The latest catastrophe bond from global reinsurance firm Swiss Re has been well-received by the ILS investor base, helping the Matterhorn Re Ltd. (Series 2020-1) cat bond double in size while marketing to become a $350 million issuance.
The new cat bond for 2020 will be the largest from Swiss Re under its new special purpose insurer Matterhorn Re Ltd. and is actually the largest cat bond issuance to which the reinsurer is direct beneficiary of the protection since a Mythen Re deal in 2012.
Swiss Re returned to the catastrophe bond market in December looking to sponsor its second Matterhorn Re catastrophe bond in six months, seeking at least $175 million of retrocessional reinsurance protection against U.S. named storm losses.
The twin tranche transaction sees Swiss Re continuing to accelerate its use of the capital markets as a source of capacity and retrocession, in support of its continued underwriting expansion into global peak property catastrophe risks.
The deal launched targeting $175 million of coverage across the two tranches of Series 2020-1 notes that are being issued.
But we now understand from market sources that high levels of investor demand have helped this cat bond to upsize, with the transaction doubling and now looking set to complete offering Swiss Re $350 million of retro protection.
The coverage Swiss Re will benefit from with the Matterhorn Re 2020-1 cat bond will be for certain U.S. named storm losses, on a weighted industry loss and per-occurrence basis, across two full wind seasons or approximately two years.
We now understand that the coverage is slightly different across the two tranches of notes as well, in terms of geography.
The Class A tranche of Matterhorn Re 2020 notes covers Swiss Re against named storm losses across much of the U.S. coastline from Texas to Maine, while the Class B tranche is more limited in coverage being northeast only, or states from from Virginia to Maine.
The first tranche of Series 2020-1 Class A notes launched with a target of $100 million in size and with these notes having an initial expected loss of 2.82% they were offered to investors with coupon guidance in a range from 5.5% to 6%.
Now, we understand, the Class A tranche has increased in size to $175 million, while at the same time the coupon pricing has now been fixed at 5.25%, so below the bottom end of initial guidance (an almost 9% fall in pricing from the original mid-point of guidance).
The second tranche of Series 2020-1 Class B notes launched with a target for $75 million of coverage and an initial expected loss of 3.6% this slightly riskier layer of notes were offered to cat bond investors with coupon price guidance of 8% to 8.75%.
Now, we’re told this tranche has more than doubled in size to also reach $175 million and the pricing has again fallen to below the initial range, this time quite significantly to a coupon of 7.5% (a more than 10% fall in pricing from the original mid-point of guidance).
So for Swiss Re this looks like a very successful catastrophe bond issuance with attractive pricing and execution, as the deal size has doubled while pricing of the Class A and B tranches of notes have fallen by 9% and 10% respectively.
Meaning that this cat bond transaction likely represents a very efficient source of retrocessional reinsurance capital for Swiss Re.
Alongside the recent expansion of the reinsurers Sector Re sidecar, the increased use of the catastrophe bond market represents another way that Swiss Re is pulling more third-party capital into its business model, at a time when it is expanding its front-end underwriting appetite for catastrophe risks.
This transaction marks a further expansion of Swiss Re’s capital markets ambitions and can help the reinsurer better control the volatility it may face in terms of losses from hurricane exposed regions of the U.S. when major storms occur.
It’s encouraging to see the catastrophe bond market beginning to play an increasingly important role for one of the world’s largest reinsurers.