Intellectual property a $500m premium opportunity for ILS funds: Aon’s Lee

Following the completion of several transactions featuring a collateralized financing solution for intellectual property assets, this emerging asset class could be a massive opportunity for ILS funds and their investors, according to Lewis Lee, CEO of Aon’s Intellectual Property Solutions.

Insurance and reinsurance broker Aon revealed a solution to help intellectual property rich companies to realise the value of their proprietary IP a year ago.

The first transaction was cited as “an innovative ILS friendly structure” by investment manager Hudson Structured Capital Management Ltd. (HSCM), which participated as the largest market.

A second collateralized IP financing arrangement was announced just over a month ago, as Aon completed a transaction that leveraged capital market investor appetite to support a collateralized insurance and debt financing arrangement for a growing medical-tech company.

Artemis spoke with Lewis Lee, CEO of Aon’s Intellectual Property Solutions, to discuss the opportunity these intellectual property transactions present to capital market investors and especially to insurance-linked securities (ILS) funds and their clients.

With intellectual property (IP) expected to be a key driver of value for many companies over the coming years, finding ways to offset risk associated with IP and finance it at the same time, is expected to be a growing insurance and reinsurance market opportunity, but one that is perhaps even better suited to the capital markets.

Lee explained, “At a high level, intellectual property (IP) financing is indeed an interesting opportunity for ILS funds because of the potential insurance yield on these deals.

“Given that IP-intensive companies only default at a 4 percent rate on average (Mann Study), and the loan is over-collateralized by the value of the IP assets, most of the ILS industry view this as a compelling risk-adjusted return.

“Most ILS funds find that our ability to assess the quality, risks and value of these IP assets allows them to underwrite to the risk of collateral value impairment.

“This work helps them gain comfort with the risk of a large collateral impairment event taking place.”

Asked to put a figure on the quantum of the opportunity in IP structured risk financing deals like this, Lee said it could be as much as $500 million of premium per year.

“While it is hard to predict given the early stages of the product, it is fair to say that this has the potential to yield more than USD $500,000,000 of gross written premium (GWP) to the insurance-linked fund (ILF) market per year,” he explained.

Adding that, “The introduction of intellectual property (IP) to the insurance-linked securities (ILS) fund market is interesting for many reasons.”

Here, Lee said that, “Intellectual property is a highly developed asset class, and the valuation of IP has been well established over time. Despite that, it has had very little insurance participation over the last 30 years.”

Further explaining that the ILS market may find it appealing for its diversification and, like catastrophe risks, its low correlation.

“The IP asset class builds on the insurance nexus required in the ILS business. IP is diversifying as a sector and, unlike ILS, is less subject to correlation within the insurance sector,” Lee said.

Lee is bullish on the growth potential, saying that the ILS business could double if it embraces IP related risk as an asset class.

“The IP asset class represents potential growth in AUM that is well in excess of the size of the ILS business. IP supports approximately 90 percent of the value of the S&P 500,” Lee stated.

Which clearly underscores that, for those investors with an appetite for this sort of investment, Aon is hoping to develop a strong pipeline and so will certainly look to broaden the range of markets investing in these deals, to aid in their syndication.

Lee explained how Aon has invested time and expertise in developing this IP related asset class, “At Aon, we have taken an innovative approach supported by our vast expertise.

“By identifying value chains from IP assets, we can value IP that can be used as collateral for loans, insured against loss or properly positioned in defense of infringement allegations”