding in Eastern Europe in the first half of the year are already above the long-term average, pressuring profits at a range of insurance companies.

Swiss Re and Munich Re both upped their Chile quake losses from initial estimates of claims. The Feb. 27 earthquake killed nearly 350 people and was the fifth-strongest since worldwide records began in 1900.

Access to the insurance-linked market has become a core strategy in supplementing traditional reinsurance, but cat bonds still need to prove their value over the market cycle, say insurers.

“Prices must be aligned between reinsurance and cat bonds, otherwise the market cannot evolve,” said Allianz’s Rindermann, saying the test will come when a sizeable cat event triggers a significant amount of bonds.

“The cat bond market must be reliable and available in both pre and post event situations; otherwise you cannot rely on it,” he said, adding that when this event does occur, new bonds would need to be issued and investors must be still available at prices that are comparable to reinsurance.

Remeber, Take your profits, if there is dilution hit the sell button.

Posted by Shayne Heffernan on Jun 24th, 2010and filed underEquities, Latest News, Markets, News & Events, The Hot List.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site