French reinsurance giant SCOR has established its fourth contingent capital facility, securing an EUR 300 million source of responsive capital coverage for natural catastrophe and extreme mortality events.
SCOR has been a regular issuer of contingent capital since 2010, when the reinsurance firm first added a line of contingent equity capital to its tower of protection with a EUR 150m natural catastrophe coverage facility spanning three years.
That first facility paid out for the reinsurance firm, as catastrophes in Q1 2011 triggered the contingent capital and enabled SCOR to drawdown on EUR 75 million of the facility, which it subsequently topped back up in 2012.
Then SCOR returned in 2013 with a larger EUR 200 million contingent capital facility that the reinsurance company extended to cover both both natural catastrophe and extreme life (mortality) events for the first time.
This was followed in 2016 with another renewal of the contingent capital facility, with SCOR also growing it to EUR 300 million of protection, across both nat cat and mortality risks.
Now, SCOR has renewed the contingent capital facility again, recognising the effectiveness of the protection it offers and the efficiency of this form of capital as a supporting piece of its retrocessional reinsurance needs.
Commenting on the news, Denis Kessler, Chairman & Chief Executive Officer of SCOR, said, “Our new strategic plan “Quantum Leap” sets out ambitious profitability and solvency targets given the current financial and economic environment. This new contingent capital facility is an essential part of the active capital management policy that is at the heart of our strategy. This facility protects SCOR’s solvency, at a very low cost for our shareholders, against events such as a global pandemic or a natural catastrophe of historic proportions.”
Again, this facility is a contingent equity line arranged with a major banking group, J.P. Morgan in this case, still providing EUR 300 million of risk coverage in case of extreme natural catastrophe or life related events that impact mortality.
SCOR said the latest contingent capital arrangement is “consistent with the previous facilities” and will come into force on January 1st 2020, after the existing facilities term ends, then run for three years.
SCOR said the facility presents a “very cost-effective alternative to traditional retro and ILS,” which this year may have been even more important as the reinsurance firm has taken longer to secure its retrocession program than normal as rates rose significantly for its aggregate layers.
The contingent capital facility can be triggered by significant natural catastrophe or extreme mortality events, calibrated to pay out at levels that will protect SCOR’s own solvency level.
The probability of the facility being triggered is very low, at similar levels to previous facilities and SCOR said that this reduces the probability-weighted costs of the coverage for it.
If the facility gets triggered during its three-year term, a drawdown could result in an aggregate increase in SCOR’s share capital of up to EUR 300 million (including issuance premium).
A triggering of the facility can only occur when SCOR’s total annual aggregated losses or claims from natural catastrophes or extreme events affecting mortality claims above a pre-defined threshold between January 1st 2020, and December 31st 2022.
This immediate liquidity in SCOR’s equity would occur through the issuance of a corresponding amount of shares up to EUR 300 million in value, that would then be sold via a firm subscription commitment with J.P. Morgan and ultimately add to SCOR’s solvency capital.
SCOR notes that the facility is recognised in its internal model and has received favorable qualitative and quantitative assessments from rating agencies and that it is highly likely it reaches its term without being triggered, so not becoming dilutive to the reinsurance firm’s shareholders, given its remoteness.
While a contingent equity line such as this can be considered dilutive, it is there to ensure capital solvency after major loss events occur. Without this, the effect on SCOR’s share price from the catastrophe or mortality loss could actually be much worse for its investors than any dilutive effects.
A slight dilution to equity capital is far preferable to a major financial loss from a large catastrophe or mortality event. Having this facility in place would position SCOR mor favourably for trading out of major global loss events and the liquidity can likely be secured more rapidly than some other forms of retro protection after it triggers.
Securing a responsive source of capital that is calibrated to pay out after major losses occur is valuable for SCOR, even more so given this does not come from the retro reinsurance or insurance-linked securities (ILS) markets and so is diversifying for its capital and protection towers.
The coverage that this contingent capital facility provides SCOR is very similar to a catastrophe bond, or a multi-year aggregate excess of loss reinsurance transaction. But the structure helps to diversify the reinsurers’ sources of risk capital and is targeted specifically to protect solvency ratios, by boosting equity capital in times of need.
Contingent capital and also contingent convertible transactions have been used by other re/insurers in the past for catastrophe reinsurance coverage, but they still remain a much rarer capital markets risk transfer structure to-date.
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