One of the world’s largest reinsurance companies Swiss Re is returning to the capital markets with its first excess mortality catastrophe bond transaction since 2012, seeking at least $100 million of retrocession through a Vita Capital VI Limited (Series 2015-1) issuance.
This is the first Vita Capital mortality cat bond since Vita Capital V Ltd. in June 2012. Swiss Re also sponsored Mythen Re Ltd. (Series 2012-2), which featured UK extreme mortality risk in November 2012 as well. In fact this Vita Capital VI mortality cat bond is the first deal Swiss Re has sponsored since Mythen Re Ltd. (Series 2013-1) in July 2013, so it’s encouraging to see the firm back.
With this transaction, Artemis understands that Swiss Re is seeking at least $100 million of excess (or extreme) mortality retrocessional reinsurance protection through the issuance of a single tranche of Series 2015-1 Class A notes by recently established Cayman Islands special purpose vehicle Vita Capital VI Limited.
The notes issued by Vita Capital VI will be exposed to extreme mortality events in Australia, Canada and the UK over a 5 year term from January 2016. The notes can be triggered by an extreme mortality event that raises a mortality index above predefined trigger points. The mortality index will be weighted by age and gender.
Investors in these notes will be at risk of an increase in age and gender-weighted mortality rates exceeding a specified percentage of the predefined index in the covered areas.
In order for the mortality index triggers for each covered area to be breached, the index must breach a trigger level of 120% for Australia, 115% for Canada and 120% for the UK, we’re told.
In terms of probabilities, the Vita Capital VI 2015-1 notes have a probability of attachment of 1.24%, a probability of exhaustion of 0.81% and an expected loss of 0.99%.
The notes are being offered to investors with coupon price guidance of 2.75% to 3.25%, which even at the lower end of guidance would equate to a multiple of at least 2.78 times the EL.
We understand that the notes feature a dropdown facility for year five, which would reduce the mortality index trigger level. This may be a way to make the coverage more valuable in the last year of its term. Swiss Re has redeemed previous Vita mortality cat bonds before the end of their lives due to the fact that pandemic coverage becomes reduced at that stage (more on this here).
We understand that these Vita Capital VI mortality insurance-linked notes will cover all mortality events, including deaths caused by terrorism events. However, the main threats and contributors to expected loss to such mortality cat bond notes remains pandemic diseases and outbreaks of severe influenza.
At one point back in July 2012 after the issuance of Vita Capital V, Swiss Re had a significant $2.25 billion of outstanding extreme mortality protection through the Vita series of ILS transactions. Today, the amount of pure mortality risk in the outstanding cat bond and ILS market has shrunk to around $934 million.
Many life insurers and reinsurers have taken to acquiring books of longevity exposure to hedge their mortality risks, hence using less capacity for pure mortality risk transfer. Others have turned to traditional reinsurance capacity due to the sometimes cheaper cost.
However mortality risk transfer is expected to become more of a concern for life insurers and reinsurers under Solvency II, with access to fully collateralized ILS capacity beneficial on a capital efficiency basis, so we could see more such transactions in the future.
So ILS investors will be pleased to see a new extreme (or excess) mortality catastrophe bond deal come to market and keen to access the diversification it can offer. The fact that it is Swiss Re will also be welcomed, as the reinsurance firm has been notably absent from ILS issuance for a while now.
Swiss Re Capital Markets are structuring agent and bookrunner for the Vita Capital VI 2015-1 deal and RMS are providing risk modelling services, we understand.
We’ll update you as the Vita Capital VI Limited (Series 2015-1) mortality catastrophe bond comes to market. You can read about this and every other Swiss Re Vita issuance in the Artemis Deal Directory.