Asset Backed Insurance-Linked Securities

As mentioned in one of the recent industry articles: “While in recent years the main priority for investors was finding yield, last year the focus turned to preserving capital. One asset class that promises to deliver both good income and decorrelation from the wider financial markets is insurance-linked securities (ILS)”.

In a nutshell, ILS is a way for (re-)insurers and specialist ILS Funds to hedge an unwanted risk of a really major (especially when it comes to Industry Loss Warranties), but unlikely catastrophe that could jeopardize a company’s continued survival or profitability, while conscious investors are in a position to take this risk and therefore work with a pure transaction unlike insurance debt/equity, which bundles with operational, credit, market, and other issues.

As a niche reinsurer Phoenix CRetro pleased to present an opportunity to participate in a structured and novel framework facilitating a fruitful business flow between entities interested in pledging their Commercial Property asset(s) as security in order to invest further in private ILS  transactions. We call it Asset-Backed ILS or ABILS.

Through this authentic solution, a short-term cash loan with 60-80% LTV ratio is offered to assets owners against pledging their commercial properties. It is envisaged that Tier-1 bank will issue structured products which are pass-through securities reflecting the cash-flows arising from this transaction. Local bank provides bank guarantee to the issuing bank (effectively guaranteed the notes). Money raised through the sale of structured products will be places into Collateral Trust, which acts as security for participation in the entire ILS transaction.


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This allows insurance companies in Central Europe to overcome issues with comparatively low sovereign/company ratings so to participate in the US and broader global CAT market as institutional investors with still strong risk assessment capabilities.

At the same time, this offers an opportunity to specialized lenders interested in providing loan for transparent and high-quality investments characterized by low-correlation to risks corresponding to the property itself.

Important point for CEE and wider European insurance companies to mention is that when used under Solvency II regime, the ABILS concept present certain obvious advantages:

  • It is a highly regulated instrument (Commission Delegated Regulation (EU) 2015/35, Revised Technical Specifications for the Solvency II valuation and Solvency Capital Requirements calculations), which is easily categorised as the Commission delegated act includes a detailed list of criteria to identify high-quality securitisation;
  • Compared to direct property investments it has lower capital requirements (risk factors applicable to high-quality securitisation positions are capped at 3% while commercial property investment require 25% reserving);
  • It brings liquidity improvements through attractive returns and structure stability providing soundable diversification effect as ILS are generally uncorrelated to the other asset classes, thus improving the risk profile of the investment portfolio;
  • Also it has different balance sheet impacts (investment may be treated as an asset by applying the Type 2 equity stress (for buyer – Type 1 or Type 2 securitisation exposure stresses) or as a negative liability).

These advantages also were independently found and outlined in a recent article by Artemis, de facto repeating our findings in late 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 industry and enables us to structure a solid investment facility benefiting all parties involved in such transaction: lenders, investors and protection buyers.

Also if you want to learn more on particular sample of the ILW deal here are LOSS FREE and LOSS OCCURRING Scenarios

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Some comments from industry colleagues:

Clive O’Connell, Insurance & Reinsurance Legal Professional, Non-Executive Director of Twelve Capital AG:

«This is a very exciting development. The idea of securing participation in risk through property is not new but this incarnation of the theory appears to be backed by safeguards that will avoid the perils of the past and allow those with property portfolios to “make their money work twice”.

The most notable use of this principle was Lloyd’s in the 1980s. At that time a number of names backed their participation with their interests in properties be it their farms or y certain dexterity and use of letters of credit, their homes. The results were disasterous. Unlimited liability and massive losses saw many lose everything they owned.

This idea, however, avoids the pitfalls that led to that debacle. By restricting the investment to an element of a property portfolio, the arrangement works to limit losses on the one hand and loss of security on the other.

Taking investment from insurers allows them to spread their risk involvement into areas that are diverse and non accumulative and enjoy the benefits of such investment in a short term market place without the need for long term commitment of capital or other resources.

It will be very interesting to see how this idea develops and expands. As Eastern European insurers become alive to the benefits of ILS for their own solvency protection, could we some day see North American insurers hedging their property portfolios eastwards?”

Ross Webber, Chief Executive Officer at Bermuda Business Development Agency (BDA):

“Very interesting, Kirill. Bermuda’s leadership in this area helps encourage continued innovation and the bringing to market of appropriate new products. Thanks for your continued support and helping our market evolve.”

Diana Mitroi, CEO at Risksearch BV:

“We have just tested ILS in a Solvency II balance sheet, the results were really good. Even Type 2 looks better than the property exposure, because of the high return”

Sergey Grazhdankin, Managing Partner at gmbc group:

«Reads very promising and opens new horizons for lucrative returns especially in a low-interest environment. Nice one.»

Igor Vasylchenko, Cert CII, Deputy Chairman of the Board at MEGAGARANT Insurance Company:

“An effective mechanism to transfer assets in the form of real estate into the opportunity to have access to global profitable reinsurance programs without bothering about licenses and other regulatory issues.”



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