Swiss Re plans first flood bond issue

Reinsurer Swiss Re intends to issue the world’s first catastrophe bonds, giving investors exposure to flood risk, by the end of March.

Rating agency Standard and Poor’s has rated a single $150 million tranche of notes at BB+. They will offer exposure to earthquake risk in the US (except California) and Canada, as well as river flood risk in Great Britain. Repayment of principal will be tied to losses on a notional portfolio of exposures following an earthquake in north America and an index of measured river flood depths in Britain. Portfolio loss modelling and index administration will be provided by California-based catastrophe-risk specialist Risk Management Solutions (RMS).

The river flood index has at least 50 weighted reference locations across the UK. Losses due will accrue once a minimum of four of these locations experience severe flood warnings lasting a day or more during a period of 12 consecutive days. Location weightings in the flood index, as well as the notional portfolio of earthquake exposures, may also be annually adjusted by Swiss Re to better match its own liabilities.

The notes have a legal maturity of July 2012. They are designed to hedge risks reinsured by Swiss Re for Munich-based insurance group Allianz.