ABILS for insurance companies as potential investors from CEE region

1 September 2016 —
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 Bermudian 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.


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 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).
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.

Kirill Savrassov
Senior Vice-President & CEO at Phoenix CRetro Reinsurance Co


Share |