The first standalone terrorism risk catastrophe bond to hit the market, a £75 million Baltic PCC Limited (Series 2019) transaction sponsored by UK government-backed mutual terrorism reinsurance facility Pool Re, has now been priced at the top-end of its initial spread guidance.
Pool Re’s first terror risk cat bond launched to the insurance-linked securities (ILS) investment market in January and saw the terrorism reinsurance provider looking to tap the capital markets for retrocession through a securitization for the first time.
Being a UK terror reinsurance facility, it’s no surprise Pool Re is using the UK’s ILS regulatory framework to issue this transaction, with Baltic PCC Limited being a UK registered protected cell company and transformer.
The Baltic PCC terrorism cat bond transaction will provide sponsor Pool Re with a three-year source of fully collateralised retrocessional reinsurance, covering it against losses due to terror attacks striking the mainland UK.
Baltic PCC Limited is set to issue £75 million of Series 2019 Class A notes, which are being sold to ILS investors and the resulting proceeds used to collateralise the underlying retrocessional reinsurance agreement between Baltic PCC and Pool Re.
The terrorism retrocession protection would trigger on an indemnity and annual aggregate basis, so offering Pool Re cover against major terror attacks as well as frequency protection for a series of smaller attacks occurring during a single annual risk period.
The coverage provided by Baltic PCC can be triggered at £500 million of losses to Pool Re and the terrorism cat bond covers a £200 million layer, up to an exhaustion point of £700 million. In terms of risk metrics, this equates to an initial attachment probability of 3.05% and an initial expected loss of 2.71%.
The coverage Pool Re will benefit from includes cyber terrorism risks, as well as property risks and some business interruption as well.
When the transaction launched to the ILS market the £75 million of notes were offered with coupon price guidance in a range from 5.4% to 5.9%.
We’re told that the notes have now successfully been priced, which means this first standalone terrorism cat bond is going to be settled, but with its interest spread at the top-end of the initial guidance, at 5.9%.
It suggests the investors backing this terror cat bond were happy to support it, but felt the pricing needed to be at the upper-end of guidance.
But as a first ever catastrophe bond issuance exposed to losses due to terror attacks that isn’t surprising and it’s a testament to the work put in by the deal team that this transaction will close successfully and bring an entirely new class of risk to the catastrophe bond market.
Pool Reinsurance Company (Pool Re) had investigated the insurance-linked securities (ILS) market as a potential source of additional terrorism risk retrocession for some time.
In March 2018 it came to light that Pool Re was investigating the UK ILS regulatory regime and the Risk Transformation Regulations 2017, in order to tap the 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 suggesting the use of the UK ILS regulatory regime as the vehicle would be possible.
Now, Pool Re has successfully seen its first terrorism cat bond marketed, seen investor interest enable the deal to price and by the end of this month it will close and offer the terror reinsurance facility an expanded source of retro from the capital markets.
We understand the transaction will be settled next week and come on-risk as of March 1st for Pool Re.