Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Vega Capital 2010-1 cat bond upgraded by Moody’s on improving outlook


Swiss Re’s 2010 catastrophe bond deal Vega Capital Ltd. Series 2010-1 has had its rating upgraded by Moody’s after the deal got through its first year without any qualifying catastrophe events impacting it. This Vega Capital cat bond provides Swiss Re with cover against multi-peril losses that may result from the occurrence of up to five events over the three-year risk period to December 2013. Perils covered by the transaction include European windstorms, Japan typhoons, Japan earthquakes, California earthquakes and North Atlantic hurricanes.

With less than two years now remaining on the transactions term, Moody’s notes that the probability of attachment has now lowered as the risk period has shortened by one-third. Essentially the chance of the required number of qualified events with the associated aggregated losses required to attach the notes has significantly reduced.

Additionally, Swiss Re have to pay into a reserve account which is now mounting up and has a balance of $21.3m, this has to be depleted before investor capital. Vega Capital 2010 also has another tranche of unrated notes which provide a layer of protection below the ones Moody’s has upgraded.

Moody’s said:

Due to the size of the remaining first loss layer and structure of the loss trigger mechanism of the transaction that limits the annual losses attributable to each separate peril, the occurrence of more than one of the covered type of perils are required for the Class C Notes to experience any losses.

Interestingly though, Moody’s notes that the Tohoku earthquake did in fact have an impact on this deal and caused a reserve account loss of $15.93m. The Tohoku earthquake and the major aftershock were not sufficient to attach the notes but the reserve account does seem to have been depleted by this amount.

Moody’s notes:

In reaching its determination, Moody’s reviewed two Events Reports prepared by the Calculation Agent which made the following calculations for the two Parametric Japan Earthquake Events:

(1) Earthquake Tohoku, Event Notice dated March 16, 2011,with an Index Value of 285.1 and an Event Percentage of 42.48%, and

(2) Magnitude 7.9 aftershock of Tohoku Earthquake, Event Notice dated April 8, 2011, with an Index Value of 8.4 and an Event Percentage of 0%.

Based on this calculation, the Reserve Account Loss Amount was US$15.93 million. The structure of Vega Capital Ltd. allows for the build-up over time of a first-loss protection layer via payments by the Counterparty to the Reserve Account.

The unique structure of the Vega Capital cat bond could well have been a factor that protected noteholders from losses that could otherwise have attached after the Tohoku earthquake. Investors will be pleased with this report and the upgrade should raise investor confidence in these notes.

Moody’s upgraded the $63.9m tranche of Vega Capital Ltd. Series 2010-1 Class A notes from ‘Ba3’ to ‘Ba2’. As we said, the $42.6m Class D notes were not rated, but it must be assumed that these are also less at risk with the passing of one year of the three-year risk period.

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