Global reinsurance giant SCOR has announced the launch of a new three-year, €300 million contingent capital facility, providing the firm with protection against extreme natural catastrophes or life events impacting mortality.
The facility takes the form of a contingent equity line, and is the fourth launched by SCOR, replacing as of January 1st, 2020, the current contingent capital facility which expires at the end of 2019.
SCOR’s first, pioneering contingent capital transaction was a €150 million natural catastrophe facility in 2010 which was triggered and resulted in a €75 million drawdown in 2011. This was followed by an extension of the facility back up to the €150 million mark in 2012.
In late 2013, SCOR followed up with a renewal of its contingent capital facility, issuing a €200 million contingent equity line. Then, in late 2016 the reinsurer launched a €300 million contingent capital facility, which is set to expire at the end of this year.
With the latest renewal SCOR has demonstrated its commitment to accessing diverse sources of capital for extreme catastrophe and mortality retrocession, securing a renewal contingent equity line of €300 million.
SCOR notes that this new solution is consistent with the previous facilities, and states that it enables it to protect its solvency in case of catastrophe events and is consistent with its “Quantum Leap” strategy.
The reinsurer explains that as part of the authorisation granted by the General Meeting of its shareholders in April 2019, the new contingent capital equity line has been arranged with J.P. Morgan. The contingent equity line is calibrated to protect the reinsurer’s solvency and allows SCOR to extend its solvency while offering a very cost-effective alternative to traditional retrocession and insurance -linked securities (ILS), such as catastrophe bonds.
The firm says that the probability that the events will trigger the contingent capital facility is very low and is similar to the previous contingent capital facility, ultimately limiting the probability-weighted costs for SCOR and its shareholders.
Under the terms of the latest facility, SCOR explains that a drawdown might result in an aggregate increase in the share capital of SCOR of up to €300 million (including issuance premium), in respect of which the firm has entered into a firm subscription commitment with J.P. Morgan. The issuance of shares would be triggered when SCOR has experienced total annual aggregate losses or claims from natural catastrophes or extreme events impacting mortality claims above a certain threshold, which has not been made public, between January 1st, 2020 and December 31st, 2022.
SCOR’s Chairman and Chief Executive Officer (CEO), Dennis Kessler, commented: “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.”
The reinsurer adds that as well as being accounted for in its internal model, the new contingent capital facility has received substantial favourable assessments from the ratings agencies.
SCOR adds that in the event of no extreme event triggering the solution, no shares will be issued under the facility, meaning it is very likely that this new three-year facility will reach its term without any dilutive impact for SCOR’s shareholders.
While contingent transactions such as this are certainly nothing new, they are one of the rarer forms of risk transfer seen in the marketplace. For SCOR, this approach is clearly a favourable and diverse way to secure risk transfer support and ultimately remove some catastrophe and mortality risk from its equity balance sheet.
