Pool Re investigates use of UK ILS structure for terror retrocession

The UK’s government-backed mutual terrorism reinsurance facility Pool Re is actively exploring the issuance of an insurance-linked securities (ILS), or at least some collateralized reinsurance, using the recently set up UK ILS regulatory regime, as the mutual looks to expand its sources of terror retrocession to the capital markets.

Speaking at the SIFMA IRLS 2018 conference in Miami this week, Ian Coulman, the CIO of Pool Re, explained that the ILS structure is being actively explored.

Market sources have also said that Pool Re has a pitch deck of sorts, which it has been sharing to gauge interest from the ILS fund community. In this way, Pool Re is assessing the potential for an ILS deal to be successful, as well as seeking feedback to tweak any offering and ensure it incorporates investors wish-lists where possible.

Pool Re’s CEO Julian Enoizi has previously said that the ILS market would present a logical evolution in Pool Re’s sources of retrocessional protection, with the terrorism protection gap now larger than ever and expanding all the time, underlining the need for innovative and effective solutions.

Being government supported, Pool Re is looking to gradually move the taxpayer as far from the risk as possible through the use of reinsurance and in future the capital markets, Coulman said during a panel session at the SIFMA IRLS event.

De-risking the government to protect its balance-sheet is a key aim, Coulman explained, but with the terror retrocessional reinsurance market of a finite size, tapping the capital markets is seen as a way to secure complementary coverage, putting an ILS issuance firmly on the table for Pool Re.

“Ultimately the government would like to ensure that it’s not on its balance-sheet anymore, stop providing what is essentially an unlimited guarantee.

“We’ve moved along in that process, as a result of modernisation programs that began in 2014 and 2015 when we purchased reinsurance for the first time. We’ve started to push the taxpayer and the government further away from that potential risk.

“ILS we see potentially as the next step in that journey,” Coulman said.

Pool Re can currently withstand a terrorism loss event of about £12 billion thanks to its current capital stack and protections, Coulman explained, shifting this risk to the private market and away from the government and taxpayers.

The use of ILS could help Pool Re to shift this risk even further away from the government, with the help of the capital markets and ILS fund managers, hence the terror reinsurer is looking at its options currently.

Coulman explained the rationale for exploring ILS and the UK ILS structure for Pool Re, “It’s diversifying risk, it’s building resilience, it’s pushing the taxpayer further away from the potential loss. It should complement the capital structure that we have, with the reinsurance program that is in place.

“It’s just sharing that risk with a wider range of potential investors.

“We have the reinsurance program, the government stakeholder, but if we can broaden and share that risk across the capital markets, then that’s better. It helps build that overall resilience we’re trying to achieve.”

So Pool Re has begun the work of bringing a theoretical ILS transaction to market. Sources said discussions have been ongoing over the potential structure, form and size of such an issue and while a placeholder size of $100 million has been mooted, according to attendees at SIFMA we spoke with, it is just that and could be much larger if the right structure and risk level can be found to suit the ILS investor base risk appetite.

Coulman explained the process, saying, “We’re at the moment researching and considering how an ILS might work, where it would attach within our capital structure, what kind of rates we’d have to pay.

“We see it as very much complementing, certainly complementing the reinsurance, but working to build that resilience within the overall structure. We’re going through this process right now to decide what should that be.”

Of course, Pool Re is being pushed to utilise the UK ILS structure, given the UK government backed nature of the reinsurance pool, but Coulman suggested that Pool Re will look for the most efficient and the right solution, rather than being pushed down one avenue before it is ready to proceed.

“We as a UK entity owned by the members, we have the government backstop and public policy objectives, there is an element of political encouragement to look at the UK ILS given the passing of the UK legislation in November to allow ILS or special purpose vehicles to be established in London,” he explained.

Continuing, “The expertise and the knowledge is there, but its a question of how to go about it. There’s some question marks over whether it will be able to compete with the likes of Bermuda and that’s still to be tested.”

If Pool Re wants to considerably increase the size of its retrocession program with the help of the capital markets, it may find that a collateralized reinsurance solution is preferable to a catastrophe bond, especially for the first placement into the ILS market.

The UK protected cell structure could support that, perhaps in a sidecar style a little like the first UK ILS transaction completed by Neon.

A UK ILS vehicle could take a quota share of a specific layer of Pool Re’s risk, or a number of slices within different cells to match investors appetites, offering the terrorism reinsurer significant flexibility in its retro program and a platform it could grow.

Of course that can just as easily be achieved in Bermuda, Guernsey or elsewhere, so it will be interesting to see where Pool Re elects to pursue its first capital markets retro placement.

Importantly, Coulman said that keeping investors appraised of the process is key, and hence it has engaged early with them, before a transaction is actually ready.

This will help Pool Re to hone its approach to the ILS market and its investors and get the transaction offering right and therefore unlock as much capacity as possible from ILS funds and investors.

“One of the key aspects is setting expectations to investors from the start, informing them of what the risks are and what’s involved, but keeping them involved on a regular basis as well,” he explained.

“If you keep that relationship and the information flowing about what you’re doing, what’s developing, where the risks are, I think you’ve got a better chance of keeping those investors for the long-term and they’ll have the appetite for new issues as you move forward,” Coulman closed.

Pool Re recently announced it had increased the size of its retrocessional reinsurance program to £2.1 billion and also added cyber terror cover to it as well.