The first catastrophe bond rating action caused by the Covid-19 coronavirus pandemic has now been resolved and reverted, as S&P Global Ratings affirmed Swiss Re’s late 2015 Vita Capital VI Limited (Series 2015-1) transaction and removed it from a negative watch.
The mortality catastrophe bond which featured a single $100 million tranche of Class A notes issued by Vita Capital VI Ltd., one of only a handful still in-force at the time of the pandemic, had its ‘BB (sf)’ rating placed on CreditWatch with negative implications by S&P at the beginning of April.
The Vita Capital VI excess or extreme mortality cat bond deal provides global reinsurance player Swiss Re with a fully collateralised and capital markets backed source of multi-year extreme mortality retrocession.
As a result, the Vita Capital VI mortality bonds are exposed to potential losses should deaths due to the coronavirus pandemic rise so significantly that they elevate the rate of mortality claims experienced by Swiss Re’s life reinsurance business.
With deaths from the pandemic rising back in early April, S&P placed the notes on watch as they are one of the riskiest layers in the market, so potential for exposure was deemed high enough to warrant additional oversight for the mortality cat bond deal.
But now, with the pandemic coming under some control and the death rate much slower, S&P has reversed its action.
“Since the peak at the beginning of April of daily deaths in the U.K. caused by COVID-19, mortality numbers have been decreasing, and have reached levels similar to those before the COVID-19 outbreak was declared a pandemic,” S&P explained.
“As a result, the uncertainty around the total number of deaths caused by the pandemic in the U.K. has decreased, and we have estimated the mortality index values to the end of 2020 based on actual deaths and various mortality rate assumptions for the remainder of the year. Based on our analysis, we believe that the probability of the notes to attach remains within the probability of attachment represented by the stress scenarios which we used as the basis for our initial ratings,” the rating agency continued.
The mortality cat bond notes can be triggered by any extreme mortality event that raises an age and gender weighted reference mortality index above predefined trigger points.
With the risk period set to end on December 31st 2020 and due to the fact mortality from the pandemic has affected older age groups the worst, and these only contribute a small proportion to the mortality index value calculation for the Vita Capital cat bond, and deaths stabilising in the UK, S&P feels the risk of this mortality cat bond being triggered has now greatly reduced.
As a result, S&P said, “Currently, we do not anticipate that Swiss Re will extend the notes’ maturity beyond their scheduled maturity date.”
Any extension would result in a coupon step-down and would mean S&P reduce the rating on the Vita Capital mortality bond notes to ‘D (sf)’.
But S&P explained that, “We consider this scenario to be remote.”
Of course, with second waves of the pandemic being seen in some regions of the world, including certain states of the U.S., there remains some uncertainty.
Should the UK experience a second wave and increased deaths from the pandemic it is possible these notes come back into focus. However, that does seem a relatively remote chance right now. But investors will be watching closely as to how the UK handles any emerging peaks in coronavirus cases over the remainder of the risk period for this mortality cat bond.