Global reinsurance company Swiss Re is back with what will be its fourth catastrophe bond in less than one year, as it seeks another $200 million or greater of U.S. named storm retrocessional support from the capital markets with Matterhorn Re Ltd. (Series 2020-3).
Having been away from the catastrophe bond market as a sponsor for a number of years (since 2013 for nat cat risks), Swiss Re returned in June 2019 and since then has secured some $855 million of retrocessional reinsurance protection from catastrophe bond investors.
Swiss Re launched its new issuance vehicle Matterhorn Re Ltd. last year, to tap the capital markets to support its retrocessional reinsurance needs.
The company is now seeking to take the amount of capacity secured from the capital markets past the billion dollar mark, as a new Matterhorn Re Ltd. catastrophe bond has been launched to investors, sources told us.
For this Matterhorn Re Ltd. Series 2020-3 cat bond transaction, we’re told Swiss Re is seeking $200 million or more of retrocessional reinsurance protection against named storms in the United States.
We understand the named storm coverage will run all the way around the hurricane exposed coastline of the U.S., from Texas to the northeast.
Matterhorn Re Ltd. will issued three tranches of notes to support this arrangement, we’re told, with all exposed to U.S. named storms on an industry loss index and per-occurrence basis. PCS will be the industry loss data reporting agent.
Targeting $200 million for the issuance, we don’t understand how that will break down across tranches at the moment, but the three tranches will be sold to investors and the proceeds used to collateralise underlying retrocessional reinsurance agreements between Matterhorn Re and Swiss Re, we understand.
We’re told that of the three tranches of notes, Class A and Class B will provide Swiss Re with retro reinsurance protection across two hurricane seasons, with maturity slated for the end of 2021, while the Class C tranche covers just one wind season, to the end of 2020.
The Series 2020-3 Class A tranche of notes that Matterhorn Re will issue are the least risky layer, having an initial expected loss of 1.9%, our sources said.
The Class A tranche of notes are being offered to cat bond investors with price guidance in a range from 6.5% to 7.25%, our sources explained.
The Class B and C tranches are higher risk but are set to cover the same risk layer, as both will have an expected loss of 4.65%, we understand.
However there is a pricing difference, as the Class B tranche of notes that is set to cover Swiss Re for two hurricane seasons is structured with an interest coupon and price guidance of 11.5% to 12.25%.
But, we’re told the Class C tranche that provides coverage for just one wind season, is being issued at a discount to par, so akin to a zero coupon notes arrangement. The pricing guidance puts the notes at between 90.25% to 91.% of par value, which would be considered similar to a 9% to 9.75% coupon range for them.
It’s worth comparing that zero coupon layer to Swiss Re’s first Matterhorn Re deal back from June/July last year, which had a one-year modelled expected loss of 1.92% and eventually priced at 91.5% of par value, so a coupon equivalent of 8.5% over the term of the cat bond deal. However, that deal only provided U.S. northeast wind coverage, so not the entire hurricane exposed coastal region of the country.
It’s good to see Swiss Re back in the catastrophe bond market again, as it continues to place an increasing emphasis on the importance of the capital markets in its retrocession program and the usefulness of the catastrophe bond as a retro structure.
It will be interesting to see how the investor market responds to this transaction.