According to sources, investment bank Credit Suisse’s Operational Re Ltd. transaction, which looks to emulate the catastrophe bond to secure insurance via the capital markets for operational risk exposures, is now set to launch in the coming days as a CHF200m (approx US$205m) bond.
Originally, Credit Suisse had targeted CHF630m of cover through the sale of the Operational Re cat bonds, with the proceeds set to provide reinsurance against a five-year CHF700m insurance policy provided by Zurich.
Now, we’re told that the latest terms for the transaction show a targeted size of CHF270m for the overall operational risk insurance protection, with Zurich still expected to retain CHF70m and the Operational Re Ltd. special purpose insurer set to issue CHF200m of notes to provide the fully collateralised reinsurance protection.
While Zurich’s retention will remain the same size, the percentage of the insurance policy to be retained by the insurer is of course increasing quite significantly.
The transaction remains split into two tranches, with a riskier junior tranche sized at CHF110m and a senior tranche at CHF90m, we understand.
Credit Suisse will itself continue to retain an operational risk loss of CHF3.5 billion, with that effectively the attachment point, but the other terms of the Operational Re operational risk cat bond all remain the same, we’re told.
So the underlying insurance policy and the reinsurance from the Operational Re ILS notes will still provide Credit Suisse with annual aggregate protection against certain operational risk losses. With specific limits still in place to ensure that no single operational risk loss event, or category of loss, can trigger these notes on its own. So this is effectively a second and subsequent loss event ILS deal.
We’re told that the pricing has also been adjusted on one of the tranches of notes to be issued by Operational Re Ltd.
The riskier junior tranche of Operational Re notes will continue to offer investors the 5.5% coupon we wrote about recently here. But the senior tranche has had the coupon raised slightly, to 4.5% from the previous 4%.
So with the size of the Operational Re transaction shrinking and the coupon rising on the less risky tranche, it seems investor response to the transaction has not been as welcoming as the initial target size and pricing had hoped for.
But this is to be expected, with this a new use of a catastrophe bond and investors unfamiliar with the risks covered. It would be fascinating to understand the investor mix that do subscribe to this transaction, as it seems a decent portion of the notes will go outside of the ILS investor base, to more traditional investors and hedge funds, we’re told.
Still, it is encouraging to see the transaction continue to make progress, as it does offer an example of the catastrophe bond structure being used to cover a broader range of business risks, something the structure has always promised to be capable of.
We’ll update you as and when any further details become available, or as the transaction closes.
Also read much more detail on this transaction in our previous coverage: