Swiss Re launches $2 billion catastrophe securitisation programme

The four-year deal, called Pioneer 2002 Ltd, has six classes, corresponding to six risk classes, according to an investor familiar with the transaction. A $75 million class is based on North Atlantic hurricane risk, and four $25 million classes are based, separately, on European windstorm, California earthquake, central US earthquake and Japanese earthquake risk. The triggers for each class are parametric; that is, they are based on physical measures of the peril and not on actual insurance losses.

A sixth $50 million class is based on all the perils together. This class pays out to Swiss Re with the first occurrence of any one peril in the basket at a level of severity higher than in the peril’s single-class form.

Pioneer is unique because it addresses a catastrophe securities market shortfall in which large issues based on one risk, say $500 million on US hurricane risk, dominate the market at the time of their issue. This dominance widens the spread an issuer has to pay due to the lack of diversification potential for investors elsewhere in the small, fairly illiquid catastrophe risk market. “The way it’s been in the past with the lumpiness of issuance is that people have been unable to buy a whole lot of them at a tight price, because there’s nothing to diversify it against,” said an investor familiar with the deal. This is especially frustrating to investors whose mandates require specified levels of catastrophe risk portfolio diversification or who are prevented from rebalancing their portfolios by trading in the secondary markets for catastrophe risk, said the investor.

By the terms of the deal, Swiss Re Capital Markets may issue more securities within any of the structure’s six catastrophe risk classes at quarterly intervals up to a final total of $2 billion. By allowing several risks to be issued together on a regular basis, Pioneer allows investors to build their portfolios in a diversified manner. Issuance will be determined by market demand, gauged in part by pricing for a previous quarter’s Pioneer issue.

According to the investor, five classes will be rated BB+, while the central US earthquake class is expected to be BBB-. Swiss Re Capital Markets is not committed to issue any future securities under Pioneer in any one of the perils. For example, all the remaining issues could be in the North Atlantic hurricane risk class, though that would be unlikely, said the investor.

Swiss Re officials did not return calls by press time. Officials at Lehman Brothers, which is said to co-manager on the deal with Swiss Re Capital Markets, could not be reached by press time. An official at EQECAT, the Oakland, California-based insurance risk consulting firm, said to have modelled the deal, declined to comment.