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UnipolSai values lower counterparty credit risk of Azzurro Re cat bond


Italian non-life insurance company Assicurazioni S.p.A. values the reduced counterparty credit risk associated with the fully-collateralized reinsurance protection it sourced from the capital markets through the recent Azzurro Re I Limited catastrophe bond.

For UnipolSai it was important to begin building relationships with capital markets and insurance-linked securities (ILS) investors, as a way to establish access to the growing pool of alternative reinsurance capital for its future reinsurance needs.

Azzurro Re I was the first Italy earthquake catastrophe bond in the market’s history, bringing a new diversifying peril to the ILS investment community. It was also the first time that UnipolSai had sought cat bond protection, an experience the insurer clearly values.

Marco Sordoni, Head of Reinsurance at UnipolSai, explained; “UnipolSai is establishing relationships with investors as part of our long-term strategy to access the spectrum of global capital markets should our future reinsurance capacity needs increase. With the current low penetration rate of earthquake insurance in Italy and wider international markets, we have proactively sponsored this transaction in anticipation of our potential growth in exposure.”

The reduced counterparty credit risk of fully-collateralized reinsurance protection is often a key driver for primary insurers to decide to access the ILS market. With the collateral secured in a trust account, fully collateralized and invested in safe assets such as highly rated Treasuries, a catastrophe bond, or other ILS cover, removes the risk of a counterparty failing or being unable to pay out when a claim is made.

As risk and regulatory capital requirements develop, a diversification of those sources of risk capital could become even more valuable, raising the importance of being able to mix reinsurance providers that are leveraged balance-sheets with those that are collateralized.

By establishing these relationships with the ILS investor community now, UnipolSai can hope to maintain them and use the ILS and cat bond market as a way to better diversify its risk capital providers over the coming years.

“We value the reduction in post-event counterparty risk from the fully collateralized cover and we continue to work on other innovative risk transfer solutions as we to look to develop our international capabilities,” Sordoni continued.

The three-year Azzurro Re cat bond provides UnipolSai with €200m of collateralized earthquake reinsurance protection for Italy and quakes occurring in surrounding areas. The per-occurrence and indemnity protection mirrors the reinsurance terms within UnipolSai’s program, better integrating the ILS with its traditional coverage.

Willis Capital Markets & Advisory (WCMA) in collaboration with the group’s reinsurance broker Willis Re structured and placed the transaction for the Italian insurer. As well as being the first cat bond to cover Italian quake risks, it is also the first in 2015 to cover European perils.

Tony Melia, CEO of Willis Re International, commented; “Azzurro Re demonstrates UnipolSai’s leadership in the international reinsurance market as well as Willis’s leadership position in structuring complex and advanced risk transfer solution for our international clients. We are delighted to have supported UnipolSai in its effort to engage successfully with insurance-linked securities investors as part of their long-term development strategy.”

Melia also gave a nod to the importance of diversification within reinsurance programs and the importance of adding ILS capital into the mix, saying; “Azzurro Re is a clear demonstration of the continued trend for diversified reinsurance buying, with buyers restructuring their reinsurance programs to better integrate ILS capacity, ultimately to improve performance and efficiency gains for the benefit of policyholders as well as shareholders. We look forward to delivering future results alongside WCMA across new risks and territories.”

Bill Dubinsky, Managing Director and Head of ILS at WCMA, added; “This transaction demonstrates the continued investor appetite for catastrophe risk and highlights the strong interest for investment in diversifying perils. Alongside Willis Re we look forward to continue broadening the scope of products available to investors and also look forward to bringing the buyers of reinsurance more choice to diversify their sources of reinsurance capacity.”

The support that first-time sponsor UnipolSai received from the ILS market was impressive, with more than 20 ILS investors subscribing to the Azzurro Re issuance, helping it to upsize from an initial €150m to €200m, while pricing at 2.15%, a record low for a first time European cat bond sponsor for a first-event indemnity cover.

That is again testament to the appetite for diversifying risks and to broaden the scope of the catastrophe bond market, with investors willing to support new sponsors and new risks which help to broaden the ILS markets reach.

For UnipolSai its first cat bond is an important step in gaining a more diversified reinsurance strategy, which will benefit it for the future.

Sordoni said; “Azzurro Re is an important transaction for UnipolSai and supports our long-term development strategy across the international markets as well as in Italy. We are also proud to have sponsored Azzurro Re as an industry-first transaction for the catastrophe bond market.”

You can read all about the Azzurro Re I Limited cat bond in the Artemis catastrophe bond Deal Directory.

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