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15 March 2019 by jbchevrel

Swiss Re (SCHREI) has seen its sub 5y CDS widen +10bp today, thus underperforming the broader reinsurance sector (MUNRESUB +4bp HANRUESUB +1bp) following the issuance of €750M subordinated 31-year notes at 245bp above DBR. SCHREISUB (+10) has also underperformed the senior CDS (SCHREI +2), thus decompressing +6bp today, on a 1:2 basis. Noteworthy that since the Jan 3 peak in spreads, SCHREISUB has tightened 46bp and it was flat vs SCHREI, on a 1:2 basis. To some extent, the sub/snr ratio has been resilient to the direction of spreads. SCHREI sub/snr compression trade might have looked attractive because the ratio (currently 2.5x) is higher than insurers’ (AEGON ASSGEN AXASA & AVLN are closer to 2x). However, it was not until now, particularly low compared to other reinsurers’ sub/snr ratios (HANRUE 2.8x MUNRE 3.1x). This was because, although there was a SCHREI bond to deliver into the senior CDS (for ex the 2 7/8 2022s), there was none to deliver into the sub CDS. The swiss insurer Zurich (ZURNVX), in the same situation, has its sub/snr also equal to 2.5x. This new sub issuance can thus potentially change the dynamic in SCHREI sub/snr CDS ratio.