Combine Re bondholders safe from payout - Moody's

LONDON Tue Nov 13, 2012 9:41am EST

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LONDON Nov 13 (Reuters) - Investors who brought a specialist bond designed to protect Swiss Re from natural disaster claims will not lose money over superstorm Sandy, rating agency Moody's said.

Swiss Re sold $200 million worth of the catastrophe bond in March to investors who took on potential liability for claims on two of its insurer customers in the United States, the Country Mutual Insurance Company and the North Carolina Farm Mutual Insurance Company.

'Cat bonds' are issued by reinsurers seeking collateralized protection from investors, as opposed to via the traditional reinsurance market. Investors usually receive interest payments and are required to pay out only under specific conditions.

Country Mutual said they expect to lose $40 million from Sandy, which is not enough to trigger the bond, Moody's said in a statement.

Moody's said Country Mutual's market share in the affected states amounts to less than 0.2 percent, and the majority of losses from Sandy are from flooding and business interruption claims - which are not covered by County Mutual policies.

Sandy will however count as a qualifying event under the terms of the transaction, which is set up as an "aggregate bond", meaning that a number of natural disasters need to reach a certain amount of insured losses before it triggers.

For Combine Re, insured losses from a single event or a number of accumulating losses from U.S. hurricane, earthquakes, severe thunderstorms and windstorms need to hit $300 million within one year before investors are required to pay out.

Tornado and severe thunderstorm loss in New Mexico, Wyoming and Colorado this summer and losses from Hurricane Isaac have already eroded $110.3 million of the reinsurance protection offered by Combine Re - with Sandy taking out a further $40 million.

The risk period for Combine Re expires on Dec. 31, and will reset to zero in 2013 if losses do not mount up to $300 million, said Moody's.

"Given that the current risk period has only two months of coverage remaining, the primary exposure on the notes is to additional losses resulting from winter storms between now and 31 December," the credit rating agency said.

If a $20 billion loss estimate from catastrophe-forecasting company Eqecat is correct, Sandy would rank as the third-worst hurricane in history, based on inflation-adjusted losses, according to the Insurance Information Institute.

Cat bond experts do not expect any large scale losses from Sandy on catastrophe bonds.

- For more details on cat bond transactions, see the Thomson Reuters Insurance Linked Securities Community, click here. (Reporting by Sarah Mortimer; Editing by Ruth Pitchford)

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