The latest catastrophe bond to be sponsored by reinsurance firm Swiss Re has been successfully upsized 7.5% at pricing, we can reveal, with the Matterhorn Re Ltd. (Series 2020-3) transaction now set to secure the company $215 million of U.S. named storm retrocession.
At the same time, the pricing for the now two-tranche issuance has moved towards the upper-end of the coupon guidance range.
But, by the reinsurance firm electing to issue one tranche of risk as zero-coupon notes with just a one-year tenure, it looks as if Swiss Re has managed to secure relatively attractive pricing for its newest catastrophe bond coverage anyway.
The fourth in the Matterhorn Re catastrophe bond series for Swiss Re, this new 2020-3 transaction was launched to the market earlier this month.
At launch, the deal was marketed as a $200 million cat bond deal, across three offered tranches of notes.
The Matterhorn 2020-3 issuance will provide Swiss Re with retrocessional reinsurance protection against named storms in the United States, with the coverage running all the way around the hurricane exposed coastline of the U.S., from Texas to the northeast.
At the deals launch, Matterhorn Re Ltd. was offering three tranches of notes, 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.
We understand now that one tranche was dropped, so the now $215 million of retrocessional reinsurance protection will be structured across just two tranches of notes that are being sold to investors.
The deal launched offering a Class A and Class B tranche that would 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 Class B and Class C tranches covered exactly the same layer of risk, with the differences being the tenure or duration of coverage and the fact that Class B was structured with a coupon payment, where as the Class C notes were structured as a zero-coupon offering.
It is the Class B notes that were dropped in the end, meaning that Swiss Re went for the single year of coverage, but structured as a zero-coupon issuance in the end, which we imagine was down to more competitive pricing being available for this tranche.
So here’s how the new Matterhorn Re 2020-3 catastrophe bond will now be issued.
The Series 2020-3 Class A tranche of notes that Matterhorn Re will issue are the least risky layer and provide two years of protection, now sized at $110 million after pricing, with the notes having an initial expected loss of 1.9%. On the pricing, these notes were offered to investors with price guidance in a range from 6.5% to 7.25% and have now been priced at 7%, according to our sources.
The Series 2020-3 Class C tranche of notes, which are higher risk and offer just a single year of coverage, with an initial expected loss of 4.65%, have priced at $105 million in size, we’re told. These notes were offered to investors with price guidance putting the notes at between 90.25% to 91.% of par value, which would be considered similar to a 9% to 9.75% coupon range, but at pricing we’re told this settled at 90.5% of par value, equivalent to 9.5%, so again towards the upper-end of guidance.
Clearly, with this latest cat bond issuance, Swiss Re was looking to test market appetite for retrocessional U.S. wind risks at this time.
It seems likely the feedback on the now dropped Class B tranche suggested it would have priced much higher, due to cat bond investors demands for increasing spreads. Hence the issuance gave Swiss Re the option to drop that tranche and still secure protection through the single-year, zero coupon layer.
Once this latest successful catastrophe bond issuance completes for Swiss Re, which is due in May, the reinsurance firm will have secured some $1.07 billion of retrocession from the capital markets since it launched the Matterhorn Re cat bond program last June.
After a multi-year hiatus from the catastrophe bond market, Swiss Re has come back in a meaningful way and we expect that this will continue, especially while the reinsurer is growing its catastrophe book and global retro capacity remains constricted.