French reinsurer SCOR have announced that they have extended the cover available to them through their natural catastrophe contingent capital facility which they launched back in 2010. They have elected to extend the innovative contingent capital solution, which acts as an event-driven guaranteed equity line, by an additional €75m taking the amount of cover SCOR’s existing contingent capital facility provides back up to €150m.
When SCOR launched this facility in September 2010, it was a €150m contingent capital facility structured in two €75m tranches. SCOR drew down on one of the tranches after the facility was triggered by their catastrophe loss experience in Q1 2011. So this announcement today see’s the facility bounce back to its original size of €150m. Also last year, SCOR recalibrated the trigger point for the contingent capital facility, to have a more remote trigger probability.
The facility takes the form of a contingent capital equity line with bank UBS. It allows SCOR to issue new shares when the facility is triggered. A trigger event is defined as when SCOR has experienced total annual aggregated losses from natural catastrophes above a predetermined threshold in a given calendar year from 1st January 2012 to 31st December 2013.
SCOR considers the nat cat contingent capital facility a reinsurance layer of last resort; meaning that it would be triggered after SCOR’s retrocession and insurance-linked securities (ILS) solutions. It allows SCOR to further diversify their sources of reinsurance protection and they say it offers them a very cost-effective alternative to retro and ILS.
Contingent capital facilities are expected to become more widely used as their popularity grows and they become more cost comparable to other sources of cover. As SCOR says, they add a valuable extra prong of diversification to a retrocessional reinsurance and ILS/catastrophe bond strategy which we’re likely to see other large reinsurers experiment with in the future.
Further details on the structure and terms of the facility from SCOR’s press release can be found below. It clearly shows the wide-ranging natural catastrophe cover that this facility provides:
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Characteristics of the second contingent equity line
The transaction takes the form of an additional issuance of warrants to UBS pursuant to the 26th resolution of the extraordinary general meeting of the shareholders of SCOR dated May 4, 2011 and approved by a resolution of its Board of Directors dated November 9, 2011.
Under this new arrangement, SCOR has undertaken to drawdown on the facility upon the occurrence of a trigger event and UBS has undertaken to exercise the number of warrants necessary for the subscription of new SCOR shares in a total amount of EUR 75 million (including issuance premium).
The drawdown on the extended facility will only be available when the level of estimated ultimate net losses [2] incurred by the SCOR group as an insurer or reinsurer, as confirmed by its statutory auditors, reaches a pre-defined threshold in a given calendar year from January 1, 2012 to December 31, 2013 (the “Risk Coverage Period”) as the direct result of the occurrence within that year of one or more natural catastrophe-type events. Such threshold may be recalibrated each year by SCOR within certain limits defined to adjust the coverage levels to changes in the insurance and reinsurance market conditions to ensure the consistency of the facility’s risk profile over the period.
Under the extended facility, the eligible worldwide natural catastrophe events under the transaction include the following:
- 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.
As a result of the extension of the existing EUR 75 million facility, the aggregate amount available under the combined facility upon the occurrence of natural catastrophe related trigger event will be EUR 150 million.
In addition, 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), the issuance of new shares in an amount of EUR 75 million [3] (including issuance premium) will be automatically triggered in order to minimize the risk of this financial cover being unavailable (the warrants being unexercisable below par value) should a natural catastrophe related trigger event occur during the remainder of the Risk Coverage Period. Such share price trigger is actionable once in the life of the transaction.
Subject to certain extension and/or suspension periods for regulatory or other reasons, the warrants will remain exercisable until the expiration of a three months period after the end of the Risk Coverage Period.
The subscription price to be paid by UBS has been set at 90% of the volume weighted average price of the SCOR shares on Euronext Paris over the three trading days preceding the exercise of the warrants.
The transaction is secured by a firm underwriting commitment from UBS (which does nevertheless not intend to become a long term shareholder of SCOR and may resell the shares by way of private placement and/or sales on the open market).
From the notification of the occurrence of a triggering event by SCOR to UBS until the exercise of the warrants, UBS will be prohibited from engaging in hedging transactions on the SCOR shares, other than ordinary course transactions undertaken independently by UBS’s affiliated banking and brokerage businesses.
Under current market conditions, the subscription price would amount to EUR 16.678 (based on a 10% discount on the 3 day volume weighted average price of EUR 18.531 [4] per share) and drawdown under this additional facility would result in the issuance of 4,496,896 new SCOR shares, amounting to 2.3% of SCOR’s share capital. [5]
In case of issuance of new shares, SCOR will make the appropriate disclosures to the market, in compliance with applicable market regulations at such time, on the circumstances of such issuance, the issuance price, the number of shares issued and the consequences of such issuance for its shareholders.
The execution of this additional facility will have no material impact on SCOR 2012 accounts.
Limited potential dilutive impact of the transaction for SCOR Shareholders
This additional financial coverage is an event-driven contingent capital equity line, which may be triggered upon the occurrence of the above-described triggering events only. Its potential dilutive impact therefore depends on the probability of occurrence of such triggering events.
SCOR management believes that there is a significant net economic benefit of such contingent capital solution for its shareholders, as it favourably compares with traditional retrocession or ILS and optimises SCOR’s risk protection costs with limited potential dilutive impact. SCOR estimates the annual probability of a trigger event to be 1.4%.
The following chart summarizes the potential dilutive impact of this additional facility for a shareholder holding 1% of SCOR’s share capital prior to the share issuance (calculated on the basis of the number of shares that make up the share capital as of March 31, 2012).
(1) Based on the dilution of share capital as of March 31, 2012 in accordance with International Financial Reporting Standards (IFRS).
[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] To be deducted from the aggregate amount of the combined facilities
[4] From May 14 to May 16, 2012
[5] On the basis of SCOR’s current share capital made up of 192.190.348 shares as at March 31, 2012, which includes Treasury shares.
