Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Benu Capital Limited

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Benu Capital Limited – At a glance:

  • Issuer: Benu Capital Limited
  • Cedent / sponsor: AXA Global Life
  • Placement / structuring agent/s: Swiss Re Capital Markets is lead structuring agent & joint bookrunner. Natixis is co-structuring agent & joint bookrunner. BNP Paribas and Aon Benfield Securities are joint bookrunners.
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: Excess mortality (France, Japan, U.S.)
  • Size: $305m
  • Trigger type: Mortality index
  • Ratings: S&P: Class A - 'BB+sf', Class B - 'BBsf'
  • Date of issue: Apr 2015

Benu Capital Limited – Full details:

Benu Capital Limited, a newly formed Irish special purpose vehicle, will seek to issue two tranches of mortality linked notes totaling €285m (US$305m) in order to collateralize a reinsurance agreement with AXA Global Life.

The mortality bond notes will provide AXA Global Life with excess mortality protection for France, Japan and the U.S. over a five year period from January 2015 to the end of 2019, Artemis understands.

The transaction utilises an ISDA-based risk transfer contract providing excess mortality protection, above the specified mortality index attachment points, on an annual aggregate basis over the five year term to the issuer.

The Benu Capital mortality cat bond notes will be linked to a mortality index trigger, which is weighted by both age and gender within for each covered region. As a result, each region will have its own trigger point for each of the two tranches of excess mortality-linked notes.

The Benu Capital Class A notes, sized at €150m, will have an attachment probability of 1.06%, an exhaustion probability of 0.44% and an expected loss of 0.64%. These notes are being marketed with price guidance of 2.15% to 2.65%.

The Class A notes will trigger at a mortality index level of 116% for France, 116% for Japan and 108% in the U.S. The exhaustion points are 152.7% for France, 140.8% for Japan and 120.4% for the U.S.

These notes also feature a dropdown level for each region, set at 110% for France, 110% for Japan and 106% for the U.S. We understand they would dropdown if the coverage from the Class B tranche, which are riskier, was eroded or exhausted during the five year term of the deal.

The Class B notes are sized at €100m, have an attachment probability of 1.79%, an exhaustion probability of 1.33% and an expected loss of 1.33%. These notes are being marketed with price guidance of 2.9% to 3.5%.

The Class B notes will trigger at a mortality index level of 108.1% for France, 108.2% for Japan and 104.1% in the U.S. The exhaustion points are 116% for France, 116% for Japan and 108% for the U.S.

So Class B is the riskier of the two slices of excess mortality reinsurance protection. As with all excess mortality deals the key risks covered are pandemic or disease events, such as severe flu outbreaks and the like, but events such as war, earthquakes, terrorism etc are also modelled. Data to report mortality rates within each covered area are taken from the main government statistical reporting agencies.

Standard & Poor’s noted that there is a remote risk of unmodelled events occurring that could trigger the notes, such as a tsunami, epidemic, perhaps war or major terrorism event. It’s impossible to model all potential events in a mortality transaction, meaning that some unmodelled risk will always be present.

Similarly uncertainty is present due to medical advances and changes in lifestyle, which can affect mortality rates dramatically. Scientific development of vaccines and other drugs could reduce mortality rates dramatically in the future. However changes in lifestyle could affect them negatively.

Also a minor concern is the fact that as world populations grow the frequency and severity of future pandemics or epidemics can increase as well, due to factors such as increasing population density and rising global air travel rates.

To counter these factors the risk modelling for the transaction stresses pandemic and epidemic risks, and also reviews and stresses mortality improvement factors as well. S&P itself also considered a qualitative assessment of various event scenarios that could affect the bond.

S&P rated the Class A notes ‘BB+sf’, and the Class B notes ‘BBsf’.

Update 1:

According to sources, the Benu Capital mortality cat bond looks like it may increase in size before completion.

The Class A tranche is likely to be sized at €120m to €150m, depending on demand.

Meanwhile the Class B tranche of notes is expected to be sized somewhere in the range of €130m to €160m.

Between the two tranches that should still ensure a total deal size of at least €250m, in fact we’re told that is now the minimum target, but with a good chance that investor demand could lift the deal above that size by its completion. It could get as large as €310m if both tranches hit the upper end of those ranges.

It’s worth noting that the Class B notes are the riskier of the two, so will pay a higher coupon, demonstrating that investors continue to have more appetite for the higher yielding tranches of notes as this tranche is certain to upsize according to the numbers above.

The Class A tranche pricing has moved up towards the upper end of initial guidance at 2.55%.

The Class B, riskier tranche has also moved above the mid-point, towards the upper end, with price guidance now listed as 3.35%.

The Class A notes have an initial base expected loss of 0.64%, which with pricing at 2.55% would provide a multiple of nearly 4x and a spread above expected loss of 1.91%.

Class B has an initial base expected loss of 1.33%, which with pricing at 3.35% would mean a multiple of 2.5x and a spread above expected loss of 2.02%.

Update 2:

At final pricing the Benu Capital deal did indeed upsize and investors showed that the higher risk and return Class B layer was the preferred.

Sources told Artemis that the Class A notes settled at a size of €135m, while the Class B notes grew to €150m, giving the overall size of €285m.

In terms of pricing there has been no change from the update above. The Class A tranche priced at 2.55% and the Class B at 3.35%.

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