The recently completed EUR 200 million Lion II Re DAC catastrophe bond transaction set a new low in terms of the pricing multiple, of the expected loss level to the amount of coupon that investors will be paid, in the history of the 144a cat bond market, according to GC Securities.
The investment banking and insurance-linked securities unit of reinsurance broker Guy Carpenter acted as the lead structurer and sole bookrunner for the recent Lion II Re cat bond, which benefits Italian headquartered global insurer Assicurazioni Generali S.p.A. with a source of capital markets backed, fully-collateralized multi-peril reinsurance protection.
The transaction set a few new firsts for the catastrophe bond market, including being the first European multi-peril 144a cat bond deal with an indemnity trigger, and the first 144a cat bond to feature continental European flood risks. It’s also the first Euro denominated cat bond since 2015, despite the low interest rate environment in the region.
But perhaps most notable is the low pricing achieved, on a risk adjusted basis, which has resulted in the Lion II Re cat bond setting a record for the lowest pricing multiple of a 144a cat bond as well.
Cory Anger, Global Head of ILS Structuring at GC Securities, commented on the deal; “Generali’s balanced structuring decisions when renewing their prior Lion I coverage through the Lion II cat bond led to an expansion of the covered perils (including into non-modelable territories) and also achieving the first euro-denominated cat bond since 2015 despite negative interest rates in the euro-zone.
“All of this was achieved at the lowest ever differential between the Risk Interest Spread relative to the insurance risk (annual expected loss) in the history of the 144A cat bond market.”
The EUR 200 million of Lion II Re cat bond notes have an initial modelled expected loss of 2.24%, while the coupon finally settled at a reduced level of 3%. As a multiple, of expected loss to coupon, 1.34 times the EL is particularly low for any transaction, but perhaps especially so for a cat bond that features an unmodelled peril as well.
Providing Generali with four years of per-occurrence based indemnity reinsurance protection for losses from Europe windstorms, Europe flood, and earthquakes affecting Italy, the transaction was an expansion of the sponsors previous windstorm only cat bond.
James Nash, CEO of Guy Carpenter International, said; “We are delighted to have successfully applied our capital agnostic approach within the European region as well as completed the first ever 144A cat bond exposed to Europe flood. This transaction was optimized to match Generali’s specific needs to the current appetite of capital markets investors while also matching the rest of the risk transfer program with the strengths of the traditional reinsurance market.”
Investor support helped to drive the multiple down, with the coupon falling during the marketing phase of the transaction and resulting in a very low spread for this level of risk.
“Generali’s decision to sponsor Lion II Re away from the typical late Q3 and/or Q4 timeframe for Europe perils was rewarded with the broad-based and robust support of more than 20 investors that allowed the deal to be priced almost 15% lower than lowest end of initial guidance.
“The great execution of the Lion I and Lion II bonds is evidence that 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 we anticipate robust investor support for future Generali issuances,” explained Chi Hum, Global Head of ILS Distribution, GC Securities.
As the ILS investor community supports such low levels of pricing for sponsors the size of Generali, it will likely encourage them to return to the ILS market more frequently and with larger deals, as capital optimisation using the capital markets for reinsurance becomes an increasingly high priority with these large insurers.
Anger added; “We are honored to have been selected to lead the structuring of, and sole distribution of, the Lion II bonds to facilitate Generali’s continued centralization and capital optimization objectives to achieve best terms and conditions.”