Pandemic bonds shrug off swine flu threat

Tue Apr 28, 2009 9:47am EDT

* Threatened pandemic yet to hit extreme mortality bonds

* Trigger levels high and geographically specific

* Bonds cover only a fraction of insurers' potential losses

By Catherine Evans

LONDON, April 28 (Reuters) - Fears of a swine flu pandemic have yet to affect bonds securitising insurers' exposure to a sharp rise in death rates, because millions of people would have to die from the virus before any payout is triggered.

Investors said extreme mortality bonds -- catastrophe bonds that allow investors to bet against the risk of a devastating pandemic -- had barely reacted to the rapid spread of a virus that has killed up to 149 people in Mexico. [ID:nLS803449] [ID:nLS472470].

About $1.5 billion of such bonds are outstanding, according to an October 2008 report by Guy Carpenter, the reinsurance unit of insurance broking giant Marsh & McLennan (MMC.N).

"There has not been any price impact on these bonds simply because the swine flu event is insignificant at the current point in time," said Christian Bruns, VP Insurance-Linked Investments at Swiss private bank Clariden Leu. Outstanding bonds cover only the United States, Britain, Canada, France, Germany and Japan, he noted, with deaths on a massive scale required before investors face any loss.

"The only two historic events which would have come close to a (partial) trigger of the pandemic cat bonds in the market are the Spanish Flu (1918 pandemic event) and World War II (all deaths over 1939-1945 combined)," Bruns said in an email.

"So we are talking here anywhere between 10 and 20 million people dead over a one year period."

The 1918 Spanish influenza pandemic, in which more than 50 million people died, is the benchmark by which all modern pandemics are measured.

An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20 percent or more above what is expected for a given population.

Another investor said bonds with a heavier U.S. component might come under some selling pressure if the swine flu outbreak there becomes severe. No fatalities from the new strain of the virus have so far been reported outside Mexico.

Reinsurer Swiss Re RUKN.VX, which has about $1 billion of extreme mortality bonds outstanding, said it had not seen any trading in the sector on Monday.

The most recent such transaction was in February 2008, when Munich Re (MUVGn.DE), the world's biggest reinsurer, transferred $100 million of risk to the capital markets with a five-year bond sold via special purpose vehicle Nathan Ltd.

It was the first issue from a $1.5 billion debt shelf that Munich Re said would protect it against "large losses deriving from an exceptional rise in mortality rates ... across the United States, Canada, England and Wales, and Germany".

French insurer Axa (AXAF.PA) also has outstanding bonds.

Extreme mortality bonds cover just a fraction of insurers' potential losses from a widespread flu outbreak.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the U.S. life insurance industry $31 billion in additional death claims, while a pandemic on the scale of 1918 could cost $133 billion. (Editing by Andrew Macdonald)

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