Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Swiss Re in $190.7m Sector Re V reinsurance sidecar note issuance


Swiss Re recently sponsored the issuance of three series of notes, totaling $190.7m, using its collateralized reinsurance sidecar Sector Re V Ltd., providing the reinsurer with retrocessional and capital support, Artemis can report.

The Sector Re series of sidecars provides global reinsurance firm Swiss Re with a source of retrocessional capacity and a mechanism to tap into the capital markets and insurance-linked securities (ILS) investors.

That allows the reinsurer to make the most of the capital management flexibility that the sidecars afford, while also leveraging a source of efficient ILS capital which can effectively expand its own capacity, while providing protection, as well.

Through Sector Re V, Swiss Re enables investors to participate in a quota share of a portion of its business, believed to be 100% property catastrophe exposed.

Swiss Re recently used its latest collateralized sidecar vehicle, the Bermuda incorporated Sector Re V Ltd., to issue three tranches of notes to ILS and capital markets investors, demonstrating the reinsurers desire to maintain relationships with ILS investors.

The three tranches issued by Sector Re V total $190.7m, which is much smaller than the $500m plus that Sector Re used to issue a number of years ago. The three tranches are sized $60m, $72.3m and $58.4m.

The issuance date was the 30th April and the notes are understood to have a one-year risk period, as is typical of the Sector Re sidecar notes. The notes are structured as zero coupon bonds, with investors putting up 100% of the collateral and then sharing in the profits and losses of the underlying book of business at the end of the term.

So, compared to a more simple collateralized reinsurance structure, with Sector Re V losses could be considered to first erode any profits, then the premium associated with the reinsurance treaty, followed by which the investors collateral would be eroded next.

The reinsurer looks at the sidecar vehicles as a tool to support its cycle management, hence the Sector Re series has shrunk in recent years where the global catastrophe reinsurance loss experience has been more benign, meaning Swiss Re does not require as much external capital support.

Here Swiss Re differs to some other reinsurance firms, preferring to opt for managing the cycle actively by using less retrocession and aiming to keep as much of the risk premium for itself and its shareholders. It’s encouraging, however, for ILS investors to see that Swiss Re is keeping its relationship with them alive through the use of Sector Re V.

It’s also worth noting that sidecars like Sector Re V are less important from a retrocessional protection point of view, than from a cycle and capital management point of view for reinsurers like Swiss Re in this benign loss environment.

Reinsurers, and also ILS managers, are increasingly using retrocessional capacity currently as a portfolio management tool to shave off some of the peaks of their book, passing them on to capital with a lower cost, which helps them to manage their portfolios efficiently.

Artemis understands that the three tranches of notes issued by Sector Re V have been offered in a variety of formats, with some having both voting and non-voting share classes, while the smaller tranche also had a Regulation S class. The use of multiple share classes across each tranche helps to widen the set of investors the notes can be sold to.

The Sector Re sidecar note series have proved popular with mutual ILS fund managers, as they are a more structured way of accessing sidecar quota shares. A number of the investment managers running 1940’s Act funds, or in Europe UCITS strategies, are invested into these notes.

Swiss Re’s Sector Re V sidecar is one of the longest standing quota share vehicles in the market, along with Hannover Re’s K-Cessions vehicle. Investors will be encouraged to see it still in use, as if the market turns and losses increase we’d expect to see these vehicles become more important to reinsurers and grow in issuance again.

We’ve added this issuance from the Sector Re V reinsurance sidecar vehicle to our list of collateralized reinsurance sidecar transactions.

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