First tranche of Salam III Sukuk life insurance-linked securitization issued

by Artemis on October 9, 2013

The first tranche of the novel Salam III Limited securitization of in-force life insurance policies has now been issued. The unique deal, transacted as an Islamic bond, or Sukuk, is the first time we know of an insurance-linked securitization (ILS) of takaful (Sharia’a-compliant) insurance policies taking place.

The Salam III transaction sees FWU Group subsidiary ATLANTICLUX transfer the policyholder lapse risk associated with a defined block of in-force life insurance policies through securitization as a tranche of notes to be sold to investors. The transaction also facilitates transfer of the majority of the mortality risk associated with the policies involved through a retrocessional reinsurance contract.

Salam III Limited is a limited, non-cellular Guernsey domiciled company that has been set up specifically to issue the Sukuk programme and enter into a swap agreement with Salam III A IC Limited, an incorporated cell of Salam ATL Re ICC Limited. Salam III A IC Limited acts as a “transformer vehicle” in this transaction and enters into a reinsurance contract with ATL.

Through this reinsurance contract, ATL cedes 90% of the remaining mortality risk to Salam III A IC Limited and part of the lapse risk from a designated block of new business policies.

A retrocession contract has been set up between Salam III A IC Limited and Partner Reinsurance Europe SE, a wholly owned subsidiary of Partner Reinsurance Europe Ltd., for all mortality risk in the designated portfolio and therefore leaves Salam III A IC Limited retaining only lapse risk which is then transferred by the swap agreement to Salam III Limited.

EIIB-Rasmala acted as lead arranger and bookrunner for FWU Group, on this US$100 million sukuk al-wakala programme. The first tranche of the programme, of US$20 million, has closed, having been oversubscribed by investors keen to access the returns of takaful compliant insurance business.

The Salam III deal is a securitization of takaful (Sharia’a-compliant) insurance policies which provides investors a chance to participate and invest in sukuk certificates backed by Atlanticlux Lebensversicherung S.A. The sukuk programme was assigned an investment grade credit rating by Fitch and is to be issued in amortizing tranches, each with a five year term, and an average life of approximately 2.5 years. Coupon or interest distributions are to be made quarterly to investors at an expected rate of 7% per annum.

The actual sponsor of the sukuk is FWU. The sukuk will fund through he sale of certificates (notes), in a fully Sharia’a-compliant manner, a set of retakaful (or re-insurance) transactions for Atlanticlux, one of FWU’s subsidiaries. The sukuk is asset-backed (fully-collateralized), with the proceeds being used to fund sales commissions, or upfront acquisition costs of new business, on unit-linked life insurance policies.

The lead arranger and bookrunner EIIB-Rasmala, comprises the AIM-listed European Islamic Investment Bank Plc (“EIIB”) and Rasmala Group (“Rasmala”).

Harris Irfan, Managing Director at EIIB in London, commented; “The arrangement and issuance of this unique sukuk offering represents exciting new ground for the Islamic finance industry. This issuance is unique in that it facilitates investor exposure to a quality, fully Sharia’a compliant and rated European credit. Moreover, the issuance is asset-backed rather than asset-based, due to its securitisation of takaful insurance policies – a movement in the right direction for the Islamic finance industry by linking the financial economy with the real economy. We are excited to be the lead arranger on this industry leading transaction, as well as by the future possibilities that it opens up.”

Dr. Markus E. Fischer, Chief Financial Officer of FWU Group, added; “FWU has been a leading life takaful provider in both the Middle East and Asian markets for many years. This issuance represents an important step for FWU to expand its funding sources into the Sharia’a compliant capital markets. This issuance also further strengthens FWU’s “SALAM” brand in the Islamic finance market. As a company, we are proud to be part of such a dynamic and fast growing market.”

An application has been made to CISX Guernsey for the Certificates to be listed and to be admitted for trading.

Morgan Lewis & Bockius acted as legal counsel to FWU, and as the transaction structuring counsel. Bedell Cristin Guernsey Partnership acted as Guernsey counsel to the Issue and Issuer, and Amanie Advisors acted as Sharia’a advisors to FWU.

Fitch Ratings assigned Salam III Limited’s USD100m insurance-linked Sukuk (Islamic bond) programme a rating of ‘BBB-‘. Fitch has also assigned a rating of ‘BBB-‘ to the first USD20m tranche under the programme, which was issued on 3 October 2013.

We first wrote about this transaction back in August here.

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