Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Operational Re IV Ltd., $217.25m op-risk cat bond issued, likely for Credit Suisse


A fourth securitization of operational risks in a catastrophe bond format has now completed, Artemis can reveal, with $217.25 million of notes issued by Operational Re IV Ltd., assumed to be the latest example of a vehicle channelling a capital market investor source of operational risk insurance to investment banking giant Credit Suisse.

credit-suisse-logoThe first Operational Re catastrophe bond, or operational risk bond, issuance came to market in 2016 and was followed by new deals in 2018 and 2020.

In each case, investment bank Credit Suisse has been the beneficiary of the operational risk insurance coverage, with this provided via an operational risk insurance arrangement with insurer Zurich Insurance Co. Ltd.

Zurich is then the cedent to the Operational Re deal, entering into a reinsurance agreement with each of the Bermuda based special purpose vehicles.

In this case, we understand that Operational Re IV Ltd. has issued $217.25 million of notes across two tranches, split into two sections of 144A and RegS note issuances.

The operational risk insurance agreement is larger, we’re told, but this Operational Re IV deal allows the sources of capital to be diversified, with Zurich acting as an intermediary to pass through this portion of the operational risk coverage to Credit Suisse, backed by insurance-linked securities (ILS) and other types of institutional investors.

Initial discussions with sources suggest the mechanics and motivations for this new deal are the same as with the other Operational Re operational risk securitizations.

Credit Suisse started looking to the capital markets to source operational risk insurance, or reinsurance capacity via its Zurich insurance arrangement, back in 2016, with its first transaction a roughly $222 million Operational Re Ltd.

Credit Suisse followed this up with another transaction in 2018, when a CHF 146 million (roughly $222m) Operational Re II Ltd. transaction came to market

Most recently, a $461.22 million operational risk catastrophe bond, Operational Re III Ltd., was issued.

The structure and mechanics of the securitization are the same as with any catastrophe bond transaction, channelling capital markets backed reinsurance capacity to support the insurance needs of the investment bank sponsor, with Credit Suisse requiring a significant operational risk insurance policy given its scale and reach.

The coverage is very different to the typical cat bonds we feature, with the Operational Re bonds set to provide Credit Suisse with broad insurance protection against a range of operational risks on an aggregate basis, which we assume to be the same with this new Operational Re IV deal.

As with previous deals, this new Operational Re IV has been issued before the previous Operational Re III deal matures, with that one slated for maturity in January 2024.

The reason for this is, these Operational Re cat bonds enable Credit Suisse to reduce its risk weighted assets (RWA’s) and the protection these provide may wane as maturity nears, due to regulatory requirements. Hence overlapping them may be attractive from a regulatory capital standpoint.

The new $217.25 million of notes issued by Operational Re IV Ltd. are due for maturity as of January 2026, we’ve learned, so we should perhaps expect a future issuance in early 2025.

That said, this latest operational risk securitization is smaller than the last, which could be a function of catastrophe bond investor appetites being dented, also investor appetite may have been lower given some of the news cycle over issues Credit Suisse has faced in recent years, some of which have been seen as possible threats to the previous Operational Re cat bonds.

On the coverage these provide to Credit Suisse, presumably the beneficiary as the previous deals all benefited the bank, if the same as the previous three operational risk insurance-linked securities (ILS) deals, then Credit Suisse will benefit from a multi-year source of operational risk protection that includes coverage for a wide-range of exposures.

The first three operational risk cat bonds provided Credit Suisse with protection for exposures including: certain cyber risk exposures, such as IT system failure that causes business interruption; fraudulent behaviour both of external parties and employees of the investment bank; fiduciary issues; losses due to improper business practices or unauthorised activity; accounting errors; documentation errors; regulatory compliance issues; HR issues; discrimination in the workplace; or even personal injury.

As with the Operational Re III deal, we also understand that this Operational Re IV has terms in place to ensure that no single operational risk loss event, or defined category of loss according to the transaction, can trigger the operational risk ILS notes on its own.

We’re also told that there could be some additional exclusions in place for this new operational risk bond issuance, to ensure now exposure to events that have occurred in the past and perhaps also to exclude certain types of risk.

Given the transaction is aggregate in nature and has these terms and limits, it would ensure the deal acts as a second and subsequent loss event cat bond protection.

This Operational Re series of operational risk cat bonds provide the beneficiary Credit Suisse with a source of broad operational risk insurance coverage over three years, through the mechanism of an ILS or catastrophe bond issuance, enabling it and insurer Zurich to secure reinsurance support from capital markets investors and specialist ILS funds to support the arrangement.

The Operational Re IV Ltd. transaction featured the issuance of $217.25 million of notes across two tranches split into 144A and RegS sections, with the tranches corresponding to different layers of risk, as detailed below:

  • $22.75m of Class A, Rule 144A notes.
  • $54.5m of Class A, Regulation S notes.
  • $60m of Class B, Rule 144A notes.
  • $80m of Class B, Regulation S notes.

As with all of the Operational Re cat bonds, this Operational Re IV Ltd. deal is likely to only provide some of the reinsurance capital to support the new operational risk insurance arrangement between Zurich and beneficiary Credit Suisse, with the overall operational risk insurance policy perhaps far larger.

It’s also possible there could be other, more privately placed tranches of notes issued by Operational Re IV Ltd.

Presumably the risk modelling will have been undertaken by Milliman Inc., which had modelled the operational risks for the first three Operational Re transactions.

We’ll update you if any additional information comes to light.

You can read all about this new Operational Re IV Ltd. deal in our comprehensive catastrophe bond and related ILS Deal Directory.

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