SCOR grows, expands natural catastrophe contingent capital facility

French reinsurance firm SCOR has renewed its innovative contingent capital facility, which takes the form of a guaranteed equity line with UBS, and has expanded the cover it provides the reinsurer to €200m, covering both natural catastrophe and extreme life events.

SCOR took out its first version of this contingent capital equity line with UBS in 2010, when the facility was €150m in size and just providing retrocessional reinsurance protection for natural catastrophe losses suffered by the reinsurer.

The facility proved its worth in 2011, when natural catastrophe losses suffered by SCOR triggered the facility allowing the reinsurer to drawdown on one €75m tranche of the contingent capital equity facility. SCOR then replenished the facility back to the original €150m in May 2012.

The natural catastrophe contingent capital facility became a core part of SCOR’s retrocessional planning, alongside its use of catastrophe bonds, mortality bonds and other capital markets tools. The original facility had a three-year term, expiring at the end of 2013. Now the reinsurer is expanding and growing the facility, by including extreme mortality events such as pandemics within the covered perils and growing the facility to €200m.

The new facility, which comes into effect on 1st January 2014, can be triggered by natural catastrophe losses suffered by the reinsurer and now by extreme life events as well, according to SCOR’s press release. The cover it provides is calibrated to protect SCOR’s solvency, being matched to its ‘Optimal Dynamics’ strategic plan which defines an ‘Optimal’ solvency zone, so triggers before solvency drops below the optimal level. SCOR said that the facility allows it to further diversify its sources of retrocessional protection, providing a cost-effective alternative to traditional retro and ILS.

SCOR will pay UBS an annual commission of 0.10% and says that this makes the new facility highly cost-efficient relative to the previous contingent capital arrangements and other forms of capital. The trigger thresholds have been raised in the new facility, so the facility has a lower probability of being triggered, helping to lower the probability-weighted costs to SCOR and its shareholders.

So, if SCOR experiences total annual aggregated losses or claims from natural catastrophes or extreme life events above certain pre-defined thresholds between January 1, 2014 and December 31, 2016, it would result in a drawdown increasing its share capital by up to €200m (including issuance premium). SCOR has entered into a firm subscription commitment with UBS for the facility.

Denis Kessler, Chairman & Chief Executive Officer of SCOR, commented on the facility; “We are very pleased to launch a new, innovative and efficient contingent capital facility. It is fully in line with the active capital management policy we set out in our 3-year plan “Optimal Dynamics”. The facility continues to protect SCOR from the accumulation of defined extreme events and will help to reinforce the Group’s solvency if needed. It is a highly efficient source of capital within SCOR’s capital structure, and is even more cost-effective than the last facility. It is also more innovative than the last facility, in that the triggers now dovetail well with our new “Optimal” capital zone, and encompass extreme life events such as pandemics. Nevertheless, the probability of triggering the facility, which we estimate at below 2% per year, is very low. Given the theoretical dilutive impact of this product, this translates into a probable average dilution of less than 0.1%.”

These contingent capital facilities are a very good complement to other sources of retro for large reinsurers, providing a guaranteed capital injection through equity should specific losses occur due to catastrophes and in the case of this new facility life events. As such the cover is similar to a catastrophe bond or ILS, in that it is contingent on a triggering event, but the capital payout flows into the business in a different way and comes from diversified sources.

The triggers are based on SCOR’s ultimate net losses from a wide range of natural perils, or a wide range of life and mortality events. The coverage is particularly broad, perhaps more so than a cat bond or ILS would be able to deliver in a single transaction such as this.

Some more details of the coverage provided by SCOR’s new contingent capital facility can be found below:

The transaction will give rise to the issuance of approximately 12.7 million warrants issued by SCOR to UBS. Each warrant gives UBS the right to subscribe to two new SCOR shares.

The issuance of the warrants was authorized by the 20th resolution of the Extraordinary General Meeting of SCOR shareholders on April 25, 2013 and was approved by a resolution of its Board of Directors on November 5, 2013.

Under the transaction agreement, SCOR has undertaken to drawdown the facility upon the occurrence of a triggering event resulting from natural or non-natural catastrophes as described below, and UBS has undertaken to exercise accordingly the number of warrants necessary for the subscription of EUR 200 million of new shares in two separate tranches of EUR 100 million each.

The drawdowns of the facility will only be available when:

1) the amount of the estimated ultimate net loss[2]incurred by the SCOR group as an insurer or reinsurer (as reviewed by SCOR’s statutory auditors) reaches pre-defined thresholds in a given calendar year from January 1, 2014 to December 31, 2016 (the “Risk Coverage Period”) as a direct result of the occurrence within that year of one or more natural catastrophe-type events, including but not limited to:

• earthquake, seaquake, earthquake shock, seismic and/or volcanic disturbance/eruption,
• hurricane, rainstorm, storm, tempest, tornado, cyclone, typhoon,
• tidal wave, tsunami, flood,
• hail, winter weather/freeze, ice storm, weight of snow, avalanche,
• meteor/asteroid impact,
• landslip, landslide, mudslide, bush fire, forest fire and lightning.

Or, when

2) the amount of net claims[3]of the SCOR group’s life segment over two (2) consecutive semesters (as reviewed by SCOR’s statutory auditors) reaches pre-defined thresholds within the Risk Coverage Period as the consequence, in particular, of one or more of the following life business related events:

• deviation of epidemic, pandemic or a similar incidence or wide spread of one or more medical conditions deriving from any disease(s),
• acts of war, acts of terrorism,
• accidents due to non-natural cause(s),
• material deviation from forecast biometric trends (mortality, morbidity, disability or longevity) recorded by the life segment for any reason whatsoever.

In addition, subject to no drawdown having already been conducted under the facility, if the daily volume weighted average price of the SCOR shares on Euronext Paris falls below EUR 10 (i.e. a price level close to the par value of the SCOR share), an individual tranche of EUR 100 million will be drawn down out of the EUR 200 million facility in order to ensure the availability of this financial cover (the warrants being non-exercisable below par value) if a natural or non-natural catastrophe-type event occurs during the remainder of the Risk Coverage Period.