Catastrophe bond capacity is maturing, and not much of it is coming back. In the first quarter, $1.8 billion in cat bond risk capital matured, and only $508 million returned in the form of new issuances, according to Thomson Reuters. This quarter, $2.77 billion is maturing, and the absence of first-time issuers makes it unlikely that the market will replace it all. More than a billion of it was from State Farm's Merna Re transaction. The successor to it has already been issued, cleverly named Merna Re II, at only a fraction of the previous bond.

Look for big numbers from the property/casualty sector of the insurance industry for full-year 2009. Light catastrophe losses were a big help, leaving more cash in the coffers to benefit from the recovering financial markets following the September 2008 crisis. Reinsurance companies, in particular, will benefit from the light catastrophe activity of 2009.

Among 52 publicly traded insurance companies, rating agency Fitch reports, the incurred loss ratio fell to 65.8%, a decline of 1.8 percentage points, and the expense ratio increased to 28.5% (up 0.6 percentage points). This caused underwriting profits for the entire group to improve, as indicate by the overall combined ratio of 94.3% for 2009, down from 95.5% in 2008 (a lower combined ratio s a positive development).

After weeks of speculation, the financial damage from the Chile earthquake and Windstorm Xynthia in Europe is starting to emerge. According to a recent report by Moody's, 16 global reinsurance companies have reported their net insured losses (before taxes) from the catastrophe event, and the damage has already reached $3.5 billion, increasing an already high tally. The firm expects these events to have a noticeable impact on first quarter results for the industry.

According to the report, the first quarter of 2010's results "will have many moving pieces, including the possibility of favorable loss reserve development." It continues, though, that "we would expect a number of reinsurers to post both operating and net losses for the quarter."

Merna Re, the largest catastrophe bond of all time, is set to mature in June, and State Farm is already putting together its replacement, the creatively named Merna Re II. The successor, planned for issuance in April, is said to be for $400 million in risk capital, though investor demand could push it as high as $700 million. This still pales in comparison to the $1.2 billion that the original brought in the door.

If State Farm is able to stimulate demand for Merna Re II, which would protect the company from non-California earthquake risk in the U.S., it will be third cat bond to come to market in 2010, which is expected to be a strong year for this form of risk transfer. The cat bond market fell silent after the near-collapse of American International Group (AIG) in September 2008 but was still the third busiest in terms of capital issued in the history of the cat bond market. Heading into 2009, prospects for the cat bond space seemed uncertain, but a robust fourth quarter eventually resulted in a year-over-year increase, driven mostly by repeat issuers.

Despite the magnitude of the recent earthquake in Chile – in both physical and financial terms – it's unlikely to trigger a catastrophe bond payout. Catastrophe modeling firms AIR Worldwide and EQECAT offer a range of estimated insured losses of $2 billion to $8 billion, though the dust is still settling. According to insurance securitization blog Artemis.bm, "A similar quake in the right area of the U.S. or Japan would most certainly have triggered a cat bond."

Though there has been cat bond activity in Latin America, none have been issued in the region to cover earthquake risk. Low rates of insurance penetration are likely to keep what will already be a costly situation for insurers and reinsurers from being even worse -- i.e., because not much coverage has been written in Chile.

The earthquake that ripped through Chile left total economic damages estimated to range from $15 billion to $30 billion. The magnitude 8.8 quake impacted Santiago, where more than half the economic losses are said to have occurred, as well as the coastal area of Valparaiso and Vina del Mar, according to a report by catastrophe modeling firm EQECAT.

Based on the preliminary economic estimates, the impact of the disaster is equivalent to 10% to 15% of Chile's real GDP, and reconstruction costs are expected to be much higher than the stated losses, due to newer building standards that must be met. Damage to residential properties is expected to range from 55% to 65% of the total, with commercial damage accounting for 20% to 30% and industrial damage 15% to 20%, EQECAT says.

Insurance and reinsurance companies with risk in this region will be watching subsequent reports closely in order to gauge the impact on their portfolios.