First terrorism risk cat bond oversubscribed: Pool Re

Pool Re, the UK government-backed mutual terrorism reinsurance facility, has now successfully completed the issuance of its first terrorism risk catastrophe bond, the £75 million ($97m) Baltic PCC Limited (Series 2019) with the placement said to have been oversubscribed thanks to ILS investor support.

The insurance-linked securities (ILS) market has seen terrorism risk before, of course. As long ago as 2003, the cat bond market saw a transaction called Golden Goal Finance Ltd. which provided event cancellation protection against risks including terror attacks.

There have also been a number of repeated and renewed collateralized reinsurance or private ILS transactions that transfer terror risks to the capital markets, with a number of triggers and structures employed over the year.

But Pool Re’s successful transaction is the first standalone terror risk Rule 144A cat bond transaction, so brings a new diversifying and man-made peril to the insurance-linked securities (ILS) market.

Pool Re said today that the transaction was oversubscribed thanks to investor demand.

The £75 million transaction did see its pricing rise during the period it was marketed, having been launched to investors offering a coupon price guidance in a range from 5.4% to 5.9%. At pricing the coupon was fixed at the top-end of that range, offering an initial interest spread of 5.9%, in order to garner the necessary ILS investor support, which was clearly successful.

Commenting on the completion of the Baltic PCC terrorism cat bond, CEO of Pool Re Julian Enoizi said, “This is the first stand-alone terrorism risk catastrophe bond. We have been working towards this placement for several years and are excited to bring an entirely new source of capital to the terrorism risk market for the first time. It diversifies the funding of our retrocession programme, complementing the capital of traditional reinsurers to spread terrorism risk even more broadly.

“In addition, it further protects HM Treasury, and helps us towards our ultimate goal of returning as much risk as possible to private markets.”

The catastrophe bond covers physical damage risks from terror attacks in the mainland UK, including covering attacks characterised as nuclear, chemical, biological or radiological, as well as providing Pool Re with coverage for any losses triggered by a terror-related cyber attack.

The £75 million catastrophe bond will now provide a small component of the £8.9 billion of protection that the UK taxpayer benefits from thanks to Pool Re and its reinsurance and retrocession arrangements.

This protection consists of Pool Re’s own reserves, retrocessional reinsurance protection, £410 million of retentions held by its Member insurers, and now the new £75 million cat bond issued by UK domiciled special-purpose vehicle Baltic PCC Ltd. The cat bond triggers after losses in excess of Pool Re Members’ net loss of £500 million.

Ian Coulman, Pool Re CIO, commented, “We began the analysis of potentially sourcing capital from the ILS market shortly after our initial placement of the commercial retrocession programme. Part of this involved having discussions with a broad range of ILS related experts, to help shape our thinking around the optimal structure.

“Furthermore, during this time, we have advanced our modelling capabilities in relation to the terrorism threat, which has been instrumental in getting investors comfortable with the risk. This is clearly a positive development for the ILS market as it introduces a new diversifying peril.”

The cat bond provides Pool Re with retrocessional reinsurance coverage on an annual aggregate and indemnity trigger basis across a three-year term.

The Baltic PCC terror cat bond issue did not use a third-party risk modelling firm, which we know raised questions with some investors who prefer to see an unrelated third-party providing risk metrics as not every ILS fund manager has the ability to model a complex risk like terrorism on its own.

But the sophistication and detail in the risk modelling and analytics, which was provided by Pool Re’s in-house actuarial team using its own model calibrated by Cranfield University using Computational Fluid Dynamics, was clearly more than sufficient to generate the investor support required to get the cat bond issuance completed at the targeted £75 million size.

Pool Re’s cat bond is only the second to be issued under the UK’s relatively recently enacted ILS regulatory system.

GC Securities placed the three-year bond for Pool Re, while Clifford Chance provided legal support.

Shiv Kumar, President, GC Securities, said, “Executing this successful placement whilst the ILS market is processing losses from 2017 and 2018, demonstrates the strength and quality of Pool Re’s proposition and their market-leading risk analysis. This type of innovation is a great example of the major role the UK market can play in broadening the ILS asset class.”

Katherine Coates, corporate partner at Clifford Chance and head of the lawfirm’s Global Insurance Group, added, “We were delighted to advise Pool Re on this ground-breaking transaction, leveraging our extensive ILS expertise to date and strong working relationship with UK regulators, to ensure a positive outcome for all parties.

“The deal is another strong endorsement of the UK’s new ILS regime and closing it would not have been possible without the effective support of the PRA.”

Importantly, Pool Re has been working to help insurers and reinsurers better understand and quantify terrorism risk so that the private market can take on more of the exposure.

Hence, the successful placement of this terror ILS bond with institutional and specialist investors is Pool Re’s latest tool to support this part of its strategy, moving terror risk further away from the UK taxpayer while shifting premiums back to the private market.

You can read all about this first standalone terrorism cat bond Baltic PCC Limited (Series 2019) and every other catastrophe bond transaction since the market began in our Deal Directory. It has also been included into all of our cat bond market charts and statistics.