Developed by Karson, K-Notes are a marketable security that requires the issuer to pay the face value amount plus interest upon maturity, or if demanded earlier.
They were developed to meet US insurance regulation criteria, but also present an alternative to credit-for-reinsurance applications, traditional letters of credit and funded trust accounts. They can also be used as admitted assets, which can be held as capital on the books of a ceding insurance company.
The K-Note transaction platform is supported by BNY Mellon’s corporate trust, custody and collateral management services, and is designed to be scalable and efficient. BNY Mellon’s London team was selected to support the Canadian transaction in 2009, and the bank also provides access to wider capital markets to provide financing capacity.
The Canadian transaction involved the issuance and deposit of a K-Note in to a reinsurance security arrangement account, which was established in accordance with the Canadian Office of the Superintendent of Financial Institutions.
It is backed by a payment obligation of a third party financial institution and a portfolio of investment assets.
Derrell Hendrix, CEO of Karson, said: “We are pleased to have concluded this first of what we hope to be many Canadian reserve financing transactions based on clear guidance from the Canadian regulator.”
“The Karson programme has again successfully transformed its access to market capacity into the issuance of an instrument, a K-Note, that satisfied our client’s reinsurance collateral financing need. We have been able to meet a very challenging client requirement while continuing to develop a scalable and sustainable execution platform with our partners at BNY Mellon.”
Dean Fletcher, head of corporate trust for Europe, the Middle East and Africa at BNY Mellon, said: “With the influx of new regulations there is a continual need to scrutinise effective ways of meeting capital adequacy requirements.”
He added: “This is a landmark transaction and will provide a template for us to work with Karson to help their clients navigate the new regulatory landscape following the financial crisis.”
Karson has completed 16 K-Note transactions to date, raising $8.2 billion in reserve collateral and capital financing capacity on behalf of its clients.