Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

With latest Lakeside Re cat bond Zurich achieve broader investor support


The Lakeside Re III Ltd. catastrophe bond which completed in December brought benefits to sponsoring insurance group Zurich beyond purely transferring risk to the capital markets. The $270m U.S. and Canada earthquake cat bond provides Zurich with a multi-year source of collateralized reinsurance indemnification on an annual aggregate basis. It is Zurich’s third cat bond in the Lakeside Re series and allowed it to expand the investor base across a broad group of investors worldwide.

The third Lakeside deal saw Zurich use an ultimate net loss indemnity trigger on an annual aggregate basis for the first time. Its previous two Lakeside Re cat bonds were indemnity and dual PCS/indemnity but both on a per-occurrence basis, so the Lakeside Re III provides broader cover for smaller earthquake events too.

Lakeside Re III also expanded the geographical scope of Zurich’s cat bond earthquake cover to include earthquake risks from the New Madrid fault and Canada as well as California and certain western U.S. states. The two previous Lakeside Re cat bonds had covered California quake only.

Despite the aggregate nature of the trigger, the expanded and much larger coverage area and a higher annualized expected loss (2.04% vs 1.55% for Lakeside II), the Lakeside Re III cat bond priced only just higher than the Lakeside Re II bond from 2009. Lakeside Re III priced at 8.0%, while Lakeside Re II had priced at 7.75%. For comparison, the Lakeside Re Ltd. cat bond in 2006 priced at 6.5%.

The fact that Zurich managed to secure the broadened coverage at such an attractive price is testament to investor appetite for risk in the cat bond market which allows sponsors to secure cover at a lower annual risk spread. The maturity of the structures used, and the matching of sponsors risk transfer needs with investors diversification requirements, enables cover to be placed in the capital markets at much improved coupon rates.

With the latest Lakeside Re III the investor base for Zurich’s cat bond needs was broadened significantly and the cat bond was placed with investors worldwide. In broadening the support they received from investors Zurich’s status as a strategic cat bond sponsor was strengthened and a longterm relationship with the investor base also assisted the deals successful issuance.

The transaction was placed with a broad worldwide group of investors, and this has helped Zurich to strengthen its strategic position in the market. The transaction was oversubscribed and priced at the lower-end of the marketed range.

The global group of institutional investors who the Lakeside Re III cat bond was placed with included all the usual specialist ILS investment funds, hedge funds, pension funds, reinsurers and mutual funds. Dedicated ILS funds contributed the most capital, which is typical of most cat bond transactions in the current market.

The Lakeside Re III placement strategy involved a much broader group of investors and allowed Zurich to strengthen its position in the marketplace as a sponsor. This led to oversubscription which helps a sponsor achieve better pricing and also means that no single investor can dominate the direction of pricing.

The strategy that Zurich has employed in getting Lakeside Re III to market has clearly been considered a success and enabled it to significantly grow the breadth of capital sources for its collateralized reinsurance program. This should stand the insurer in good stead when they next bring a cat bond to market.

You can read details of the Lakeside Re III Ltd. transaction in our catastrophe bond Deal Directory. You can also read about Zurich’s two previous Lakeside cat bonds, Lakeside Re II Ltd. and Lakeside Re Ltd.

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