Property catastrophe securitisations are the latest product offering in Dublin.
New century, new products. The first half of 2000 saw French reinsurer SCOR complete the first insurance securitisation in Dublin, a $200m property catastrophe note issued by Atlas Reinsurance plc.
The issue generated a flurry of interest, and in the second half of the year a second insurance securitisation vehicle launched in Dublin. The French had returned in the form of Assurances Generales de France IART (AGF IART), the originator for the offering by Mediterranean Re plc of $129m of property catastrophe notes.
Mediterranean Re had been incorporated earlier in 2000 as a reinsurance company. Statutory notification in accordance with the new reinsurance regulatory requirements was submitted to the government regulator, the Department of Enterprise, Trade and Employment (DETE). Mediterranean Re has entered into a multi-year reinsurance contract with AGF IART, which provides for payments following certain earthquakes in the Monaco region and certain windstorms in France. The notes were issued for a period just under five years.
One of the major attractions of Ireland for a ceding insurer is its onshore location. The onshore features of Ireland which differentiate the location for risk securitisation include EU membership, a strong insurance and financial regulatory environment, a network of double tax treaties and an accommodating tax environment.
Currently top of the league for risk securitisations is Cayman. Its pre-eminent position is, however, looking shaky; the OECD has threatened sanctions against the Cayman Islands unless a series of tax reforms are implemented. In addition, the Caymans have been blacklisted by the Financial Action Task Force on Money Laundering (FATF). Ireland is not blacklisted and Ireland represents a very real competitor to the Caymans for securitisation transactions going forward.
What Ireland offers is twofold: firstly, a fiscally acceptable location into which premiums can be paid and a tax deduction achieved, and secondly a fiscally acceptable domicile for the issuance of notes to investors.
Investors in catastrophe bonds have, up until now, not been discerning as to the location of the special purpose vehicle (SPV) needed for these types of transactions, but this is now changing as the promoters of securitisation vehicles look for domiciles that are attractive in the eyes of investors. Having the SPV located in Dublin provides a secure and quality location for the issuance of the notes. Many companies and countries restrict business with offshore tax havens, thus precluding investors who may wish to purchase these cat bonds to diversify their investment portfolios. While on the one hand Ireland has a complex tax framework, the flip side is the quality of the location from the perspective of the local tax authorities in the home country of the originator and investors.
The opportunity to quote the notes issued by the Irish SPV on the Irish stock exchange is currently being examined in Ireland. This development would further enhance Ireland's reputation for issuance of risk securitisation notes.
Ireland continues to expand its double tax treaty network, thus increasing the number of countries whose residents can benefit from the payment of interest gross from an Irish SPV. Treaties have now been concluded with 39 countries. New treaties signed recently include Bulgaria, India and Romania, negotiations for new treaties have been concluded with China and Egypt and new treaties currently under negotiation include Turkey and the Ukraine.
In addition, the Insurance Act 2000, which became law on 1 January 2001, has ramifications for this type of business. The Act impacts reinsurance companies registered in Ireland and overseas companies carrying on reinsurance business from an Irish location. It confers enabling powers on the Minister to increase the level of regulation and supervision of reinsurance operations. It also introduces new notification requirements for approval by the DETE of reinsurance operations establishing in Ireland and introduces a notification period. It further requires an update to the DETE of changes to the information contained in the notification.
What impact does the Insurance Act 2000 have on Irish securitisation transactions? It requires 30 days' notice to be given to the DETE together with information specified in the statutory notification before the company can be incorporated. This information includes details on directors, managers, shareholders, business accepted, business retroceded, reinsurers and professional advisers. It will require the SPV to notify the DETE at least annually of any changes in the information so notified. At this stage that is the extent of the impact.
To date, the Minister has not implemented the enabling powers given to him under the Act. In effect these would allow him to apply the Insurance Acts or any part of them, to reinsurance operations in a similar manner to the application to insurance operations. This implementation could impact SPVs, particularly if current regulations governing insurers' solvency margins, investment allocations and currency matching are applied to SPVs. It is strongly hoped within the insurance industry in Dublin that any further regulation of reinsurance business in Dublin is introduced in a manner permitting the further expansion of the domicile as a base for securitisation transactions. Industry groups are liaising with government to ensure this is the case. In the discussion paper issued by the DETE at the time of introduction of the Insurance Bill 1999 the DETE stated, “there does not therefore appear to be at present a strong case for introducing a system of statutory regulation for the Irish reinsurance industry, given the burden that this would represent for the (mainly IFSC) companies involved”.
One other important development announced in February 2001 is the establishment of a single financial regulator in Ireland, the Central Bank of Ireland and Financial Services Authority (CBIFSA). This authority will have two independent bodies within it – a Financial Services Regulatory Authority and the Irish Monetary Authority and its formation is very welcome, eliminating the uncertainty that has reigned for the past couple of years. The CBIFSA can now move forward to further develop Ireland's financial services industry, bringing together the regulation of practically all financial services providers for consumers – banks, finance companies, insurance companies, life assurers, investment managers, investment and insurance brokers. The insurance regulatory powers of the DETE will therefore pass to this authority, which ultimately reports to the Irish Department of Finance.
Ireland has now proven its ability to domicile risk SPVs with the SCOR and AGF transactions, two transactions with similar risks but different deal structures. By domiciling these SPVs in Ireland, the substantial additional benefits of Ireland over traditional SPV domiciles such as Cayman have become very clear.
For the originator, Ireland is a safe haven and not a tax haven, and therefore a fiscally acceptable location to the home country's tax authority. In addition, an Irish SPV can attract a much larger pool of potential investors, again due to the EU location of the SPV and the Irish double tax treaties.
The next step will be to obtain a listing for the SPV notes on the Irish Stock Exchange.
Finally, the new single regulator of financial services will have as one of its mandates the development of the financial services industry in Ireland.
The proof of this I believe will be evident going forward with Ireland's share of this market increasing. Watch this space!