Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Swiss Re seeking dual-trigger contingent capital cover with new transaction


Financial market sources have told us that reinsurance firm Swiss Re is looking to secure a new source of contingent capital protection for its solvency and balance sheet with the launch and marketing of a new dual-trigger contingent capital securitized bond issuance.

According to sources, a contingent capital deal is currently being marketed to investors on behalf of Swiss Re. Through the issuance Swiss Re is looking for protection against a decline in its solvency levels, one of the triggers, or against a 1 in 200 year Atlantic hurricane event, the second trigger.

The notes being marketed are contingent write-off securities, we understand, meaning that if either of the trigger conditions are met investors will lose the full value of their investment principal. This trigger is unique as far as we know in the world of contingent capital or contingent convertibles (CoCo’s), as it includes an insurance event, making it very similar to a catastrophe bond. We’re told that the notes will have a 32 year tenure, with maturity due in 2045.

The dual-trigger is particularly interesting as it combines a solvency ratio trigger with a catastrophe event trigger and whichever is breached first will cause the principal of the notes to be written off. The first trigger is based on Swiss Re’s solvency as measured under the Swiss Solvency Test (SST). If Swiss Re’s solvency test measurement falls below 135% the contingent write-off notes would be deemed triggered and investors would lose their principal.

The second trigger is linked to a catastrophe event. It is designed to provide Swiss Re with contingent capital in the event of a 1 in 200 year Atlantic hurricane using an industry loss trigger. We’re told that the trigger for this may move based on an annual reset but for launch the 1 in 200 year hurricane event industry loss has been set at $134.3 billion of insured losses. We’re not sure what reporting agency the transaction will use.

It’s fascinating to see Swiss Re looking to secure tail-risk cover in this way. By protecting itself based on solvency ratio Swiss Re can secure a source of capital which would pay out after major catastrophe events, major financial shocks, pandemics and any other incident that could cause the firm a major decline in solvency.

By explicitly adding in the catastrophe event trigger to these notes Swiss Re is also ensuring that it has a source of protection against what is considered one of the insured loss events that could be most damaging to the industry. A major U.S. hurricane event creating over $134 billion of insurance industry losses would cause a significant shake-up in the insurance and reinsurance industry. These notes would provide Swiss Re with a contingent capital injection right at the time that it was most needed.

Having contingent capital could enable a reinsurer like Swiss Re to take advantage of opportunities after the largest of catastrophe events. After an event of that magnitude the reinsurance sector would find its capital drained and Swiss Re, with a transaction like this, would be able to replenish capital to take advantage of new opportunities perhaps more rapidly than others.

Contingent capital, in the form of write-off bonds such as these, is akin to a catastrophe bond in many ways, especially when it has a catastrophe event trigger like this deal. French reinsurer SCOR also has a contingent capital facility which is linked to its catastrophe loss experience.

Swiss Re issued $750m of contingent capital notes earlier this year which were also linked to the reinsurers solvency, as measured by the Swiss Solvency Test (SST). For that issuance, if the SST falls below 125% the principal would be written off in full and Swiss Re would receive the capital. This new contingent deal has a lower trigger, being triggered at an SST of 135% so before 125%, meaning that the solvency aspect of this new issuance would pay out before the $750m of notes it issued earlier this year.

According to Swiss Re’s website, its solvency ratio under the SST metric stood at 224% (245% for the entire Swiss Re Group), at the start of 2013. It had risen by 20% from 202% in the second half of 2012, but still stands a way below the 305% it hit in 2010. So, for the solvency ratio to drop down to 135% to affect these contingent notes you can see that a major event or financial shock would have to befall Swiss Re.

This transaction is another interesting example of a reinsurer tapping the capital markets for a source of protection. Being contingent in nature it as akin to a catastrophe bond, or industry loss based retrocessional protection. However as a contingent note issuance it may be marketed more broadly than a cat bond and perhaps access new sources of capital from different types of investors who would not look at a straight cat bond issuance.

For a reinsurer with the size and scale of Swiss Re, having diverse sources of capital behind you when major losses or other events shake your solvency is vital. By cleverly using a mix of contingent capital, debt issuance, catastrophe bonds and retrocession, Swiss Re is ensuring it has the financial backing to recover quickly from, and take advantage of any new opportunities, in the wake of major catastrophes and shocks to its solvency.

We understand that these contingent notes are being marketed by a number of major investment banks on behalf of Swiss Re.

At this time we don’t have any further details on the size, structure or coupon that these contingent notes may pay. We’ll update you as and when we hear anymore on this transaction.

Update: Details of the completion of this transaction are available here.

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