Swiss Re cat bondholders fear losses as PCS ups Sandy forecast

LONDON Tue Jan 22, 2013 11:46am EST

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LONDON Jan 22 (Reuters) - Data aggregator Property Claims Service (PCS) upped its insured loss estimate from superstorm Sandy to $18.75 billion, leaving investors in a catastrophe bond issued by Swiss Re facing possible losses.

The PCS loss figure has only been made available to subscribers, but was confirmed to Reuters by cat bond funds and traders, who say the estimate is close to triggering a payout on part of a catastrophe bond sponsored by Swiss Re, the world's second-largest reinsurer.

So called "cat bonds" allow insurers to pass on extreme risks, such as those related to earthquakes or hurricanes, to financial market investors, and are seen as an alternative to reinsurance.

Cat bond traders say insured losses of $20 billion or more on the $80 million class F-4 notes from Swiss Re's Successor X Ltd (Series 2011-3) transaction would trigger a payout from investors who bought into the bond.

Swiss Re would use the cash to absorb some of its losses from superstorm Sandy.

The bond protects Swiss Re from U.S. hurricane risk and was issued in 2011.

PCS is an industry loss compilation service used by the majority of catastrophe bonds to define whether an insurance event qualifies for a payout under the terms of the deal.

The estimate has increased from $11 billion, which PCS announced in November, but that figure was expected to rise as PCS has always dramatically increased estimates from its initial guess as it gathers data from insurers.

The estimate is still lower than estimates released by disaster modelling firms such as RMS, AIR Worldwide and Eqecat, which stand at $15 billion - $25 billion.

"For an event of the magnitude of Sandy, we are still in the early stages for reaching the final PCS estimate," a UK-based cat bond broker told Reuters.

Brokers have seen investors trying to get rid of their exposure to the class F-4 notes on the Successor X bond, believing that if PCS increased its loss estimate by another 10 percent, the transaction would likely trigger investor losses.

Such payouts are rare, with only eight of some 210 property catastrophe bonds issued since 1997 triggering payouts.

(To join the Thomson Reuters Insurance Linked Securities Community for more news and analysis, click here) (Reporting by Sarah Mortimer; Editing by Helen Massy-Beresford)

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