A united front

The first half of 2014 marked a significant milestone for the insurance-linked securities (ILS) sector as Italian insurer Generali entered the sector with the first European wind indemnity-based 144A catastrophe bond in recent years.

Lion I Re, as the bond is known, was issued through a single tranche of notes, and closed at €190 million, with investor demand driving its size up by 27 percent from the initial €150 million offering.

Delighted with the level of interest from investors, Generali—a company with roots that can be traced back to 1831—is very proud of its introductory transaction.

As Franco Urlini, head of group reinsurance and R&D explains, Lion I Re’s inception was dependent on the alignment of several keys factors.

“Entering the ILS space was something that we were starting to think about and we were interested to compare the solutions provided by the ILS market with the traditional market, where we were historically in business,” he says.

"As the traditional and ILS markets have both been softening in the last couple of years, we now see a correlation between the two."

“However, as the traditional and ILS markets have both been softening in the last couple of years, we now see a correlation between the two and realised that there is no longer a gap between them, which suggested that a cat bond would be a good option for us. Currently we are in a great position as the buyers.”

In recent years, Generali has focused on managing the risk of the overall group in a more centralised way which would inevitably allow the company to better leverage opportunities in the ILS market.

By bringing investors the value of a combined team with long-standing insurance and capital markets experience, Generali felt that investors would see its strong commitment to the sector.

“It was a really important step for us because it also meant that we could put a new framework in place which can be activated when suitable to contribute to the achievement of the group’s targets,” says Mirko Sartori of the capital management team.

Careful planning

Lion I Re provides Generali with fully collateralised cover through the whole risk period and allows the insurer to rely on multi-year committed capacity at convenient pricing levels.

As one of the largest global insurance providers—it reached a total premium income of €66 billion in 2013—this was very important for the insurer.

“The bond is fully integrated with our current insurance protection, so not on the top or parallel, and this represents a substantial achievement for our overall group protection,” says Urlini.

Sartori adds: “In addition to being a significant 144A European windstorm bond with an indemnity trigger, we have also been able to access the market during the calendar year compensating investors of the actual risk they are bearing, taking into account the seasonality of this specific kind of risk.”

The bond itself was modelled by RMS, bringing a greater level of transparency to the transaction, which Generali felt was important when gaining investor interest.

Urlini says that as the company already uses RMS for its European windstorm risk for traditional reinsurance purposes, the bond’s modelling was very much in line with the way it conducts business. That, coupled with the general market approval of using a third party risk modeller, made the decision unquestionable.

“The decision to use RMS is certainly factored into the coupon rate,” says Sartori. “Being the first 144A European windstorm indemnity bond in the market place in recent years, investors wanted to know how we managed the portfolio and how we measured the risk in the bond, so using RMS made that clearer.”

Leading the way

With more than a century of experience behind it, Generali is not only a key player in the global market, but also the leader in its home country of Italy.

For this reason, Urlini says, he would not be surprised to see others in the Italian market look to enter the ILS sector.

“I’m sure that our Italian competitors will look with a lot of interest. Italy is very much a country where some natural perils are quite relevant (earthquake for example), so I’m sure some players will consider the transfer of risk on Italian quake soon,” he says.

Old habits

Generali currently has relationships with the main providers of reinsurance worldwide, dividing its programme among several different companies.

For its catastrophe cover—the largest programme it purchases in the market—the insurer works with a host of companies including European continental reinsurers, the London market, Bermuda and the US.

However, while financial strength and rating is important to the company, spread also plays an essential role. “The most important thing for the group is the quality and the diversification of the counterparties, so in a simplified way, the financial strength of the companies to whom we cede our business,” explains Urlini.

“Rating of reinsurers is also important although it is a simplification and just a part of the analysis that we perform when selecting the counterparties.

“We have developed a relationship with many players to get the best spread. We are not in the hands of few reinsurers.”

Sartori continues: “This is why it was important for us to broaden our reinsurance panel accessing capital markets capacity. It allows us to decrease the concentration of risk that we otherwise have with traditional providers.”

While Generali’s recent transaction represents only a small part of its reinsurance protection, Urlini explains that given the right circumstances, the insurer would certainly increase its interaction in the space.

“The ILS market will represent in the future an important part of our overall risk transfer strategy and implementation, but at the moment, in absolute amount, it is not the most important part. The cat bond for example, represents less than 25 percent of our European windstorm exposure,” he says.

“We have much larger risks which we manage through reinsurance, such as Italian EQ. This is a much higher exposure, so the ILS market involvement would be an integration of the existing reinsurance protection and—depending on market conditions—could play an important role in the future.

“Whether to place more risk in the traditional or ILS markets will depend on the market conditions, as well as the capability of the two markets to provide competitive solutions to our industry.”