Swiss Re Insurance-Linked Fund Management

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AXA reported to be readying new mortality catastrophe bond


According to Reuters, French insurance group AXA is marketing a new 144A mortality catastrophe bond transaction, as it seeks to secure capital markets reinsurance protection for large increases in mortality experience under its life insurance portfolio.

Mortality catastrophe bonds, or mortality insurance-linked securities, are designed to provide the sponsor or cedent with a mechanism to transfer a portion of their mortality linked risks to capital market investors using a cat bond securitization structure.

Mortality cat bonds provide the cedent with protection against large mortality events, such as a pandemic outbreak, regional or world war, nuclear explosion or disaster, or terrorism event. The subject is particularly topical right now with the outbreak of the Ebola virus in Africa and growing concerns that this could be spread more widely.

However, typically the risk that life insurers are seeking protection for, with an extreme mortality bond, is a flu pandemic, as this usually sits at the top of modelled stochastic events which are deemed most likely to severely affect their life insurance portfolio with a sudden jump in mortality rates.

Reuters reports that French insurer AXA is actively pitching a mortality ILS deal to investors. Our sources tell us that such a deal has been put in front of key ILS investment managers to gauge appetite for assuming this type of risk. Investors we’ve spoken with said that they are keen to invest in what would be seen as a diversifier for the ILS and cat bond market, which suggests that such a deal could be successfully issued.

We haven’t seen a mortality linked ILS or catastrophe bond deal since SCOR’s September 2013 deal Atlas IX Capital Limited (Series 2013-1) and prior to that Mythen Re Ltd. (Series 2012-2) and Vita Capital V Ltd., both from Swiss Re in 2012.

Extreme mortality bonds tend to use indices constructed from mortality rates to define a trigger. Should mortality rates rise above a predefined index value then the bond will pay out, either in part or in full, meaning investors would lose part or all of their principal and the sponsor will receive the collateral.

Typically the risk of a pandemic, or other major mortality event, that would result in a high enough mortality rate to trigger a mortality bond is low, which suggests that ILS investors will be happy to support this transaction for AXA despite the growing fear posed by Ebola. With demand for ILS and cat bond risk remaining high AXA could find market conditions are ideal for issuing such a mortality bond deal at this time.

Demand for a mortality bond hitting the ILS market at this time could drive the price down, as well as allow the sponsor to upsize the coverage provided. The diversification benefits of a mortality bond could outweigh a particularly low coupon, if it is a very low risk bond, for some investors who have been struggling to access new diversifying risks in the property catastrophe arena.

According to Reuters a spokesperson from AXA said the firm could not comment as the trade is in a 144A format.

We’ll bring you more details if our when they become available on this extreme mortality bond from insurer AXA.

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