Vega Capital 2010-1 cat bond upgraded despite Sandy loss reserve payment

Swiss Re’s Vega Capital Ltd. Series 2010-1 catastrophe bond transaction, which was issued on behalf of the sponsoring reinsurer in December 2010, has had its Class C notes ratings upgraded again by Moody’s on a further improved outlook thanks to a growing reserve account. This is despite the reserve account having faced a small loss from last years superstorm Sandy, which saw a reduction of the reserve account by $7.2m.

The Class C cat bond notes issued by Vega Capital in its 2010-1 issuance were last upgraded in February 2012 based on Moody’s perception that the reserve account had an improved position and the risk-period remaining was reducing. Then, in December 2012, Moody’s put the Class C notes on a watch for a potential upgrade but noted that any upgrade would be dependent on the size of any loss that hurricane Sandy caused to the cat bond reserve account.

Now Moody’s has the details on the losses caused by Sandy and says that despite this $7.2m reduction in the reserve account, the account has been increased by the regular payments that the sponsor Swiss Re makes into it. This build up of what Moody’s terms the first-loss protection layer, combined with a further reduction of the remaining risk period as the transaction matures at the end of 2013, has resulted in this upgrade to the Class C notes.

Thanks to the regular reserve account payments that Swiss Re makes the reserve account stands at $42m as of March 2013. This is after a reserve account loss from the Tohoku earthquake of $15.9m and the $7.2m loss from Sandy have been fully accounted for. In addition, Moody’s points out that the $42.6m unrated Class D tranche of notes provide another layer of protection beneath the Class C notes.

With less that a year remaining on the term of the cat bond, Moody’s says that the likelihood of the occurrence of the number of qualified events with sufficient aggregate losses required to cause a loss to the Class C Notes has been significantly reduced.

The Vega Capital 2010 cat bond provides Swiss Re with a source of retrocessional reinsurance cover for multi-peril losses that may result from the occurrence of up to five covered events over the remaining risk period up to 20th December 2013. Perils covered by the transaction include European windstorms, Japan typhoons, Japan earthquakes, California earthquakes and North Atlantic hurricanes.

The structure employed in the Vega Capital catastrophe bond has proved to be robust and offered good protection to its investors. Despite having faced reserve account losses the investors themselves have not faced any loss of principal. This is also partly to do with the way the trigger was arranged, as it limits the annual losses attributable to each of the types of peril.

This also means that for Vega Capital 2010’s notes to face a loss over the remaining risk period more than one of the covered perils will need to have a qualifying peril. The unique structure of the Vega Capital cat bond, with this multi-event and also multi-trigger approach to qualifying catastrophe events and the layered protection the reserve account affords, has seemingly been successful. It is perhaps a little surprising not to have seen this type of structure re-used more frequently.

Moody’s has upgraded the $63.9m tranche of Vega Capital Ltd. Series 2010-1 Class A notes from ‘Ba2′ to ‘Baa3′.