Collateralized note helps Aus / NZ insurer Youi access ILS investors

by Artemis on June 29, 2015

A new Australia and New Zealand focused insurer named Youi has tapped the ILS market for protection, thanks to the transformation of a collateralized reinsurance contract into note form, enabling Youi’s risk to be broadly syndicated to ILS investors.

Primary insurer Youi Pty Ltd, which operates as a homeowner and auto insurer in Australia and New Zealand, has sought out fully-collateralized reinsurance capacity from the capital markets for the first time.

The transaction has been completed with the help of ILS structuring and bookrunning firm Rewire Holdings and using its online marketplace Rewireconnect in order to broadly syndicate the deal to ILS investors.

We understand that the Australian primary insurer wanted to go out simultaneously to the traditional reinsurance market as well as to insurance-linked investors, to get a broad view on pricing from both markets.

Rewire is said to have structured the collateralized reinsurance deal into a note form, with the goal of making it easier for the cedent and to achieve broader syndication to include the capital markets and a consistent price indication.

To achieve this Rewire has used the services of transformer and insurance manager Horseshoe and its Horseshoe Re reinsurance vehicle, we’re told, leveraging its services to transform the deal into note form.

Instead of going down a route which can see primary insurer cedents having to negotiate terms with every counterparty, in a collateralized ILS deal, Rewire negotiated a single reinsurance contract which was then transformed into a note, so it could be syndicated and sold to investors.

We’re told that the deal priced at terms that were commensurate with the pricing in the traditional reinsurance market, but that the end result was a much more broadly syndicated transaction, including a panel of ILS investors.

We’re told that there were two layers of risk collateralized, with one being much riskier than the other. Pricing is said to have been 48% for one layer and 11% for the other.

Both tranches of notes have a one year duration and have been structured as zero coupon. Using the first 48% RoL note as an example, this means investors placed 52% cash into the Trust and Youi placed the remaining 48%. In a no-loss scenario investors would receive 100% back after 1 year. But the structure acts in such a way as the investors benefit from leverage due to the cedents cash participation.

While the notes are considered private, so not transferable, they likely could be made so quite easily through a listing, which would enable them to be sold on a secondary market.

The benefits for the cedent or sponsor are many. Less legal overhead as the contract was negotiated once and then syndicated out. Better diversification of risk capital, by being able to go out to the traditional and ILS markets at the same time. Lower frictional costs through using Rewire’s online service for bookrunning, although we understand a roadshow took place as well.

Rewire Holdings LLC told Artemis that interest from ILS investors was strong for this Youi collateralized note deal.

Rewire worked alongside Youi and the traditional reinsurance broker to prepare a collateralized reinsurance submission. This submission marketed certain layers of Youi’s reinsurance program to the collateralized markets at the same time that the traditional reinsurance broker was marketing it to traditional reinsurers.

The collateralized reinsurance note structure that Rewire designed for this transaction allowed the process to be streamlined, while the ceding insurer could have its reinsurance syndicated to multiple investors, much like a cat bond issuance.

That allowed Youi to achieve two important goals. Firstly maximising distribution and pricing efficiency of its reinsurance placement, by allowing access to all markets (both traditional and ILS) while keeping a consistent reinsurance agreement and reinsurance trust.

Secondly, the transaction enabled ILS investors to participate, access and look at risk that alternatively they would not have seen in the ILS market. In this way Rewire has facilitated the transfer of risk to a much broader base to include the capital markets and ILS investors.

As a result, Youi achieved broad syndication of these notes, bringing new markets onto their reinsurance program and started building relationships with ILS investors in their program, which will stand them in good stead for future participation.

Stefano Sola, co-founder and CEO of Rewire Holdings LLC, told Artemis; “We are very happy with the execution achieved for Youi and are happy that this innovative structure managed to achieve important goals for Youi, both in their current program and hopefully in future interest from both the traditional and capital markets. ILS investors showed strong interest across layers of the program.”

It’s a fascinating development, which could make accessing ILS investors even simpler, more cost-effective, and ultimately an easier experience for primary insurer cedents. The fact that this is a new, smaller sponsor, suggests that this could help to broaden the ILS market and bring new risks to it.

It could also signal a new way to get to a private catastrophe bond, or a cat bond lite. While this isn’t a cat bond, rather it’s a structured note of sorts, it could easily (we assume) be taken a step further to be listed and achieve the same goals as a private cat bond deal, such as a rule 4(a)(2) issuance.

It’s particularly encouraging to see Rewire helping new cedents to enter the ILS market in a structured, cost-effective and low-friction manner. This should help to stimulate other new sponsors to look to the collateralized and ILS markets when searching for reinsurance capacity.

As Rewire Holdings expands its user base the breadth of the syndication it can achieve for cedents is growing all the time. Rewireconnect now has over 40 dedicated ILS investors signed up to its platform, with more than 200 individual users.

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