Swiss Reinsurance Co. Ltd. today introduced a $75 million catastrophe bond, covering extreme mortality risks.
Swiss Reinsurance Co. Ltd. today introduced a $75 million catastrophe bond, covering extreme mortality risks.
The offering, which was sold through a private placement, guards against unexpectedly high mortality rates in the U.S. and the United Kingdom for five years. Essentially, investors will bet that mortality rates in those respective regions won't be unusually high.
It's not the first time that Swiss Re has securitized these types of risks, as it has obtained some $1.4 billion in extreme mortality risk protection in earlier programs.
“Swiss Re is hedging mortality risks that are on its balance sheets and that accumulate as a result of life reinsurance business that it transacts,” explained Markus Schmutz, head of insurance linked securities structuring and origination at Swiss Re. He noted that the transaction is the first since last September's market downturn, signaling a rebirth of interest in mortality risk.
“I think the transaction is a good example of how the market has revived in a way: There's a lot of investor demand, and that's a good signal for the future,” Mr. Schmutz added.
Vita Capital IV Ltd., a special-purpose vehicle in the Cayman Islands, issued the bond in the capital markets.
Cat 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.
Other companies have performed extreme-mortality-risk bond offerings in the past, including Munich Re and Scottish Re.
These particular transactions are based on changes to the population mortality index, said David Rains, managing director and head of the life, accident and health specialty practice at Guy Carpenter. Most of these bonds don't specifically reference pandemics, but it's widely believed that that's the only cause of drastic changes in population, short of war or terror events, he noted.
This Swiss Re issuance marks the first time that a structural risk model for the H1N1 flu virus was used in the risk analysis for an extreme mortality risk bond. This differs from the use of actuarial models, which are based on death experiences of the past. “You can think of these analyses as large simulations of what could happen based on underlying science and not on the analysis of what's happened in the past,” explained Peter Nakada, managing director for Risk Management Solutions, the firm that performed the risk analysis for the Swiss Re offering.
Mortality-risk bonds of the past have never been triggered, Mr. Rains added.
Many of these bond deals were also put together and issued prior to the crisis, when there was a low credit spread environment. A mortality risk cat bond was wrapped by a bond insurer back then could pay investors LIBOR, plus 20 to 30 basis points. Back then, bonds that weren't wrapped could pay out 125 to 250 basis points.
However, now those bonds could pay out LIBOR, plus 500 to 700 basis points, Mr. Rains said. “It depends on your assessment of pandemic risk, and it's because of the lack of the likelihood,” he added.
Of course, “unlikely” and “impossible” are two different things. Past outbreaks of the flu in 1957 and 1968 were mild compared to the 1918 pandemic of Spanish flu, which killed millions and likely made a substantial impact on the population and its mortality rates, said Mr. Rains.
