Asset Backed Insurance-Linked Securities (ABILS)

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Phoenix CRetro is pleased to present an opportunity to participate in a structured and novel transaction facilitating a fruitful business flow between individuals/entities interested in pledging their asset(s) as security in order to invest in ILS. There are two main suitable asset categories that are qualified for such a transaction:

  • Commercial Real-Estate: This is a solution offered to property owners interested in borrowing a loan (cash; 60-80% LTV) against pledging their commercial property as security in order to invest in ILS. At the same time, this offers an opportunity to specialized lenders interested in providing short-term (1-4 years) loan for transparent and high-quality investments in ILS characterized by low-correlation to risks corresponding to the property itself.
  • Liquid and bankable assets: This is a structured solution offered to investment professionals interested in pledging their portfolio of liquid and bankable assets in order to invest in ILS. The other party (e.g. an investment bank) will provide a loan with a suitable LTV (60-80%) to the investor. The low correlation between ILS and traditional financial markets making such structure suitable to both interested investors and the banks.

Our expertise and experience in ILS investments, wide and deep (re)insurance network conjugated with our ambition to develop and innovate further within the ILS sector making us an ideal partner to investors, lenders and banks.

Insurance-Linked Securities (ILS)

With a current investment volume of USD 60bn, the asset class of ILS can be split into categories: publicly (mainly offered to Qualified Institutional Buyers) offered instruments (such as Catastrophe Bonds and Sidecars, total volume is c. USD 25bn) and privately OTC executed trades (total volume of c. USD 40 bn). Each such transaction involves two main parties: the ceding insurer (protection buyer) and the investor (protection seller).

Ceding Insurers are typically (re)insurers interested in transferring Natural Catastrophe risk to capital market investors (protection sellers) including financial institutions, family offices, sovereign funds, pension funds, etc. Effectively, a pre-defined set of risks (such as storms in the US or earthquakes in Japan) and trigger levels are set in a contract (reinsurance agreement or in some cases ISDA derivative) and are beard by investors, who in turn are compensated by a negotiated premium, paid by the ceding insurer upfront or dynamically via coupons. On the one hand, the ceding insurers are interested in such risk-transfer mechanism due to the fact that the money at risk is fully collateralized; on the other hand, investors in such instruments are offered diversification benefits, attractive premiums and low correlation to the broader financial markets. Thereby, the asset class has substantially grown and predicted to grow further to a size of USD 150bn by 2020 (a research conducted by Aon Benfield in 2015).

An increased demand for ILS investments from entities and individuals interested to enhance their utility from illiquid assets such as commercial real-estate, prompt the next stage of development for ILS. Specifically, our Asset-Backed Insurance-Linked investment facility strives to provide property owners with a (short-term) loan in order to invest in ILS. Furthermore, the fact that there is very little correlation between ILS and risks associated with short-term loans on real-estate (outside of the areas related to the ILS transaction; e.g. earthquake risk in Japan is independent of risks attributed to a commercial property such as hospital in Italy), enables us to structure a solid investment facility benefiting all parties involved in such transaction: lenders, investors and ceding insurers.

Commercial Real-estate Loans

The typical tenor for a loan for a commercial real estate ranges from 5 to 20 years, with the average estimated to be over 10 years. The amortization schedule is linked to a specific deal, but in most cases is lengthier than the term of the loan. Moreover, the debt repayment is usually executed by installments and only partially amortizing the full value of the loan. Therefore a “balloon payment” mechanism is employed as a one off payment of the borrower to the lender by the end of the loan tenor in order to accomplish the repayment of the full value of the loan. The Loan-to-Value (LTV) offered to borrowers for commercial property typically varies from 60% to 80%, depending on the quality of the property and the credit assessment performed by the lender.

There is a significant distinction between the objective of a borrower in the traditional case (that is, the purpose of ultimately owning a property) and that one associated with a property-backed ILS investment vehicle. In the latter case, the borrower is the owner of the property and is interested to make use of this (illiquid) asset in order to back an investment in ILS. The loan repayment depends on the performance of the ILS investment, and as such, the tenor is substantially shorter (1-4 years; i.e. the tenor can be matched with the risk period and collateral release of an ILS transaction). The loan terms and structure can be fully customized to optimally represent the need of both borrowers and lenders; in particular, proper levels of LTV, repayment schemes and co-investment opportunities of the lender into the ILS transaction(s) allow us setting a fully harmonized and well-aligned investment facility.

