Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Operational Re II Ltd.

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Operational Re II Ltd. – At a glance:

  • Issuer: Operational Re II Ltd.
  • Cedent / sponsor: Zurich Insurance Co. Ltd.
  • Placement / structuring agent/s: ?
  • Risk modelling / calculation agents etc: Milliman Inc
  • Risks / perils covered: Operational risks
  • Size: $148m
  • Trigger type: Indemnity
  • Ratings: ?
  • Date of issue: Jun 2018

Operational Re II Ltd. – Full details:

This is the second securitisation of operational risk insurance using a capital markets special purpose vehicle domiciled in Bermuda and a structure like a catastrophe bond.

We understand that this Operational Re II Ltd. transaction again features insurer Zurich as the ceding company, that has entered into reinsurance agreements with Bermuda SPI Operational Re II Ltd. to acquire the capital markets backed, fully-collateralized coverage to back an operational risk insurance policy.

We’re told that Zurich Insurance Co. Ltd. is again the ceding company, or sponsor, for the Operational Re II Ltd. transaction, which sees the insurer tapping ILS and capital market investors for a source of fully-collateralized reinsurance to back an operational risk insurance agreement between itself and a bank or asset manager, which we understand is almost certainly Credit Suisse again.

For this second arrangement we believe the investment bank that benefits from the coverage to be Credit Suisse again, returning to the ILS market to top up its coverage, as the initial Operational Re transaction had been much smaller than hoped for (it had originally targeted a CHF 630 million issuance) back in 2016.

This new Operational Re II Ltd. transaction has been offered on a semi-private basis, we understand, compared to the more broadly marketed 2016 deal.

So, this new transaction will provide a CHF 146 million (approx $148 million) fully-collateralised source of insurance and reinsurance protection to back an operational risk insurance policy provided by insurer Zurich to one of its corporate clients, which we understand to be Credit Suisse.

This arrangement will provide the ultimate beneficiary with just less than three years of protection, with maturity of the three tranches of notes slated for April 8th 2021.

That is the exact same maturity date as the three tranches of notes from the original Operational Re transaction. So this points to Operational Re II Ltd. being an extension of the coverage for Credit Suisse, as the investment bank looks to expand the capital markets backed operational risk protection it benefits from.

One source has told us that the three tranches of notes fill some of the gaps in the covered layer that had originally been sought for Credit Suisse in the first Operational Re deal, thus providing it with more coverage across the original layer, which had attached at CHF 3.5 billion of losses under the operational risk insurance agreement in any annual risk period (the attachment point), with an exhaustion point set at CHF 4.2 billion.

The original underlying insurance policy, which it seems these notes also support, and the reinsurance from the Operational Re II ILS notes will provide annual aggregate coverage against certain operational risk losses. There are specific limits in place to ensure that no single operational risk loss event, or defined category of loss, can trigger the notes on its own, making these deals effectively a second and subsequent loss event ILS cover.

As with the first operational risk cat bond, we assume this new transaction will provide cover for a range of risks, including certain cyber risk exposures, such as IT system failure that causes business interruption; fraudulent behaviour both of external parties and employees of the investment bank; fiduciary issues; losses due to improper business practices or unauthorised activity; accounting errors; documentation errors; regulatory compliance issues; HR issues; discrimination in the workplace; or even personal injury.

The coverage is just one aspect, as these deals also help the investment bank to reduce its risk weighted assets (RWA’s). In fact the first CHF 220m deal helped Credit Suisse reduce its RWA’s by 1.25 billion Swiss Francs.

As such these transactions offer broad operational risk insurance coverage, but through the mechanism of an ILS or cat bond and with reinsurance support from capital markets investors.

The CHF 146 million of notes are split across two Rule 144A tranches of notes and one RegS tranche, which is likely to meet a specific investors needs.

The Operational Re II Ltd. transaction features the issuance of a CHF 24.5 million Class A tranche of Rule 144A notes, a CHF 53 million Class A tranche of RegS notes and a CHF 68.5 million Class B tranche of Rule 144A notes.

So, with this transaction, Credit Suisse (we understand) has topped up the amount of operational risk insurance cover it has that is backed by the capital markets to the tune of CHF 366 million (approx $377m) across the two Operational Re ILS arrangements, with all of that coverage from the two deals now running until April 8th 2021.

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