Europe continues to warm to the idea of securitization as a financing tool for risk transfer within the life insurance industry. A new extreme mortality cat bond is the latest transaction added to the growing list of sophisticated deals that have come to market in recent years.

AXA Cessions, a subsidiary of French insurance group Axa, plans to transfer mortality risk from its reinsurance contracts to bond investors through the sale of dollar and euro denominated notes. In 2003, Swiss Re Capital Markets used Vita Capital Ltd. to issue $400 million of mortality catastrophe-indexed notes and in 2005 it used Vita Capital II Ltd. to issue $362 million of notes. In 2006, Scottish Re set up Tartan Capital Ltd. to issue $155 million of mortality-linked notes. AXA Cessions is now looking to the capital markets to diversify the coverage for its mortality catastrophe exposure.

The holders of the eight classes of notes from Osiris Capital Plc will be exposed to the risk of increasing mortality rates in the U.S., France and Japan, based on the Combined Mortality Index (CMI). According to market reports, the first issue from the 1 billion ($1.26 billion) shelf program is planned for early November, to be led managed by Ixis CIB, Lehman Brothers and Swiss Re. It will offer 100 million equivalent of class B notes and $75 million equivalent of class C and class D notes, denominated in both euros and dollars. The deal will not feature class A notes.

Bond insurer CIFG Europe guarantees two of the classes, which Standard & Poor's rated triple-A. All the notes are expected to mature by January 2010. Their S&P ratings range from AAA' to BB+'.

Risk transfer in mortality jump

Osiris Capital will provide Axa with protection against nuclear, chemical, biological and terrorist attacks, natural catastrophes and serious epidemics. This will enable Axa to transfer the risk of an extreme jump in mortality in its U.S., French and Japanese life insurance books to the capital markets for a four-year period from Jan. 1, 2006 to Dec. 31, 2009. The holders of the respective classes of notes are at risk for an increase in mortality that exceeds a specified percentage of a predefined index (the CMI), of age and gender-weighted mortality rates, on an accumulated basis over the four-year time span.

The notes will be triggered if higher-than-expected mortality rates reduce future cash flows under the notes. According to S&P, for the notes to incur a loss, an increase of at least 6% over the 2005 mortality over any two consecutive years between Jan. 1, 2006 and Dec. 31, 2009 would need to occur. Proceeds from the notes will be held in a trust and invested in secure, short-term investments. Interest to noteholders will be paid out of the returns of the invested money as well as from premiums paid by Axa for the coverage.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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