1. December 2009StoneCross Capital has been approved as the first US-based asset management company that creates and customises Shari'ah-compliant insurance-linked longevity products. Isla MacFarlane looks at how it emerged... In December 2008, the National Bureau of Economic Research officially announced that the US had entered a recession. According to StoneCross Capital, the effects of the struggling economy are most noticeable in the credit markets, and have been reflected in the value of the stock market. Profits for many of the largest life insurers were adversely impacted by the subprime mortgage crisis in the US housing markets, and in 2008 life insurers reported a net loss of over $52 billion, compared to a net profit of $29 billion in 2007. StoneCross Capital said that while this sounds like a lot of money for them to lose, it is important to know life insurers still control over $4.5 trillion in net assets. Thus, the $52 billion represents a loss of less than two per cent of the assets available to insurers to make good on the promises they have made to their policyholders. Fitch notes that the US life insurance industry is relatively well-positioned to weather an environment of capital markets volatility and market illiquidity. The insurers have limited liquidity exposures which mitigate the impact of current market illiquidity across the industry. The industry's risk-based capital position was very strong going into 2008, with many companies holding capital at levels close to or above the 'AAA' threshold based on Fitch's economic capital model. Moody's believe that life insurers are healthier than most other troubled financial-services sectors. Their report points out that most life insurers have strong liquidity profiles and are not dependent on accessing the capital markets for their operations. AM Best notes that historically in troubled economic times, life insurance companies have generally reacted prudently by reducing exposures when possible and enhancing liquidity. The current capital levels for the industry, albeit down roughly 10 per cent from year-end 2007 remains sound. For the few that may fail, state legislatures have enacted guaranty funds for the protection of policyholders and claimants so that the public is not harmed. The time is rightTodd Gillespie, Chief Investment Officer at Stone Cross Capital, said that this was the right time to launch Shari'ah-compliant insurance-linked longevity products. He said,
With the current dislocation in the global financial markets StoneCross Capital has worked diligently to be able to offer for the first time to institutions in the Islamic community the ability diversify their holdings and satisfy future product demands using an alternative asset class that is not correlated to any other asset class in the market.
The culmination of having both unique financial sectors to intersect has been challenging in the past. Since both are highly specialised it took the need of having a management team with experience in Shari'ah and longevity to spend the time and capital commitment to work through the structuring issues to come up with a structure that would endure the test of the Shari'ah scholars as well as making it economically viable to the end investors.
StoneCross Capital said that it has taken its management strategy and product design in the longevity asset class and has applied it to the principles of Shari'ah. In meeting Shari'ah legal guidelines, StoneCross Capital believes that it has created an opportunity for institutions in the Islamic community to diversify their holdings and satisfy future product demands using an alternative asset class that is not correlated to any other asset class in the market. Gillespie said,
By elevating its own standards and earning Shari'ah compliance, StoneCross Capital has solidified its commitment to the advancement of the insurance-linked longevity asset class as an alternative investment solution to institutions with limited Shari'ah-compliant investment options.
Create your own assetReportedly, StoneCross Capital's Shari'ah-compliant platform will enable an investor to customise a financial structure that would couple an existing or newly acquired Shari'ah-compliant asset with longevity assets. The company has said that the percentage of longevity assets would over-collateralise the entire structure and would ensure repayment of the principal and profit of the certificates without relying on the performance of the underlying assets. Stone Cross Capital said that the US is a good base for buying assets. Gillespie said,
Assets are at historically all time lows and with a robust Trustee, Legal and Bankruptcy code in the US it bodes well for asset protection and transparency.
StoneCross Capital added that its financial structure can help an investor to lower their volatility as well as recover their losses in the distressed asset over time. The company added that it is providing investors with a solution on how to recapture funds that have been marked down due to the economic meltdown with a long-term return using its financial platform. Gillespie concluded that the company's greatest challenge was a lack of awareness in the US market. He said,
The US Islamic finance markets are still met with much adversity and lack of knowledge as this stands to be a long-standing education of the marketplace. At present most of the US products offered to clients are mortgages and car loans. This needs to be revamped to include capital markets transactions. By taking US-based assets such as Longevity we are creating a ground breaking Shari'ah investments that has never been offered before and opening the idea for new investment in an arena where a shortfall of products currently exists.
Shari'ah advisorsStoneCross Capital has sought the advice of experienced and respected Shari'ah scholars in the creation of its Shari'ah-compliant platform. The firm is being advised by Sheikh Nizam Yaquby and Sheikh Yusuf Talal DeLorenzo. Sheikh Nizam Yaquby is a Shari'ah scholar and advisor to numerous Islamic banks and companies, including Abu Dhabi Islamic Bank, Islamic Investment Company of the Gulf, Bahrain, and the Arab Islamic Bank, Bahrain. Sheikh Yusuf Talal DeLorenzo is a member of the Shari'ah advisory boards of the Dow Jones Islamic Market Indexes, Morgan Stanley Islamic Global Equity Fund, Oasis Asset Management (South Africa), the Royal Bank of Canada, the Royal Bank of Scotland, the Bank of Ireland, Société General and Guidance Financial. StoneCross Capital's Shari'ah-compliant platform will enable an investor to customise a financial structure that would couple an existing or newly acquired Shari'ah-compliant asset with longevity assets.