Pierre Michel, the General Manager for Reinsurance and International Operations at Covea Group, recently hailed insurance-linked securities (ILS) as a natural diversifier of its reinsurance capacity, following the firm’s first catastrophe bond issuance.
Covea Group’s €90 million Hexagon Reinsurance DAC (Series 2017-1) transaction launched in December last year, providing the sponsor with multiyear European windstorm protection.
The deal was structured by Willis Towers Watson Securities, a division of insurance and reinsurance broker Willis Towers Watson, which is soon to be integrated into its reinsurance arm, Willis Re.
As part of its first-quarter 2018 ILS market report, the re/insurance broker spoke with Michel about Covea’s first entry into the catastrophe bond market, including the rationale behind securing third-party protection as well as its traditional reinsurance placement.
“Covéa is France’s largest domestic insurer. Our exposure to natural cat risks in France is therefore second to none and, speaking only of French windstorm risk for instance, we currently purchased a €1.7 billion cat program to cover it. This makes us one of the largest European buyers of reinsurance coverage.
“As a result, we rely on the behavior of our traditional reinsurers and monitor very closely our credit risk exposure. In that context, we perceive ILS to be a natural way to diversify our reinsurance capacity, with the goal of ensuring stability of supply through the cycle as well as better cost control,” said Michel.
Interestingly, Michel also explained that the issuance of Hexagon Re was used as somewhat of a learning experience for the company, as being very-well capitalised meant the firm had little capital raising experience.
“Ultimately, Hexagon Re was a strategic purchase built on a solid financial rationale,” said Michel.
Like many first-time ILS sponsors, Covea had been looking at the space for some time, talking to investors to get a feel for how its deal might be received by the marketplace and to start building relationships with the capital markets.
Following the impacts of 2017 catastrophe events that saw many ILS investors suffer losses for the first time, there was some debate about the reaction of ILS and if the investor base would remain attracted to the space.
The debate didn’t last long, however, as in spite of losses and trapped collateral, ILS reloaded and actually expanded in time for the January renewals, with investors, both existing and new, willing and able to enter the marketplace and maintain its impressive growth record.
Covea would have been aware of the losses experienced by investors, but it’s clear that the firm’s understanding of the space and the market’s maturity and sophistication, alongside its ‘natural’ diversification benefits, provided it with confidence to issue its first cat bond.
“Notably, we witnessed that the terms and conditions of cat bonds were becoming more and more in line with traditional reinsurance,” said Michel. This was an important factor for the firm, and as Michel continued to explain that a vital condition of Hexagon Re was that it replicated Covea’s traditional reinsurance as to avoid the creation of a coverage gap within its programme.
“As the space demonstrated its resilience and efficiency, we realized that it was becoming possible to sponsor a cat bond at satisfactory financial terms for us and, with the help of our advisors, we performed a feasibility study to identify a suitable working structure,” he added.
Efficient price was also an important factor, said Michel, which to some extent reduced its flexibility as the cost of traditional reinsurance for the majority of layers on its placement are lower than ILS investors’ minimum rates on line.
In response, Covea’s Hexagon Re transaction covers a lower attachment point that is more typically assumed by traditional reinsurers. Ultimately, this provided investors with a higher yield, but also showed that investors are happy to take on this risk.
“We are happy with the placement of Hexagon Re. Investors’ receptivity was excellent and the roadshow gave us an opportunity to meet the market face to face, to start building relationships that, I hope, will be as long-lasting as those we have with our traditional partner,” said Michel.
To end, Michel told Willis that one main criticism of the ILS space following Covea’s first cat bond issuance, is that when compared with traditional reinsurance, the placement was very demanding in terms of wording, documentation and formalities.
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