Swiss Re has hedged earthquake insurance sold to Mexico by synthetically issuing catastrophe bonds. The cat bonds are in fact issued by a special-purpose vehicle, linked to the insurer by a swap. In the structure, investors buy cat bonds from the SPV which holds the assets and pays Swiss Re the interest. In return, Swiss Re makes quarterly LIBOR payments to the SPV, which are passed on to the investors as the cat bond coupon.
The bonds are part of a USD450 million, three-year insurance package Mexico received from the Swiss reinsurer to finance rescue and rebuilding in the event of an earthquake. If an earthquake within a certain magnitude and depth hits any of three specified zones in Mexico, the bonds default and Swiss Re receives a guarantee of payment. Officials from Swiss Re were not available to comment and reasons for issuing through an SPV could not be determined.
Maren Josefs, analyst at Standard & Poor's in London, said these are the first cat bonds covering Mexican earthquakes S&P has rated and the first in which investors can lose 100% of the principal if the trigger conditions are met. S&P has assigned BB plus ratings to the three-year notes.
