The successful placement at low-pricing of the first green catastrophe bond occurred during an extremely active marketplace for cat bonds, noted joint bookrunner and green coordinator French financial services firm Natixis.
As we have explained, the EUR 200 million Lion III Re DAC cat bond transaction is the first green cat bond, sponsored by Italian insurer Generali who will receive three years of collateralized reinsurance against losses from European windstorms and Italian earthquakes, on an indemnity trigger and per-occurrence basis.
The transaction priced at a particularly keen level, given the notes initial expected loss of 2.99% and eventual coupon of 3.5%, giving a multiple at market of only 1.17 times the EL.
That’s even lower than Generali’s last Lion catastrophe bond, which had a multiple of just 1.33 times the expected loss.
European property catastrophe reinsurance pricing has been very low for some time and even despite some firming remains thin.
But it appears this cat bond has priced at a particularly low multiple, the lowest of any cat bond transaction (with any underlying peril) we’ve tracked this year, suggesting that investors have discounted the notes for their green or environmental, social, governance (ESG) features.
Natixis acted as joint bookrunner and sole green coordinator for the issuance, helping to place the notes with investors and working on the green framework embedded within the deal.
They noted this morning that the green catastrophe bond “was oversubscribed”, which could be down to its popularity given the green features as well.
It was the first green catastrophe bond sponsored by an insurance company ever, Natixis explained and also “first capital management product, whose freed-up capital benefit is to be allocated to Eligible Projects.”
As a reminder, the green cat bond features utilised in this transaction are: that the notes issued will free up an equivalent amount of capital from Generali’s own balance-sheet to be used for projects as specified in the green ILS framework; that the collateral will be invested specifically into green bonds issued by the EBRD; and related to reporting on the projects Generali will allocate balance-sheet capital to and the EBRD’s green bond reporting.
Natixis called the green cat bond a “highly innovative structure”.
Nicolas Merigot, Head of GSCS France and Global Head of Bank, Insurance and Pensions Solutions at Natixis, commented, “Natixis has always been very creative in the ILS world, so we are very proud to bring to the market this landmark transaction. I would like to thank Generali for their trust and support. Due to the mix of expertise within our teams – ESG, Insurance, structured finance – we have a unique positioning: enabling us to answer to our insurance clients’ and our investors’ needs by taking into account the growing interests for ESG and Green solutions.”
Timing can sometimes be important in the insurance-linked securities (ILS) market, particularly when capacity is in strong demand either due to robust issuance, or a reinsurance renewal cycle approaching.
But in this case, while the catastrophe bond market remains on record-setting pace in 2021, the notes priced at a particularly tight level this time around.
“This was a highly successful placement in an extremely active market, with eight deals at the same time as the Lion III Re DAC, so we thank all those that helped make this a great achievement. We are sure this green cat bond is the first of many more,” Merigot explained.
Julien Duquenne, Co-Head of Green and Sustainable Hub Origination EMEA, added, “This transaction is highly innovative and opens interesting leads for “green or sustainable” capital and risk management for the insurance industry. The deal links extreme climate risk mitigants with concrete allocation of capital to ‘green’ projects.”
While it’s impressive that this first green cat bond executed so strongly from a pricing standpoint, the question has to be asked whether the risk is truly being covered with such a low multiple-at-market, or whether the appetite of some investors for an ESG appropriate asset has resulted in a level of discounting.
As an investor, how healthy that is depends on your size, motives and ability to absorb the risk within your portfolios of course. But for the dedicated cat bond funds and ILS managers, is the diversification sufficient to make such low-viable?
Of course, it will only really matter if there is a loss, at which point some people may ask how well you were being compensated for the risk and whether the green features make up for any reduction in coupon.