Alpha run-off shows a risk of private debt investing for ILS funds

Danish registered insurance company Alpha Insurance A/S (Alpha) has been placed into solvent liquidation and told to stop underwriting, placing its portfolio into run-off, with the circumstances highlighting what could have been a risk for a €20 million private insurance debt transaction between it and investment manager Twelve Capital.

Swiss headquartered specialist insurance-linked securities (ILS) and reinsurance-linked investment manager Twelve Capital completed a €20 million private debt transaction for Alpha Insurance A/S of Denmark in October 2014.

The transaction saw Twelve Capital providing Alpha Insurance A/S of Denmark with €20 million of Solvency II / Tier 2 compliant capital, using a listed, unrated note debt instrument which has a ten-year maturity.

Now potentially complicating matters for that private insurance debt deal, Alpha Insurance A/S, which is an insurance company authorised and regulated by the Danish Financial Supervisory Authority, has ceased all underwriting, including renewals, and been placed in so-called solvent liquidation.

Now, solvent liquidation suggests that Alpha will be able to pay back all of its creditors, which should include Twelve Capital as the provider of this private debt arrangement.

But the circumstances and trail behind the insolvency of Alpha Insurance, bring up a potential risk that ILS fund investors in private debt instruments need to remain aware of.

What has happened in this case to Alpha could happen to any insurer, as the trigger for the solvent liquidation was in fact the fact that one of its major reinsurance providers has been placed into liquidation and had its rating suspended.

CBL Insurance Limited, a New Zealand headquartered insurer, was recently placed into liquidation at the behest of the Reserve Bank of New Zealand.

The reason for the liquidation is linked to concerns over the NZ insurers’ French construction liability risks portfolio, which brought on a large reserve charge for the insurer, then a rating downgrade and suspension, followed by the regulators ordering CBL to stop writing new business.

Things then escalated into liquidation for CBL and both its New Zealand and European entities have entered administration as a result, with regulators citing the possibility of a disorderly failure as CBL’s finances were severely distressed.

One of the victims of the contagion caused by CBL’s issues and now failure is Alpha Insurance A/S, which cited this as its reason for going into solvent liquidation.

The company explained, “Effective immediately, Alpha Insurance A/S has ceased all underwriting, including renewals. This decision is a direct consequence of CBL Insurance Limited, one of Alpha Insurance’s largest reinsurers, having had their A.M.Best “A-“ rating suspended and has been placed into interim liquidation. As such, the Board of Directors of Alpha Insurance A/S decided on Saturday, March 3rd, to cease all underwriting of new business as well as renewals with immediate effect. On Sunday, March 4th, the General Assembly of Alpha Insurance A/S decided to place the company into solvent liquidation. This means that Alpha Insurance A/S as from this date will be in run-off.”

The Danish regulator said that, “Alpha Insurance no longer complies with the minimum capital requirement, which may have negative implications for the policyholders.

“Further, one of Alpha Insurances most significant reinsurers is having financial difficulties, and there is a substantial risk that this reinsurer may not be able to meet its obligations towards Alpha Insurance.

“Therefore, in the interest of protecting the policyholders, the Danish Financial Supervisory Authority deems it necessary to order Alpha Insurance to cease writing any new insurance business immediately.”

Alpha remains technically solvent though, the company said, explaining that it expects “all present and future obligations will be honored.”

That suggests that the private debt arrangement with Twelve Capital could be redeemed and paid back, although we cannot be certain of course.

The fact CBL’s failure had a knock-on effect as the reinsurer of Alpha, potentially putting Alpha’s debt arrangement with an ILS fund manager at risk, should remind any ILS investors looking at private debt arrangements that the financial strength of reinsurers backing a counterparty can be key.

Insurance and reinsurance firm’s solvency can be affected by many factors and in this case it is the contagion, or knock-on effect, of one company being placed into administration over concerns with its business that has affected a private insurance debt counterparty and highlighted a risk for insurance-linked investment backers.

We reached out to Twelve Capital for comment, but the fund manager said it was not in a position to do so.