Redwood Capital I Ltd. has licensed insured-loss information from Insurance Services Office, Inc.’s (ISO) Property Claim Services (PCS) unit to be used as a “trigger” for payments on a one-year $165-million catastrophe securities offering that securitizes California earthquake risks.
The catastrophe securitization allows Redwood Capital I Ltd. to enter into a financial contract with Lehman Re Ltd. to provide it with earthquake risk protection. Risk securitization involves offering catastrophe securities as a financial instrument to investors who accept the risk of potential loss of their investments in the event of a catastrophe in return for a fixed stream of payments.
According to the license agreement, payments by noteholders and preferred shareholders due to California earthquakes will be triggered if PCS identifies an earthquake or multiple earthquakes as catastrophes and develops a cumulative total that equals or exceeds $22.5 billion in estimated insured property losses. The amount to be paid is determined by the PCS estimate of total insured property losses, which includes fire losses following an earthquake.
“Lehman Re’s choice bolsters PCS’s reputation as the U.S. insurance industry’s authoritative, one-stop source for catastrophe information services, including identifying and estimating insured property damage,” said Richard P. Boehning, ISO’s senior vice president.
Lehman Brothers, Inc. and Swiss Re Capital Markets Corporation acted as initial purchasers of the notes and preference shares issued by Redwood Capital I Ltd. The instruments, sold to qualified institutional investors, can be redeemed on Jan. 1, 2003.
If no earthquakes occur during the instruments’ risk period, investors will receive returns on their investment and get quarterly coupon payments. Investors could lose all or a portion of their investment and interest or dividends, as the case may be, on the securities in the event of earthquakes.
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