Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

New Vita Capital IV Ltd. mortality-linked catastrophe bond marketed by Swiss Re


The catastrophe bond and insurance-linked security investment community will be delighted that they have some new opportunities to put their funds to work in transactions offering diversification opportunities today. First, Munich Re began marketing their Queen Street III Capital European windstorm catastrophe bond today and now Swiss Re are returning to the market with two new series of Vita Capital IV mortality risk linked notes.

Swiss Re are seeking to issue $100m of mortality catastrophe-indexed notes through their Vita Capital IV Ltd. Cayman Islands domiciled SPV. Vita Capital IV was set up for the sole purpose of issuing a number of series of notes as part of a mortality catastrophe shelf program. Mortality events would include pandemics, epidemics, disasters, terrorist attacks etc.

The transaction is structured into two series of notes. The first$50m of Series V Class D notes provide cover against catastrophic mortality in Canada and Germany. The second $50m of Series VI Class E notes provide cover against catastrophic mortality events in Canada, Germany, the U.K. and the U.S. (including the District of Columbia but excluding Puerto Rico and overseas territories).

The notes are designed to provide Swiss Re with some protection against qualifying extreme mortality events affecting specified age and gender distributions in the covered countries.

The investors, or noteholders, will be at risk of an increase in age and gender-weighted mortality rates that exceeds a specified percentage of a predefined index (the mortality index value; MIV) in the covered areas. The risk period for this transaction is five years and runs from 1st January 2011 to 31st December 2015.

Standard & Poor’s explained the way the index will be calculated in their press release on the deal; “The MIV will be defined on a rolling two-year period, and the probability of a loss attaching and the magnitude of the loss in principal will depend on the extent to which the MIV for any country and measurement period (that is, two consecutive years) exceeds the attachment point for the notes. Index values corresponding to future measurement periods will be measured against the index value for 2010 for all four covered countries. Adjustments will be applied for changes in mortality over the risk period.”

At the close of the transaction, Swiss Re will enter into an ISDA standard swap contract with the issuer, exchanging payments for extreme mortality protection. The proceeds of the issuance will be invested in ‘AAA’ rated notes issued by the International Bank for Reconstruction and Development and placed in a collateral account. Coupon payments will be taken from the payments made under the ISDA contract and the investment earnings on the collateral which is held in trust.

Risk Management Solutions will be providing risk modelling and calculation agent services. Standard & Poor’s have given the Series V Class D notes a preliminary rating of ‘BBB-‘ and the Series VI class E notes a preliminary rating of ‘BB+’.

The two cat bond transactions which have been launched today will bring a welcome opportunity for diversification to investors who are seeking to lower their portfolios weighting to U.S. hurricane risk. As a result, this transaction is sure to be well received and could be oversubscribed.

Details of this transaction will be added to our Deal Directory and we’ll update you as it comes to market.

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