Swiss Re Insurance-Linked Fund Management

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Operational Re III Ltd.

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Operational Re III Ltd. – At a glance:

  • Issuer: Operational Re III Ltd.
  • Cedent / sponsor: Zurich Insurance Co. Ltd.
  • Placement / structuring agent/s: ?
  • Risk modelling / calculation agents etc: Milliman Inc.
  • Risks / perils covered: Operational risks
  • Size: $461.22m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Apr 2020

Operational Re III Ltd. – Full details:

This is the third operational risk catastrophe bond arrangement to benefit investment bank Credit Suisse.

Details are scarce with this third Credit Suisse operational risk bond transaction, but our sources said the same parties are involved, with Credit Suisse the beneficiary of the coverage, but provided via an operational risk insurance arrangement with ceding insurer Zurich Insurance Co. Ltd., who in turn enters into a reinsurance agreement with Bermuda based special purpose vehicle Operational Re III Ltd.

Operational Re III Ltd. has then issued some eight tranches of notes, which have been sold to investors and the proceeds from the sale used to collateralise the underlying reinsurance agreement between fronting insurer Zurich and Operational Re III.

As a result, the structure and mechanics are the same as any catastrophe bond transaction, bringing capital markets backed reinsurance capacity through to support the insurance needs of an investment bank sponsor that requires a significant operational risk insurance policy, in this case.

But the coverage is very different, of course, with the Operational Re III bonds providing Credit Suisse with broad insurance protection against a range of operational risks on an aggregate basis, we understand.

If the coverage is the same as the previous two operation risk insurance-linked securities (ILS) deals, then Credit Suisse will now be benefiting from a multi-year source of operational risk protection that includes coverage for a wide-range of exposures.

Credit Suisse’s first two operational risk bonds provides cover for exposures 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.

We are told that with this Operational Re III deal, Credit Suisse’s third operational risk bond, there are limits in place to ensure that no single operational risk loss event, or defined category of loss according to the transaction, can trigger the operational risk ILS notes on its own.

Which as well as the aggregate nature of the transaction, ensures that these deals are effectively a second and subsequent loss event ILS cover.

These Operational Re cat bonds enable Credit Suisse to reduce its risk weighted assets (RWA’s), which may explain the larger renewal a year before the maturity of the in-force deals, as the protection these provide may wane as maturity nears, due to regulatory requirements.

These transactions provide investment bank Credit Suisse with a source of broad operational risk insurance coverage, but utilising the mechanism of an ILS or catastrophe bond to secure the necessary reinsurance support from capital markets investors and specialist ILS funds.

One other point to note with the new Operational Re III Ltd. transaction is that this is the first to be denominated in U.S. dollars, rather than Swiss Francs. That could imply a shift in the investor base, to more dollar demanding sources, or it may just be for technical reasons, we can’t be sure.

The Operational Re III Ltd. transaction features the issuance of some $461.22 million of notes across eight tranches.

These included a $25.324 million Class A tranche of Rule 144A notes, a $118.184 million Class A tranche of RegS notes and a $58.137 million Class B tranche of Rule 144A notes and a $22 million Class B tranche of RegS notes, a $104.217 million Class C tranche of Rule 144A notes and a $11.217 million Class C tranche of RegS notes, plus a $122.138 million Class D tranche of Rule 144A notes, a $0 million Class D tranche of RegS notes (it’s not clear why a tranche of zero size was issued).

We understand the Class A to D tranches represent different coverage layers, while coupons are fixed at 5.5%, 4%, 3.8% and 4.5%, we’re told.

The coverage from this new arrangement runs to maturity in January 2024, with maturity set for the 10th of that month, so more around three years nine months.

As with previous Operational Re cat bonds, this Operational Re III Ltd. deal may only be providing some of the reinsurance capital to support the operational risk insurance arrangement between Zurich and beneficiary Credit Suisse.

Update – August 2021:

It’s been reported that the market is viewing the most junior, riskiest, tranche of notes issued by Operational Re III Ltd. as potentially at-risk, because of the challenges faced by the beneficiary of the coverage, investment bank Credit Suisse, due to the Archegos and Greensill Capital issues.

Update – January 2023:

We’ve learned that the Operational Re III issuance was matured early and redeemed, with investors being repaid in full.

We’re told that realised annual covered losses never actually reached 4% of the attachment point for the riskiest layer of notes, so as a result all investors received their money back on maturity, while insurance and reinsurance interests were released from their liabilities.

Credit Suisse sponsored a new Operational Re IV Ltd. deal.

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