Reinsurer hedges against extreme mortality in the US and UK

Swiss Re is set to transfer £75m of extreme mortality risk in the US and UK to the capital markets through a new securitisation programme.

The reinsurer has entered into a deal with VITA Capital IV Ltd, a Cayman Islands special purpose vehicle, to receive up to $75m of payments in the event of severe population mortality.

The agreement lasts until 2014. Vita IV, in turn, has issued notes linked to this risk into the capital markets. The notes are rated “BB+” by Standard & Poor’s.

This is the first time an excess mortality securitisation has been structured using a probabilistic catastrophe model rather than simply relying on historical data and is unique in covering an existing event ? the H1N1 flu pandemic ? that already poses an insurance risk.

Pandemic flu risk was assessed using the RMS Infectious Disease Model, which was first released in 2007 and is the only model of its type available in the market. A specific model for the ongoing H1N1 pandemic was also incorporated, taking account of possible mutations and antiviral resistance.

This is a continuation of Swiss Re’s hedging strategy, enabling the company to manage extreme mortality exposures in a capital-efficient manner.

Swiss Re’s Chief Underwriting Officer, Brian Gray, said: “This Vita transaction will help us to manage our exposure to peak mortality risk in a capital efficient way, to meet increased client demand for extreme mortality risk protection and, ultimately, to position us for further growth.”

Swiss Re Capital Markets acted as sole manager and bookrunner on the note issuance. Collateral for the Vita IV notes will initially consist of securities issued by the International Bank of Reconstruction and Development. Risk modelling and analysis was performed by Risk Management Solutions, Inc. Swiss Re has a history of securitizing its life risks, obtaining over USD 1.4 billion in extreme mortality risk protection in its predecessor Vita programmes.

A statement from the reinsurer said: "Notwithstanding the current media focus on the H1N1 virus, the Vita IV notes offering was a successful placement for Swiss Re."

Dr Maura Sullivan, epidemiologist in the Emerging Risk Solutions division at RMS, said: “Catastrophe risk models allow us to capture extreme events impacting today’s population which are not adequately addressed by historical data."

“Even though infectious disease scenarios in the model may share the same viral characteristics as past pandemics they are not mirrored by the same medical conditions, as we can look at factors like today’s vaccine development and government response measures, which will dramatically affect mortality rates,” Dr Sullivan added.

Christian Mumenthaler, Head of Swiss Re’s Life & Health business said: “This transaction is another example where we sustain our leadership in the life securitisations market.”

The Vita IV notes were sold in a private placement pursuant to Rule 144A of the US Securities Act of 1933, as amended, (the “Securities Act”) and have not been registered under the Securities Act or any state securities laws; they may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.