The first bonds designed to cover damage exclusively from severe thunderstorms are about to become a total wipeout for investors.
Insurer Mariah Re Ltd. is poised to default on a $100 million, three-year bond that it issued in November 2010 on behalf of American Mutual Family Insurance Co., with bondholders expected to lose all of their principal.
Even in the realm of hurricanes and other natural disasters, defaults are rare. But for Mariah, at least, more are on the way. A similar batch of bonds for $100 million was issued in December 2010, and due to large losses also are in trouble.
Bearing an annual interest rate of 6.25% in 2011 and earning investors about 7% since they were issued in November 2010, Mariah’s bonds appeared to offer a healthy premium over U.S. government debt. At that time, three-year Treasury notes were yielding just 0.392%.