Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Vega Capital 2010-1 reserve account increases, Sandy the only potential negative


The Vega Capital Ltd. Series 2010-1 catastrophe bond transaction which was issued on behalf of sponsoring reinsurer Swiss Re in December 2010 has again been said to have an increasingly positive outlook by ratings agency Moody’s. Back in February Moody’s upgraded the single tranche of Class C notes issued by Vega Capital Ltd. as the remaining term was shortening and the reserve account position was improving making losses less likely. Now Moody’s have put the notes on review for a possible further upgrade.

The Vega Capital 2010 cat bond provides Swiss Re with a source of retrocessional reinsurance cover for multi-peril losses that may result from the occurrence of up to five events over the three-year risk period to December 2013. The perils covered by the transaction include European windstorms, Japan typhoons, Japan earthquakes, California earthquakes and North Atlantic hurricanes.

Moody’s said in an announcement yesterday that it was placing the Class C notes on review for a possible upgrade primarily because of a reduction in the likelihood of the cat bond notes facing losses due to a build-up of a first loss protection layer through payments into the reserve account by Swiss Re. The reserve account has to be depleted before investor capital in the Class C notes can face any losses. Vega Capital 2010 also has another tranche of unrated notes which provide a layer of protection below the Class C notes, adding another protective cushion.

As of December 2012 the reserve account holds $45.7m which is a significant cushion to be depleted before the investors capital is touched. The reserve account stood at $21.3m back in February of this year and so has more than doubled since. The unrated Class D notes also provide a further $42.6m of protection before the rated Class C notes can face losses, meaning that over $88m needs to be depleted before the rated Class C notes investors face a loss.

Additionally, Moody’s says that as there is now only one year left to run on the transactions term, the likelihood that the required number of events with the associated aggregate losses required to attach the Class C notes has reduced further. All of these factors led Moody’s to say that the notes may receive another upgrade after the review is completed.

There is one potentially negative factor, and that is hurricane Sandy. Sandy is a covered event under the terms of the Vega Capital cat bond transaction, being a PCS North Atlantic Hurricane Event. Moody’s has considered the fact that losses from Sandy could breach the trigger level for the hurricane peril and result in payments from the reserve account to the counterparty which would reduce the first loss protection layer for the deal. However, Moody’s says that due to the size of the reserve account and the existence of the Class D notes which would be next to face a loss and would need to be exhausted before the Class C notes were hit the chance of loss to Class C is reduced. Also the structure of the transaction limits the annual losses attributable to each separate peril meaning that the deal would require the occurrence of more than one of the covered type of perils during the remaining risk period for the Class C notes to be triggered.

Moody’s are awaiting a loss report from the Calculation Agent for hurricane Sandy before they will finalise whether to upgrade the notes as part of this review. There is a chance that the loss reserve account could be hit by Sandy, as it was by the Tohoku earthquake in Japan. That event only reduced the loss reserve account by $15.93m. Once we hear that they have received that report, and have announced the completion of this review, we will update you as to whether the notes get upgraded or note.

Neither of the tranches of notes issued as part of the Vega Capital 2010-1 cat bond deal have been pricing below par as yet. It’s difficult to say whether Sandy would impact the Class D unrated tranche but the Class C tranche certainly appears safe as it has the reserve account and Class D tranche to cushion it from any losses.

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