Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Credit Suisse offers CHF630m Operational Re Ltd. operational risk ILS


Credit Suisse is making progress in its mission to leverage the insurance-linked securities (ILS) market and the structure of a catastrophe bond as a way to secure risk capital to back its operational risk insurance needs, with this unusual deal now marketing as Operational Re Ltd., we understand.

As we wrote recently, global investment banking group Credit Suisse has been testing the investment market (both ILS and traditional fixed income we understand) appetite for an ILS transaction which would ultimately provide the capacity to back an insurance policy covering the banks operational risk exposures.

The novel proposal would, if successful, provide a fully-collateralised source of insurance and reinsurance protection which would back a CHF700m (approx $687m) operational risk insurance policy provided by insurer Zurich, with Zurich retaining 10% of the risk and the remaining CHF630m (approx $620m) ceded to the deal’s investors.

It is understood that Credit Suisse turned to the ILS market and fixed income capital markets when it found that traditional reinsurance capacity could not be found to back the transaction. We’ve also heard that there was some interest from large reinsurers, but that Credit Suisse wanted a diverse panel, and the sale of ILS notes to back the protection seemed a more achievable way to get this in the current reinsurance market environment.

Now, sources tell us that Credit Suisse is actively marketing an offering document to investors which features a named Bermudian special purpose insurer (SPI) that would be utilised for as the issuance vehicle for the ILS transaction.

Operational Re Ltd. is not yet listed as having been registered, according to the register of Bermuda companies and the Bermuda Monetary Authority (BMA), but that process is perhaps underway as we write.

The offering documentation suggests that Credit Suisse is targeting a completion of this Operational Re Ltd. ILS issuance by March and wants to enter into the insurance agreement with Zurich that month. That gives the firm some weeks to market the deal to gain investor support and subscriptions for the transaction.

The basic terms of the Operational Re Ltd. operational risk ILS deal have not changed, people familar with the deal told us.

Credit Suisse is still seeking a five-year term for the insurance protection provided by Zurich and ultimately underwritten using the capital raised via the sale of ILS notes from Operational Re and the transaction remains structured on an annual aggregate and indemnity trigger basis.

As the issuer, Operational Re Ltd. will sell its notes to investors in order to collateralise a reinsurance agreement between itself and ceding insurer Zurich. That quota-share reinsurance agreement will see Operational Re taking 90% of the CHF700m insurance policy risks to be collateralised with the investor capital, leaving Zurich with the other 10%, hence the CHF630m of notes available.

To all intents and purposes Operational Re Ltd. is a catastrophe bond issuing vehicle, just covering a new type of risk. It’s a clear sign that the structure can be leveraged for a wider range of risks than the market currently features, and the fact this issuance is progressing is encouraging for the sector.

We’re adding Operational Re Ltd. into our catastrophe bond and ILS Deal Directory, as it does fit the mould of a cat bond transaction and is simply transferring a new type of insurance risk to the ILS and broader investor market.

We’ll update you as Credit Suisse’s Operational Re Ltd. ILS transaction comes to market, or if any further information emerges.

Also read:

Credit Suisse explores using ILS for operational risk insurance.

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