Swiss Re Structures $100 Million Cat Bond for Ace

NEW YORK, Jun 12, 2009 (A. M. Best via COMTEX) -- SWCEY | Quote | Chart | News | PowerRating -- Swiss Reinsurance America Corp. has issued its third catastrophe bond this year, a $100 million, three-year bond to protect against U.S. hurricane and earthquake risks for Ace American Insurance Co.

The bond was issued through Calabash Re III Ltd., a Cayman Islands-based company.

Swiss Re will use the reinsurance purchased from the issuer as a source of capacity for a reinsurance agreement that provides Ace American Insurance and its affiliates with $100 million of coverage over three years.

The Calabash Re III Ltd. bond was issued in two tranches: the Class A Series 2009-I Notes, covering U.S. hurricane and earthquake risk, and the Class B Series 2009-I Notes, covering only U.S. earthquake risk.

The cat bond uses the Modeled Industry Trigger Transaction trigger, which takes industry loss estimates from Property Claims Services and weights them by the post-event modeled share of industry loss based on Ace's applicable portfolios. Risk Management Solutions performed the expert risk modeling analysis.

William Dubinsky, director of Swiss Re America, said the hybrid trigger "effectively minimizes the possibility of a mismatch between Ace's portfolio loss and actual losses from the cat bond."

It's a combination of the indemnity trigger along the lines of the one used by personal lines insurer USAA Group in its $250 million cat bond, Residential Reinsurance 2009, and a industry index trigger like the one used in Liberty Mutual's $225 million cat bond, Mystic Re II, earlier this year.

Dubinsky said investors shy away from cat bonds that use indemnity triggers related to commercial insurers. "It would be expensive," Dubinsky said.

The collateral for Calabash Re III is also unusual. Like many of the new bonds issued this year, this bond does not rely on a total return swap.

The collateral for the Calabash Re III Ltd. cat bond, purchased with proceeds of the bond issuance, uses an investment in floating rate notes issued by the International Bank for Reconstruction and Development of the World Bank Group. The notes are puttable in whole or in part at the option of the holder after the first year.

Swiss Re said this is the first time the IBRD has been used as collateral for a cat bond.

Other new cat bonds this year, such as Munich Re's $70.4 million cat bond issued through Ianus Capital and Allianz's $180 million cat bond issued through Blue Fin II, have also avoided total return swaps. Both those cat bonds invested the collateral in puttable floating rate notes issued by the KfW banking group. KfW bonds are guaranteed by the Federal Republic of Germany.

All of the cat bonds issued this year been changed in structure to minimize the credit and counterparty default risk that has plagued past cat bonds, including those that were backed by the now-bankrupt Lehman Bros.

Ace has previously accessed capital markets capacity through cat bonds via Swiss Reinsurance America Corp. with Calabash Re I Ltd. (2006) and Calabash Re II Ltd. (2007). Swiss Re Capital Markets was the sole structurer, initial purchaser and bookrunner of Calabash Re III Ltd.

Also this year, Swiss Re structured the Liberty Mutual cat bond and another one for Swiss Re itself, Dubinsky said.

Other cat bonds issued this year include property/casualty insurer Assurant Inc.'s $150 million cat bond, Ibis Re, and French reinsurer Scor, whose $200 million cat bond, Atlas V, was the first to in the market this year.

Swiss Re America Group currently has a Best's Financial Strength Rating of A (Excellent). Ace America Pool is currently rated A+ (Superior).

Shares of Ace (NYSE: ACE) were trading at $45.02 a share on the afternoon of June 12, down 1.25% from the previous close.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)

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