Alphabet, Inc., the holding company for Google and its many units, has entered the catastrophe bond market for the first time, as the technology giant seeks $237.5 million of earthquake insurance protection that will be fully collateralized through the issuance of a Phoenician Re Ltd. (Series 2020-1) cat bond transaction to capital market investors.
The technology giants of this world all carry significant exposure to catastrophe, severe weather and climate risks and looking to the insurance-linked securities (ILS) market as a source of efficient capacity that can support their insurance needs is a natural step for companies so focused on innovation and efficiency.
Alphabet, which acts as a holding company for all of the Google tech operations, is looking to secure California earthquake protection from the capital markets, in a deal that will see the firm’s captive insurer ceding risk to a global reinsurance firm, that will in turn enter into a coverage agreement with a special purpose insurer (SPI) Phoenician Re Ltd. which will issue the cat bond notes to investors.
Phoenician Re Ltd. was registered in Bermuda in September and will seek to issue $237.5 million of cat bond notes to investors, with the proceeds set to be used to collateralize retrocessional reinsurance agreements with fronting reinsurer Hannover Re.
Hannover Re will in turn enter into a reinsurance agreement with Imi Assurance Inc., which is Google’s Hawaii domiciled captive insurer.
Alphabet Inc. then gains the insurance direct from its captive, allowing it to benefit from the capital markets appetite for assuming these peak catastrophe risks in a securitized cat bond form.
Utilising its captive as a fronting insurer, to interface with Hannover Re as fronting reinsurer, means that Google can more directly access the capital markets for the catastrophe insurance protection it seeks.
The single tranche of $237.5 million Series 2020-1 Class A notes to be issued by Phoenician Re Ltd. will provide Alphabet with a source of California earthquake insurance protection, cascaded down via the reinsurance agreements and its captive insurer, over a three-year period.
The notes will have an initial expected loss of 0.333%, we understand, which equates to an attachment point at $1.5 billion of losses and detachment at $1.75 billion.
The notes feature an indemnity trigger and coverage is on a per-occurrence basis for all of Alphabet’s subsidiaries and both physical and personal property exposures, it seems.
We’re told that while this is a cat bond focused on California earthquake exposures, it will also cover damage to Alphabet property caused by an earthquake that occurs outside of the state, but causes sufficient losses within the state to trigger the notes.
The $237.5 million of notes on offer are being marketed to catastrophe bond investors and funds with a coupon in a guidance range from 2.75% to 3.25%, we’re told.
It’s encouraging to see one of the world’s biggest tech giants looking to the catastrophe bond market as an effective source of insurance and reinsurance capacity to take on its biggest natural catastrophe exposures.
There are numerous other large, globally active corporations around the world that could benefit from coverage sourced via cat bonds, as the capital markets has the appetite and depth to be able to assume large catastrophe insurance programs like this, potentially augmenting the coverage available from traditional insurance markets.
Sometimes the traditional insurance market just cannot provide enough limit to satisfy major corporations, so bringing the capital markets into these insurance programs via ILS and cat bonds is a smart way to increase the available limit, while enabling them to benefit from diversity amongst their risk capital providers and also the efficiencies inherent in the global capital markets.