Reinsurer Swiss Re has issued a press release discussing the completion of the Combine Re Ltd. catastrophe bond which priced, was rated and listed in the Caymans recently. Combine Re Ltd. is cited as a first for the market as it combines two reinsureds parties risks into a single cat bond transaction. Of as much interest to the market though was the fact that Combine Re Ltd. featured a tranche of investment grade cat bond notes, something not in any cat bond deal seen for a number of years.
Swiss Re Capital Markets structured the deal and also acted as a bookrunner on the Combine Re transaction. The deal involved the securitization of $200m in multi-peril annual aggregate indemnity protection via Combine Re Ltd., a newly-established Cayman Islands based catastrophe bond vehicle. Swiss Re hail this as the first catastrophe bond combining the risk of two reinsured parties into a single transaction which they say marks an important innovation in better enabling insurers to access the catastrophe bond market.
How groundbreaking the two underlying sponsors actually is has been debated, as some have pointed out transactions such as the Johnston Re cat bonds (here and here) which benefit the NCJUA and NCIUA, and so have two underlying sponsors. Whatever your opinion though, this is a single cat bond deal providing capital market financing for reinsurance for two insurers and so could help to make the cat bond market easier for insurers to gain access to.
The transaction is structured so that Swiss Re has entered into a retrocession transaction with Combine Re to receive payments following the aggregation of insurance losses of the two reinsured parties, COUNTRY Mutual Insurance Company North Carolina Farm Bureau Mutual Insurance Company, Inc. Combine Re then sells cat bond notes to transfer that risk to investors. Using this structure Swiss Re has securitized $200m of risk based on the aggregate ultimate net loss of the two reinsured parties from the U.S. perils of severe thunderstorm, hurricane, earthquake and winter storm.
“This transaction is a confirmation of our client-centered approach to providing innovative and efficient risk-transfer solutions;” said Markus Schmutz, managing director, Swiss Re Capital Markets.
The risk-return profile of the cat bond is also something that is worth a mention as the transaction which is split into three tranches has one which is investment grade, one which is sub-investment grade and one which is unrated. This is unusual and will have appealed to investors. We’re actually surprised the investment grade wasn’t more in demand and upsized, but perhaps that wasn’t necessary to achieve the level of cover Swiss Re and their reinsured parties required.
“The Combine Re transaction further develops the cat bond market by providing investors with a true range of risk and return profiles, while providing both COUNTRY Mutual and the North Carolina Farm Bureau with significant annual aggregate protection, designed to respond during years of sustained multi-peril insurance losses;” said Schmutz. “Catastrophe bonds continue to be a cornerstone of Swiss Re’s own risk management strategy and Swiss Re’s extensive ILS capabilities have harnessed the benefits for both COUNTRY Mutual and the North Carolina Farm Bureau.”