Swiss Re bond lets investors bet on pandemics

New security offers protection against unexpectedly high death rates

Nov 29, 2009 @ 12:01 am

By Darla Mercado

Swiss Reinsurance Co. Ltd. last week introduced a $75 million catastrophe bond that covers extreme mortality risks.

The offering, which was sold through a private placement, guards against unexpectedly high mortality rates in the United States and the United Kingdom for five years.

This cat bond is the first of its kind to be structured using a probability model instead of using only historical data. The risk analysis predicted the likelihood of massive fatalities from swine flu in the United States and the United Kingdom.

However, it isn't the first time that Swiss Re has securitized these types of risks; it obtained some $1.4 billion in extreme mortality risk protection in other programs.

Catastrophe bonds give insurance companies and reinsurers the ability to pass on some catastrophic risk to investors so that the companies can remain solvent after a disaster.

Often, these securities are structured as floating-rate bonds and are tied to an event trigger. Investors can make a good return on their investment but may lose everything if a catastrophe triggers the bond, giving the principal to the insurer.

Vita Capital IV Ltd., a special-purpose vehicle in the Cayman Islands, issued the bond in the capital markets.

E-mail Darla Mercado at dmercado@investmentnews.com.

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