Here’s an interesting press release from Karson Management, a firm established by the team at RISConsulting Group and led by Derrell Hendrix a veteran of the insurance-linked security and alternative risk financing/transfer sectors. The press release is regarding Karson Collateral, a provider of solvency eligible collateral for risk transfer and credit enhancement applications. Their K-Note collateral product is gaining traction and offers an alternative collateral solution that meets U.S. insurance regulatory criteria and which Karson says can be used within ILS transactions.
Collateral types are a source of constant discussion within the insurance-linked security and catastrophe bond markets, with many market participants (issuers and investors) who we speak to discussing the need for innovation in this area. The K-Note solution could provide an interesting collateral option for various types of ILS and risk transfer through securitization.
The K-Note was originally designed as an alternative form of collateral for life insurance reserve transactions under Regulation XXX, however Karson Management say that they can 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. They can also be utilised within derivatives transactions as collateral under Dodd-Frank rules and EU regulations.
Given the above we thought this would interest Artemis’ audience who may not have heard of K-Notes yet. The press release from Karson Management can be found below.
Karson Announces Significant Growth in its Collateral Business
Hamilton, Bermuda, March 5th, 2012 – Karson Management announces significant growth in its Karson Collateral business volume since 2009 and further development of its collateral financing and issuance platform.
The Karson Collateral platform was launched in December 2009 as an independent source of expert, effective, secure and efficient collateral solutions with the issuance of $825 million in K-Notes, effectively reopening the market for structured regulation XXX-AXXX reserve collateral. Since then, Karson Collateral has delivered an additional $4.0 billion in collateral capacity for a further six client transactions with final maturities ranging from 1 to 10 years.
K-Notes are the product of over 10 years of research and development on alternative collateral solutions for large international insurance and reinsurance companies that resulted in an affirmative New York State Insurance Department opinion letter, as well as a rare business process patent. According to Derrell Hendrix, CEO of Karson Management, “the K-Note program provides an important collateral liquidity management tool that effectively delivers several previously untapped sources of risk financing capacity to the global insurance market.”
K-Note transactions in 2010 and 2011 provided two US-domiciled ING insurance group cedants with reserve financing solutions on both a “with-recourse” and “non-recourse” basis, with K-Notes qualifying for capital and/or surplus relief in all US states where approval was sought. These transactions were financed by three large international banks, each providing $750 million or more in capacity for tenors ranging from 1 to 10 years. According to Régis Lavergne, Global Head of Natixis Equity Finance desk, “Natixis is proud to be a prominent member of the bank panel for the Karson Collateral platform. The Karson Collateral platform is a very good opportunity for banks and opens up a whole new area of promising business based on securities lending.”
K-Notes are backed by an unconditional obligation to pay issued by a financial institution rated A- or better plus marketable securities of a mutually agreed quality that are margined daily to maintain the prescribed market value.
In addition to New York State, K-Notes have been approved by four other US state insurance regulators and have received favorable ratings from the Securities Valuation Office of the NAIC (NAIC 1) and Standard & Poor’s (A- or better). Outside of the US, K-Notes have obtained approval from the Canadian regulator of financial institutions (OSFI) and favorable guidance from the UK’s FSA as collateral supporting surplus relief for reinsurance arrangements, enabling Karson Collateral to offer multi-jurisdictional facilities.
The Karson Collateral platform provides operational security using the integrated Corporate Trust and collateral management services of BNY Mellon to ensure a high level of safety for Karson’s clients. BNY Mellon provide the Karson Collateral platform with the security and scalability essential to meeting the stringent and increasing collateral requirements expected to be imposed by financial market regulators (e.g., Dodd-Frank and Solvency II).
According to Dean Fletcher, BNY Mellon EMEA Corporate Trust Executive, “Karson Collateral has developed an innovative solution for the reinsurance industry that will provide participants with more efficient and cost-effective access to collateral to meet regulatory and credit security requirements. Utilising BNY Mellon’s extensive securities servicing expertise and cross-border resources, Karson Collateral has structured a program that increases collateral capacity despite the tight credit environment and will help ceding companies to meet credit for reinsurance or solvency relief needs in the changing regulatory landscape.”
The Karson Collateral platform offers a unique blend of client-focused deal flexibility within a standardized execution framework, which enables clients to tap a wider source of capacity providers and to negotiate favorable financial and business terms on a deal-by-deal basis using an established legal structure which has now been reviewed by a number of prominent law firms representing the transaction participants.