Swiss Re Insurance-Linked Fund Management

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Swiss Re continues Vita Capital IV mortality cat bond redemptions


Global reinsurance firm Swiss Re is continuing its habit of redeeming mortality catastrophe bond notes the reinsurer had issued through its Vita Capital IV Ltd. vehicle, with two more tranches redeemed recently.

In the latest redemption, the third year running that Swiss Re has opted to redeem some of the Vita Capital IV notes, a $100m Series V Class D tranche and an $80m Series VI Class E tranche of notes have been redeemed, one year before their expected maturity.

The first $100m of Series V Class D notes provide cover for catastrophic mortality risks in Canada and Germany and the second $80m of Series VI Class E notes cover 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).

Investors in the notes were at risk of an increase in age and gender-weighted mortality rates that exceed a specified percentage of a predefined index (the mortality index value; MIV) in the covered areas.

The Vita Capital IV mortality catastrophe bond features a redemption clause that allows Swiss Re to redeem the notes earlier than the scheduled maturity, but only within the last year of the deal. On the previous occasions that Swiss Re has elected to redeem Vita Capital IV notes early it has paid investors a ‘call premium’, which we understand on the previous occasions involved paying 101 cents per dollar for the notes.

We don’t know what has been paid to investors for the redemption this time, but it may well have been above 101 as the Class D notes were priced for bids of around 100.3 in December and the Class E for bids around 101.2, according to cat bond trading broker pricing sheets.

The two tranches of notes were scheduled to mature on the 15th January 2016, suggesting that again Swiss Re has had to wait until a year before maturity to be able to redeem the notes.

These are the last two tranches of the Vita Capital IV Ltd. transaction to be redeemed, the rest having been redeemed previously in early 2013 and again in early 2014.

As we wrote previously, Swiss Re told us that it constantly monitors the effectiveness of its in-force catastrophe bond and insurance-linked securities (ILS), particularly the effectiveness of the cover afforded by a transaction relative to the expected maturity.

As the majority of mortality cat bond transactions utilise an index trigger, typically based on mortality rates of an age and gender weighted population, which are designed to match the underlying portfolio of risk that is being ceded. These indices are typically calculated over a two-year risk measurement period, which allows for the deals to capture a pandemic event that spans across two years of the transaction term.

As a result, when these mortality cat bonds enter their final year and there has not been any major qualifying pandemic events, the effective cover provided by the cat bond is considered somewhat diluted as there is only a single year remaining of the last risk period. These optional redemptions in the final year are therefore a common feature in mortality bonds like the Vita Capital series from Swiss Re.

With no Vita Capital IV tranches of notes left in-force, only Swiss Re’s Vita Capital V Ltd. transaction, which was issued in July 2012 remains. The $275m of notes in two tranches issued by Vita Capital V mature in January 2017, which means we could see those notes redeemed as well early next year.

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