Swiss Re’s Vita Capital mortality bond trades down, loss potential rising

The secondary market price for the Vita Capital VI Limited (Series 2021-1) mortality catastrophe bond transaction that was sponsored by global reinsurance firm Swiss Re has dropped, with the market seemingly anticipating an increasing chance of losses being paid under the terms of the notes.

As we reported back in May, the Vita Capital VI mortality cat bond notes tat Swiss Re sponsored in 2021 were becoming viewed as at-risk of attaching by investors, following the release of preliminary data that showed an increase in weighted mortality rates in 2022 for the US and the UK.

The single tranche of $120 million Class B notes issued by Vita Capital VI became the first and only mortality cat bond issued during the pandemic and that explicitly included coverage for elevated deaths caused by COVID-19 deaths, but only from 2022 onwards.

The notes can be triggered by an increase in a mortality index, weighted by age and gender, if it rises above a predefined trigger point, covering certain mortality losses in Australia, Canada, the UK and the United States for Swiss Re, up to the end of 2025.

Mortality from the COVID-19 pandemic was excluded for the calendar year of issuance, 2021, but included beyond that.

For these mortality cat bond notes to face a loss, two countries need to experience sufficient excess mortality, as measured by the population weighted indices. So a single country experiencing excess mortality cannot trigger these notes alone.

But our sources told us back in May, that preliminary estimated mortality data for 2022 had been released by the reporting agencies for the UK and US and that analysis of this data suggested the potential for these mortality cat bond notes to attach, face an impairment and for investors in them to experience an erosion of their invested principal.

The notes would erode on a sliding scale, as the weighted mortality indices are combined into an aggregate, so as it rises reducing the outstanding principal gradually.

At that time, back in May, we explained that the notes were being viewed as potentially facing as much as a 50% loss of principal, and had been marked down to as low as 50 cents on the dollar by some investors that had performed an analysis on the mortality data that had been released.

Now, specialist catastrophe bond investment manager Plenum Investments has commented on this mortality cat bond, noting that a distinct drop in price has occurred.

Plenum Investments said that is has seen the Vita Capital VI 2021-1 Class B notes come under “secondary market trading pressure,” adding that a new devaluation has occurred despite their being no additional information about the loss situation of the bond.

Plenum Investments calls the notes “partially defaulted” suggesting it believed a partial loss of principal was possible even before the latest decline in price.

The ILS manager noted that the performance of its Plenum CAT Bond Fund has been affected by the latest decline in price of Swiss Re’s mortality cat bond, with the devaluation of the notes impacting its fund’s performance in the last week.

Plenum said that it holds a 0.9% stake in the Vita Capital VI mortality cat bond notes, so around $1.08 million.

The investment manager noted a significant mark-down for the notes in the last week, after they traded at 0.4225 cents on the dollar, having been valued at 0.8 the week before that.

The mortality cat bond notes now appear to be marked down to between 40 and 50 cents on certain broker pricing sheets, suggesting investor confidence in the Vita Capital VI 2021 mortality cat bond avoiding losses continues to decline.

Plenum Investments noted that there has been “No new mortality information and thus information about the loss situation of the bond is available to date.”

It’s possible an update to the preliminary data has become available though and that investors and ILS fund managers have been making their own assessment of the loss potential associated with these notes.

Either way, these Vita Capital VI 2021-1 Class B notes now seem to be increasingly viewed as likely to face a loss of principal, which could stimulate some more trading over the coming weeks.

You can read all about this Vita Capital VI Limited (Series 2021-1) transaction from Swiss Re and every other catastrophe bond issued in our Artemis Deal Directory.

We’ve added the Vita Capital VI mortality cat bond to our directory of cat bonds defaulted, triggered or deemed at-risk of attaching.