Galilei cat bonds help XL reduce PML’s and required capital

Issuing its latest catastrophe bonds has significantly bulked up XL Group’s protection against peak U.S. hurricane events, with the companies probable maximum loss for U.S. wind dropping by 20% to 30%.

At the same time the addition of the $1.275 billion of new catastrophe bond retrocessional reinsurance protection, in two chunks transacted at the end of 2016 and in early January, has also reduced the re/insurers required capital, according to executives at the firm.

There’s potentially one more benefit as well, to having grown its cat bond reinsurance protection significantly. XL Group has increased its own reinsurance underwriting significantly in the last quarter of 2016, increasing its reinsurance segment gross premiums written (GPW) by a substantial 159.5%.

That increase in reinsurance coming in has likely been offset through more retrocession ceded, with the Galilei Re cat bonds now a major source of multi-year retrocessional reinsurance for XL and XL Catlin.

That does leave us wondering whether XL has been able to benefit from an arbitrage on pricing, underwriting more primary reinsurance and offsetting the risk with lower-cost retro sourced from the capital markets.

However the price differential worked out for the re/insurer, XL Group has effectively lowered its potential for serious losses from U.S. hurricanes using the cat bonds.

President of Property and Casualty Greg Hendrick explained this to analysts during the re/insurers earnings call yesterday, saying; “For 2017 we have used the reinsurance market to reduce our exposure to certain peak natural catastrophes. This is predominantly achieved by increased issuance of our Galilei cat bonds.”

Hendrick explained that the group buys reinsurance and retro on an occurrence, aggregate, quota share basis, as well as using cat bonds to protect the firm.

The results of the upsized cat bonds alongside the other reinsurance and retro sources is a reduction in XL’s North American windstorm tail exposure by 20% to as much as 30%, Hendrick explained.

That’s quite the reduction at a time when XL has also increased its premiums underwritten.

CFO of XL Pete Porrino further explained that the Galilei Re cat bonds help by allowing the re/insurer to “reduce the required capital that we would hold.”

He added that the cat bond forms part of the calculation for capital and even factors into decisions such as how large an announced share buyback would be, reflecting the useful capital tool catastrophe bonds can serve as.

Hendrick continued by saying that among all the changes to the XL book, of which there were many given the growth in premiums, the cat bonds move ceded versus earned premiums a little, but nothing material.

Reducing PML’s so significantly, while gaining a capital level that allowed the company to reduce required capital, at a time when greater premiums were underwritten likely supported by the outflow of cessions through these securitisations, is a great example of how the capital markets can add efficiency as a source of reinsurance and retrocession.

You can read all about the Galilei Re Ltd. (Series 2016-1) and Galilei Re Ltd. (Series 2017-1)  catastrophe bond transactions in the Artemis Deal Directory.