Vita Capital V Ltd.

Swiss Re are bringing their latest Vita Capital mortality-linked catastrophe bond market, their fifth such transaction, which is being issued through a Cayman Islands entity Vita Capital V Ltd. which will issue two tranches of mortality-linked notes.

This Series 2012-1 issuance, Vita Capital V Ltd. will issue two tranches of mortality-linked cat bond notes. The aim of the transaction, is to secure a fully-collateralized source of multi-year extreme mortality protection via risk transfer with the capital markets, for the sponsor Swiss Re.

The notes issued by Vita Capital V Ltd. will provide Swiss Re with cover via an ISDA-based contract and protection is afforded on an aggregate basis over a five year risk period against excess mortality in certain specified countries. A Class D-1 tranche of notes covers excess mortality in Australia and Canada while a Class E-1 notes cover excess mortality in Australia, Canada and the U.S.

Both tranches are being marketed as at least $50m in size we are told, but it’s likely that Vita Capital V will be larger than $100m by close if Swiss Re choose to take advantage of inevitable demand for mortality risk in this form. For each class of notes, Swiss Re and Vita Capital V have entered into an ISDA-based counterparty contract under which the counterparty (which is Swiss Re) will make payments in exchange for extreme mortality protection (provided by Vita Capital V) for a specified notional amount.

Investors in the notes issued by Vita Capital V will be at risk of an increase in age and gender weighted mortality rates that exceed a specified percentage of a predefined mortality index value for the term of the deal. Interestingly, the five year risk-period is slightly retrospective and the first risk period began on the 1st January 2012, meaning that mortality data from the first half of this year is included in the deals calculation.

The trigger is based on a mortality index and there are predefined points on the index where the notes can be triggered and hence suffer a loss of principal. For the Class D-1 notes to be triggered and any loss of principal to occur, the Australia reference mortality index would need to increase by at least 35% or the Canada reference mortality index would need to increase by at least 20% over any two consecutive-year measurement period between 1st January 2012, and 31st December 2016. For the Class E-1 tranche of notes, one of the reference mortality indices would have to increase by at least 20% for Australia, 10% for Canada, and 5% for the U.S. over the same measurement period. The mortality index value (MIV) is defined on a rolling two-year period and so the likelihood of a loss occurring or the amount of any loss depends on the extent to which the mortality index value exceeds the attachment point for the notes.

Mortality catastrophe bonds such as Vita Capital V are exposed to large increases in mortality rates and so events such as pandemics, influenza outbreaks, tsunamis, earthquakes, major natural catastrophe events, terrorist attacks, disease epidemics or an unmodeled event could impact the deal. However these are remote risks and as such transactions such as this generally have lower probability of attachments than many natural catastrophe bonds.

Collateral from the sale of the notes will be invested in International Bank for Reconstruction and Development (IBRD) notes. Interestingly this is the first deal where the collateral investment will pay a negative percentage below LIBOR back as we’re told that the IBRD notes will pay around 0.3% below LIBOR. That is due to the historically low interest rates in the wider financial markets caused by the economic crisis that is hitting certain regions and markets hard.

Standard & Poor’s considers that an event such as another pandemic similar to the 1918 flu outbreak, a large event risk such as a full-scale ground war or tsunami, or several nuclear bombs exploding in large cities in Australia, Canada, or the U.S. could cause a loss for the noteholders. RMS’ risk analysis also concluded that a recurrence of the 1918 flu pandemic and World War I would have resulted in a 100% principal reduction to the Class E-1 tranche of notes, but only the 1918 flu pandemic would have resulted in a 100% principal reduction to the Class D-1 notes. In the past 100 years, events such as the peak of AIDS deaths in 1987 and the terrorist attacks of Sept. 11, 2001, would not have triggered any loss of principal under the terms of the notes. In S&P’s view, the biggest risks are a man-made catastrophe, such as a nuclear, chemical, or biological war/terrorist attack; a natural catastrophe; or a substantial pandemic. S&P has given the Class D-1 notes a preliminary rating of ‘BBB-‘ and the Class E-1 notes a preliminary rating of ‘BB+’.

We’re told by sources that the Class D-1 notes have an attachment probability of 0.34% and will likely pay a coupon in the range of 2.7% to 3%, while the Class E-1 notes have an attachment probability of 0.8% and will likely pay a coupon in the region of 3.4% to 3.8%.

Update: The transaction is now sized at $275m, a significant increase on the $100m it was first marketed at. We understand that the Class D-1 notes are $125m in size and the Class E-1 are $150m in size.

The deal will price right at the lower end of the expected range, we’re told, with the Class D-1 notes paying a coupon of 2.7% and the Class E-1 notes paying a coupon of 3.4%.

The deal completed successfully at $275m. S&P affirmed the ratings as above and the shelf programme and two tranches of notes were admitted for listing on the Cayman Islands Stock Exchange. Pricing remains unchanged, having priced right at the lower end of expectations.

Update March 2016

As is typical with the Vita Capital series of mortality catastrophe bonds, Swiss Re issued an early redemption notice for this Vita Capital V deal. The redemption payment date would be April 15th 2016.

Investors in the notes will be paid a 1% premium for the early redemption, so effectively receiving 101 cents per dollar investment.