French reinsurer SCOR has established a three-year contingent capital facility in the form of a guaranteed equity line with UBS providing it with €200 million coverage in case of extreme natural catastrophe or life events.
The facility is interesting because it covers life events as well as cat exposures while SCOR also said the deal offers greater diversification in its means of protection and counterparties and offers a very cost effective alternative to traditional retro and ILS.
The equity line facility replaces its current contingent capital facilities which come to an end on December 31, 2013. Under this new €200 million arrangement, SCOR raises its protection versus the existing contingent capital facility by €50 million.
The company said the facility is consistent with what it calls its Robust Capital Shield – one of the Group’s four cornerstones – and its Optimal Dynamics strategic plan.
This contingent capital solution is innovative in that protection would be triggered in case of extreme life events, as well as natural catastrophe events included within the last facility.
It is calibrated to protect SCOR’s solvency, in the case of such events, from deteriorating below the “Optimal” zone as defined in the “Optimal Dynamics” strategic plan.
The facility also allows SCOR to further diversify its means of protection and counterparties and offers a very cost effective alternative to traditional retro and ILS.
For this new facility SCOR pays an annual commission to UBS of 0.10%, making it cost-efficient relative to the previous contingent capital arrangements and relative to other forms of capital.
In addition, SCOR has substantially lowered the probability of the trigger events compared to its first structure in 2010 (by significantly raising the applicable trigger thresholds), which also significantly lowers the probability-weighted costs to SCOR and its shareholders.
Under the new facility, drawdown may result in an aggregate increase in the share capital of up to €200 million (including issuance premium), in respect of which SCOR has entered into a firm subscription commitment with UBS.
The issuance of the shares would be triggered when SCOR has experienced total annual aggregated losses or claims from natural catastrophes or extreme life events above certain thresholds between January 1, 2014 and December 31, 2016. The facility is available in two separate tranches of €100 million each.
As well as being recognized in SCOR’s internal model, the facility has received favorable qualitative and quantitative assessments from rating agencies, including nearly full equity credit. In the absence of the occurrence of any extreme triggering event, no shares will be issued under the facility. The facility may therefore reach its term without any dilutive impact for the shareholders.