Reinsurance firm Swiss Re has successfully completed its novel dual-trigger contingent capital security transaction, having sold CHF175m Swiss francs of notes linked to either the occurrence of a major decline in its solvency level or a major natural catastrophe loss.
We wrote about this interesting transaction at the start of last week when the offering launched to a broad community of investors. The unique deal is the first we’ve seen to include two trigger conditions which if either occur could cause the full principal of the notes to be written off.
As such this is better thought of as a contingent write-off deal, rather than contingent convertible (CoCo). Although it is being called a catastrophe contingent convertible by some.
The two triggers in the transaction provide Swiss Re with protection through a source of capital secured by the sale of securities notes to investors against either of a decline in the reinsurers solvency ratio or the occurrence of a major catastrophe loss event.
The first trigger is based on Swiss Re’s solvency as measured under the Swiss Solvency Test (SST). If Swiss Re’s solvency test measurement falls below 135% at any time during the term of the notes, the contingent write-off notes would be deemed triggered and investors would lose their principal. The second trigger is linked to the catastrophe event. It is designed to provide Swiss Re with contingent capital in the event of a 1 in 200 year Atlantic hurricane using an industry loss trigger. We’re told that the trigger for this may move based on an annual reset but for launch the 1 in 200 year hurricane event industry loss has been set at $134.3 billion of insured losses.
The deal was marketed very widely, contingent transactions tend to have broader appeal than pure catastrophe bonds meaning that Swiss Re could tap into a much broader investor market and further diversify its sources of risk capital with this deal.
A bond market analyst source told us that the transaction priced on Monday at 7.5%, for a 32 year maturity note with the option for the issuer to call the notes at par in year seven of the deal and thereafter. CHF175m (Swiss francs) of notes were sold to investors.
The pricing on the transaction settled around the middle of the launch range, we’re told. It began marketing with a range of 7.25-7.75%, which was refined to a CHF100m offering at 7.325-7.625%, finally settling at CHF175m at 7.5%.
The range of investors who participated in this transaction is particularly interesting. We understand that insurance-linked securities investors took just 2% of the deal, private banks and high-net worth investors took 48%, hedge funds 23%, family offices 15% and other institutional investors and pension funds took 12%. In terms of geography, Swiss based accounts took 96% of the notes while non-Swiss only accounted for 4%.
We understand the reason for the high Swiss investor base in this contingent deal was that it was offered domestically in Switzerland with Swiss withholding tax. It has been reported elsewhere that Swiss Re has seen the appetite of investors for the transaction and may seek to replicate it elsewhere around the world in other markets where it can tap into more sources of capital.
So with this contingent note offering Swiss Re has secured itself a healthy CHF175m (around $193m) source of risk capital which it will receive in full should either of the trigger events, solvency ratio decline or the 1-in-200 year hurricane, occur. With investors receiving 7.5% interest for the term of the notes they make a very decent investment return over the duration and it’s easy to see why these have been well received.
Contingent capital transactions have long been used to protect firms against financial or economic catastrophe. Now they are beginning to be used to protect against solvency shocks caused by natural catastrophes and so the worlds of catastrophe bonds or ILS and contingent capital collide.
We do expect to see more of these types of transactions, especially as insurers and reinsurers realise the much larger investor audience they can access through them. It will be interesting to see whether Swiss Re do look to repeat this deal in other locations.