Reinsurer Swiss Re is to utilise an early redemption clause on two more tranches of mortality catastrophe bond notes issued through Vita Capital IV Ltd. This will take the number of tranches redeemed to four out of the six issued under this mortality cat bond program.
Two tranches of mortality-linked notes were redeemed a year ago, as Swiss Re took advantage of a clause written into all the Vita Capital IV notes allowing it to redeem the notes earlier than the scheduled maturity, but only within the last year of the deal.
In order to exercise the early redemption feature Swiss Re has to pay a ‘call premium’ to investors in the notes. Last time we understood that the investors were paid 101 cents per dollar for the redemption of the $125m Series 1 and 2 Vita Capital IV notes, so we assume a similar arrangement in this years redemption.
The two tranches being redeemed are the $100m Series 3 Class E and $75m Series 4 Class E tranches issued by Vita Capital IV Ltd. in October 2010. Scheduled maturity for these tranches was the 15th January 2015, and we understand that the scheduled redemption date for both tranches of notes will be on the 15th January 2014.
Swiss Re constantly monitors the effectiveness of its catastrophe bond and insurance-linked security (ILS) protections, particularly the effectiveness of the cover afforded by a cat bond or ILS relative to the expected maturity of the transaction.
We understand that most mortality cat bond transactions have an index trigger measuring mortality rates based on age and gender weighted population designed to match the underlying portfolio of risk. Such indices are typically calculated over two-year risk measurement periods to allow the deals to capture a pandemic which spans two years.
For this reason, when the transactions enter their final year with no major qualifying pandemic events having occurred, the effective cover provided by a cat bond maybe somewhat diluted, as there is only a single year remaining of the last risk period.
Optional redemptions in the final year are therefore a common feature in mortality bonds.
There are two remaining tranches of Vita Capital IV left after these are redeemed, the $100m Series V Class D and $80m Series 6 Class E notes, both issued in August 2011. We may well see these two tranches redeemed in a years time as well if there are no pandemic events which threaten the Vita Capital IV transaction.