The sophistication of the insurance products offered through Dublin increased with the recent establishment of Ireland's first insurance securitisation vehicle, a US$200 million property catastrophe note offering successfully issued on behalf of SCOR, Paris.
Insurance securitisations traditionally have been domiciled offshore with the Cayman Islands and Bermuda commanding enviable positions in this complex marketplace. Both jurisdictions established the expertise and infrastructure to easily accommodate these transactions. An absence of tax in these countries avoided any special taxation issues for the special purpose company or vehicle(SPV).
However, given that insurance securitisations are intended to be tax neutral, there is no need to locate the SPV in a tax haven. Indeed, there is a growing desire to locate these facilities on-shore and, of late, vehicles have been domiciled in the Netherlands and the United States. One of the main reasons for the move onshore is the possible imposition of a withholding tax on a premium payment to a tax haven.
Ireland has emerged as a significant player in the financial services market following the success of the International Financial Services Centre (IFSC), which attracted many of the world's leading banks and financial institutions, together with large corporates. Banks, treasury operations, shared service centres, insurance and reinsurance companies are established in Dublin.
Asset-backed securitisations have been transacted through Dublin for many years, and expertise in this business has been built up within the leading Irish legal and accounting firms. One other contributing factor to this success has been the willingness of the Irish government to facilitate financial services through legal and tax changes. This expertise and willingness to facilitate business encouraged SCOR to securitise certain of its windstorm and earthquake risks through an Irish SPV. Some of the more important issues which had to be addressed included tax, legal and regulatory issues, as detailed below.
As Ireland has a comprehensive tax system including corporation tax, income tax, capital gains tax, stamp duties and value added tax (VAT), many issues required clarification to understand the tax treatment of the insurance securitisation under Irish tax law and, ultimately, to ensure the efficiency of this deal through Ireland. Although complex in nature, the issues were satisfactorily resolved. Following is an outline of the main technical issues addressed:
Tax treatment, however, does not necessarily follow accounting treatment. One of the most important issues requiring clarification was the corporation tax treatment of the SPV in Ireland. Here it was necessary to ensure that the expenses of the SPV were deductible against the income. To achieve this, the SPV had to be regarded as “trading” under Irish tax law.
Irish tax law has specific legislation dealing with securitisation. When drafted this legislation contemplated asset-backed securitisations, such as mortgage receivables. The Irish Revenue has now clarified that insurance securitisations qualify under this legislation. Activities carried out by a qualifying Irish securitisation company are deemed trading, provided such activities take place on an arm's length basis. As such, the reinsurance policy is treated as a qualifying asset under the legislation.
Capital and stamp duty
Additional shareholder funds can be paid in by means of a capital contribution on which capital duty is not charged.
All in all, Ireland has created a favourable tax environment for insurance securitisations. Coupled with EU membership and an extensive double tax treaty network, Ireland is ideally placed to attract securitisation SPVs.
The SPV was incorporated in Ireland as a public limited company with “real” shareholders independent of the reinsured. Traditionally, these SPVs have been owned by charitable trusts.
The notes were offered to qualified institutional buyers as a private placement by means of a confidential offering circular. They were not listed on any stock exchange.
Bankruptcy issues under Irish company law were considered, in particular the protection of the noteholders' funds from an event outside that covered in the retrocessional agreement, such as a lawsuit against the company.
The shareholders had to understand that their investment was at risk. Although remote, the risk would be from an event outside the retrocessional agreement. If there is a loss under the retrocessional agreement, the rights of the noteholders to the return of their funds is reduced by the amount of the loss, thus protecting the shareholders from underwriting losses.
Liquidation issues had to be addressed, in particular the repayment of noteholders' funds prior to the appointment of the liquidator at the end of the retrocessional contract. The preferential rights of creditors in liquidation were also reviewed.
Aside from the specified issues above, the SPV structure in Ireland is broadly similar to a Cayman or Bermuda structure.
The SPV needed the ability to transact reinsurance business in its objects clause. This immediately brought the SPV into the realm of Ireland's regulatory authority, the Department of Enterprise Trade and Employment (DETE).
The Insurance Bill 1999 has placed a formal requirement on reinsurance companies intending to establish in Ireland to notify the DETE using a prescribed format. The information required includes details of the capitalisation and solvency, the shareholders, directors and management, and details of the business to be written. The SPV needed approval from the DETE before it could be established or commence trading. The regulator was supportive of this project and approval was forthcoming.
The driver for the transaction was the purchase of cost effective, multi-year catastrophe cover for the reinsured. Key considerations were stable pricing and very importantly, the access to new, fully collateralised reinsurance capacity in the capital markets, which the reinsured had never previously accessed. The prestige and experience of successfully completing this deal have added to the resources and capabilities of the reinsured.
The desire to locate the SPV in an EU jurisdiction was very strong, and Dublin was chosen for its infrastructure. SCOR must be congratulated for the determination to tackle previously uncharted waters and for proving Dublin's ability to facilitate insurance SPVs.