Generali measures benefit of €28.1m “green cat bond” freed capital

Italian and global insurance giant Assicurazioni Generali S.p.A. has disclosed that the capital freed up by its first green catastrophe bond issuance, the €200 million Lion III Re DAC transaction, was allocated to refinance a green asset and this helped avoid greenhouse gas emissions.

Generali was early to recognise the potential for insurance and reinsurance linked investments to have green, or environmental, social and governance (ESG) credentials, and as a result of work on this, launched its own framework for Green insurance-linked securities (ILS) back in 2020.

The framework defined how Generali could use the freed-up capital benefit achieved through its sponsorship an ILS or catastrophe bond transaction for Green asset investments.

In ESG terms, with catastrophe bonds, there are the collateral assets that can be put to work for sustainable means, or there is the regulatory capital relief side of the deal, each of which can create opportunities to make an issuance more ESG-appropriate in investors eyes.

Which meant that an amount equivalent to the capital relief benefit achieved, through issuance of a Green ILS or cat bond transaction, could be exclusively used to allocate capital to, or refinance, green initiatives, projects or assets.

The insurer completed its first green catastrophe bond issuance, the €200 million Lion III Re DAC transaction, in 2021.

The €200 million of cat bond notes issued provide Generali with reinsurance protection against certain losses from European windstorms and Italian earthquakes across a multi-year term.

As insurers have to hold capital against the risks they underwrite, use of an ILS as a reinsurance arrangement can allow part of the risk capital to be freed up, under European Directives.

In the case of the Lion III Re catastrophe bond, Generali said that this freed up €28.1 million of capital for the insurer, under regulatory capital relief calculated on the basis of its Solvency Capital Requirement at the inception of the cat bonds risk period.

This was allocated to a sustainable investment that can make a positive environmental impact, in this specific case it helped to refinance a green asset that Generali already had interest in.

The asset in question was the Tour Saint-Gobain in Paris, a building project that asset management unit Generali Real Estate was behind, and that on completion achieved the highest marks possible for four international environmental certifications.

Due to the design of the building, being energy efficient and constructed using sustainable practices, it was found to have avoided overall emissions of 478 tCO2e.

As a result, the €28.1 million of capital, freed up due to the issuance of the Lion III Re catastrophe bond, was deemed to have served to avoid 35.1 tCO2e of greenhouse gas emissions, by an impact evaluation undertaken by a third-party specialist, with the report from that evaluation also audited by KPMG.

As the first and only such catastrophe bond, this Lion III Re issuance has demonstrated how by sponsoring a cat bond issuance, an insurance or reinsurance company can put capital to sustainable uses, delivering environmental benefits.

Generali secured extremely strong pricing execution with the issuance of this cat bond, as it priced with a particularly thin multiple-at-market, compared to other cat bonds issued around the same time, suggesting investors had attributed some benefit to the ESG or “green” nature of the cat bond asset.

In the current hard reinsurance market environment, potential cat bond sponsors could look to Generali’s green cat bond model as a way to gain more investor support, while also potentially widening the investor base for their cat bonds, which could assist in achieving better execution on issuance.

You can read all about Generali’s Lion III Re DAC catastrophe bond and every other cat bond ever issued in the Artemis Deal Directory.