Reinsurer Swiss Re are bringing another new catastrophe bond to market. It is the second cat bond from Swiss Re to carry the Mythen name, named after Swiss Re’s head-office location on Mythenquai in Zurich, after they successfully issued Mythen Ltd. in May. The new cat bond is called Mythen Re Ltd. (Series 2012-2) and it marks a new first for the cat bond market as Swiss Re seek to sponsor a cat bond which covers both a catastrophe peril and mortality risk within a single tranche of notes.
Mythen Re Ltd. is a Cayman Islands special purpose insurer and this 2012-2 series of notes will be its first series of notes offered under this program. The transaction involves three tranches of notes, all of which are unsized at this time, although we’re told by sources that the deal will target at least $75m and our sources said it will likely grow. The deal is designed to provide Swiss Re with a source of fully-collateralized reinsurance cover for the covered perils for a four-year period until late 2016. In this deal, the Class A tranche of notes is the really interesting one as it combines both U.S. Atlantic hurricane risk with UK extreme mortality risk in a single class of notes. The Class B and C tranches are just exposed to U.S. hurricanes.
This is the first time that a cat bond deal has ever combined hurricane risk and mortality risk into a single tranche of notes. We’ve seen cat bonds with a single tranche of notes cover two separate catastrophe perils before, but never with mortality in the mix. With the two perils in this tranche of notes being separated by the Atlantic ocean this isn’t a dual-trigger deal either.
The Class A tranche of notes can be triggered by either a U.S. hurricane event, as measured by a PCS industry loss index or by an extreme mortality event in the UK resulting in a mortality index trigger level above 125%, as calculated by RMS. The covered area is much of the hurricane exposed U.S. East and Gulf coasts, including Florida and also Puerto Rico and for the mortality risk we’re told just England and Wales (not Scotland). The hurricane industry loss attachment probability for this tranche of notes is 2.16%, the expected loss is 1.7% and the exhaustion probability is 1.4%. For the UK mortality risk the attachment probability is 0.36%, the expected loss is 0.31% and the exhaustion probability is 0.2%. From those numbers it’s clear that the extreme mortality trigger is a much more remote event and so this tranche of notes exposure to hurricanes is the more risky component (according to the modelling). You can add up those probabilities to get a combined view of the tranche however given that the triggers for the two risks are not integrated and the mortality risk is much more remote it wouldn’t be a true combined probability of attachment for this tranche.
The Class B and Class C tranches of notes are both exposed to U.S. hurricanes only on an industry-loss basis and will use a PCS industry loss trigger. Both tranches cover the same region as the Class A tranche but for different industry-loss levels. The Class B tranche of notes has an attachment probability of 3.11%, an expected loss of 2.58% and an exhaustion probability of 2.17%, which makes this tranche riskier than Class A’s hurricane exposure.. The Class C tranche of notes has an attachment probability of 4.73%, an expected loss of 3.78% and an exhaustion probability of 3.09%, making this the riskiest tranche of notes being issued.
The mortality risk component of the deal attachment point is at an index level of 125% and exhausts at an index level of 135%. All of the hurricane exposure uses a PCS industry loss index trigger. The Class A hurricane risk attachment point is at an index value of 620.2 and exhausts at 845.5. The Class B hurricane risk exposed layer attachment point is at 513.5 and exhausts at 624.8. The riskier Class C tranche attachment point is at an index value of 372.7 and exhausts at 511.4.
Swiss Re Capital Markets are arranging the deal and sole bookrunner. AIR Worldwide are providing risk modelling and calculation services for the hurricane exposure while RMS are providing risk modelling and calculation services for the mortality risk. PCS industry loss data is being used for the hurricane trigger. For the mortality trigger, actual mortality data will be input into the calculation model by RMS to derive a mortality index value which would identify whether the deal has triggered or not. Collateral for the transaction is being invested in International Bank for Reconstruction and Development notes.
Our sources tell us that the guide pricing for the deal is as follows. Class A will pay 9.00% – 9.50%, Class B 8.75% – 9.75% and Class C 11.75% – 12.75%. All pricing is on top of the collateral investment yield.
That’s all the details we have on this transaction for the moment. It will be interesting to see how well accepted this is by investors given that it contains U.S. hurricane risk and the hurricane season is not yet over. We understand that the date the cover starts will be defined based on appetite of the investors, so there is flexibility to move the inception of cover to the end of the hurricane season. We suspect that given the benign nature of the hurricane season so far, and the fact we are now passed the peak, that investors interest in this deal will not be unduly affected. The Class A tranche which combined hurricane and mortality risk is sure to be attractive as the hurricane exposure is lower risk than the B and C tranches and the mortality risk offers a diversifying opportunity.
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