Lion I Re Ltd.

Lion I Re Ltd., an Irish domiciled special purpose reinsurance vehicle, is set to issue a single tranche of notes which are being marketed with a preliminary size of €150m. With this issuance, the sponsor Assicurazioni Generali is seeking a fully-collateralized source of multi-year reinsurance protection against European windstorms.

The Lion I Re cat bond notes will provide Assicurazioni Generali with protection against European windstorms on an indemnity and per-occurrence basis. It’s encouraging to see that this cat bond uses an indemnity trigger as it is only the second to do so for the peril of European windstorm after the Windmill I Re Ltd. cat bond deal.

The Lion I Re notes will provide protection over a 3 year risk period and cover losses from European windstorms across Austria, Belgium, Czech Republic, Denmark, France, Germany, Ireland, Luxembourg, The Netherlands, Norway, Poland, Slovakia, Sweden, Switzerland and the UK.

The trigger point for the protection is at €400m of losses and the exhaustion point is at €800m, Artemis understands, which could suggest a possibility of the deal upsizing significantly if Generali chose to fill that entire layer of its reinsurance with the Lion I Re cat bond.

That equates to an attachment probability of 2.1%, an exhaustion probability of 0.45% and an expected loss of 1%. The €150m of notes were initially marketed with price guidance of 2.5% to 3% it is understood.

The Lion I Re cat bond structure allowed Generali to access the cat bond market outside of its traditional reinsurance cycle while not being penalised for this by paying any excess premium. The cat bond has been cleverly arranged to allow Generali to continue to benefit from paying premiums calculated on an annual basis.

GC Securities highlighted another interesting first for this cat bond. A new feature which allows a sponsor to access the capital markets paying an annual premium rate. This allows the cedent to step out of its typical reinsurance renewal cycle to take advantage of opportunities in the capital market. It also likely enables the cat bond to be better embedded within the reinsurance program of the cedent, certainly making accounting for the cat bond a more simple task.

Cory Anger, Global Head of ILS Structuring at GC Securities, explained; “In addition to being the first indemnity triggered 144A Europe windstorm catastrophe bond and incorporating the latest structural features of the cat bond market, Lion I Re pioneers a new methodology to allow cedents to access the capital markets at any point the during calendar year but only pay an annual premium rate that adjusts to reflect the commensurate amount of risk contributed for such portion of a partial calendar year period. Such a feature opens the ability for cedents to access capital markets protection at a different time than their traditional renewal without paying excess premium.”

Fitch highlights though that over 80% of the cat bonds exposure is located in three countries, Germany, France and Austria. Fitch also notes that the subject business covered by Lion I Re is primarily residential (70%) and commercial (21%) with a modest amount of industrial property covered.

Fitch provides some insight into the Lion I Re cat bond reset mechanism and terms, which includes a variable reset facility allowing Generali to adjust the expected loss within pre-defined boundaries.

Fitch explains; “Generali has the option to increase the subject business by 1.10 during any risk period. On each reset date, the attachment point and probability of exhaustion will be set to keep the modeled expected loss risk at 1.00%. Generali may exercise the option to adjust the expected loss in the second or third risk periods such that it falls in the range between 0.75% and 1.25%. If this occurs, the risk interest spread will be recalculated to reflect the marginal increase or decrease to the level of risk assumed by the noteholders. As the three risk periods are of unequal length, the risk interest spread will be multiplied by 0.72 and 1.54 in the first and third risk periods, corresponding to shorter and longer risk periods.”

Fitch highlights that while this is an indemnity cat bond there is some basis risk due to an element of the risk covered not being modelled, saying; “Risks that were not modeled by RMS included: the growth allowance of 1.10, storm surge (except for the west coast of U.K.), flood damage, hail damage, crop damage and currency exchange.”

Fitch notes that it is the investors who will be exposed to this basis risk between the actual net losses that Generali experiences and the modelled loss information provided by risk modeller RMS.

Update 1:

The €150m tranche of notes has upsized and is expected to complete around €180m to €190m in size, a possible increase of 27%.

At the same time the price guidance has been reduced. The Lion I Re cat bond was initially marketed with a coupon price range of 2.5% to 3% but that range has been narrowed and lowered to below the bottom of that range, with the notes now offered with a coupon of 2.25% to 2.5%. If it prices at the bottom of the reduced range, at 2.25%, it would be a reduction in price of 18% from the middle of the original guidance.

Update 2:

Assicurazioni Generali S.p.A. successfully closed the Lion I Re Limited cat bond to secure itself €190m of fully-collateralized European windstorm reinsurance protection at keen pricing.

At pricing and closing the Lion I Re cat bond notes settled to offer investors a yield of 2.25%, which is a drop of 18% in pricing from the mid-point of initial guidance.

Update 3 (5th May 2015):

At the reset the variable reset was used 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.