SCOR grows its catastrophe & mortality contingent capital facility

French reinsurance company SCOR has announced the issuance of a new three-year contingent capital facility that will provide the company with EUR 300 million of cover against losses from natural catastrophe and extreme mortality events.

The contingent capital deal provides SCOR with a EUR 300 million contingent equity line that can be triggered by losses from natural catastrophe events and significant mortality losses. This enables SCOR to further diversify its sources of retrocessional capital, with capital market investors the providers.

This is the reinsurers third contingent capital deal and also its largest to date. The first was a EUR 150 million natural catastrophe facility in 2010 which was actually triggered resulting in a EUR 75 million drawdown in 2011. This facility was subsequently extended back up to EUR 150 million in 2012.

SCOR followed that up with a contingent capital renewal, issuing a EUR 200 million contingent equity line in late 2013. As well as growing the contingent capital arrangement this also saw life reinsurance related mortality risks included for the first time.

Now SCOR has demonstrated its commitment to accessing diverse sources of capital for peak catastrophe and mortality retrocession, growing the contingent equity line to EUR 300 million for its latest renewal. This renewal covers all-natural catastrophe perils and mortality from the majority of sources (full details further down).

Denis Kessler, Chairman & Chief Executive Officer of SCOR, commented on the announcement; “This new contingent capital facility is fully in line with the active capital management policy at the heart of our 3-year plan “Vision in Action” and helps to safeguard the Group’s solvency in case of extreme catastrophe events. This facility protects SCOR’s solvency, at a very low cost for our shareholders, against events such as a global pandemic or a natural catastrophe of historic proportions.”

SCOR has arranged this new and expanded contingent capital equity line with French bank BNP Paribas. It will replace the current contingent capital deal as of January 1st 2017, increasing its protection versus the existing contingent capital solution by EUR 100 million.

The facility can be triggered natural catastrophe events and extreme mortality events, with the coverage calibrated to protect SCOR against adverse solvency movements after such losses.

SCOR said that the use of contingent equity from the capital markets helps it to diversify its retrocessional coverage, offering a cost-effective alternative to traditional retro reinsurance and insurance-linked securities (ILS) such as catastrophe bonds.

The company said that the probability of the facility being triggered is actually lower than that of the initial 2011 contingent capital deal, reducing the probability-weighted costs for SCOR and its shareholders.

Any drawdown occurring after a catastrophe or mortality event can result in an aggregate increase in SCOR’s share capital of up to EUR 300 million (including the issuance premium). SCOR has a firm subscription commitment with BNP Paribas guaranteeing the equity under the contract terms.

To be triggered, annual aggregate losses from natural catastrophes and extreme mortality events must pass a pre-defined trigger point between January 1st 2017 and December 31st 2019.

In this way the coverage is very similar to a catastrophe bond, or a multi-year aggregate excess of loss reinsurance transaction, but the structure helps to diversify the sources of risk capital and also is targeted to protect solvency ratios by boosting equity capital in times of need.

SCOR notes that the contingent capital facility is both recognised in its internal model and has also received qualitative and quantitative assessments from the rating agencies.

If the contingent capital is not triggered then no shares are issued. If it is, then it can be considered slightly dilutive to the companies shareholders, but under the circumstances a slight dilution to equity capital is far preferable to a major loss from a large catastrophe or mortality event.

It’s a clever transaction, which makes use of the capital markets appetite to support reinsurance companies and to essentially take some catastrophe and mortality risk off SCOR’s equity balance-sheet.

A number of other companies have used such contingent transactions in the past for catastrophe reinsurance coverage, but they still remain a much rarer capital markets risk transfer structure to-date.

SCOR provided an explanation of the structure:

Characteristics of the contingent equity line

The transaction will give rise to the issuance of approximately 9.6 million warrants issued by SCOR to BNP Paribas. Each warrant gives BNP Paribas the right to subscribe to two new SCOR shares without exceeding 10% of SCOR’s share capital.

The issuance of the warrants was authorized by the 17th resolution of the Extraordinary General Meeting of SCOR shareholders on April 27, 2016 and was approved by a resolution of its Board of Directors on October 26, 2016.

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 BNP Paribas has undertaken to exercise accordingly the number of warrants necessary for the subscription of EUR 300 million[1] (issuing premium included) of new shares in two separate tranches of EUR 150 million each.

