Tradition Re hedges Florida hurricane risk using Dutch auction

by Artemis on March 4, 2010

Tradition Re has announced the completion of the first Dutch auction for Florida hurricane windstorm risks. The deal allowed an unnamed reinsurer to hedge it’s hurricane exposure for the year and we believe this is the first time a Dutch auction has been used for this purpose within the reinsurance market.

The deal was traded using a Chicago Mercantile Exchange (CME) CME Hurricane Index (CHI) Seasonal Accumulated Binary
Option.

It’s great to see a method of hedging usually used in the weather risk and derivatives market brought to the reinsurance marketplace. It adds yet another capital markets risk transfer tool to the reinsurers box and could help to allow smaller reinsurers to transfer their windstorm risk with lower costs than other alternative risk transfer techniques.

Full press release from Tradition Re below:

Tradition Re Hosts Dutch Market Auction for CME-Cleared Hurricane Index Contract

New York, NY, March 3, 2010 – Tradition Re, the U.S. reinsurance division of Tradition, a leading interdealer broker and a  subsidiary of Compagnie Financière Tradition, today announced that it completed a Dutch auction on behalf of a reinsurance market participant wishing to hedge their risk for the 2010 hurricane season in Florida (BHF). Additional capacity was placed subsequent to the auction.

Offers were submitted in the form of point price levels, as traded on the Chicago Mercantile Exchange (CME), for a Florida CME Hurricane Index (CHI) Seasonal Accumulated Binary Option with a strike of 22. The total amount cleared on the CME was 400 lots equaling USD 4,000,000 at a price of 11.43. Formal proposals were submitted to Tradition and executed on March 2, 2010. Participants in the auction encompassed a variety of participants from the reinsurance and financial markets.

“While our core business is traditional reinsurance placements, we are pleased to have tried and succeeded in bringing this innovative auction approach into the (re)insurance market,” commented Patrick Gonnelli, Executive Vice President for Tradition Re.

On March 2, Tradition Re also completed another CHI trade for a Second Event Binary Texas-Florida (GF2) contract with a CHI strike of seven for 1,000 lots equaling USD 10,000,000 at a price of 24.42.

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