Swiss Reinsurance Co. Ltd. today issued a $150 million natural-catastrophe bond using the capital markets to protect itself from natural disasters.
Swiss Reinsurance Co. Ltd. today issued a $150 million natural-catastrophe bond using the capital markets to protect itself from natural disasters.
The bond, which matures in late 2010, focuses on North Atlantic hurricanes, European windstorms and Californian earthquakes.
The offering, issued through Successor X Ltd. in a private placement, contains three series of notes valued at $50 million apiece.
Investors picked up the notes at a discount instead of paying par value. They will still receive 100% of the bond's face value at maturity if no trigger event occurs.
Catastrophe bonds allow reinsurance companies to hand off specific risks to investors through the capital markets by offering floating-rate bonds. The Swiss Re bond's principal is attached to a trigger that's linked to a major catastrophe, which means that investors can lose everything if certain events — such as a severe hurricane — take place.
Investors can reap a considerable return if the bond reaches maturity without a trigger event.
“Insurance-linked securities are a cornerstone of Swiss Re's hedging strategy,” Brian Gray, the company's chief underwriting officer, said in a statement. “It helps us to manage peak natural-catastrophe risk, lowers capital requirements and reduces earnings volatility.”
The three tranches were offered at a 12%, 16% and 20% discount from their face value, based on the amount of damage that might occur under different scenarios, noted Markus Schmutz, managing director at Swiss Re. The reinsurer puts up the remainder.
The return to the investor stems from the difference between the offering price and the 100% redemption that's paid out if there is no trigger event.
