A dispute levelled against specialist insurance-linked securities (ILS) asset manager Securis over a clawback complaint made by Paraline’s ICAT Syndicate 4242 has been ruled in favour of the ILS fund manager, as clawback never existed in the contract.
Securis Investment Partners had backed a collateralised reinsurance agreement with Paraline operated ICAT Syndicate 4242 at Lloyd’s, providing one-shot property catastrophe reinsurance coverage and utilising Aon’s White Rock transformer.
ICAT Syndicate 4242 and White Rock Insurance Company PCC Ltd, which is a Guernsey-based Protected Cell Company, entered into the collateralised reinsurance agreement and the related Trust Agreement and Interests and Liabilities Agreement alongside the contract, in 2017.
The trust account for the collateralised reinsurance agreement was funded to the benefit of the syndicate using capital from various Securis managed ILS funds.
Despite the heavy catastrophe losses from hurricanes in 2017 the contract ran its course and having not been triggered, the Syndicate released the collateral back to White Rock at the end of the risk period and it was returned to the Securis funds.
However, ICAT Syndicate 4242 increased its reserves substantially for hurricanes Harvey and Irma in 2018, after the protection from the collateralised reinsurance agreement had matured and the collateral had been returned and called for White Rock to re-deposit the collateral into the trust.
The request for a return of collateral was refused by White Rock and Securis, as the underlying reinsurance agreements and contract only permitted a one-way release of collateral and the collateral release mechanism in the trust agreement contained no clawback provision, to enable a return of collateral.
So the dispute began. But it transpires that a clawback agreement was actually negotiated out of the collateralised reinsurance transaction contract and so never existed.
Fast-forward and the dispute goes to arbitration in New York, with the Syndicate still calling for clawback to be allowed and the collateral to be returned, which Securis actively defended against.
Explaining the situation to us, Vegard Nilsen, CEO of Securis Investment Partners said, “With respect to ICAT Syndicate 4242, we were recently called to participate and defend White Rock’s position in arbitration proceedings commenced by the Syndicate; we participated, laid out the facts and, as Securis has always maintained, the panel ruled there was no clawback in the contract. We consider the matter closed.”
“In the specific case of ICAT 4242, Securis negotiated “clawback” out of the contract in exchange for the Syndicate receiving substantially improved Buffer Loss Factors, allowing them to retain higher levels of collateral following cat events.”
If the clawback wording was negotiated out and agreed to by the cedent, or its broker on its behalf, it seems the end-result of this dispute, finding Securis not liable to return the collateral, appears the right one.
The Arbitration Award found that, whilst the April 2018 collateral release did not change White Rock’s obligations under the Agreements, the fact no clawback mechanism was included in the contract meant Securis was not required to refund the trust via White Rock to re-deposit the collateral into the trust account.
In 2019, Securis changed its risk transformation infrastructure in Bermuda from a series of Special Purpose Insurers used for collateralised reinsurance and retrocession, to a consolidated Bermuda Class 3A reinsurer named Odin Re Ltd.
“We are well aware that some cedants have a preference for the clawback feature within collateralised contracts, and we are now able to service this need from our Odin Re vehicle,” Nilsen further explained to us.
Odin Re makes it possible for Securis to offer clawback and this is now available as an option for its cedents for contracts incepting on or after January 1st 2020.