We now have further details for you about Swiss Re’s latest Vega Capital Ltd. catastrophe bond transaction (which we wrote about yesterday here). The $106.5m deal provides Swiss Re with cover for some of their North Atlantic hurricane, European windstorm, Californian earthquake, Japanese earthquake and Japanese typhoon risks.
However, Swiss Re see this more as a way to manage earnings volatility than actually achieve reinsurance protection against very large events. It’s a clever deal structure, which affords investors more protection than some other cat bond structures due to the unique use of a reserve account to add an extra layer of protection to investors principal.
The multi-event, multi-peril nature of this deal allows investors to chose between layers of risk giving them enhanced index triggers and offering diversity across five natural catastrophe risks across different regions of the world. The layered approach to the structure (reserve account, then Class D notes, then Class C notes) affords greater protection to investors and allows them to invest based on their appetite for risk. At their ILS press briefing yesterday, Swiss Re said that the Class C notes would only be at risk once Class D was exhausted, and before Class D is touched the reserve account must be eroded (although investors return may be affected if the reserve account is called upon). Swiss Re said it could take three qualifying events before the Class C notes are affected. This layering nature is a smart way to attract a diverse range of investors looking for diversified risk holding opportunities and with differing appetites to risk.
Swiss Re said ‘An aggregate annual limit per peril combined with tranching of the Notes in order of seniority allows Swiss Re to reach investors targeting different risk/return profiles and provide investors with a diversifying multi-trigger event.’
Moody’s Investor Services noted in their press release about the deal that ‘In cases where there have been partial principal losses on the Notes, future reserve account payments will increase the principal amount of the Notes by order of seniority up to the original principal amount of each class.’
“Vega allows Swiss Re to manage earnings volatility arising from peak natural catastrophe perils, over multiple events. It is an innovative cat bond that combines transparent indices for five different natural catastrophe scenarios with an efficient structure. Vega underscores our track record in product innovation, transforming high frequency cat events into capital markets,” said Martin Bisping, Swiss Re Head of Non-Life Risk Transformation.
The index triggers used for the various perils are:
- North Atlantic hurricane – PCS industry loss index
- European windstorm – PERILS industry loss index
- California earthquake – Parametric index
- Japan earthquake – Parametric index
- Japan typhoon – Parametric index
Two tranches of notes were issued in this Vega Capital transaction. $63.9m of Class C notes which were submitted for rating to Moody’s Investor Services and received a ‘Ba3’ rating from them. The $42.6m of Class D notes were not rated.
EQECAT Inc. provided risk analysis on each peril and scenario. The collateral from the notes was used to buy AAA rated puttable notes issued by the International Bank of Reconstruction and Development.
Vega Capital Ltd. as a catastrophe bond programme has a flexible structure which allows Swiss Re to make multiple issuances of securities at any time, so it seems likely that we could see further Vega transactions in the future.
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