Swiss Re Prepares to Issue Cat Bond: S&P

The market for investments in catastrophe insurance-related bonds looks ready to swell in 2010, with news this week of the first such issuance under a new program.

Bonding the risk of damage to homes in relation to natural disasters is becoming increasingly relevant as the rehab of affected houses becomes more expensive in areas hard-hit by disasters like Hurricane Katrina.

Swiss Reinsurance Co. is preparing to issue the first in a series of notes under the principal at-risk variable-rate note program, Successor X.

The notes are linked to the risk of Californian earthquakes and North Atlantic hurricanes between November 2009 and November 2010 in selected states including Puerto Rico, according to a report by credit-rating agency Standard & Poor’s.

Catastrophe bonds — or cat bonds — are a way for an insurer to boost liquidity and remain solvent. The issuer pays a larger return to investors during years without catastrophes like hurricanes and earthquakes. In years of catastrophe, the insurer uses funds to pay claims on insured on affected properties, and the investors receive lesser payouts.

Successor X provides cover to Swiss Re, S&P said, against losses incurred from November 2009 to November 2010. Swiss Re will have the option to extend the transaction beyond the scheduled redemption date in increments of three months. It may extend the transaction up to six months for the earthquake risk and up to two years for the hurricane peril, to allow for loss calculation.

The transaction is expected to close in November 2009, but the collateral value was not disclosed at the time this story was published.

Write to Diana Golobay.