The catastrophe bond and ILS market looks set to see a very rare casualty cat bond type transaction as European insurance giant Assicurazioni Generali seeks a €180m or larger source of motor third-party liability reinsurance protection through a Horse Capital I DAC securitisation.
Casualty and liability risks are often discussed by the insurance-linked securities (ILS) market as a future source of market expansion and growth, but the structure has always been hard to perfect. This transaction is the first cat bond like deal to feature a liability loss ratio trigger that we’ve seen and, as a mechanism to structure and provide the coverage for a large and well-respected insurer, it makes a lot of sense.
According to sources, Generali is looking to secure a capital market backed source of fully collateralised reinsurance protection against a significant deterioration in the motor third-party liability loss ratio’s of an aggregated group of its insurer subsidiaries around Europe.
The reinsurance coverage from the Horse Capital I ILS transaction will be provided across a portfolio of Generali owned insurers from Austria, Czech Republic, France, Germany, Italy, Spain and Switzerland, whose motor third-party liability loss ratios will be covered by the deal.
The transaction features an indemnity trigger and losses will be calculated on an annual aggregate basis across the covered insurers, we understand. The covered insurers loss ratios will be monitored and reported across three years from 2017, with Milliman acting as risk modelling agent..
Three classes of notes are being issued by Horse Capital I DAC, an Irish domiciled designated activity company set up for this ILS transaction. We’re told that the underlying transaction, providing the reinsurance between Generali and Horse Capital I, is a derivative structure.
A €60m Class A tranche of notes have an attachment probability of 1.63%, an expected loss of 1.32% and would cover the aggregate loss ratio from 95% to 97.25%, we’re told. This tranche is being marketed to investors with price guidance of 3.5% to 4.5%.
A €60m Class B tranche has an attachment probability of 4.11%, an expected loss of 2.9% and cover the loss ratio from 92.75% to 95%. These notes being riskier offer investors a coupon in a guidance range from 6% to 7%.
Finally, a €60m Class C tranche has an attachment probability of 8.04%, an expected loss of 5.9% and cover the reported aggregated loss ratio from 90.5% to 92.75%. This tranche of notes are being marketed with price guidance of 10.5% to 12%.
All three tranches have a drop-down feature we understand, making the coverage more flexible for the sponsoring insurer.
The transaction is being brought to market by Willis Capital Markets & Advisory, as sole structuring agent. WCMA is also a joint bookrunner alongside Barclays Bank. Milliman is providing the risk modelling underpinning the transaction.
It’s an innovative transaction and will be viewed with great interest by investors and other potential sponsors alike. So many large insurers have exposure to casualty risks, such as motor third-party liability, that can be reported on an aggregated loss ratio basis.
If this transaction is successfully issued, which is highly likely given the diversification it offers to the ILS investor base, we could see other sponsors seeking to follow suit. It’s a clever way to secure reinsurance from the capital market to cover deteriorating loss ratios.
This could be one of those transactions we see as ground-breaking in the future. At a time when the ILS market is primed for further growth, but sometimes the availability of opportunities to invest in holds back ILS fund managers ability to raise more capital, an expansion into liability and casualty risks is perhaps overdue.
We understand that the Horse Capital I DAC third-party motor liability catastrophe bond (or ILS as this isn’t a natural catastrophe risk) is set to be issued during December, so prior to the end of the year.
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