mortality bonds (CATM)

[gsgs]

a chart with actual prices is here:

http://healthspringmeeting.soa.org/files/pdf/lsprng07-015-all.pdf

page 15







see here for an interesting survey on mortality bonds :

http://66.102.9.104/search?q=cache:XrUqqvVdDn4J:www.mortalityrisk.org/Papers/Application/2007BauerKramerCATM.pdf

Milliman used an actuarial approach , while RMS used
an epidemiological approach , leading to significantly larger
risk estimates.
So it seems to me that the earlier emissions and estimates
and ratings didn't take into account the H5N1-situation at all !?!

Nor do any of the pricing models apparantly consider virological expertise.

[gsgs]

Re: mortality bonds (CATM)

...
As indicated in Table 3, S&P upgraded all
three Vita II classes by one notch in April 2006; according to Standard
andPoors (2006), this upgrade was mainly due to the availability of new
mortality data showing mortality improvements, advances in vaccine research,
and continuing work of governments regarding their pandemic preparedness plans.
As mentioned above, Tartan was the third CATM transaction, and so far,
the only one without the involvement of Swiss Re. This first issue out
of Scottish Re $300mn shelf structure was also the first issue with a
tranche wrapped by a mono-line
insurer. In comparison to the Vita II Class D tranche, the non-guaranteed
ClassB note priced very high even though they have the same trigger and
exhaustion levels. One possible reason for this outcome is that Goldman
Sachs is said to have not approached the right investors for this type of risk:
While Vita I and II were mainly sold within the (re)insurance world and to
specialized CAT bond investors, Goldman Sachs has approached traditional
ABS investors who are not so familiar with mortality risks. Furthermore,
in contrast to the deals before, Tartan is only based on US mortality
experience and, thus, there is no diversification effect among several
populations. However, the probably most
important reason was timing: During the marketing period of the transaction in
the beginning of 2006, the international press had paid an increased attention
to possible outbreaks of AvianFlu and to pandemics in general (see, e.g., the
Pandemic Theme Index provided byConquest Investment Advisory AG).5
Based on Logisch (2007).6
...
Six months after Tartan,
when the public discussions regarding pandemic fears had calmed down,
the fourth series of CATM bonds were issued by OSIRIS CapitalPlc (OSIRIS).
Again, Swiss Re was involved as structurer and lead underwriter for the
underlying EUR 100 bn shelf program, but not as protection buyer;
the deal has been structured as a securitization for the catastrophe
mortality risk within the books of AXA Cessions (AXA), a subcompany
of the French AXA group. Therefore,it is the first
deal which involves a primary insurer, and for the first time the
underlying CMI is not dominated by US mortality experience. Aside
from Swiss Re,IXIS Corporate and Investment Bank (IXIS) and
Lehman Brothers Inc. (Lehman)were invited to act as co-underwriters.
According to a press release from Swiss Re on 11/13/2006,
investors demand was very strong and all classes were oversubscribed.
Euroweek (2006) even reports that all tranches were increased in size
due to high investor demand and that all classes were priced well within
the price guidance.However, even though the BBB/Baa2 rated Class B2 tranche
was priced tighter than the BBB+/Baa3 Class B note from Tartan,
it was still far from the level of the Vita II Class D Bond;
this may be a consequence of increased investors expectations
after the Tartan transaction. The high demand was mainly due to the fact
that in addition to specialized CAT bond investors, Swiss Re, IXIS,
and Lehman also approached traditional ABS investors.
Furthermore, as with the BB+/Baa1 rated Class D note for the first time
a non-investment grade tranche was offered within
a CATM securitization, the deal has also drawn attention from hedge funds.
All in all, 50% of the bonds were sold to asset managers, 20% to banks,
and 25% to hedge funds (cmp. International Financing Review (2006)).
In late December 2006, Vita Capital III Ltd. (Vita III) issued the
third series of bonds out of Swiss Res shelf program with the key
objective to replace Vita I,which had expired in the same month.
However, the total amount was increased in comparison to Vita I. All
offered tranches are of a high seniority with all ratings above A,
and they were priced similarly to the comparable OSIRIS notes.
It is worth noting that five of the nine tranches are wrapped by
three different mono-line insurers. This shows
that the market is developing well as more and more investors seem to be
interested.In conclusion, it appears that in the relatively short history
of the CATM market,the spectrum of investors has broadened considerably.
While initially the transactions were mainly geared towards specialized
CAT bond investors, more and morefixed-income and traditional ABS investors
seem to be interested. This may bereasoned with the low correlation or
only one-way relationship with debt capital and equity markets and the
resulting diversification possibilities, but the attractive risk-return
profile when comparing CATM bonds to similar rated Mortage Backed
Securities (MBS) or Collateralized Debt Obligation (CDO) tranches
certainly plays a role, too.
For example, an anonymous investor explained that he is investing
in CATM bonds because of the relative high spread margins and added:
If there will be one day such a severe world-wide pandemic that one
of the bonds I bought will be triggered, there will be more important
things to look after than an investment portfolio.

