Ex-Credit Suisse Team Plans $1 Billion Fund for Data Center Risk

(Bloomberg) — A team of former Credit Suisse bankers is preparing to launch a fund they say will offer double-digit returns in exchange for taking on some of the insurance risk tied to data centers.

Euler ILS Partners, an alternative investor formed through a 2024 management buyout of Credit Suisse Insurance Linked Strategies Ltd., is in the process of teaming up with an insurance company to underwrite specialist policies, Chief Investment Officer Niklaus Hilti told Bloomberg. Euler, which has already received initial signs of interest from investors, is targeting about $1 billion in capital for the co-investment, institutional fund, he said.

It would be the first time a product in the market for insurance-linked securities specifically targets data-center risk, according to Hilti. Euler plans to structure the vehicle as a so-called sidecar, meaning investors will take a quota share of an insurer’s risk. Returns are expected to be above 15%, Hilti said.

“This is an historic opportunity for the insurance-linked market,” he said.

ILS products have so far tended to focus on the impact of natural disasters on residential property, with catastrophe bonds gaining in popularity in recent years. Issuance of cat bonds has soared — growing about 24% last year — as insurers increasingly look for ways to offload part of the risk on their books to the capital markets.

As hyperscalers continue to build out data centers to power growth in artificial intelligence, the insurers agreeing to provide coverage now face a new era of risk. According to S&P Global, total insurable values for a single data center are expected to reach up to $30 billion per location, compared to $10 billion for some of the world’s biggest bridges. Against that backdrop, ILS investors are looking to capitalize on the insurance gap that’s likely to emerge.

“There are quite a number of ILS investors who have approached us about how they can participate in this market,” said Joe Peiser, chief executive of risk capital at insurance broker Aon Plc. He expects the first catastrophe bond for data centers to be issued in the next 12 months, with the risk transfer coming from a reinsurer’s portfolio.

Jimmy Keime, global head of engineering and nuclear at Swiss Re, says investors should be aware of the exposure to weather-related perils that many data centers are likely to face.

“If you look at where US data centers are being built,” and compare that to the risk map for natural hazards, “you’ll see that the vast majority of data centers are exposed,” he said.

Swiss Re’s models show that more than 40% of US data center capacity sits in potentially significant tornado zones. The risk is then compounded by so-called concentration risk, which occurs when data center clusters get built inside the same 20-mile (32.2 kilometer) radius, as is the case in parts of Texas and Virginia.

Verisk Maplecroft, a risk analytics firm, says rising temperatures are already threatening the resilience of more than half the 100 largest data-center hubs, and driving up cooling and energy requirements. That’s as more than half the biggest data-center hubs are in high water-stressed areas.

Data centers are vulnerable to acute climate events “which may damage assets, threaten their structural integrity, and disrupt operations,” according to a report co-authored by Anais Lorand, a climate and nature risk manager at AXA Climate.

Though insurers and reinsurers will carry the bulk of the risk associated with providing coverage for data centers, “there’s no doubt in my mind that ILS investors will play a part in the expansion of capacity,” Peiser at Aon said.

Hilti notes that he and his team have experience in dealing with outsized insurance risks. After the Deepwater Horizon offshore drilling disaster in 2010, Hilti’s ILS team at Credit Suisse tapped into a spike in demand for oil-rig insurance that traditional providers struggled to meet. The Credit Suisse team he led at the time brought together institutional investors to finance a bespoke vehicle that served as a backstop for an insurer’s policies covering about 200 high-value rigs, Hilti said.

In the two years during which the vehicle existed, it returned somewhere between 18% and 24%, according to Hilti.

And when that extra capacity is no longer needed, “we basically give investors their capital back and pull out,” he said.

–With assistance from Leonard Kehnscherper.

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