The issuance of Assicurazioni Generali S.p.A.’s first catastrophe bond Lion I Re Limited actually saw five new firsts for the cat bond market. The successful completion of this transaction could help to open the cat bond market to more sponsors in future.
The Lion I Re cat bond is not the first cat bond to use an indemnity trigger for European windstorm, that honour goes to
a private transaction Halyard Re from 2000 (thanks to a reader for the correction), it is however the first fully Rule 144A compliant securitization of European windstorm risk on an indemnity basis.
It is also the first European windstorm indemnity cat bond transaction to take advantage of using a third-party risk modeller for risk analysis in RMS, the first catastrophe bond to be issued by one of the world’s largest insurers Generali and the first catastrophe bond from an Italian sponsor.
Perhaps most interesting though in terms of firsts is the feature in the Lion I Re cat bond structure which 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, the broker dealer and capital markets focused division of reinsurance brokerage Guy Carpenter, acted as lead structuring agent and joint bookrunner for the Lion I Re cat bond transaction.
On the completion of the transaction GC Securities noted the placement of; “Principal At-Risk Variable Rate Notes, with notional principal at €190,000,000, through a newly formed special purpose reinsurance vehicle domiciled in Ireland, Lion I Re Limited, to benefit Assicurazioni Generali S.p.A., an Italian insurance company and the parent company of the Generali Group. This is the first time that Assicurazioni Generali S.p.A. has utilized the cat bond market and is the first ever 144A cat bond to provide indemnity protection against Europe windstorm risks. Additionally, it is the first Italian sponsored catastrophe bond.”
Nick Frankland, CEO of Guy Carpenter, EMEA, commented on the completion of Lion I Re; “We are delighted to have successfully closed the issuance of the first ever indemnity based cat bond for Europe windstorm. This transaction has matched Generali’s specific needs to the current appetite of the capital markets in a ground breaking structure that provides them with unique coverage.”
David Priebe, Vice Chairman of Guy Carpenter, added; “The continued remarkable convergence of capital markets capacity in the reinsurance market has continued into 2014 year-to-date and facilitated Generali’s inaugural use of capital markets-based risk transfer capacity. Generali’s prudent decisions in how to target the use of capital markets reaped them best execution.”
Cory Anger, Global Head of ILS Structuring, 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.
Anger 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.”
“Additionally, defining Europe windstorm for the expansive European geography that was covered under the Lion I Re was carefully crafted in order to best extract such risk from an ongoing traditional reinsurance program and was fully accepted by the investor base. We are honored to have been selected to lead the structuring of, and jointly distribute the Lion I Re notes to facilitate Generali’s centralization and capital optimization objectives,” Anger continued.
Chi Hum, Global Head of ILS Distribution, GC Securities, said that investors were keen to support Generali in its first cat bond; “Generali’s decision to sponsor Lion I Re ahead of other Europe windstorm issuances in the fall was rewarded with the broad-based and robust support of more than 20 investors that allowed the deal to be upsized and to be priced through the initial guidance. Additionally, the investor community recognizes Generali’s reputation as a premier global insurance company seeking to diversify its reinsurance capacity program to include capital markets and looks forward to continuing their support for future Generali issuances.”
Catastrophe risk modelling firm RMS highlighted the fact that the Lion I Re Limited catastrophe bond is the first indemnity trigger European windstorm cat bond to use an independent modelling agent. The transaction was modelled using the RMS 2011 Europe Windstorm Model.
“We are proud to have partnered with Generali on this highly successful and important transaction” commented Peter Nakada managing director of RMS Capital Markets. “The strong support from investors demonstrates the market’s appetite for diversifying perils such as Europe windstorm. Successful execution with an indemnity trigger also shows growing comfort with this type of risk. Overall this is a strong endorsement of both Generali’s catastrophe management and RMS modeling capabilities”
All of these firsts are very positive steps for the catastrophe bond market for the future. Having large primary insurer sponsors such as Generali accessing the market successfully could result in it repeatedly and increasingly leveraging cat bond cover as part of its reinsurance program. It will also help to educate the Italian re/insurance market in the use of cat bonds as risk transfer.
The first issuance of a 144A cat bond featuring a European windstorm indemnity trigger could help to encourage other European primary insurers into the cat bond market. For some of these primary insurers an industry loss triggered cat bond would contain too much basis risk for them to become comfortable enough with the issuance of such a deal.
The use of an independent modelling agent will help to give potential sponsors confidence that the risks are understood and that the models they likely use internally can be utilised for issuance of cat bonds and will be readily accepted by capital markets investors.
Finally, the feature which allows a sponsor to step into the capital market in the middle of its reinsurance purchasing cycle, but without being penalised in terms of paying any extra premium, is an important one introduced with this deal. For some smaller issuers this has been a problem, as the timing of their reinsurance renewal has not always been conducive to tapping the capital markets.
It will make it easier for potential sponsors to access the capital markets at different times of year, perhaps helping issuance to be staggered throughout the calendar instead of being crowded around key reinsurance renewals quite so much.
The world’s largest reinsurer Munich Re acted as co-structuring agent on the transaction. Thomas Blunck, Member of Munich Re’s Board of Management, commented; “The transaction is the outcome of a successful collaboration with our long-standing client Generali. We are happy to have assisted Generali with this broader-ranging risk-transfer instrument, augmenting our tailor-made traditional reinsurance programme.”
Also read from yesterday: Generali appreciates flexibility and diversification of Lion I Re cat bond.
Q1 2014 Catastrophe Bond & ILS Market Report – A Record Quarter
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the first-quarter of 2014, looking at the new risk capital issued and the composition of the transactions completed during Q1 2014. Download your copy here.