Canadian K-Note reinsurance collateral financing transaction completed

Karson Management (Bermuda) Limited, led by veteran of the insurance-linked security (ILS) and alternative risk financing sector Derrell Hendrix, alongside BNY Mellon have announced the successful completion of the first K-Note reinsurance collateral financing transaction in Canada.

We first wrote about Karson Management’s collateral alternatives and the development of the K-Note back in 2010. Since then Karson has completed 16 K-Note transactions with $8.2 billion in reserve collateral and capital financing capacity raised on behalf of its clients.

When first developed the K-Note was launched as an efficient and scalable source of short and long-term collateral, presented as an alternative form of collateral for life insurance reserve transactions under Regulation XXX. However Karson also said that K-Notes could easily be used for other re/insurance specific needs such as collateral for ILS and cat bond deals and even for increasing risk based capital requirements and solvency requirements under regulation such as Solvency II, Basel III or similarly rating agency requirements.

With K-Notes Karson aims to provide “an important collateral liquidity management tool that effectively delivers several previously untapped sources of risk financing capacity to the global insurance market,” the firm said previously.

The announcement today is regarding a multi-million Canadian dollar transaction involving the issuance and deposit of a K-Note into a reinsurance security arrangement (RSA) account established in accordance with the Canadian regulator, the Office of the Superintendent of Financial Institutions (OSFI). The K-Note is backed by a payment obligation of a third-party financial institution and a portfolio of underlying investment assets.

K-Notes have been designed by Karson to leverage a number of investment bank and advisory BNY Mellon’s corporate trust, custody and collateral management services. This can give participants in a transaction the confidence that the collateral provided by K-Notes is high-quality, even the underlying assets or guarantees may be of an alternative nature.

Derrell Hendrix, CEO of Karson, commented on today’s announcement; “We are pleased to have concluded this first of what we hope to be many Canadian reserve financing transactions based on clear guidance from the Canadian regulator. The Karson program has again successfully transformed its access to market capacity into the issuance of an instrument, a K-Note, that satisfied our client’s reinsurance collateral financing need. We have been able to meet a very challenging client requirement while continuing to develop a scalable and sustainable execution platform with our partners at BNY Mellon.”

“With the influx of new regulations there is a continual need to scrutinise effective ways of meeting capital adequacy requirements,” added Dean Fletcher, head of Corporate Trust EMEA at BNY Mellon. “This is a landmark transaction and will provide a template for us to work with Karson to help their clients navigate the new regulatory landscape following the financial crisis.”

Karson is also in the process of launching what it terms a “Unique asset reclassification and loan transformation platform” with which it aims to allow clients to convert illiquid assets and loans into a tri-party eligible security that can be used for liquidity financing purposes and general collateral applications.

That sounds of interest to reinsurance and ILS, particularly as capital market investors may have assets that they would like to use as collateral, but currently can’t. If Karson could help those investors to put illiquid assets to work as collateral, by transforming them into K-Notes which could then be used as reinsurance collateral, it could help some investors upsize their allocations to ILS or collateralised reinsurance deals.