In order to estimate and analyze the risks within CATM
bonds, investment managers started hiring actuaries to act as specialists on
insurance risks. However, sofar, the market participants mainly rely on the
advice of so-called modeling firms.In the next Section, after providing an
overview on these consultants and their modeling approaches, we introduce
a model which can be used to price and analyze extreme mortality risks.
The term one-way relationship means that adverse events in the financial
market have no impact on the performance of a CATM bond, whereas a severe
pandemic could affect the financial markets considerably.

Aside from the arranger, SPV managers, rating agencies etc.,
so-called risk modeling firms play an important role in a catastrophe
mortality securitization. They are appointed to calculate loss
probabilities and expected losses for the different tranches of a transaction.
These are important information as usually investors and rating agencies
base their decisions on this data. Furthermore, they are in charge of
calculating the combined mortality index; thus, they are also referred
to as calculation agents. To date, the global
acting actuarial consultant Milliman Inc.(Milliman) was hired as the
calculation agent in all transactions so far.
However,within the Vita III transaction, the
US based company Risk Management Solutions(RMS) was also involved
as an adviser for the mono-line insurer Financial Security Assurance
Inc. (FSA). The modeling approaches of Milliman and RMS differ
considerably: While Miliman bases their
analysis on an actuarial model, RMS usesan epidemiological approach.
Although no mathematical details on their respective models can be
presented as, to our knowledge, these are not publicized, an overview
on their approaches is provided in Subsection 3.1 based on the available
information.In Subsection 3.2, we
present our approach, which is based on stochastic mortality modeling, and
explain how it can be applied for risk-analysis and valuation purposes.3.1
General Modeling Approaches

RMS: An Epidemiological Approach
RMS is an international company providing consultancy services and models
for catastrophic
events such as earthquakes, windstorms, and hurricanes. Their cus-tomers include
(re)insurers as well as other financial service providers, who theyconsult on,
e.g., weather derivatives. They report that their catastrophe mortalitymodel is
based on epidemiological data and research rather than historical data,and that
they were supported by world-wide experts in influenza research whendeveloping
their methodology. However, historical data is used to test the model.It is
worth mentioning that their model does not include man made catastrophessuch as
terrorism acts.Within their model, event tree techniques are applied to produce
1,890 probabil-ity weighted scenarios; Figure 2 shows the underlying event tree.
Regarding the10Based on Logisch (2007), who reports a web presentation held by
an RMS modeling expert inJanuary 2007 as his main source.

Page 11
Risk and Valuation of Mortality Contingent CAT bonds11Baseline ComponentDisease
ComponentTerrorism ComponentCombined ModelResults AnalyzerFigure 3: Milliman
Model Overview (Source: Logisch (2007))probability of an outbreak, RMS mentions
that historically, there have been anaverage of three pandemics per century.
Thus, they assume an annual outbreakprobability of 3-4%. However, as
industrialized livestock husbandry or other condi-tions fostering mutations of
viruses have increased in recent decades, it is possiblethat the situation has
worsened. Furthermore, the ongoing scientific debate if therisk of a pandemic is
increased due to H5N1 prevalence in bird populations (theso-called Avian Flu) is
another indication that the historical probability may betoo low. Therefore, RMS
advises to also use levels of 5% and 6.7% for stress-testingpurposes. The
parameters determining infectiousness and lethality are fixed basedon influenza
research. In particular, they researched what proportion of the pop-ulation is
susceptible for a virus, which proportion will get affected, and what
thecorresponding recovery rates are.More precisely, the demographic impact of a
virus is considered in their model asusually very young and very old people –
those with a weaker immune system – aremost affected by a virus. On the other

