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Generali’s recent Lion I Re cat bond exceeded expectations at the insurer, both in terms of price and interest, and in the face of a fiercely competitive reinsurance market.
That is the word from Franco Urlini, head of group reinsurance and R&D at Generali, who tells Bermuda:Re that the insurer was “extremely satisfied with the bond and the price we achieved. We had a target in mind, but the final result exceeded that”.
“Compared with traditional reinsurance – and considering both the structuring costs and associated credit risk - the bond proved an attractive transaction for the Generali Group.”
Mirko Sartori of the capital management team in Generali says that the bond was well-received by the market with the final coupon price reaching 2.25 percent – “the lowest achieved spread in the ILS market for risks different than health; and well below the initial pricing guidelines” – while the transaction was upsized from an initial €150 million to €190 million.
Urlini says that the €190 million limit was constrained only by Generali’s reinsurance appetite, rather than that of investors, with interest in the European windstorm transaction proving fierce.
Helping matters was the bond’s diversifying nature and its indemnity trigger, which proved attractive to both investors and Generali.
“We wanted to use this form of trigger because the bond replaces traditional reinsurance in our portfolio, which already uses indemnity as a basis for assuming risk. In this way we were able to avoid the basis risk associated with a change in trigger type,” explains Urlini.
The indemnity trigger also worked well with investors who have grown increasingly comfortable with the trigger, says Sartori. “ILS funds are increasingly taking on reinsurance underwriters who understand these kinds of transactions, which are in fact quite close to traditional reinsurance.” This proximity helped to heighten interest in the bond and drive down the price for Generali.
Urlini admits that indemnity transactions require more work, but says that Generali was looking to leverage its “high degree of detail on exposure and risk within our portfolio”, a fact that was “very much appreciated by investors and was reflected in the price”.
Urlini says that the transaction represents around 20 percent of Generali’s reinsurance spend for European windstorm, but it is apparent that the group is considering other perils for the convergence space.
Generali considered Italian quake initially for the transaction, but traditional pricing remains competitive explains Urlini, although he does not discount such a transaction emerging in the medium-term.
Sartori says that Generali is considering other perils such as quake and life, with the team having received a mandate from top management to develop a reinsurance buying strategy that includes alternative capital.
Sartori explains that the Lion I Re transaction also helps with the group’s push to improve its capital position in the face of Solvency II requirements.
“The transaction has improved the capital and solvency position of the group. Fully collateralised reinsurance delivers significant advantages in terms of Solvency II metrics—lowering the concentration risk we have into our reinsurance panels and minimising the credit risk charge we face within the group,” says Sartori.
Generali is evidently pleased with the transaction and after a time watching the market develop it seems that more transactions from the insurer may follow.
Generali, cat bonds, ILS, reinsurance, Lion I Re