Pool Re, the UK government-supported mutual terrorism reinsurance provider, is back in the catastrophe bond market and seeking a UK £75 million (approx. US $102m) renewal of its landmark terror catastrophe bond, with a Baltic PCC Limited (Series 2022-1) cat bond issuance.
Pool Re first ventured to the catastrophe bond market in search of retrocessional reinsurance protection for UK terror attack losses in 2019, with a UK £75 million (approx. US $97m at the time) Baltic PCC Limited (Series 2019) transaction.
That first Baltic PCC terrorism cat bond matures at the end of this month, so it’s encouraging to see Pool Re back in the market and looking to at least replace its capital markets backed retro protection.
It was understood that Pool Re would seek a renewal of its landmark cat bond.
Now the details of a new issuance are being marketed to investors and we’ve learned enough about it to add the transaction to our Deal Directory, where it becomes only the second pure terror cat bond we’ve recorded since our cat bond market records began in 1996.
As in the 2019 cat bond, the new Baltic PCC 2022-1 issuance will only provide Pool Re with cover against terror losses that occur in England, Scotland and Wales.
UK domiciled special purpose reinsurance vehicle Baltic PCC Limited is issuing a single tranche of Series 2022-1 notes, on behalf of its second protected cell, we’re told, with the target being to sell at least UK £75 million of notes to cat bond investors.
The proceeds of the sale of the notes will be used to collateralise a retrocessional reinsurance agreement between Baltic PCC and Pool Reinsurance Company.
Once again, Pool Re is seeking three years of retro terrorism reinsurance coverage with its second Baltic PCC cat bond, with the term slated to mature after the end of February 2025, we’re told.
The coverage will be on an indemnity trigger and annual aggregate basis, so the Baltic PCC 2022-1 terror cat bond will provide Pool Re with both occurrence protection for major terror attacks and frequency protection for a series of small terrorist attacks.
As with the 2019 deal, this is a relatively unusual indemnity retro cat bond, as retro cat bonds are more typically index-based.
But with Pool Re mutualising risk from its members and because of the nature of the exposures it writes, an indemnity structure becomes more achievable and so this new cat bond will fit neatly into the terror reinsurers retro tower.
We’re told that the new Baltic PCC terror cat bond notes will attach at £500 million of losses to Pool Re and cover a share of a layer up to exhaustion at £700 million, which is precisely the same attachment and exhaustion as the 2019 cat bond deal.
The single currently UK £75 million tranche of Series 2022-1 notes that Baltic PCC Limited is looking to issue will have an initial attachment probability of 2.59%, an initial expected loss of 2.38% and are being offered to cat bond investors with price guidance in a range from 5.25% to 5.75%, our sources said.
The Baltic PCC 2019 terror cat bond notes carried an initial expected loss of 2.71% and were offered with coupon price guidance in a range from 5.4% to 5.9%. Those notes eventually priced at the top-end of the initial guidance, to offer investors a 5.9% coupon (a 2.18 multiple of EL at market).
So, with the expected loss slightly lower in 2022, due to changes in Pool Re’s exposure we assume, if this new Baltic PCC terror catastrophe bond was to price at the middle or top-end of guidance the multiple could be higher than seen for the 2019 deal.
A couple of points worth noting on this new terror cat bond deal, are that this is a Rule 144A cat bond offering, where as the 2019 deal was offered as a private Rule 4(2) placement.
Also of note is the fact we’re told the risk modeller for this Baltic PCC 2022-1 cat bond is listed as Synthetik Applied Technologies LLC, a tech company that leverages artificial intelligence and data analytics to help clients understand significant threats, such as terrorism-related.
The new Baltic PCC 2022 terrorism cat bond will slot neatly into Pool Re’s £2.475 billion excess of £400 million retro reinsurance tower, which the company renewed in Feb 2021.
Pool Re will be out in the market renewing its traditional sources of retrocessional reinsurance alongside this catastrophe bond, so it will be interesting to see whether cat bond market conditions and investor appetites can help the company to upsize the capital market contribution this time around.
We’ll update you as the new cat bond from Pool Re comes to market.