London, June 10 (Reuters) - Swiss Re RUKN.VX , the world’s second-largest reinsurer, has issued the market’s first catastrophe bond covering extreme mortality risk in 2010, under its long-running Vita Capital series of transactions.
Caymans-Island based Vita Capital IV Ltd will protect the reinsurer against $50 million of catastrophic mortality exposure in the United States and UK and is the only mortality bond to be issued since Swiss Re’s Vita Capital IV in November last year.
The Series II Class E Notes have been rated BB+ by Standard and Poor’s (S&P) and the proceeds of the notes will be invested in International Bank for Reconstruction and Development (IBRD) notes and deposited in the collateral account, which will issue a return of plus 5.25 percent.
The four-year bond has a U.S. attachment point of 105.0 percent, the level at which the bondholder has to start paying benefits until it reaches the exhaustion point of 110 percent. The UK attachment point is 112.5 percent and exhaustion point is 120 percent.
Attachment and exhaustion points are expressed as a percentage of the expected mortality rate.
There is a remote risk of severe epidemics occurring, said S&P in a post-sale report on Vita Capital IV, but said the bond’s underlying mortality risk exposure in terms of geographic location, age, and gender shows strong diversification.
Life reinsurance companies can either retain the mortality risks obtained from their reinsurance contracts or use any form of retrocession to transfer the risk out to an independent third party.
"In the past few years reinsurers have been looking for more ways to use the capital markets to expand their capacity to write more mortality risk business. Swiss Re was the first to issue mortality catastrophe-indexed notes, in 2003," said S&P. (Editing by Greg Mahlich) (Click here to join the Thomson Reuters Insurance Linked Securities Community for more news and analysis: here)