Swiss Re Completes $309 Million Credit Risk Transfer

January 23, 2006

Swiss Re announced that it has completed a its first credit reinsurance securitization – a €252 million ($309 million) issue transferring credit insurance risk to the capital markets, “thereby increasing Swiss Re’s capital efficiency.”

John Fitzpatrick, Head of Financial Services commented: “This is the first indemnity-based credit reinsurance securitization ever completed. The objective of the transaction is to achieve economic, regulatory and rating capital relief as part of Swiss Re’s overall objective to transfer risks to the capital markets and further improve capital efficiency.”

A number of analysts have noted that this type of securitization breaks new ground, as it transfers a basic type of risk to the capital markets, rather than targeting a specific risk of loss, as is the case with Cat Bonds. When Swiss Re announced its intention to securitize part of its credit insurance risk, Standard & Poor’s commented: “The motivation behind these transactions was a combination of risk transfer and a desire to bring regulatory and rating agency capital requirements in line with the companies’ view of economic capital. Increasingly large and sophisticated groups, such as Swiss Re and AXA, are acquiring risk in the conventional way but then packaging part of that risk and passing it on to the capital markets.” (See IJ Web site Jan. 19)

Swiss Re gave the following details of the transaction: “The risk transfer consists of a retrocession agreement between Swiss Re and Crystal Credit Ltd. covering the aggregate losses to Swiss Re in excess of a Swiss Re first loss retention. Crystal Credit will issue €252 million [$309 million] of principal at-risk variable-rate notes for this purpose. The underlying risk is linked to the claims and reserves which Swiss Re will have on its credit reinsurance business for the underwriting years 2006, 2007 and 2008. The indemnity trigger allows Swiss Re to achieve capital relief at minimal basis risk while providing the investor with the benefit of an actively managed credit insurance book over three years.”

Peter Schmidt, Head of the reinsurer’s Credit Solutions Division explained: “This securitization is interesting firstly because it is based on a highly diversified underlying risk in terms of geography and industry sectors. Secondly it sets a new benchmark for the insurance sector in terms of capital and capacity management.”

The issue, which closed on 13 January 2006, was purchased by a variety of institutional investors. It consists of three separate tranches, with an average pre-tax coupon of 3 month Euribor plus 3.93 percent per annum, paying quarterly, with a scheduled maturity of 3 years and a legal final maturity of 6.5 years.

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