[doe22]

Re: mortality bonds (CATM)

Some data, rationalisable pattern, much clearer than trying to track prices of bioflu stocks...

wow

[gsgs]

Re: mortality bonds (CATM)

Vita III is listed now at the Irish Stock Exchange,
but I can't get prices.
If someone can get actual prices or a chart, please post !

http://www.ise.ie/app/tranchePriceHistory.asp?refNo=15269&trancheID=1&SEDOL=B2NTKC9

http://www.setbb.com/fluwiki2/viewtopic.php?t=124&mforum=fluwiki2

[gsgs]

Re: mortality bonds (CATM)

ftp://mse.univ-paris1.fr/pub/mse/CES2008/B08049.pdf

the spreads of the mortality bonds rise strongly from July 2007
the spreads are multiplied by 5
This figure allows also to highlight the fact that the main driver of
the mortality bonds' spreads is the financial factor.
Thus the spread evolution may be explained by the increasing investors' risk aversion
for the financial risks.
Another reason is the doubt about the accuracy of the actuarial models
underlying to the mortality bonds like the subprime crisis casts doubt on the risk models
of some financial institutions.

It seems that the catastrophe bonds are not so concerned about the
financial crisis....

http://www.setbb.com/fluwiki2/viewtopic.php?p=1323

-------------------

> the doubt about the accuracy of the actuarial models
> underlying to the mortality bonds

I wrote about this earlier, also sent some emails to actuaries
with no reply.
Apparantly they just considered the history without
consulting and cooperating with the medical experts
about the current H5N1-risk.

So, that was a warning already in 2006, that the rating agencies
shouldn't be trusted too much ...

[gsgs]

Re: mortality bonds (CATM)

spreads went up a lot due to the financial crisis

update here:

http://www.actuaries.org/Munich2009/presentations/LIFE/1_Wed_10.50_LIFE_Bridet_Financial_markets_Presentation.pdf

(page 23)

[gsgs]

Re: mortality bonds (CATM)

VITA IV was launched in fall 2009,
risk analysis by RMS using their 2007-model

A specific model for the ongoing H1N1 pandemic was also incorporated, taking account of possible
mutations and antiviral resistance.

Dr. Maura Sullivan
Peter Nakada

The model scenarios are developed using scientific data and mathematical and empirical models,
as well as the experience of epidemiologists, virologists and medical doctors

{I couldn't find which virologists or epidemiologists gave their experience here}

apparantly they don't think that the risk depends much on immunity, virology, sequences,
spread, reassortment of H5N1,H9N2 , swine surveillance, terrorist+military activities,
new drugs ...

http://www.devhosting.co.uk/cir/%20Swiss%20Re%20launches%20H1N1%20mortality%20bond.php

http://www.insuranceerm.com/analysis/modelling-infectious-disease-risk.html

[gsgs]

Re: mortality bonds (CATM)

some mortality bonds expired in Jan.2012

now AFAIK we only have
Nathan Re from Munich Re ($100M) which expires in 2013
and the vita iv series from Swiss Re (all together $500M ?)
which expires in 2016

it would be interesting to see if 2nd market prices were affected
by the current NSABB-discussion

http://www.guycarp.com/portal/extranet/insights/briefingsPDF/2008/Pandemic%20Briefing%206_10.pdf;jsessionid=P7FJF80tx5HHhJ1Q4wxVvJH4QNQFT64L49D5GyDYQfYJSFtyvnYM!-1840000266?vid=3

http://www.artemis.bm/blog/2009/04/28/a-swine-flu-pandemic-and-the-catastrophe-bond-market/

http://www.akad.de/fileadmin/akad.de/assets/PDF/WHL_Schriftenreihe/WHL_Schrift_Nr_24.pdf

http://www.swissre.com/media/news_releases/Swiss_Re_transfers_USD_180_million_of_extreme_mortality_risk_to_the_capital_markets_through_the_Vita_securitization_programme.html

