The African Development Bank, the government of the United Kingdom, and global insurers, AXA XL, Axis Specialty, and HDI Global Specialty, have closed on a new and innovative risk sharing transaction.
The Room to Run Sovereign transaction was structured with the intention of scaling up the African Development Bank Group’s commitments to climate finance by up to $2 billion.
It will play a major part in supporting African countries to meet their Nationally Determined Contributions (NDCs).
Support provided by the United Kingdom and private insurers in this risk transfer arrangement will allow the Bank to reduce the risk capital currently consumed by its sovereign operations. Therefore, this will create opportunities for new lending operations in priority sectors, particularly within climate finance, to help support more mitigation and adaptation projects across the African continent.
Moreover, the Room to Run Sovereign is a risk sharing arrangement based on a subset of the Bank’s portfolio of sovereign loans for up to 15 years, where the insurance market, – namely AXA XL, Axis Specialty, and HDI Global Specialty – is taking a $400 million first loss tranche, while the United Kingdom’s Foreign Commonwealth and Development Office (FCDO) will provide a further $1.6 billion of cover, on a second loss basis, on the same subset portfolio of loans.
Hassatou N’Sele, The African Development Bank Group’s Vice President Finance and Chief Financial Officer, commented: “The Bank believes this is a cutting-edge transaction that will tremendously assist it in playing its countercyclical role as the continent emerges from the impacts of the COVID-19 pandemic, while simultaneously facing the negative outcomes of the invasion of Ukraine which has contributed to the emerging food crisis.
“This transaction will help shore up the capital adequacy of the institution while ensuring we can do more for our clients, especially in the area of climate change action.”
Vicky Ford, FCDO Minister of State for Development, added: “I am delighted that the Room to Run Sovereign guarantee, which the UK committed to in May, is now finalised. I’d like to formally welcome our three new City of London insurance providers to the partnership. This $2 billion guarantee reflects the UK’s commitment to investing in climate related projects, driving clean growth and delivering global climate ambitions.”
Additionally, the transaction also covers current and future loans from eleven borrowing countries of the Bank Group’s non-concessional window.
“AXIS is proud to play a leading role in AfDB’s Room to Run Sovereign program, aligning the strength of our specialist underwriting with the London insurance industry’s ability to collaborate to support positive change,” said Richard Lamb, Head of Credit and Political Risks at AXIS’ Lloyd’s of London Syndicate.
“We are excited to support this landmark policy between the AfDB, the UK Government, and private insurers. The combination of an MDB’s unique lending capabilities and private insurer coverage can help unlock large amounts of capital to further assist countries and sectors in need of finance,” added Nick Robinson, Head of Credit and Political Risk at HDI Global Specialty.
“This important transaction is further evidence of the importance of mobilisation by DFIs of unfunded insurance capacity from the private sector to support climate, mitigation and adaptation finance in Africa. This transaction demonstrates the significant risk bearing capabilities of the insurance market when collaborating with a DFI and the potential that insurance products can provide for increased development-focused lending”, commented Simon Bessant, Director at the Texel Group, insurance broker to the African Development Bank for the Room 2 Run Sovereign transaction.
Meanwhile, earlier this year, the African Development Bank signed an agreement to invest in the Joint Reinsurance Company of Member States of Conférence Interafricaine des Marchés d’Assurances (CICA-Re).
