Citing climate risk, Blackstone sees cat bonds & ILS as real estate risk transfer options


Investment giant Blackstone is increasingly focusing on the need to manage risks within its various real estate companies and assets, using risk transfer solutions, insurance and instruments such as catastrophe bonds and insurance-linked securities (ILS).

Blackstone is one of the biggest investment groups in the world and has a global real estate portfolio that it values at around US $514 billion, while managing close to $280 billion of investor capital in real estate strategies, companies and portfolios.

The company has a sophisticated approach to managing this money in the real estate sector, as you might expect, following a conviction based approach, furnished by data insights gleaned from its extensive reach into global markets.

This is an important point, as having this access to data and near real-time insights into markets, valuations, and themes, alongside a growing risk management practice and ability to measure risk, enables Blackstone to take better-informed decisions when it comes to hedging exposures that its real estate portfolios naturally carry.

Blackstone’s focus on risk transfer has been on the rise, with real estate one key asset class where we’re told it sees both an opportunity and need to carve out excess risk and exposure, to protect its assets, its investors and its own profits.

The investor has, of course, been doing this for years, with traditional insurance solutions such as captives one way it has achieved a level of protection and hedging (removing risk from its main balance-sheet).

But, we understand that the increasing focus on climate-related exposures, as well as awareness of the threat certain natural perils can pose, has driven Blackstone to heighten its focus on risk, resulting in a desire to try out new mechanisms and structures to protect its enormous real estate portfolio.

All of which culminated in the ground-breaking Wrigley Re Ltd. (Series 2021-1) parametric catastrophe bond transaction that came to market last year.

The Wrigley Re cat bond deal saw Blackstone accessing risk transfer, or insurance, capacity from the capital markets via its captive insurer and a securitization for the first time.

Effectively, the cat bond provided Blackstone with a source of multi-year risk transfer, specifically parametric earthquake insurance protection, for its main real estate captive insurer, named Gryphon Mutual Insurance Company.

We’re told Gryphon Mutual Insurance has been accessing sources of supportive capacity for some time, it’s not just an off-balance-sheet retained pool of risk.

But the Wrigley Re catastrophe bond marked a new entry into the capital markets for complementary risk capital, in an efficient structure, backed by third-party investors, rather than through the traditional insurance industry.

Hannover Re featured as a fronting reinsurance company for the cat bond transaction, taking the risk from the captive and transferring it to the capital markets for Blackstone.

But this really was Blackstone thinking outside of the box, as to how it can carve exposure from its real estate portfolio in a more efficient way.

We’re told climate risk is a driver here for Blackstone, as the investment giant understands the need to be able to manage exposures of all kinds, while climate is seen as likely to weigh on asset values if not risk managed.

Starting with a peak catastrophe exposure, such as earthquake and this catastrophe bond, provided the firm with a testing ground for interfacing more directly with capital markets.

Now, we’re told this focus on managing and ultimately finding the right solutions for transferring risks, or hedging exposures, within its real estate business is a rising priority for Blackstone.

The company is in the market hiring a new VP of Global Insurance Solutions for its subsidiary Revantage, a service company that works to support Blackstone’s real estate companies.

There’s nothing ground-breaking about hiring a senior leader to help drive the insurance and risk transfer strategy for the Blackstone real estate portfolio, but taken alongside what we’re hearing from sources connected to the firm, it is clear the investment giant is looking to ensure risks are managed and access to risk capital in all its forms is provided.

The pending new hire at Revantage will be responsible for innovation in the placement of its insurance programs on a global basis, including the “design, and execution of insurance-linked securities, such as CAT bonds and evaluation and execution of new lines of coverage and/or addressing the needs of new clients to Revantage.”

It sounds like an interesting challenge, but when taken in the context of one of the world’s largest real estate investors and holders of physical and financial assets in the space looking to get ahead of the curve on risk transfer and risk capital sources, the position could be a meaningful sign of intent.

We can only guess at Blackstone’s strategy, but having accessed the catastrophe bond market once, the company is almost certain to be exploring where and how the capital markets, insurance-linked securities (ILS) and other forms of innovative risk transfer can support its real estate portfolios needs and also returns.

More broadly, these risk transfer activities in the real estate space may also have read-across relevance for other areas of Blackstone’s massive portfolio of assets and interests, which will have significant levels of risk embedded in them, with a relatively significant amount likely unhedged at this time.

All Posts

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!