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Derivatives

Swiss Re Prepares CAT Bond Issue

Swiss Re is preparing a USD150-400 million catastrophe bond deal that it will issue early next year, according to officials familiar with the deal. The proceeds would be used to provide coverage against an earthquake in California. Calls to Swiss Re were not returned.

Early estimates from an investor familiar with the deal put it at between USD200-400 million, while a New York-based rating agency official predicted it would likely be USD150-200 million. He said, however that with the offering still two months away, that it is difficult to estimate an exact size. "But it will be nothing below USD150 million," he added.

The move puts Swiss Re on a growing list of re-insurance and insurance companies that have started looking toward the capital markets as a way to remove risk, at lower costs, from their balance sheets in the wake of the Sept. 11 terrorist attacks. Other market makers, such as Lehman Re, are also prepping deals. Lehman Re is expected to issue up to USD600 million through the closing of four or five CAT bond deals next year, according to a recent article in DW's sister publication BondWeek.

"These re-insurance companies don't want to take on any more risk after Sept. 11. The entire industry has already lost more than USD70 billion because of the attacks," the investor said. He added that the deal would likely have a maturity of three to five years.

Debt market professionals are predicting that more than USD3 billion in CAT bonds will be issued through the first months of 2002, as insurance companies look to increase their capacity for covering disasters, such as earthquakes and hurricanes. They added that since 1997 only about USD4 billion had been issued in CAT bonds. "With premiums so high right now, re-insurance and insurance companies are looking for a securitization alternative," said one professional.

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