Since its launch in 2009, Vita IV has been used to transfer
nearly USD 500 million of mortality risk to the capital markets.

http://www.newsinsurances.co.uk/sp-swiss-res-mortality-catastrophe-indexed-notes-issued-vita-capital-assigned-preliminary-ratings/0169480251

vita iv capped mortality bonds
USA: 105%-110%
UK: 112.5%-120%

Munich Reinsurance Co. said Monday.
Catastrophe bonds issued in 2010 totaled about $5 billion and Munich Re projected
that about $5.5 billion to $6 billion in cat bonds would be issued in 2011.

series I (Nov.2009)
series II (May,2010)
series III (~Apr.2011) , $175M
I and II together $125M
series IV (~Apr.2011) , $175M : $100M USA+Japan , $75 Canda+Germany
BB+(S&P) expire in 2005


series I , UK
series II , USA

http://www.swissre.com/media/news_releases/pr_20101026_vita.html

27.Oct.2010 , $100M series III , USA+Japan , 2015 , S&P-BB+(sf) , class E
27.Oct.2010 , $75M series iv , canada+Germany , .2015 , S&P-BB+(sf) , class E

http://www.swissre.com/media/news_releases/Swiss_Re_transfers_USD_180_million_of_extreme_mortality_risk_to_the_capital_markets_through_the_Vita_securitization_programme.html

05 August 2011 , $100M series V , Canada+Germany , $100M , Jan 2016 , S&P-BBB-(sf)
05. August 2011 , $80M series VI , USA,UK,Canada,Germany , Jan 2016 , S&P BB+(sf)

http://www.rms.com/news/NewsPress/PR_102610_NZEQ_Loss.asp

-- New Issue: Vita Capital IV Ltd., June 8, 2010
-- New Issue: Vita Capital IV Ltd., Nov. 26, 2009
-- New Issue: Vita Capital IV Ltd., Oct. 28, 2010
-- Rating On Vita IV Series III Class E Notes Lowered On Heightened
Exposure To Tsunami Risk, Jun 14, 2011

https://www.structuredcreditinvestor.com/default.asp?page=1100&subtype=notloggedon&Status=8&SID=28365&ISS=22378

the exact conditions are hard to obtain, and I found no charts
with prices on the 2ndary market over time as the one above
maybe this is intentional ?!
maybe swiss re found this post and decided it's better, to keep
things secret, lol

the press releases concentrate on the amount of $M issued,
but important are the conditions and the price ("spread"),
so I think it's somehow misleading. What's the expected
leverage on mortality changes ?


googling for
"mortality index value" "vita iv"

27 Oct 2010 ... Swiss Re has printed the latest iterations of its Vita mortality catastrophe ... The
US$100m series III class E notes priced at 375bp over the interest on ...
percentage of a predefined index (the mortality index value; MIV) in the US and
Japan. ... Collateral for the new Series of Vita IV notes consists of securities ...

[sharon sanders]

Re: mortality bonds (CATM)

Interesting. Thanks Gsgs. So, apparently there are less mortality bonds now since the older ones are not being re-issued or converted?

[gsgs]

Re: mortality bonds (CATM)

the old ones expired
most expired on Jan 2010 or Jan 2011, some on Jan 2012 (vita III)
one is still running until Jan 2013 (Nathan from Munich Re, $100M)

the market went crazy in 2008, (financial crisis) when buyers
demanded more lower prizes, all CATs went down (catastrophe bonds)
together with CDO (collateral debt obligations) , I think.

So no new CATMs except vita IV were emitted since 2008

Guy Carpenter seems to be specialized on this, but there is not much info.

They are privately placed through the vita iv Cayman
company whole sole purpose is the placement of these bonds.
I assume they have fixed buyers and direct contacts
with the fonds-mangers
---------

searching "mortality" at http://www.guycarp.com - zero hits.
The do all sorts of CAT-bonds, mortality bonds are out of fashion