Successor, Swiss Re’s new catastrophe bond programme, has been warmly welcomed by investors. The reinsurer sold $950 million-worth of bonds in the first series of issuance from Successor – a shelf programme capable of issuing up to $16.5 billion of bonds. But one investor says it had originally planned to issue much less.
“It was very well received,” says the investor. “The proof is in how much was issued versus the targeted amount. From that point of view, it was incredibly successful.” The investor believes Swiss Re was originally targeting an issuance of $300 million from Successor.
He says the $950 million issuance is particularly impressive because there are so many other deals vying for investors’ attention. A number of new deals have been launched in the past month. These include Calabash Re, also issued by Swiss Re to cover business ceded to it by Bermudian insurer Ace, and Cat Mex, a $160 million bond issued by the Mexican government to protect against earthquake losses.
And the investor says there are five new deals being marketed, although he declined to provide further details. He adds that some recent deals have not been able to reach their targeted level.
The Successor programme comprises 22 tranches of bonds. A spokeswoman for Swiss Re did not reveal the coupon for the separate tranches, but said that the volume-weighted average coupon of the first $950 million of issuance was 1,600 basis points over three-month Libor.
There were a number of reasons for Successor’s warm reception, the investor believes. “Part of it was that it paid very well. Another part was that it was a very clean deal,” he says. He describes the deal as clean because he believes Swiss Re went out of its way to make it attractive to investors. For example, it included loss cost inflation into its modelled losses where other issuers did not. “You could do it yourself, but they did it for you,” says the investor.
The deal may also have done well because Swiss Re has been issuing cat bonds and other risk-linked securities since 1997. “The market is rewarding cedants who have been out there for a long time. They’re not just coming in to get capacity and be gone next year,” says the investor.
The Successor deal will replace Pioneer and Arbor, Swiss Re’s previous shelf programmes. It protects Swiss Re against the same main risks as these two deals did: U.S. windstorm, Europe windstorm, California earthquake and Japan earthquake. But it is much bigger, more complex, and covers a wider range of losses within those four main risk areas.
The program uses 11 special purpose vehicles, each of which can issue up to $1.5 billion-worth of bonds. Six of these vehicles issue single-risk bonds covering the four main risks. The remaining five, labelled I to V, issue multi-risk bonds, which cover different combinations of the four main risk types.
As well as having a choice of risks, investors can choose between two trigger types. The bonds’ payments can either be based on an industry loss index provided by Property Claim Services or modelled losses to a notional portfolio – a virtual portfolio created to closely match Swiss Re’s real portfolio. The virtual portfolio is used to determine the approximate effect of a given catastrophe on Swiss Re with the losses modelled by risk modelling firm Eqecat.
One of the biggest differences between Successor and Swiss Re’s previous cat bond programmes is that it covers a bigger range of losses. Previous bonds covered very high loss layers and protected Swiss Re’s solvency capital. As well as doing this, Successor also protects Swiss Re against earnings volatility.
To provide this diversity, the Successor program can issue seven different classes of notes – labelled A to F – which each have different attachment points. The F class is unique because it only pays out if losses are above the attachment point but below a specified exhaustion point. This mechanism has never been seen before in a cat bond. The company says the F class protects it against low-attaching earnings events.
Another new feature of the Successor program is that it covers secondary events, such as tsunamis or fires caused by earthquakes.