Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Combine Re Ltd. catastrophe bond from Swiss Re completes on target, gets rated


The Combine Re Ltd. catastrophe bond which is sponsored by Swiss Re America but combines two reinsured parties (Country Mutual Insurance Company and the North Carolina Farm Bureau’s mutual insurance arm) risks into a single cat bond transaction has completed successfully at its target of $200m. $150m of the notes, in two of the three tranches that were issued, have been rated by Moody’s with one tranche becoming a very rare tranche of investment grade cat bond notes.

Combine Re is an indemnity cat bond which covers sponsor Swiss Re America for the obligations under their reinsurance agreements with the two reinsureds. Combine Re provides cover for the ultimate net losses of the two reinsureds from the U.S. perils of hurricanes, earthquakes, severe thunderstorms and winter storms. Swiss Re have two separate reinsurance agreements with the reinsured parties. Swiss Re then have two separate retrocessional agreements with Combine Re and the risks are ceded to noteholders.

Moody’s rated this cat bond, making it the first cat bond rated by Moody’s this year, and gave a tranche of notes an investment grade rating which is unusual in the market. There have been cat bonds which have achieved an investment grade rating before, but not since deals such as  Merna Reinsurance Ltd. and Gamut Re Ltd. from 2007. The $100m Series 2012-1 Class A notes have an extremely low probability of attachment and so are much less risky than most cat bond tranches. Moody’s gave the Class A notes a final rating of ‘Baa1’ (investment grade) and also rated the $50m Class B tranche of notes at ‘Ba3’ (sub-investment grade). A third $50m Class C tranche of notes was not submitted for rating.

Pricing is now available for the transaction. The Class A notes, being less risky with an attachment of 0.04%, pay a lower coupon at 4.5% above Treasury money market yields. The Class B notes, which have an attachment probability of 0.8%, pay 10% above and the Class C notes whose attachment probability is much higher at 3.14% pay a massive 17.75% above Treasuries. This cat bond really did have something for everyone in the investor space, with investment grade notes likely to have attracted more conservative investors or new entrants to the space, while the Class B and C notes will have been attractive to experienced investors willing to take on the higher risks.

Combine Re Ltd. will protect Swiss Re America and the two reinsureds for 2.75 years, with three risk periods, and is due to mature at the end of 2014. Collateral will be split into two trust accounts and invested in highly rated Treasuries.

The three tranches of notes issued by Combine Re Ltd. have all been admitted for listing on the Cayman Islands Stock Exchange.

It will be interesting to see if Swiss Re issue more cat bonds with a similar structure, the investment grade aspect (which helps ensure investors are particularly interested in the deal) and also multiple ultimate beneficiaries (which helps to make it more cost-effective) as it could enable them to attract more of their reinsurance clients into cat bond transactions.

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