Baltic PCC Limited (Series 2019)

Pool Reinsurance Company (Pool Re), the UK government-backed mutual terrorism reinsurance facility, is set to tap the capital markets for the first time for a source of retrocessional coverage, with a catastrophe bond to be issued through a UK domiciled and regulated insurance-linked securities (ILS) vehicle.

This will be the first terrorism catastrophe bond in history and one of only a handful of terrorism ILS transactions ever structured and issued.

Pool Re has been planning to issue a catastrophe bond or other ILS instrument in order to access capital market funding to augment its retrocessional reinsurance coverage for some time now, with this Baltic PCC Limited 2019 transaction the first evidence of a deal coming to market.

Baltic PCC Limited is a newly registered protected cell company that will be regulated and authorised under the United Kingdom’s Risk Transformation Regulations 2017 as a transformer of risks, we understand.

We’re told that this initial transaction sees Pool Re seeking out at least GB £75 million (roughly US $97m) of retrocessional reinsurance protection covering terrorism risks in the UK. The covered area is said to be England, Scotland and Wales. The length of coverage will be three years from March 1st, split into three individual risk periods, we understand. The transaction is expected to be issued in February, market sources said.

Baltic PCC Limited will issue a single tranche of Series 2019 Class A notes, we’re told, with the notes set to be sold to ILS investors and the proceeds used to collateralise a retrocessional reinsurance agreement between Baltic PCC and Pool Re itself.

The coverage will be structured to trigger on an indemnity and annual aggregate basis, we understand, hence providing both occurrence protection for major terror attacks and frequency protection for a series of small terrorist attacks.

We’re told that the attachment point for the coverage that Baltic PCC will provide is likely to be £500 million of loss to Pool Re, with the terrorism cat bond providing coverage across a £200 million layer, exhausting at £700 million of losses to Pool Re.

That equates to an initial attachment probability of 3.05% and an initial expected loss of 2.71%, we’re told.

Sources told us that there is no third-party risk modelling firm involved in this transaction, likely due to a lack of available terrorism risk models in the market.

The terrorism risk cat bond notes to be issued by Baltic PCC Limited are being offered to ILS investors with coupon price guidance in a range from 5.4% to 5.9%, we understand.

Update 1:

The Baltic PCC terrorism risk cat bond  from Pool Re remained at UK £75 million in size, but the pricing settled at the top-end of initial guidance at 5.9%.