S&P rates two catastrophe bonds as issuance picks up pace

LONDON, July 15 (Reuters) - The world's top two reinsurers have each launched a catastrophe bond after a slowdown in issuance following changes that risk modelling company RMS made to its U.S. hurricane models earlier this year.

Swiss Re and Munich Re (MUVGn.DE) are looking to sell insurance-linked notes to capital markets investors for mortality risk and European windstorm risk respectively, rating agency Standard & Poor's said in two separate notes on Friday.

In the second quarter of 2011, all the new cat bond transactions - issued by reinsurers seeking collateralized protection from capital markets investors - were exposed to U.S. hurricane risk, a favourite among investors as it brings in the highest returns if the bond is not triggered.

According to a report by reinsurance broker Willis Re's subsidiary Willis Capital Markets & Advisory, 71 percent of outstanding cat bond limit is exposed to U.S. hurricane risk of some form.

But the RMS software revisions stalled further issuance of U.S. wind bonds as the market digested higher than expected changes to estimated losses, resulting in slightly less issuance of cat bonds compared to 2010. The model revisions led to S&P downgrading six catastrophe bonds that used RMS as risk assessor.

Swiss Re is preparing to sell $100 million in Series V Class D and Series VI Class E notes under its long-running Vita Capital series of transactions, S&P said.

Caymans-Island based Vita Capital IV Ltd will protect the reinsurer against catastrophic mortality exposure in Canada, Germany, the UK and the United States via the two series of notes, and is the only mortality bond to be issued in 2011.

The $50 million Series V Class D notes have been rated BBB- by S&P, while the $50 million Series VI Class E notes have been rated BB+. Proceeds from both sets of notes will be invested in International Bank for Reconstruction and Development (IBRD) debt and deposited in the collateral account, which will give a return of LIBOR plus margin.

RMS will provide the model components for the mortality events.

Meanwhile, S&P said Munich Re has launched $50 million of notes to investors under its Queen Street Capital Ltd special purpose vehicle to cover the reinsurer against losses from European windstorms between July 2011 and July 2014.

Irish-based Queen Street III Capital's notes have been assigned a BB+ rating by S&P, which said proceeds from the sale of the three-year notes will be invested in a U.S. Treasury money market fund invested in T-bills set up specifically for this transaction.

Following a qualifying event, AIR Worldwide Corp. (AIR) will calculate an index value based on industry losses reported by Swiss-based loss and exposure aggregator PERILS.

The two bonds represent a diversification away from U.S. wind-related bonds. Market participants have predicted a surge in the third and fourth quarters in cat bonds that securitise other peak perils, such as longevity risk, health insurance, European windstorm and Japanese earthquake.

(To join the Thomson Reuters Insurance Linked Securities Community for more news and analysis, click here ) (Editing by Catherine Evans)