Case Studies

Insurance Linked Securitization – Collateral Solutions

January 25, 2022

Although well known for its work on a broad spectrum of corporate and securitization transactions on behalf of corporate trust clients, Emmet also has a team dedicated to insurance linked securitization (“ILS”) transactions as well as insurance and reinsurance trust related arrangements. Mitigation of counterparty risk and custody of assets in collateral and trust accounts have been a prime concern for transaction sponsors and their counsels in the ILS market, in particular following the issues with respect to impaired collateral on a number of Lehman related deals in the late 2000s and collateral related issues outside the ILS market during that time.

Set forth below is a discussion of how Emmet assists its corporate trust clients and their transactional counterparties in the ILS market mitigate counterparty risk in relation to the custody of account assets.

Emmet attorneys were involved on behalf of the indenture trustees, reinsurance trustees, paying agents and collateral and custodial agents in many high-profile and innovative insurance and reinsurance transactions in 2016 with a number of private placements being completed at the end of the year. That work has continued into 2017 with a slate of new transactions. The Emmet team has worked with these sponsors and their counsels to find the most efficient solutions for the holding of collateral for ILS transactions, typically including U.S. and non-U.S. money market funds, notes issued by the European Bank for Reconstruction and Development and International Bank for Reconstruction and Development as well as direct holding in U.S. Treasury notes and the ultimate fallback to holdings in U.S. dollars or Euros. These assets may be held in trust accounts or collateral accounts (often with a custodial account overlay) depending on whether the transaction sponsor needs credit for reinsurance in the United States. Due to the central role played by such collateral holdings in the ILS market and changing regulatory and market forces, customized solutions have been needed for various deal structures that also work within the regulatory framework of the corporate trust service providers. Emmet represents a broad spectrum of these service providers and works to optimize the approach to such collateral holdings based on objectives of the ILS sponsors, the approach to payments within or outside the United States and the existing infrastructure at each trustee client. The approach will vary depending on these objectives, the nature of the assets and where they will be held, typically in the United States or the United Kingdom.

While the most cost-effective approach to the transactions is typically the use of simple structures, documentary standardization and the use of existing precedents, innovation of deal structures and corresponding documentation to meet the needs of ILS sponsors is often desirable. In such contexts, Emmet has worked with deal counsels, sponsors and its trustee clients to navigate the nuances of different collateral structures. Emmet expects to continue to assist the corporate trustees and their contractual counterparts in adapting to the evolving ILS market and regulatory framework as that takes shape in 2017.

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