Swiss Re breaks new ground but CoCoCats unlikely to go mainstream
* Zurich-based reinsurer finds just CHF175m of demand for cat/CoCo
* One in 200-year hurricane covered in bond sale
By Jon Penner and Aimee Donnellan
LONDON, Oct 4 (IFR) - Swiss Re broke new ground in reinsurance hybrid capital this week when it priced a dual-trigger CoCo that borrowed features from the catastrophe bond market, although the bespoke nature of the deal means it's unlikely to be replicated widely.
The Zurich-based reinsurance company printed a CHF175m (EUR142.7m) 32-year non-call seven-year bond.
The subordinated contingent write-off structure incorporated triggers for both solvency and insurance risks. The deal is not entirely unique, as French reinsurer SCOR priced a similar private placement in euros this year, but there are very few other obvious candidates to bring such a trade, experts said.
"This is a bit of a strange animal with both solvency and cat triggers that seemed to only appeal to quite a specialist audience," said a hybrid capital expert.
Certain investors were frightened by the complexity of the structure. Perhaps one of the scariest elements is the trigger for a one-in-200-year Atlantic hurricane, a feature typically seen in a catastrophe bond but not in normal capital-raising exercises. If such an event were to occur, the paper would be written down to zero.
The usual risk profile of cat bonds is based on much higher probabilities, usually in the one in 30-year to one in 50-year range, and they generally have a much larger yield to make up for the increased risk.
One lead indicated that the 1/200 risk embedded in this deal would only have warranted roughly just 2% yield, well below the amount typically required by insurance-linked security (ILS) buyers, who are more used to 5-7% yields.
Swiss Re would have struggled to shift the hurricane risk off its balance sheet with a standalone cat bond, and decided to fold it into a solvency bond offering investors 7.5%.
"Most ILS investors wouldn't get out of bed for a 2% return, so this was a chance for Swiss Re to sell hurricane tail-risk to a wider pool of investors," said a DCM banker.
The fact that the deal also had elements of a traditional CoCo meant that the Zurich-based reinsurer could distribute catastrophe risk to a wider pool of investors.
CoCos are also a useful tool for reinsurers seeking to cover their risks effectively.
Compared with traditional cat bonds, CoCos not only offer longer duration and larger sized deals, but also provide access to a more diverse investor base - one that banks such as Credit Agricole and Credit Suisse have already taken advantage of to issue permanent write-down deals.
But Swiss Re's hybrid is slightly more complicated than your garden variety CoCo or cat issue.
The bond will also trigger if Swiss Re's Swiss Solvency Test numbers fall below 135%. However, its latest SST levels were at 245% for the Group and 224% for Swiss Reinsurance Company Ltd (the issuing entity), as at the end of the first half of 2013. Like the catastrophe risk, that level has also been modelled to have a 1/200-year probability of occurring.
The added complexity of the hurricane trigger along with the solvency trigger led to some interesting conversations for lead managers - Credit Suisse, Deutsche Bank, UBS and ZKB - that were looking to reach a wide investor audience.
Splitting the deal into its three main components, they settled on around 4% for a standard classic hybrid, 1.5% for the SST writedown - using a similar US dollar deal as a guide - and 2% for the cat risk.
Despite its multiple triggers, orders came in for the bond from private banks and ultra high net worth individuals with 48%, while hedge funds took 23%, family offices 15%, institutional and pension funds 12%, and insurance-linked security funds 2%.
The bonds came off a bit in the secondary market, quoted around 98.75-99.30, or roughly 6bp wider on a yield basis, by Friday afternoon. (Reporting by Jon Penner and Aimee Donnellan; Editing by Alex Chambers)
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