Pool Re, the UK government-backed mutual terrorism reinsurance facility, is bringing the first standalone terrorism risk catastrophe bond to market to tap the capital markets for retrocession, in a £75 million ($97m) Baltic PCC Limited (Series 2019) transaction.
Pool Reinsurance Company (Pool Re) has been exploring use of the insurance-linked securities (ILS) market to source additional terrorism risk retrocession from a diversifying source of risk capital for some months now.
Back in March 2018 it came to light that Pool Re was investigating the UK ILS regulatory regime and the Risk Transformation regulations 2017, as a vehicle for expanding its sources of terror retrocession to the ILS and capital markets.
Pool Re renewed is retrocessional reinsurance program around the same time, buying UK £2.1 billion of coverage, while at the same time it announced the inclusion of cyber terrorism reinsurance cover within its product offering.
Then in late April 2018, Pool Re announced that it had engaged GC Securities to explore the issuance of a terrorism exposed explores the issuance of an insurance-linked security (ILS), again mentioning the use of the UK ILS regulatory regime as the vehicle.
Fast-forward a few months and we’re told the transaction is in the market, the first offering of a standalone terrorism risk catastrophe bond in the ILS market’s history.
Terrorism risks have been ceded to capital market investors before through the 2003 transaction Golden Goal Finance Ltd., but that was event cancellation risk due to terror attacks. There have been other collateralized reinsurance and private ILS transactions that reinsure terror risk related property damage, as is seen in this cat bond, but this is without a doubt the first full 144A cat bond covering solely that risk.
Baltic PCC Limited has been registered as a UK protected cell vehicle and transformer, we understand, which will be regulated and authorised under the United Kingdom’s Risk Transformation Regulations 2017.
We’re told that this initial transaction through Baltic PCC Limited, which is a multi-use ILS vehicle, sees Pool Re seeking out at least UK £75 million of retrocessional reinsurance protection covering terrorism risks in the UK.
The covered area is said to be the UK mainland, we’re told. The length of coverage is said to be three years from March 1st, split into three individual risk periods and the transaction is expected to be issued in February.
Baltic PCC Limited will issue a single £75 million (or larger) tranche of Series 2019 Class A notes, our sources said, with the notes set to be sold to ILS investors and the resulting proceeds used to collateralise a retrocessional reinsurance agreement between Baltic PCC and Pool Re itself.
The terrorism retrocession coverage will be structured to trigger on an indemnity and annual aggregate basis, we understand, hence providing both occurrence protection for major terror attacks as well as frequency protection for a series of smaller terrorist attacks occurring during a single risk period for the notes.
We’re told that the attachment point for the coverage that Baltic PCC will provide to sponsor Pool Re is likely to be £500 million of loss to Pool Re, with the terrorism cat bond providing coverage across a £200 million layer up to £700 million.
That equates to an initial attachment probability of 3.05% and an initial expected loss of 2.71%, we’re told.
The coverage will include cyber terrorism risk, as well as property risks and some business interruption, it seems.
Sources also 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.
It’s encouraging to hear that Pool Re is moving forwards with its ambition to leverage ILS market capacity within its retrocession program.
With terrorism an evolving threat and Pool Re having a key role in enabling the provision of private market terrorism insurance to UK businesses, the facility is likely to require regular capacity for its terror retro needs.
Hence if this first terror cat bond is successful and others see the potential for capital markets capacity to back terror reinsurance risks, it could provide a welcome new diversifier for the ILS investment market.
Of course terrorism risk will not be for every cat bond or ILS fund and investor. It’s likely that the most specialised and sophisticated ILS funds and investors will be the main backers for a transaction like this that brings new risks to market.