Swiss Re stop-loss deal a “win-win”, ILS notes oversubscribed: Rüede

Swiss Re’s landmark hybrid bank financing and insurance-linked securities (ILS) backed whole account stop-loss transaction was a “win-win” for the reinsurer and the investors backing the deal, with the ILS component of the arrangement oversubscribed due to its popularity, Philipp Rüede explained to Artemis.

The innovative $1.15 billion transaction saw Swiss Re leveraging ILS market infrastructure in a segregated account of its special purpose insurer Matterhorn Re Ltd. to access both traditional banking capital, through a $1 billion loan agreement with J.P. Morgan, and another $150 million of capacity from ILS investors through a privately placed catastrophe bond issuance.

Blending the two types of financing into one arrangement helps to maximise economies of scale and allows Swiss Re to capitalise on investor appetite, while offering something novel and attractive to investors at the same time.

Speaking with Artemis today, Philipp Rüede, Head of Swiss Re’s Alternative Capital Partners (ACP) unit, told us that looking to alternative capital sources is a natural fit for Swiss Re and also revealed this wasn’t the first arrangement of this kind for the reinsurance company.

Rüede said, “Swiss Re has a very long history of innovation in the ILS space going back to the 1990s, and therefore this was the natural place for us to return. We value the benefits of multi-year, fully-collateralised products, and the ILS market continues to play a key role in our risk transfer strategy.

“The transaction represents the culmination of a couple of years’ work, having placed two transactions on a similar basis in 2021 in order develop comfort on both sides with the structure, exposures and transaction mechanics. This third transaction is by far the largest iteration.”

We asked Rüede why this structure works for Swiss Re and what the rationale was for seeking out a group-wide whole account stop-loss cover.

“The whole account stop-loss transaction was developed in order to find a further intersect between, on the one hand, Alternative Capital Partner’s mission to enhance our already flexible capital structure in order to deliver value to shareholders and, on the other hand, investor appetite for more investment opportunities. As this structure picks up all tail risk from our underwriting, regardless of the line of business, geography etc., it provides very efficient relief against our underwriting capital.

“This enables a genuine win-win – investors secure attractive returns and Swiss Re secures very cost-efficient capital,” he explained.

The ILS component of the transaction, at $150 million of notes, was relatively small compared to the $1 billion loan from J.P. Morgan.

But ILS investors are showing an increasing appetite for this type of arrangement it seems.

Rüede told us, “The arrangement was very positively received by ILS investors. Whilst we marketed the junior insurance-linked notes portion with a select group of investors, it still ended up oversubscribed.”

Adding that, “We believe this type of transaction is still relatively new for ILS investors and therefore requires extensive due diligence for investors to get comfortable with the Swiss Re portfolio, our modelling and the drivers of risk. We would certainly welcome a bigger, more liquid market for this risk.”

In fact, this group wide, all lines of business stop-loss is seen as an area that the capital markets could develop an increasingly large appetite for, although it does require work to get to a level of scale, it seems.

But scale and sophistication is equally important on the sponsor side, as well as investors, in order to develop the understanding required to engage in transactions like this.

“Investors needed to be comfortable with Swiss Re’s portfolio (across all business units, P&C and L&H, all lines of business, all perils etc.), as well as how it may develop over time, in addition to our modelling of the exposures,” Rüede said.

He further explained that, “Investors in this transaction benefit from Swiss Re’s significant size and diversification, and its leadership in terms of governance, risk expertise and modelling.

“As a result, we envisage that only a limited subset of sponsors would be able to fulfil investors’ due diligence requirements in order to access ILS capacity in this form.”

Now on its third iteration of this stop-loss with capital market backing, Rüede believes they can be developed further and drive an efficient type of protection for Swiss Re’s entire business.

“As previously mentioned, this transaction follows two previous transactions closed in 2021. Currently, two such transactions are in-force,” he said. “We expect to continue exploring opportunities of this kind, including the potential for overlapping multi-year covers.

“It is testament of our strategy with the set-up of Alternative Capital Partners (ACP) in 2019 to consider all sources of capital holistically and to enhance our already flexible capital structure.”

Finally, Rüede noted that this new use of Matterhorn Re sits well alongside Swiss Re’s more traditional retrocessional reinsurance and catastrophe bonds.

“Different parts of our outwards retrocession portfolio do different jobs for us. Some allow for the management of very specific perils (for example, the usual Matterhorn cat bonds target U.S. hurricane exposure specifically) and others, such as this transaction, provide capital on a very broad basis at a very efficient cost.”

But, what’s important for the reinsurer as it grows into an attractive market is having robust protection and efficient capitalisation, which this stop-loss provides on both counts.

“What is key for us is having as broad a range of tools and market access points in our tool box as possible, and I think that at Swiss Re we do have access to a very wide range of tools and counterparties to manage the underwriting risks on our balance sheet.

“This is a source of pride to me but is also key strategically for the group,” Rüede closed.

Also read: Swiss Re gets $1.15bn stop-loss cover in hybrid cat bond / loan transaction.