Generali’s Lion I Re cat bond gets a little more risky after reset

The Lion I Re Ltd. catastrophe bond from European headquartered insurer Assicurazioni Generali S.p.A. has got a little bit riskier for its investors, after the sponsor elected to increase the risk level slightly at the recent annual reset.

Lion I Re provides Assicurazioni Generali S.p.A. with a €190m source of fully-collateralized European windstorm reinsurance protection. The deal was issued in 2014 and runs for three years, with an annual reset in April at which point the insurer can adjust the covered portfolio a little.

Rating agency Fitch explained that there had been no covered events during the first year of the cat bond’s tenure.

However, at the reset the sponsor Generali elected to use the variable reset, to allow the property exposures within the covered portfolio to be updated slightly.

Back in December, risk modeller RMS reported that the attachment probability had risen from the initial 2.1% to 2.32% for the risk period Jan. 1, 2015 through Dec. 31, 2015. This updated probability reflects updated property exposures within the Subject Business in the Covered Area that have been run through the escrowed RMS model, Fitch explained.

As a result the expected loss has increased slightly to 1.09% from 1%, which results in an update to the risk interest spread as well, to 2.36% which is a very slight increase on the 2.25% the Lion I Re cat bond launched with. The trigger and exhaustion points of €400m and €800m remain unchanged, Fitch said.

As a result of the change in attachment probability Fitch reassessed the notes to check that the rating it had given at launch could be maintained. Fitch confirmed that it still corresponds to an implied rating of ‘B+’, so no change required.

This is a good example of the variable reset being put to use to allow a sponsor to make changes to the covered portfolio to include new and updated exposures. The changes are not dramatic, as you’d expect from a large insurer like Assicurazioni Generali S.p.A. with its broadly diversified book, but it demonstrates the flexibility that these resets provide to sponsors of cat bonds.