Swiss Re strikes $150 million contingent capital deal

Swiss Re, the Zurich-based reinsurer, has closed a $150 million contingent capital deal with MBIA, the world’s largest financial guarantor, based in Armonk, New York. The deal closed on December 27, but its details have been closely guarded until now.

London-based Tom Skwarek, head of Swiss Re’s capital solutions group, said the MBIA deal, which Swiss Re calls a “committed long-term capital security”, represents the first of several similar transactions planned with insurance companies in the first half of this year to cover a variety of catastrophe risks.

Under the terms of the deal, MBIA has the right to issue Swiss Re $150 million of 15-year variable rate subordinated notes, which MBIA has the option of converting to non-cumulative preferred shares, redeemable at any time, should it suffer catastrophic losses on the bonds it guarantees in the next 10 years.

The economic motivation of the insured party, MBIA, is to have access to cheaper capital than it could obtain through capital markets or bank loans after a catastrophic event. “The client has a sure price to issue the instruments to us when it really needs to, or when the price to tap the market with similar capital instruments would be far too high,” said Skwarek.

Joe Sevely, MBIA’s treasurer, said the deal complemented existing capital facilities MBIA has with banks. Sevely cited diversifying capital resources and strengthening the company’s relationship with Swiss Re as MBIA’s two main benefits from the deal. “It bolsters our triple-A ratings, but the chance that we would use it is really remote,” said Sevely.

According to Skwarek, the higher cost of insurance has corporate risk managers eager to find cheaper sources of catastrophe protection in financial deals that combine capital and insurance market approaches. “We're getting enquiries from clients that we haven't really had these conversations with before, whether they’re insurance companies or major corporations,” said Skwarek. Swiss Re this week estimated reinsurance premiums globally would be about 17% in 2002, versus just under 10% in 2001. The higher premiums are due to record insurance industry losses of $60 billion in 2001.

Contingent capital instruments are unlike traditional insurance because the underwriter does not pay cash to cover losses after a triggering event, but instead provides the insured party with financing. “A company is sharing its future value with us by giving us a security, so we expect the company to recover. And the value of that security allows us to decrease the cost of what would have traditionally been a straight insurance instrument," said Skwarek. Swiss Re estimates its own risk as underwriter and prices the deals by estimating both an event’s probability and the post-event value of the securities committed.