Having completed another collateralised stop-loss transaction, to bring more efficient capital into its business, Swiss Re may be nearing the limits of its appetite for this type of arrangement, while the sophistication required means not every reinsurer could replicate this deal.
Artemis spoke with Philipp Rüede, Head of Swiss Re Alternative Capital Partners to learn more about the latest collateralised stop-loss deal and the motives one of the largest global reinsurance firms has for accessing capital in this form.
Yesterday, the reinsurer announced it has secured $700 million of alternative capital protection for severe underwriting losses, through another collateralised stop-loss arrangement using its Matterhorn Re SPI, with the funding led by investment bank J.P. Morgan.
J.P. Morgan provided the US $700 million in financing via a senior loan, that runs through a newly established Matterhorn Re segregated account named Argon II.
While not an insurance-linked securities (ILS) arrangement, these transactions represent an efficient way to leverage investor appetite for insurance and reinsurance-linked returns, enabling Swiss Re to benefit from a partnership with investors to boost its own capital.
Rüede explained, “Within Alternative Capital Partners (ACP) we have the aim of accessing different sources of capital with the ultimate aim of lowering Swiss Re’s cost of equity.
“In this case, the deal represents a cost-effective form of capital for Swiss Re. This is a particularly attractive and efficient way to fund growth in what we see as an attractive and hardening reinsurance market.”
It’s not just positive for Swiss Re though, as this arrangement represents a unique way for investors to access the underwriting performance of one of the largest and most diversified balance-sheets in the insurance and reinsurance markets.
At the same time, the collateralised stop-loss is structured to be appealing in a similar way to an insurance-linked security (ILS), by delivering returns linked to the underlying performance of insurance risk written by the sponsor.
“We believe the approach taken offers an attractive proposition for investors,” Rüede told Artemis.
Adding that, “Through the deal, investors are exposed to the underwriting risks on Swiss Re’s balance sheet and not any financial markets risk from the asset side of the balance sheet.
“Accordingly, the transaction can provide diversification and relatively attractive returns as part of a credit portfolio via loan format.”
However, transactions of this kind are particularly complex, requiring require sophistication on both the investor and sponsor side, and not a simple task to complete.
“In relation to the market, these types of transaction require investors to undertake quite extensive due diligence to get comfortable on the whole Swiss Re portfolio (across all lines of business, all perils etc), the drivers of risk and our modelling of these,” Rüede stated.
“Investors in this transaction benefit from Swiss Re’s significant size and diversification, and its leadership in terms of governance, risk expertise and modelling,” he further explained.
Adding that, “Due to the challenges mentioned earlier, we also envisage that only a limited subset of sponsors would be able to fulfil investors’ due diligence requirements in order to access capital in this form.”
Finally, we asked Rüede whether these innovative capital structures are one that could be tapped repeatedly to bring more efficient capital markets funding into Swiss Re’s business.
But there are limits to even Swiss Re’s appetite and ability to leverage capital in this form and Rüede told us, “From a Swiss Re perspective, however, our needs are nearly saturated for such a remote structure and therefore we do not plan to issue much more going forward.”
Read all about Swiss Re’s new stop-loss transaction in our article on yesterday’s announcement.
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