XL Mid Ocean Re Places $200 Million Retrocessional Property Catastrophe Cover

In what it claims is the first open market bid process between reinsurers and the capital markets, X.L. Mid Ocean Reinsurance Company (XL Mid Ocean Re) has placed a $200 million retrocessional property catastrophe cover. The transaction was offered in two tranches and covered the upper layers of XL Mid Ocean Re's hurricane and earthquake exposure in the United States and its territories and possessions in the Caribbean.

EXEL, the parent company of XL Mid Ocean Re, initiated and managed this process in which three markets—the traditional reinsurance, the non-traditional reinsurance and risk securitization via the capital markets—were approached simultaneously with the goal of obtaining the best financial solution for protecting EXEL's catastrophe exposure. The risk securitization structure is unique in that it provides retrocessional cover in financial swap form, with claim recovery triggered by catastrophe losses actually incurred by XL Mid Ocean Re, rather than by a catastrophe index or industry size event. XL Mid Ocean Re was recently created by EXEL following the merger of X.L. Global Reinsurance Company and Mid Ocean Reinsurance Company.

"We are delighted with the outcome of this innovative transaction," says Robert R. Lusardi, executive vice president and chief financial officer of EXEL. "Insurance risk transfer to the capital markets is only in its formative stages and it is unclear in which direction this market will develop, how cost effective it will be as an alternative to the more traditional markets, and how it will interact with those markets." Lusardi explains that EXEL intends to participate fully in all facets of the insurance capital markets as they emerge, not only as an issuer of insurance securities but also as a purchaser of risks in bond or swap form.

Lusardi continues, "The capital market transaction was structured in swap form instead of a more traditional catastrophe bond due to time constraints surrounding the EXEL Limited and Mid Ocean Limited merger, which closed on August 7, 1998." Lusardi says that the company was offered significantly greater capacity than the $200 million being sought. "We accomplished our goals of ceding the upper layers of our catastrophe program in a financially attractive form and in further enhancing EXEL's name in the capital and reinsurance markets," he concludes.