PICC P&C’s new $12m Great Wall Re is the first Hong Kong sidecar ILS issuance

PICC Property and Casualty Company Limited has now reported that its new US $12 million issuance of insurance-linked securities under its Great Wall Re Limited special purpose insurer is actually a quota share reinsurance sidecar, the first in Hong Kong, designed to provide protection to its offshore wind power property insurance book on the Chinese Mainland.

Given the limited information, we were incorrect in initially reporting that the new Great Wall Re issuance we had learned about was a catastrophe bond, having made the assumption it was a follow-up to PICC Property and Casualty Company’s debut sponsorship back in late 2022, the $32.5 million Great Wall Re Limited cat bond deal.

PICC Property and Casualty Company has instead utilised Hong Kong’s insurance-linked securities regulatory regime to become the first collateralised reinsurance sidecar sponsor to use an SPI located there.

We had reported on October 5th that a new Great Wall Re issuance of insurance-linked securities had been completed, assuming it to be another cat bond from the sponsor, then following up a few days later after we learned it was a US $12 million (HK $94m) issuance of notes.

Now, it’s clear that this is a landmark first quota share reinsurance sidecar securitisation for Hong Kong, as the country successfully expands the use-cases for its ILS infrastructure.

This morning PICC Property and Casualty Company has said that the US $12 million (HK $94m) Great Wall Re ILS issuance is “the first issuance of insurance-linked securities with a “sidecar” structure in the Hong Kong market,” and the first issuance of sidecar insurance-linked securities by any domestic Chinese insurance company.

It’s a relatively unique deal as well given it provides reinsurance to both PICC People’s Insurance and Property Insurance covering offshore wind power property risks in mainland China, certainly an infrequently seen risk profile for the ILS market, perhaps the first time the market has seen these risks in ILS form.

The insurer said this is “another innovative practice for the company to use the international capital market to spread insurance risks after the successful issuance of disaster bonds in Hong Kong in 2022.”

Being a sidecar, the underlying subject reinsurance arrangement with this US $12 million Great Wall Re deal is a quota share, or proportional reinsurance, transferring the risks to capital market investors on that basis.

The Hong Kong based SPI raises capital to fund the risks by issuing equity or debt securities, with those funds deposited in trust accounts and invested in low-risk, highly liquid assets, paying the investors backed the deal over-time. The income and loss of the insurance-linked securities are linked to the profit and loss of the sidecar’s proportional reinsurance contracts.

PICC P&C explained, “Its issuance structure reflects the core characteristics of income sharing, risk sharing and flexible loading and unloading between insurance companies and capital market investors, so it is called “sidecar”. The “sidecar” insurance-linked securities and disaster bonds that spread risks through super-compensation reinsurance complement each other, which provides new tools for Chinese insurance companies to expand risk diversification channels and enhance underwriting capabilities.”

PICC P&C further stated, “This issue introduces the risk of China’s offshore wind power insurance into the international capital market, enhances international investors’ understanding of China’s green energy insurance business, and expands the risk diversification channel for the development of green energy for insurance services.

“The insurance-linked securities previously issued in the Hong Kong market are all disaster bond structures. This “sidecar” issuance enriches the transaction structure and business scenario of the Hong Kong insurance-linked securities market, which helps to promote the coordinated development of the Hong Kong insurance market, capital market and professional service institutions, and helps improve the Hong Kong International Financial Center. Function, improve the global competitiveness of Hong Kong International Financial Center, and inject new momentum into the financial innovation of the Guangdong-Hong Kong-Macao Greater Bay Area.

“In the next step, People’s Insurance and Property Insurance will continue to practice political and people’s requirements, coordinate development and security, deepen the exploration of insurance risk securitization, continuously broaden the risk dispersion channels, improve the risk protection capacity of large disasters, and contribute to the construction of the national disaster risk protection system and the construction of the Hong Kong International Financial Center.”

Hong Kong’s Financial Services & Treasury Bureau said that it “welcomed the inaugural issuance of insurance-linked securities (ILS) in the form of a “sidecar” by the PICC Property & Casualty Company (PICC P&C) in Hong Kong.”

Secretary for Financial Services & the Treasury Christopher Hui commented, “We welcome PICC P&C’s issuance of Hong Kong’s first ‘sidecar’. This demonstrates Hong Kong’s combined strengths in reinsurance and capital markets.

“The issuance marks significant progress gained for Hong Kong’s insurance industry and capital markets in risk transfer and the use of alternative capital under the support of our country. It will further enhance the market’s capacity to manage catastrophe and other specialty risks, and consolidate Hong Kong’s position as an international risk management centre.

“This will enable us to unleash the synergy effect of multilayered risk transfer and pooling mechanisms through ILS and other tools, thus consolidating our strategic role as a regional and global catastrophe and specialty risk management hub.

“ILS and captive insurance, which we have long been promoting, can provide enterprises ‘going global’ with diversified means of spreading and managing risks.

“We expect this combination of financial policy measures will allow enterprises to leverage Hong Kong as a safe haven for ‘going global’ with greater ease of mind.”

Clement Cheung, Chief Executive Officer of the Insurance Authority added, “Riding on policy support from the National Financial Regulatory Administration, this ILS issuance fully demonstrates the commitment and determination with which we pursue the development of Hong Kong into a global risk management centre.

“The IA will also sustain efforts to facilitate introduction of protected cell company as an ILS structure and review the existing definition of eligible ILS investors for a more vibrant trading market.”

Now that we understand this new Great Wall Re insurance-linked securities arrangement for PICC P&C is a quota share reinsurance sidecar deal we have removed it from our catastrophe bond Deal Directory and added it to our directory of reinsurance sidecar transactions.

It’s encouraging to see the expansion of Hong Kong’s ILS regime to incorporate sidecar arrangements and also good to see the unique use-case to cover offshore wind power risks in China.

Find details of numerous reinsurance sidecar investments and transactions, including life reinsurance sidecar structures, in our directory of collateralized reinsurance sidecar transactions.