Pool Re, the UK’s government-backed terrorism reinsurer, has completed what it claims to be the first-ever standalone terrorism catastrophe bond, providing £75 million of retrocession protection for losses in excess of £500 million.
The bond, which was issued through special-purpose vehicle Baltic PCC Ltd, is designed to move UK taxpayers even further from the risks that Pool Re mutualises on their behalf.
The reinsurer said the bond is the first-ever insurance-linked securities (ILS) contract to cover terrorism risk exclusively, and only the second to be issued under the UK’s new regulatory system for ILS.
The deal will provide cover for physical damage arising from terrorist attacks including chemical, biological, radiological and nuclear, as well as losses triggered by cyber means.
It forms part of an £8.9 billion economic buffer that protects the UK taxpayer from terror losses, which also consists of Pool Re’s own reserves, reinsurance protection, £410 million retentions of its member insurers.
GC Securities placed the three-year bond, which provides cover on an annual aggregate basis and carries an initial interest spread of 5.9% per annum.
“We have been working towards this placement for several years and are excited to bring an entirely new source of capital to the terrorism risk market for the first time,” Julian Enoizi, Chief Executive of Pool Re.
“It diversifies the funding of our retrocession programme, complementing the capital of traditional reinsurers to spread terrorism risk even more broadly,” he explained. “In addition, it further protects HM Treasury, and helps us towards our ultimate goal of returning as much risk as possible to private markets.”
Ian Coulman, Pool Re’s Chief Investment Officer (CIO), also commented: “We began the analysis of potentially sourcing capital from the ILS market shortly after our initial placement of the commercial retrocession programme. Part of this involved having discussions with a broad range of ILS related experts, to help shape our thinking around the optimal structure.”
“Furthermore, during this time, we have advanced our modelling capabilities in relation to the terrorism threat, which has been instrumental in getting investors comfortable with the risk,” he continued. “This is clearly a positive development for the ILS market as it introduces a new diversifying peril.”
Shiv Kumar, President of GC Securities, further stated: “Executing this successful placement whilst the ILS market is processing losses from 2017 and 2018, demonstrates the strength and quality of Pool Re’s proposition and their market-leading risk analysis. This type of innovation is a great example of the major role the UK market can play in broadening the ILS asset class.”
While catastrophe bonds have become more popular as a means for investors to diversify their portfolios in recent years, until now they have largely been limited to natural disaster risks such as hurricanes or earthquakes.
“We congratulate Pool Re on bringing the first terrorism ILS transaction to the market,” said Malcolm Newman, Chair of the London Market Group ILS Taskforce.
“This flexibility, together with the advantages of the UK legislative framework, is why the ILS Taskforce expects that the Protected Cell Company will increasingly be the vehicle of choice in the UK for future transactions,” he remarked
Katherine Coates, corporate partner at Clifford Chance and head of the firm’s Global Insurance Group, added: “We were delighted to advise Pool Re on this ground-breaking transaction, leveraging our extensive ILS expertise to date and strong working relationship with UK regulators, to ensure a positive outcome for all parties.
“The deal is another strong endorsement of the UK’s new ILS regime and closing it would not have been possible without the effective support of the PRA.”
Pool Re recently received Parliamentary approval to cover non-damage business interruption losses incurred by businesses that cannot trade or access their premises in the wake of a terrorist attack.