The drawdowns of the facility will only be available when:

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, 2017 to December 31, 2019, 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

the amount of net claims[3] of the SCOR group’s life reinsurance segment over two (2) consecutive semesters over the period from July 1, 2016 to December 31, 2019 (as reviewed by SCOR’s statutory auditors) reaches pre-defined thresholds 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 shares), an individual tranche of EUR 150 million (issuance fees included) will be drawn down 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.

The warrants will remain exercisable until three months after the expiry of the above Risk Coverage Period.

In accordance with the authorization granted by the General Meeting of SCOR shareholders on

April 27, 2016, the maximum number of new shares issued in the event of exercise of the warrants may not exceed 10% of SCOR’s share capital.

All subscriptions for new shares by BNP Paribas will be made at a price equal to the volume-weighted average price of the SCOR shares on Euronext Paris over the three trading days preceding the exercise of the warrants, with a discount of 5%.

BNP Paribas is committed to subscribing to the new shares but does not intend to become a long-term shareholder of SCOR and will resell the shares by way of private placements and/or sales on the open market. In this respect SCOR and BNP Paribas have entered into a profit sharing arrangement whereby 75% of the gain, if any, will be retroceded to SCOR. If the resale of the new shares occurs immediately upon exercise of the warrants through an off-market transaction, the profit share ratio owed to SCOR will be paid in the form of SCOR shares in order to limit the dilutive impact of the transaction for SCOR’s shareholders.

From the notification of the occurrence of a triggering event by SCOR to BNP Paribas until the exercise of the warrants, BNP Paribas will be prohibited from engaging in hedging transactions on SCOR shares, other than ordinary course of business transactions undertaken independently by BNP Paribas’s affiliated banking and brokerage businesses.

By way of illustration:

a/ Under current market conditions (i.e. an issuance price of EUR 29.81 based on a 5% discount on a

3-trading day volume-weighted average price of EUR 31.38[4] per share), drawdown of the total cover
(EUR 300 million) would account for a maximum of 5.23% of SCOR’s share capital[5].

b/ In the highly adverse event that a single tranche of EUR 150 million is drawn down due to the fall of SCOR’s share price, based on a 3-trading day volume-weighted average price of EUR 10 per share (i.e. an issuance price of EUR 9.5 per share after the 5% discount) the transaction would account for 8.20% of SCOR’s share capital[6].

Given these theoretical dilution levels, and because the number of new shares issued upon exercise of the warrants cannot exceed 10% of SCOR’s share capital, no prospectus for the AMF will be prepared in connection with the setting up of this contingent equity line. Should the contingent capital be triggered and issued, SCOR will make the appropriate disclosures to the market in compliance with applicable market regulations as at the time of issuance of the new shares, regarding the circumstances of such issuance, the amount of the drawdown, the issuance price, the number of shares issued and the consequences of such issuance for its shareholders.

The transaction will have no impact on SCOR’s 2016 accounts except for the immaterial subscription amount received by SCOR from BNP Paribas for the warrant issuance (EUR 0.001 per warrant).

Limited potential dilutive impact of the transaction for SCOR shareholders

This financial coverage is an event-driven contingent capital equity line, which may only be triggered by the occurrence of the aforementioned triggering events. Its potential dilutive impact therefore depends on the probability of occurrence of such triggering events, as well as on the share price at the time of trigger.

SCOR’s management believes that such a contingent capital solution provides a significant net economic benefit for its shareholders, as it favorably compares to traditional retrocession and ILS and it optimizes SCOR’s risk protection costs with a limited potential dilutive impact. SCOR estimates that the annual probability of any of the triggers occurring over the program is less than 2%, which in practice puts the probable average dilution at approximately 0.15%[7].

[1] Without exceeding 10% of SCOR’s share capital

[2] The estimated ultimate net loss is the aggregate of the individual estimated ultimate net losses of all natural catastrophe events in a given calendar year. The individual estimated ultimate net loss is the estimated pre-tax impact of any qualifying natural catastrophe event, net of all recoveries (reinsurance and derivatives) and additional expenses as recorded in the SCOR group books.

[3] The ultimate net claims amount is the aggregate of all claims relating to non-natural catastrophe events affecting the SCOR group’s life segment over a two (2) semester time period (i.e. amount of gross benefits and claims – amount of ceded benefits and claims over the time period considered).

[4] From December 12, 2016 to December 14, 2016.
[5] On the basis of SCOR’s share capital made up of 192,445,910 shares as at November 30, 2016, as publicly disclosed on December 1, 2016.

[6] Idem note 5.

[7] On the basis of an issuance price of EUR 29.81 per share.