Global reinsurance firm Swiss Re looks set for another good result from its latest visit to the catastrophe bond market, as its new Matterhorn Re Ltd. (Series 2020-5) transaction has now doubled in size, while at the same time its coupon pricing has fallen to below the guidance range.
The Matterhorn Re 2020-5 transaction is Swiss Re’s fifth catastrophe bond of 2020 and its sixth in total under the Matterhorn Re program, as it brings the capital markets and insurance-linked securities (ILS) capital deeply into its retrocessional reinsurance program arrangements.
As Swiss Re has expanded its appetite for property catastrophe risks, the cat bond market and cat bond investors have been playing an increasing role in supporting this expansion, allowing the global reinsurer to manage its probable maximum loss (PML) exposures.
As we were first to report last week, Swiss Re returned to the market with its latest cat bond, seeking at least $150 million of retrocessional reinsurance protection through this Matterhorn Re 2020-5 issuance.
The catastrophe bond will provide Swiss Re with collateralised reinsurance protection against U.S. named storm losses, from two tranches of notes across two years and on a per-occurrence basis, using weighted industry loss index triggers.
Now, we’re told the reception from investors to Swiss Re’s latest catastrophe bond has been strong, resulting in the deal doubling in size to $300 million.
At the same time, the pricing for each of the two tranches of notes being issued has now been fixed at a level below the initial guidance range, indicating high investor appetite for this deal.
As it now stands, we’re told that Matterhorn Re Ltd. will issue a $150 million Series 2020-5 Class A tranche of notes to cover northeast U.S. named storm risks, this tranche having doubled from the $75 million it began marketing at. These notes have an initial expected loss of 2.4% and were first offered to investors with coupon price guidance in a range from 4.5% to 5%, but we’re now told the pricing has been fixed at 4.25%, so below initial guidance.
The second tranche of notes has also doubled from its launch $75 million to become a $150 million tranche of Series 2020-5 Class B notes. This layer is slightly riskier due to having a broader coverage area that includes the east coast, Florida, certain Gulf Coast states and also Puerto Rico. These notes have an initial expected loss of 2.4% and were first offered to investors with price guidance in a range from 5.75% to 6.25%, but this has now fallen and been fixed at 5.5%, so again below the initial guidance.
The increase in size and reduction in pricing, a roughly 11% decline in pricing from the mid-point of initial guidance for the Class A notes and 12.5% for the Class B’s, both suggest rising investor demand for new catastrophe bond issues and that spreads are falling as a result.
Part of this will be a function of some cat bond fund managers having been able to secure new inflows of capital that they will need to deploy. But it’s also a function of the rising levels of competition in property catastrophe markets as the renewals approach, plus the fact the volatility from the pandemic that elevated spread expectations for many investors are receding somewhat.
It’s going to be interesting to see how this dynamic, of falling cat bond spreads at issuance, reads across to the January reinsurance renewals, as it does perhaps suggest rate increases hoped for may not be as significant as many would like to see.
For Swiss Re though, as sponsor and beneficiary of the reinsurance protection this new cat bond provides, strong execution is again the order of the day.
Once this transaction settles, which we understand to be in just over a week’s time, Swiss Re will have $1.61 billion of Matterhorn Re program catastrophe bond protection outstanding, plus another $100 million of mortality cat bond cover from its last Vita Capital transaction, making it one of the largest sponsors of cat bond structures in the market.
Swiss Re launched the Matterhorn Re catastrophe bond program at the mid-point of 2019 and since then has sponsored $1.31 billion of these bonds.
Also of note, is the fact this is Swiss Re’s fifth Matterhorn Re cat bond of 2020, making the reinsurer the first sponsor of catastrophe bonds to have five issuances in a single calendar year, something never seen before in the years that we’ve been tracking the catastrophe bond market’s development through our Deal Directory.
It’s clear catastrophe bonds will remain a core piece of Swiss Re’s retrocession and we expect to see the reinsurer back in the market in early 2021.
You can read all about this this Matterhorn Re Ltd. (Series 2020-5) catastrophe bond from Swiss Re and every cat bond Swiss Re has ever sponsored in our comprehensive cat bond and related ILS Deal Directory.