Liquid and Bankable Assets

A portfolio of bankable assets with a proper level of diversification and a liquidity criteria can be pledged as a security in exchange to a loan that will be used as a collateral invested in ILS. The particulars of such transaction will depend on the characteristics of the asset portfolio and target ILS investment(s) and shall we tuned to represent the requirements of both investors and banks.

Asset-Backed Insurance-Linked Securities: Structure and Lexicon

 

Lender: Specialized entity providing a loan against a pledged commercial real-estate as security to a borrower investing in ILS.

Borrower/Investor: An entity owning a commercial property and obtaining a loan from the lender (against pledging the property) in order to invest the proceeds of this loan (equivalently use as collateral) in an ILS transaction.

Ceding Insurer: A (re)insurance firm buying a fully collateralized protection from the borrower/investor.

Segregated Cell: A fully protected cell from other liabilities within Phoenix CRetro other than those related to the risk-transfer agreement with the Ceding Insurer (executed on behalf of the borrower/investor).

Collateral Trust Account: a special purpose trust (in a highly rated bank) holding the collateral and premium. The proceeds are returned back to the borrower/investor by the end of the risk period, unless a loss claimed by the ceding insurer is qualified as per the risk-transfer contract. The beneficial owner of the trust is the Ceding Insurer and the guarantor is the Segregated Cell.

FURTHER INFO AND CONTACT DETAILS: https://www.phoenix-re.co.uk

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Disclaimer

Phoenix CRetro Reinsurance Company (“Phoenix CRetro”) is authorised and regulated by Bermuda Monetary Authority pursuant to Insurance Act 1978 and Segregated Accounts Companies Act 2000 of Bermuda.

This document is solely for your use (“you”). The concepts and structures it contains are confidential and proprietary information, as well as business assets of Phoenix CRetro and our affiliates (“PHCRE”, “us” or “we”). They are shared with you for the exclusive purpose of allowing you to evaluate your interest in such structures. In particular, this information may not be used to discuss similar structures with any person PHCRE could reasonably consider a competitor in this field. Unless otherwise agreed in writing, PHCRE and its affiliates act solely in the capacity of an arm’s length contractual counterparty and not as an adviser or fiduciary. Accordingly, you should not regard transaction proposals or other written or oral communications from us as a recommendation or advice that a transaction is appropriate for you or meets your financial objectives.

Any financial transaction involves a variety of potentially significant risks and issues. Before entering into any financial transaction, you should ensure that you fully understand the terms, have evaluated the risks and determined that the transaction is appropriate for you in all respects. If you believe that you need assistance, you should consult appropriate advisers before entering into the transaction. PHCRE does not provide accounting, tax or legal advice. In addition, we agree that, subject to applicable law, you may disclose any and all aspects of any potential transaction or structure described herein that are necessary to support any U.S. federal income tax benefits, without PHCRE imposing limitation of any kind. This material does not constitute an offer to enter into any transaction. Such material is believed by us to be reliable, but we make no representation as to its accuracy or completeness. This brief statement does not purport to describe all of the risks associated with financial transactions and should not be construed as advice to you.

Certain aspects of this presentation may give rise to perceived or actual conflicts of interest (i) between you and us and/or (ii) among you, us and other third parties. Such conflicts may arise from other business activities customarily conducted by other areas of our firm with you or with other clients. Such activities may include, but are not limited to, sales and trading activities. For example, we may already have executed similar transactions or strategies for our own account or accounts of other clients and we may have made similar presentations to others. Execution of any transaction contemplated in this presentation may involve other affiliates of PHCRE and may result in perceived or actual self-dealing intended to generate revenue for our firm. This document is for information purposes only and does not constitute an invitation or inducement or an offer or commitment, a solicitation of an offer or commitment, or any advice or recommendation, to conclude any transaction. While information herein has been obtained from sources believed to be reliable, we do not represent it to be accurate or complete. The information contained herein includes illustrations, estimates and projections and involves significant elements of subjective judgment, assumptions and analysis. Any views or opinions (including illustrations, estimates, statements or forecasts) constitute our judgment as of the date indicated and are subject to change without notice. No representation is made as to the accuracy of such illustrations, estimates or projections or that all assumptions relating to them have been considered or stated or that such projections or returns will be realised. The returns or performance results may be lower than estimated herein. Note that past performance is not indicative of future results. The information contained herein does not purport to contain all of the information that may be required to evaluate such solutions and you are encouraged to conduct independent analysis of the data referred to herein. We do not undertake to update this document.

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