Operational Re IV Ltd.

This is the fourth securitization of operational risks in a catastrophe bond arrangement as part of the Operational Re series of deals.

Operational Re IV Ltd. is a Bermuda based special purpose insurer (SPI) originally registered in the first-quarter of 2022, but with an issuance only completed at the start of 2023.

As with all three Operational Re cat bonds that preceded this deal, we assume that the ultimate beneficiary of the operational risk insurance protection this provides is global investment bank Credit Suisse, while insurer Zurich is assumed to be the intermediating counterparty and actual cedent to the Operational Re IV issuance.

Zurich is then the cedent to the Operational Re deal, entering into a reinsurance agreement with each of the Bermuda based special purpose vehicles.

In this case, we understand that Operational Re IV Ltd. has issued $217.25 million of notes across two tranches, split into two sections of 144A and RegS note issuances.

The operational risk insurance agreement is larger, we’re told, but this Operational Re IV deal allows the sources of capital to be diversified, with Zurich acting as an intermediary to pass through this portion of the operational risk coverage to Credit Suisse, backed by insurance-linked securities (ILS) and other types of institutional investors.

Initial discussions with sources suggest the mechanics and motivations for this new deal are the same as with the other Operational Re operational risk securitizations.

The coverage is very different to the typical cat bonds we feature, with the Operational Re bonds set to provide Credit Suisse with broad insurance protection against a range of operational risks on an aggregate basis, which we assume to be the same with this new Operational Re IV deal.

As with previous deals, this new Operational Re IV has been issued before the previous Operational Re III deal matures, with that one slated for maturity in January 2024.

The reason for this is, these Operational Re cat bonds enable Credit Suisse to reduce its risk weighted assets (RWA’s) and the protection these provide may wane as maturity nears, due to regulatory requirements. Hence overlapping them may be attractive from a regulatory capital standpoint.

The new $217.25 million of notes issued by Operational Re IV Ltd. are due for maturity as of January 2026, we’ve learned, so we should perhaps expect a future issuance in early 2025.

On the coverage these provide to Credit Suisse, presumably the beneficiary as the previous deals all benefited the bank, if the same as the previous three operational risk insurance-linked securities (ILS) deals, then Credit Suisse will benefit from a multi-year source of operational risk protection that includes coverage for a wide-range of exposures.

The first three operational risk cat bonds provided Credit Suisse with protection 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.

As with the Operational Re III deal, we also understand that this Operational Re IV has terms 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.

We’re also told that there could be some additional exclusions in place for this new operational risk bond issuance, to ensure now exposure to events that have occurred in the past and perhaps also to exclude certain types of risk.

Given the transaction is aggregate in nature and has these terms and limits, it would ensure the deal acts as a second and subsequent loss event cat bond protection.

The Operational Re IV Ltd. transaction featured the issuance of $217.25 million of notes across two tranches split into 144A and RegS sections, with the tranches corresponding to different layers of risk, as detailed below:

• $22.75m of Class A, Rule 144A notes.
• $54.5m of Class A, Regulation S notes.
• $60m of Class B, Rule 144A notes.
• $80m of Class B, Regulation S notes.

As with all of the Operational Re cat bonds, this Operational Re IV Ltd. deal is likely to only provide some of the reinsurance capital to support the new operational risk insurance arrangement between Zurich and beneficiary Credit Suisse, with the overall operational risk insurance policy perhaps far larger.

It’s also possible there could be other, more privately placed tranches of notes issued by Operational Re IV Ltd.

The risk modelling has been undertaken by Milliman Inc., which had also modelled the operational risks for the first three Operational Re transactions.

We’re told by sources that the underlying insurance policy to the Operational Re IV catastrophe bond excludes any losses linked to operational risk events that were already discovered prior to the January 3rd 2023 issuance date.

The policy also excludes losses from any new operational risk event that has the same originating cause as one discovered prior to issuance, as well as any causally inter-related or inter-connected operational risk events.

So investors in the new Operational Re IV went into the transaction safe in the knowledge that there was no potential exposure to the high-profile events Credit Suisse had faced (Archegos and Greensill), nor that anything related or connected could affect the notes in future.

Also of note, we’re told that one update to the Operational Re IV cat bond, over the previous iterations, was the inclusion of a specific clause to exclude the territories of Russia and Belarus from the underlying insurance policies coverage.

Update:

We’re told that originally this Operational Re IV cat bond had been planned to have four tranches, but this was reduced to the two, with 144A and Reg S sections in each.

We’ve learned the pricing for each of the two tranches, with the Class A’s having a coupon of 6.6% and the Class B’s 7.1%.