Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

No principal loss to Vega Capital Ltd. 2010-1 catastrophe bond after Japan earthquakes


The Vega Capital Ltd. 2010-1 Class C notes were one of the last tranches of catastrophe bonds which were still considered at risk due to the 11th March earthquake in Japan. Ratings agency Moody’s had placed the $63.9m of cat bond notes issued by Vega Capital in December 2010 on review in March as they were potentially considered triggered by the massive magnitude 9.0 earthquake off the coast of Japan.

In fact, it transpires that these notes issued by Vega Capital were also considered at risk for the 8th April magnitude 7.9 aftershock which struck Japan, which goes some way to explaining the slow reporting time from the calculation agent as they had a second event index to calculate.

Vega Capital 2010-1 was issued on behalf of Swiss Re to provide them with protection against a range of perils with cover against qualifying earthquakes in Japan as well as certain European windstorms, Japan typhoons, California earthquakes and North Atlantic hurricanes.

The Class C notes were placed on review as Moody’s considered it likely that the earthquakes would have triggered the transaction which would have activated the tranche of notes for losses from second and subsequent events. The second aftershock event could have reduced the tranches protection further. Vega Capital uses parametric triggers using data from the Japan Meteorological Agency. The risk modeller creates an index using JMA data against which events are measured to determine if they were severe enough to cause any losses and to measure the amount of losses experienced.

Moody’s has now received a report containing the final loss determination from the calculation agent for the transaction. The 11th March Tohoku earthquake resulted in an Index Value of 285.1 and an Event Percentage of 42.48%. The 7.9 aftershock resulted in an Index Value of 8.4 and an Event Percentage of 0%. Moody’s says neither event result in Principal Loss Amounts to the notes.

Vega Capital is structured so that it uses a reserve account to build up an extra layer of protection for investors. It was thought in March that the reserve account payments may not have been sufficient to soak up any losses from the Tohoku earthquake which could have left the tranche exposed to loss. However, Moody’s calculated that based on the index values above the reserve account loss amount from the events is $15.93m but the current balance of the reserve account is sufficient at $19.771m. That means that the reserve account loss amount will be subtracted from the reserve account balance leaving a balance of $3.87m. So, while Vega Capital as seen a small loss of just under $16m, that will be paid out of the reserve account and not affect the investors principal.

Moody’s notes that this Class C tranche is also afforded protection by an unrated $42.6m Class D tranche of notes. Moody’s concludes that ‘because of the size of the remaining first loss layer and that the loss trigger mechanism of the transaction limits the annual losses attributable to each separate peril, one or more covered events are required for the Class C Notes to experience any losses’. As a result the notes have been removed from review and return to their original rating of ‘Ba3’.

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