Insurers Eye Opportunities in Commodity Trade Finance - Risk.net
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16/06/2014 11:15 Insurers eye opportunities in commodity trade finance - Risk.net Page 1 sur 2 http://www.risk.net/insurance-risk/news/2320000/insurers-eye-opportunities-in-commodity-trade-finance Related articles Insurers eye opportunities in commodity trade finance CX Re and Partnership Assurance invest in CTF assets European insurers are investing in commodity trade finance (CTF) as they look for new ways to increase yield and diversify their short-dated investment portfolios. CTF is an umbrella term for a wide range of assets used to finance the production and transportation of physical materials around the world, secured by the underlying commodities themselves. The current size of the market is $18 trillion. CX Reinsurance Company, owned by Tawa, an acquirer of insurance firms in run-off, recently made a large investment in CTF, the size of which was not disclosed, citing the asset class's attractive return profile and negligible counterparty risk. In June, annuity provider Partnership Assurance issued more than £4 million of loans to facilitate CTF. Investment specialists say CTF is likely to become a core asset class for insurers in the medium term. "We are aware of at least one very large UK insurer looking to invest in the mass-end of the trade finance market," says Yasheen Rajan, London-based partner and chief operating officer at Utility Capital Group (UCG), an independent fiduciary manager and specialist provider of investment advice to financial institutions. "Insurers have already started to diversify the long-end of their curve through infrastructure and are now looking for an attractive short-dated asset class to complement," he adds. CTF allows firms to tap a sector of the economy that is otherwise inaccessible, as typically commodity trading companies are not publicly quoted. The withdrawal of some banks from the trade finance sector has cleared the way for insurers to invest in this class. James Stuart-Smith, co-chief executive of UCG in London, says the banking sector is reluctant to finance commodity transactions undertaken by smaller traders, opening space for other institutions to enter the market. "There is a general theme of banks lending less. Factors such as Basel III forced them to
Transcript of Insurers Eye Opportunities in Commodity Trade Finance - Risk.net
16/06/2014 11:15Insurers eye opportunities in commodity trade finance - Risk.net
Page 1 sur 2http://www.risk.net/insurance-risk/news/2320000/insurers-eye-opportunities-in-commodity-trade-finance
Related articles
Insurers eye opportunities in commodity trade financeCX Re and Partnership Assurance invest in CTF assets
European insurers are investing in commodity trade finance (CTF) as they look for newways to increase yield and diversify their short-dated investment portfolios.
CTF is an umbrella term for a wide range of assets used to finance the production andtransportation of physical materials around the world, secured by the underlyingcommodities themselves. The current size of the market is $18 trillion.
CX Reinsurance Company, owned by Tawa, an acquirer of insurance firms in run-off,recently made a large investment in CTF, the size of which was not disclosed, citing theasset class's attractive return profile and negligible counterparty risk. In June, annuityprovider Partnership Assurance issued more than £4 million of loans to facilitate CTF.
Investment specialists say CTF is likely to become a core asset class for insurers in themedium term. "We are aware of at least one very large UK insurer looking to invest in themass-end of the trade finance market," says Yasheen Rajan, London-based partner andchief operating officer at Utility Capital Group (UCG), an independent fiduciary managerand specialist provider of investment advice to financial institutions.
"Insurers have already started to diversify the long-end of their curve throughinfrastructure and are now looking for an attractive short-dated asset class tocomplement," he adds.
CTF allows firms to tap a sector of the economy that is otherwise inaccessible, as typicallycommodity trading companies are not publicly quoted. The withdrawal of some banksfrom the trade finance sector has cleared the way for insurers to invest in this class.
James Stuart-Smith, co-chief executive of UCG in London, says the banking sector isreluctant to finance commodity transactions undertaken by smaller traders, opening spacefor other institutions to enter the market.
"There is a general theme of banks lending less. Factors such as Basel III forced them to
16/06/2014 11:15Insurers eye opportunities in commodity trade finance - Risk.net
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reconsider the way they measure their risks, and therefore they end up lending against thehigher-quality borrowers rather than traders with small balance sheets," says Stuart-Smith.
In some areas of CTF, banks are working with insurers to create bespoke investmentvehicles that suit their risk profile.
Konrad Wälti, managing director of CTF at Credit Suisse in Zurich, explains: "Certainbanks can leverage insurers to increase their own risk appetite for CTF. For example, wehave always placed in the insurance market commodity-related risks, including projectfinance, simple trade transactions and selling commodities on letters of credit. What isnew, though, are products that are tailor-made for non-bank institutions to invest in."
These products include default swap structures, where an insurer is paid for taking on thebank's risk from a CTF transaction, and credit-linked notes where the underlying cashflowis based on loan repayments from a range of commodity traders.
The flexibility of these products is expected to generate a broad interest in CTF in the yearsto come. "A clear benefit with trade finance is that you can tailor your investment to matchyour specific needs as an insurer. In addition, transactions are short term and liquidatenaturally so investors can see returns being realised quite quickly without getting lockedin," says UCG's Rajan.
But while the investment risk of CTF is negligible thanks to the physical collateralunderlying these trades, some insurers may struggle to enter the market because ofoperational and logistical difficulties.
"These transactions are very heterogeneous. Also, there are limited benchmarks againstwhich you can measure the risks you're engaging in because commodity finance assets arenot typically publically quoted," says Credit Suisse's Wälti.
In addition, he says, there is no market-maker. "If you want to sell it prior to maturity youmight face an issue."
