Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Avalon Re Ltd.

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Avalon Re Ltd. – At a glance:

  • Issuer: Avalon Re Ltd.
  • Cedent / sponsor: Oil Casualty Insurance Ltd.
  • Placement / structuring agent/s: Goldman Sachs
  • Risk modelling / calculation agents etc: ?
  • Risks / perils covered: Casualty losses
  • Size: $405m
  • Trigger type: Indemnity
  • Ratings: Fitch: Class A - 'BBB+', Class B - 'BB+', Class C 'B-'
  • Date of issue: Jul 2005
  • news coverage: Articles discussing Avalon Re Ltd. from
  • Other coverage: Link to external coverage

Avalon Re Ltd. – Full details:

Avalon Re is a Cayman Islands-domiciled insurance company formed solely to issue variable-rate notes linked to Oil Casualty Insurance Ltd’s casualty exposure.

Under the reinsurance contract, Avalon Re will reimburse OCIL for insured casualty-related losses, in excess of predefined attachment points, that are incurred by the company during the next three years.

The reinsurance contract between Avalon and OCIL is a three year, excess-of-loss contract which provides protection for losses to OCIL above $300m.

The way Avalon Re was structured suggests that this is an aggregate transaction but not on an annual basis, rather losses mount over the three years. That seems risky to us as the probability of two or more major casualty events occurring in a three year period must be reasonably high.

Also, we believe that Avalon Re cuts across many types of risk, including some liability type risks which could be the kind which develop losses slowly, this adds risk to investors.

It may be that Avalon Re, while a poster child for a new casualty cat bond class, might end up looked back on as rather rudimentary. We hope that isn’t the case, but it does seem to us that a little more strategic selection of the types of risk to include would have gone a long way.


Avalon Re has since been held up as an example of a catastrophe bond structure which was not well thought through as the development time for losses meant that it has taken years for the eventual fate of the deal to be understood.

As expected, the deal has now officially defaulted and had to make a loss payment for the amount of $12.69m.

Losses from the covered events totalled $314.1m ($297m from the Buncefield oil depot explosion and $17.1m from the New York steam pipe explosion), Avalon Re covered 90% of the losses in excess of a $300m attachment point and so the holders of Class C notes will be liable for the excess losses. Class C’s balance was $135m and that is now reduced by the $12.69m.

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