Bond Market Lets CMBS Players Unload Catastrophe Risk to Investors.

Five years after the market began in earnest, catastrophe bonds have found a niche as a supplement to insurance on commercial properties that are vulnerable to natural disasters such as earthquakes and hurricanes.

Last year, a record $1.2 billion of "catastrophe bonds" were issued, transferring risk from property owners or insurers to investors in the capital markets.

In addition, this risk-transfer strategy gained a stronger foothold in the United States last year, when Vivendi issued bonds to protect against earthquake damage to its Universal Studios properties in Southern California. The bonds are attractive to entities seeking to manage "high severity, low frequency" risks to reduce credit concern on the financing of real estate.

Because of the high severity associated with major storms and disasters, investors financing properties with this type of risk are increasingly concerned about "counterparty" risk associated with their reinsurers. The capital markets provide an alternative source of risk transfer.

So far, East Coast hurricanes in the United States, California earthquakes, European winter storms and Japanese earthquakes are the perils most frequently securitized, according to a study by the investment banking firm Marsh & McLennan.

Essentially, catastrophe bonds transfer insurance risk from corporations, property owners, reinsurers and insurers to investors. Since 1997, when the market began in earnest, 46 catastrophe bonds have been issued, with total risk limits of more than $6 billion. And $3 billion remained outstanding at the end of last year.

Catastrophe bonds have "dampened the rise in prices" of catastrophe reinsurance programs, according to Marsh & McLennan.