JP Morgan has placed $100 million of extreme mortality bonds for reinsurer Munich Re, in the first foray into the mortality bond market for both firms.Tom Keating, JP Morgan’s head of debt capital markets in Europe, said: “Our insurance clients have started showing more and more practical interest in what structured finance could do for their business. On the flip side, we also found there was increased interest in alternative assets from investors.” He said JP Morgan could help to place similar bonds in future.
The five-year bonds are part of a $1.5 billion programme by Munich Re to lay off its extreme mortality risk, according to the reinsurer. Extreme mortality bonds – sometimes known as ‘bird flu bonds’ – pay out in the event of mass casualties, such as those inflicted by a flu pandemic.
The bonds were rated A- by New York-based Standard & Poor’s and placed at Libor plus 135 basis points among institutional investors in Europe, the US and Asia. They are linked to a weighted index of mortality rates across England and Wales, the US, Canada and Germany.
Some $706 million in extreme mortality bonds were originated in 2007, according to Goldman Sachs, up from $597 million in 2006. Goldman Sachs, Lehman Brothers and Swiss Re are among the most active dealers in the mortality bond market.
Insurance-linked securities have been affected in different ways by seesawing credit markets over the past eight months. A new demand for genuinely uncorrelated assets has largely benefited catastrophe bonds. Life insurance securitisations, on the other hand, have been battered by the under-capitalisation of monoline insurers that wrapped most of these transactions.
Given this, some insurance structuring houses have pinpointed mortality bonds as an area of growth during 2008. “[Mortality bonds] provide transparent structure, they provide more diverse risk and they give investors a way to manage their exposures by trading in and out of them,” said Shiv Kumar, New York-based head of financial institution structured finance at Goldman Sachs.
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