Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Calabash Re III Ltd cat bond gets to market through innovation


Swiss Re has released further details on it’s recent Calabash Re III Ltd catastrophe bond deal. The $100m deal provides Swiss Reinsurance America Ltd with a source of capacity for a reinsurance agreement which gives it three years of cover. The deal provides Swiss Re America with protection against losses incurred from ceded hurricane and earthquake reinsurance agreements with Ace Ltd.

The Calabash Re III deal utilizes the latest advance in trigger modelling. The bond uses the patent-pending Modeled Industry Trigger Transaction (MITT) which takes industry wide loss estimates from Property Claims Services (PCS) and applies weighting by the post-event modeled share of industry loss based on certain applicable portfolios. Swiss Re note that this helped to result in a substantially more efficient set up for both investors and client.

This was the first cat bond deal to fully disclose the the full modeled Event Loss Table for the transaction as part of the documentation given to potential investors. With such access investors can quantify risk and impact on their portfolio much more precisely. Disclosure of this information is standard in reinsurance transactions but Risk Management Solutions (who modeled the risks for this deal) advised to do so as it levels the playing field for investors.

The other factor which helped to make this deal efficient and enabled it to get to market in these troubled investment times is the type of collateral chosen for the deal. Swiss Re chose to invest the proceeds of the bonds sale in floating rate notes issued by the International Bank for Reconstruction and Development (part of the World Bank Group). The notes are flexible in that they are puttable in whole or in part during the first year of the deal should they so choose. This is a first in cat bond structuring. Highly rated notes have been used as collateral before but never from an institution which is owned by 185 member countries and with a ‘AAA’ rating. The notes are matched in duration to the Calabash Re III deal.

Utilizing highly rated sources of collateral instead of a total return swap counterparty seems to be the way to ensure investors flock to your insurance linked security deal. Add in full disclosure of modeled events and the latest advancements in triggers and it’s not surprising that we hear that Calabash Re III may have been the first deal to have outstripped demand this year.

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