Global reinsurance firm Swiss Re has continued its trend of redeeming its series of Vita Capital mortality linked catastrophe bonds, with its $275m 2012 transaction Vita Capital V Ltd. called a year early and investors to be paid a premium of 1%.
Swiss Re has regularly redeemed its mortality catastrophe bonds issued as part of its Vita Capital series in recent years. This is now the fourth year running that a Vita deal has been redeemed early by the reinsurance firm.
The reason for the early redemption is that the indices underlying the transaction were calculated over a two-year risk measurement period, allowing for the deals to capture a pandemic event that spans across more than one year of the transaction term.
As a result, when these mortality cat bonds enter their final year and there has not been a major qualifying pandemic event, the effective cover provided by the Vita Capital V cat bond is considered somewhat diluted as there is only a single year remaining of the last risk period.
The majority of mortality cat bond transactions, such as the Vita Capital series of deals, 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.
Vita Capital V provided Swiss Re with a source of retrocessional mortality reinsurance protection, with one tranche covering excess mortality experience in Australia and Canada and the other also providing cover for the U.S.
The official redemption date will be on the next payment date of 15th April 2016, for the $125m Class D-1 and $150m Class E-1 notes issued by Vita Capital V. Swiss Re will pay a 1% call premium for redeeming the notes, effectively paying 101 cents per dollar to investors for the right to redeem the Vita Capital V notes.
Going forwards, Swiss Re has one remaining mortality cat bond deal still outstanding, the $100m Vita Capital VI Limited (Series 2015-1) mortality cat bond. This transaction uses a trigger mechanism that is calculated on an annual basis as well as a drop-down feature for the last year of the term, which we’re told makes the likelihood of redemption in the final year lower.
We understand that the EUR285m Benu Capital Limited mortality bond, which benefits cedant AXA Global Life but was structured by Swiss Re, also features an annual trigger and drop-down so again may not be redeemed in the same way that all the Vita’s have been to date.
That means this redemption of Vita Capital V could be the last time we see a mortality catastrophe bond called early, for these reasons, as the structuring of these ILS instruments has been adjusted to provide measurement across each annual risk period.