Mythen Re Ltd. (Series 2012-2)

The second cat bond from reinsurer Swiss Re to carry the Mythen name, so named after their head-office location on Mythenquai in Zurich, after they successfully issued Mythen Ltd. in May.

This new cat bond is called Mythen Re Ltd. (Series 2012-2) and marks a first for the cat bond market as it seeks to issue notes which cover both a catastrophe peril (hurricane) and mortality risk within a single tranche of notes.

Mythen Re Ltd. is a Cayman Islands special purpose insurer established to issue variable rate notes and this 2012-2 series of notes will be its first series of notes offered under the program. The transaction involves three tranches, 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 beyond that. 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, each with their own distinct triggers. 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.

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 the Class A 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. hurricane risks 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. 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 the deal.

The mortality risk component of the deal attaches 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 attaches at an index value of 620.2 and exhausts at 845.5. The Class B hurricane risk exposed layer attaches at 513.5 and exhausts at 624.8. The riskier Class C tranche attaches at an index value of 372.7 and exhausts at 511.4.

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.

The guidance pricing for each tranche in this cat bond is as follows. All percentages are above the collateral investment yield percentage rate:
Class A: 9.00% – 9.50%
Class B: 8.75% – 9.75%
Class C: 11.75% – 12.75%

Update (24th October 2012):

The Class B tranche of notes has been withdrawn from this offering. We’re unsure exactly why but sources suggest it may not have had enough interest to make it economical to issue. The Class A hurricane/mortality and Class C riskier hurricane tranches both still remain.

The transaction is targeting $200m, with the Class A tranche sized at $120m and the Class C sized at $80m.

Pricing has dropped to the lower end of the range yet again. The Class A tranche is now expected to price at between 8.50% and 9.00%, while the Class C tranche is expected to price at 11.75%. Once again this demonstrates the appetite in the market right now.

Update 2:

Mythen Re Ltd. priced on the 25th October, remaining at $200m in size. The Class A tranche of notes priced at 8.50% and the Class C tranche priced at 11.75%.