CAP-JLT brokers its first catastrophe swap

Tue Dec 11, 2007 7:53am EST - Reuters

LONDON, Dec 11 (Reuters) - Interdealer broker ICAP (IAP.L: Quote, Profile, Research) and insurance broker Jardine Lloyd Thompson Group (JLT.L: Quote, Profile, Research) said their joint venture ICAP-JLT brokered a catastrophe swap, one of the first in a new market, on North American windstorm risk.

They declined to disclose the size and the names of the parties to the over-the-counter transaction.

Catastrophe swaps -- whether OTC or exchange-traded -- are are financial instruments that allow the insurance industry to offload to the broader market the risk that is linked to a single catastrophic event such as a windstorm or earthquake in a geographic region such as Europe, North America or Japan.

In the tailor-made, OTC transactions, a reinsurer makes a fixed upfront payment to investors such as investment banks and hedge funds to take on the risk, typically for a calendar year, that a catastrophic event will lead to industry-wide losses over a certain amount.

That trigger level starts at $10 billion at least and can run to $20 billion or $30 billion or more. In the event that a catastrophe leads to industry losses over that amount, the investor pays the reinsurer to cover its losses up to an agreed level, say $30 million or $50 million.

The new joint venture announced by the companies in February was set up to structure catastrophe swaps and other insurance-related financial instruments and to broker them.

"The range and scale of opportunities for capital markets investors to gain exposure to the property catastrophe sector is growing fast," ICAP Chief Executive Michael Spencer said in a joint statement.

The companies said they were encouraged by strong interest from a broad potential customer base for insurance derivatives, instruments that tend to move independently from many other types of assets in the market. (Reporting by Jane Baird; Editing by Louise Ireland)

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