Fiona Le Poidevin of Guernsey Finance explains what makes Guernsey an attractive location for ILS.
The insurance-linked securities (ILS) sector is gaining traction across the globe as it evolves from what was previously regarded as a niche market to one that is a recognised, independent asset class.
For Guernsey's financial services industry this has come as no surprise. Our service providers and practitioners have long been aware of the benefits ILS products can offer insurers and investors, particularly as risks continue to diversify and grow around us.
Insurers like ILS because it enables them to purchase additional protection for low frequency, high severity losses, including natural and non-natural perils, operating in the traditional insurance market, typically in the form of catastrophe or "cat" bonds, collateralised reinsurance or industry loss warrants. For investors, ILS products are attractive because returns are non-correlated with the general financial markets. Although specialist catastrophe funds remain the largest investor in ILS, mutual funds including pension funds and institutional investors have increased their participation in this asset class significantly.
Blend of expertise
This 'twin-attractiveness' of ILS suits Guernsey perfectly as we have a long track record and existing expertise in both the insurance and investment fund sectors, which we can combine and use to optimise our ILS offering.
Importantly, Guernsey has a long history of being self-governing and self-funding. It is politically and economically stable with no national debt which should be taken into consideration compared with other jurisdictions that operate in the ILS space. Another attraction of Guernsey is the prevalent ethos of corporate governance and investor protection.
Guernsey pioneered the cell company concept back in 1997 with the introduction of the protected cell company (PCC) for use in the captive insurance sector. The subsequent success of this innovation is illustrated by the fact that we're ranked as the number one captive insurance domicile in Europe and the fourth largest globally.
The cell company is now used across the financial services world for the structuring of many different types of products, including ILS. For example, the Hexagon Group PCC has established more than 20 protected cells in Guernsey, each writing one or more fully collateralised reinsurance contracts with assets at risk exceeding US$300m. Our funds sector is highly respected internationally due to our experience which has accumulated over many years in dealing with a broad range of asset classes such as private equity, venture capital, funds of hedge funds, infrastructure, property and now ILS as a standalone asset class. Guernsey provides access to capital markets, most notably the London Stock Exchange (LSE) and other international exchanges including Hong Kong, Toronto, Ireland and Euronext, as well as the domestic Channel Islands Securities Exchange (CISE).
For example, the Guernsey domiciled DCG Iris Fund listed on the Main Market of the LSE in June 2012 after Dexion Capital raised more than £60m for the vehicle – a closed-ended feeder fund into the Low Volatility Plus Fund managed by Credit Suisse Asset Management's ILS team. DCG Iris announced in January of this year that it had achieved a total return of 2.2% in the six months to 30 November 2013, helped by low catastrophe losses. The company said it had also boosted returns by shifting away from catastrophe bonds into higher yielding private collateralised reinsurance deals.
There are fund managers and promoters in Guernsey with capital to deploy, some of which are showing an increased interest in ILS and setting aside allocations for the asset class.
Guernsey has more entities listed on the LSE markets than any other jurisdiction globally (excluding the UK). LSE data to the end of December 2013 shows that there were 115 Guernsey-incorporated entities listed across the Main Market, the alternative investment market (AIM) and the specialist fund market (SFM). Guernsey added 17 new entities during 2013, which again was more than any other jurisdiction except the UK itself.
Sufficient liquidity is a major challenge for many insurance related funds, but Guernsey's experience in successfully listing vehicles on the LSE and other markets is a key ingredient of our offering, as is our experience of dual listings. Dual listings bring with them the potential liquidity offered by a secondary market, such as our local CISE, which is a major benefit for an ILS investment strategy.
Guernsey also boasts some impressive insurance statistics with figures to the end of 2013 highlighting our appeal. The island saw 89 new international insurers being licensed during 2013, a large proportion of which were vehicles relating specifically to ILS and their use of the PCC. Guernsey insurance managers Robus and Aon Captive and Insurance Managers (Guernsey) were responsible for approximately 40 of these new additions between them.
In 2013 Robus' protected cell company, Hexagon PCC Group, established 22 ILS structures under the Hexagon PCC Group umbrella. These structures are being used to conclude fully collateralised reinsurance contracts (sometimes known as private trades) in the non-life space. These see each cell enter into an excess of loss/aggregate/quota share reinsurance policy for various covers such as property (natural and non-natural perils), marine, energy, crop, premium reinstatement or prize indemnity. The cell is then fully funded by the investing ILS fund up to the amount of its maximum obligation under the reinsurance contract.
Aon Captive and Insurance Managers (Guernsey) has been involved with more than 80 ILS transactions since 2006, with annual transactions increasing year on year. One of those is Solidum Re Eiger IC Limited, an insurance vehicle which listed bonds with a value of US$52.5m on the CISE. The transaction was a reinsurance placement accepted by an incorporated cell (IC) from a US cedent. The transaction utilised a dual listing on the CISE and the Vienna Stock Exchange. Industry feedback also suggests that a number of collateralised ILS transactions were completed in 2013, which saw International Swaps and Derivatives Association (ISDA) contracts being used as an alternative to a reinsurance contract, demonstrating the breadth of the collateralised reinsurance and ILS business currently being undertaken in Guernsey.
The cost efficiency of our structures and the speed we can deliver them to market means that we compare very favourably with other domiciles. Similarly, Guernsey is regarded as a supportive jurisdiction for innovative alternative investment structures and we have a great history in this respect.
Guernsey's response to the Alternative Investment Fund Managers Directive (AIFMD) is further reassurance for any ILS strategy. The ability to either stay out of or 'opt in' to the rules could be of critical importance, particularly for the many ILS funds that are targeted at only non-EU investors. With Guernsey not being in the EU (although it is in the European time zone), it is not required to implement the AIFMD and is considered a 'third country' for the purposes of the AIFMD. However, with Europe still one of our biggest markets, we have ensured that this proportion of our business remains unaffected. As such, the Guernsey Government has introduced a dual regulatory regime for investment funds: the existing regime remains in place for managers and investors not requiring an AIFMD fund, including those using EU national private placement regimes and those marketing to non-EU investors; and an opt-in regime which is fully compliant with the AIFMD.
Although third countries are not required to implement an AIFMD equivalent regime until the third country passport becomes available in 2015, we felt that it was important to provide certainty as soon as possible. With that in mind, the GFSC rules that form the 'opt in' regime took effect from 2 January 2014.
Our funds regime is just one of a number of outstanding factors that mean Guernsey provides a unique proposition as a hub for ILS business. This is now being recognised by many in the market and we expect that this growth will continue as increasing numbers of insurers and fund managers seek to satisfy the demand from clients and investors for the diversified and uncorrelated returns provided by ILS.
An original version of this article was published in Captive Review's Capitve ILS Report 2014, March 2014.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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