For the most part, all the talk a few years ago about securitizing terrorism risk remained just that - talk. New developments, and an indirect reference, could help these deals along.

Swiss Re, a prolific issuer of bonds covering property damage from earthquakes and hurricanes, recently completed its first securitization linked to life insurance. The $400 million deal covers extreme mortality risk in certain scenarios, such as epidemics and nuclear, chemical or biological attacks.

Some sources familiar with the deal suggested Swiss Re might be planning to issue more in the future, but that could not be confirmed with the company by press time.

Rodrigo Araya, a vice president at Moody's Investors Service, described the deal as "unique" because it is structured like a catastrophe bond, or CAT bond.

"CAT bonds normally cover natural perils like earthquakes, hurricanes, windstorms," Araya said. "This is somewhat different. It covers what we call extreme mortality.' "

It is also unique for incorporating terrorism risk, although that is done indirectly through the potential loss of life that might result. "It doesn't cover a terrorist attack per se," Araya said. The deal, which is tied to mortality rates in five countries, triggers only if deaths during a four-year period exceed an established baseline by 30%.

Another recent CAT bond is believed to be the first involving terrorism risk - a deal from Federation Internationale de Football Association (FIFA) covering the risk of canceling the final match of the 2006 World Cup in Germany (see ASR 9/8, 10/6). But the deal from Swiss Re appears to be the first to link life insurance and terrorism risk.

Araya said Swiss Re initially intended to include fatalities from illnesses such as AIDS in the risk scenarios, but the rating agency, when analyzing the structure, asked to include other events that might impact mortality, such as nuclear, chemical or biological attacks.

Vita Capital Ltd., a special purpose entity based in the Cayman Islands, issued the principal-at-risk variable rate notes, which mature Jan. 1, 2007. Investors in the dollar-denominated deal will be paid a quarterly coupon rate of three-month Libor plus a spread of 135 basis points.

Swiss Re Capital Markets structured the deal and acted as sole bookrunner. Standard & Poor's assigned an A+' rating, Moody's an A3'.

As with other insurance-linked securities, the coverage is based on an index, which, in this case, is the 2002 mortality for the general population in five countries weighted by country, age and sex. The countries are: the U.S. (70%), U.K. (15%), France (7.5%), Switzerland (5%) and Italy (2.5%).

The principal is at risk if mortality is 30% more than the 2002 actual number of deaths in the target population during any single calendar year between Jan. 1, 2003 to Dec. 31, 2006.

Analysts believe the chance of the deal triggering is remote. More than 800,000 deaths above what is expected would have to occur in the four-year period before any loss is incurred by investors, according to a preliminary analysis by S&P.

Given that high threshold, only two events in the past 100 years would have triggered a loss, S&P said. The largest increase in mortality was the 1918 influenza epidemic, which caused a 33.2% increase in mortality that year. The second largest event was World War II, which caused a 6.5% increase in mortality in 1940.

Analysts suggested that market dynamics could result in similar deals going forward. In the past two years, reinsurers have been looking for more ways to use the capital markets to expand their capacity to write mortality risk business, S&P analysts said.

Swiss Re, the world's largest life and health reinsurer, is rated AA' by S&P and Aa1' by Moody's.

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