Swiss Re Insurance-Linked Fund Management

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Swiss Re redeems one tranche of Crystal Credit, default still likely on others


Swiss Re have redeemed the €108m Class A tranche of Crystal Credit Ltd., their beleaguered catastrophe bond type deal which securitized payments related to an indemnity-based excess-of-loss retrocession agreement between Swiss Re and Crystal Credit. The transaction is a cat bond type deal which covered a defined portfolio of credit reinsurance treaties for Swiss Re.

We’ve been expecting default for Crystal Credit for some time with repeated rating downgrades from the ratings agencies and mounting losses threatening the Class B and C notes. All our previous coverage of Crystal Credit can be found here.

Standard & Poor’s says that claim activity for the first quarter of 2011 has been in line with expectations. They see this as further evidence to reinforce their belief that the Class B notes are likely to default at or before maturity; the Class C notes have already defaulted.

S&P have been receiving information from Swiss Re on the portfolio of reinsurance treaties which are at risk. As a result of studying this information S&P says that they ‘still believe that losses on the class B & C notes are very likely to be higher than the attachment points when the notes mature, and that principal will most likely not be fully repaid at the notes’ legal maturity’.

S&P provide the following information regarding each tranche of Crystal Credit:

For the class C notes to incur a loss, aggregate ceded losses must reach €666 million at maturity. Swiss Re’s last investor report was based on information as of Feb. 22, 2011. It listed aggregate paid losses to Crystal Credit of €720 million and aggregate reported losses of €778 million.

For the class B notes to incur a loss, aggregate ceded losses must reach €729 million at maturity. Using our internal projections, we estimate that paid aggregate losses will reach this level before the end of 2011.

For the class A notes to incur a loss, aggregate ceded losses must reach €810 million at maturity. We estimate that aggregate losses are highly unlikely to reach this level, which is consistent with Swiss Re’s decision to redeem these notes.

The final proof of losses will be delivered by Swiss Re in April 2012 and only at that point will they be able to retrieve loss payments from Crystal Credit Ltd. We’ll continue to update you as more information comes to light.

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