Belgium’s Ethias adopts Nomura’s Flexis to hedge insurance contracts

Belgium’s second largest insurer, Ethias, has adopted Nomura’s Flexis structure in the first deal of its kind in the local retail insurance market. The Lift Security 12/2009 structure features a bankruptcy-remote special purpose vehicle as the issuer, which uses Belgian government bonds as collateral.

Ethias had conducted a so-called beauty parade for a product that it could buy as a hedge against the insurance contracts it was selling to its clients. The capital is guaranteed by Belgian government bonds, and the option is provided by Nomura and collateralised with G7 government bonds or cash via the Japanese bank’s Flexis platform. “So if Nomura went into default, the repayment capital would be secured by the Belgium government bonds and the mark-to-market of the option would be collateralised by G7 government bonds,” says Benjamin Cyrot, Nomura’s executive director of sales for France, Belgium and Luxembourg.

Ethias had previously bought products from banks including Lehman Brothers. The insurer had demanded a collateralised structure without any bank risk involved as a condition to come back to the market, says Cyrot. “People are very aware of counterparty risk and the offering is going to depend on the level of risk investors are ready to take,” he says.

The “large-sized” euro-denominated trade that followed was based on the Eurostoxx, S&P, Nikkei, MSCI Brazil and Hang Seng benchmark indexes, and pays 6% if all are above their initial levels. There is a trigger if index growth exceeds 160%, at which point the product becomes a fixed-rate bond paying 6%. The marketing period was one month, the observation dates are annual and the option is standard. Subscriptions began on December 18, 2009.

Flexis offers protective safeguards to calm any investor concerns about default, valuation and liquidity. The resolution process in the event of an arranger default, in the form of resilience mechanisms, sets the product apart and takes it beyond the standard techniques adopted for bankruptcy remoteness (Structured Products, July/August 2009).