Borussia Dortmund is using an unusual insurance policy to recover most of the income it is losing for failing to qualify for European soccer’s elite Champions League for the first time in five years, according to two people with knowledge of the arrangement.
Germany’s only publicly traded soccer club is in the third year of an insurance contract that protects against lost revenue from missing the tournament, said the people, who declined to comment publicly as the details are confidential. The deal has about 12 underwriters led by Catlin Group Ltd. and XL Group Plc, they said.
Dortmund, which had revenue of 260.7 million euros ($279.6 million) in the fiscal year ended June 30, received 34.7 million euros in prize money for reaching the quarterfinals last season, competition organizer UEFA said. Only three team executives were aware of the insurance policy, a requirement from the providers to prevent coach Juergen Klopp and his players from giving up on finishing high in the league, one of the people said. Dortmund Chief Executive Officer Hans-Joachim Watzke, in an e-mail, declined to comment.
Such cover, banned by English soccer as a guard against match-rigging, is becoming sought-after by executives at elite clubs in other European countries, according to Tom Mitchell, a director at London-based Sportsrisq Capital Ltd. It’s akin to airlines hedging on oil prices, he said.
“It’s becoming a hot topic,” Mitchell said. In soccer, “like any business, shareholders and owners need to be protected against risk,” he said.
Not qualifying for the Champions League is among the largest financial risks for a club in Europe’s top leagues, Mitchell said. Shares of Dortmund, which will lose Klopp after the season, fell 2.5 percent to 3.43 euros at 12:51 p.m., extending their 2015 decline to 11 percent.
Dortmund is ninth in the top German league after 29 of 34 games, and cannot qualify for the Champions League. The top three teams reach the tournament with a fourth entering a qualifying round. Klopp said last week he’s leaving after this season, saying he’s not “the perfect coach for this exceptional club anymore.” Former Mainz coach Thomas Tuchel was hired to replace him.
Dortmund took out the policy in 2012, when the team won its second straight Bundesliga title. The policy was renewed for a third time before this season. The underwriters would have had the option to cancel the insurance if Klopp or three of Dortmund’s top players had left the team during the year, one of the people said.
Dortmund, which hosts Eintracht Frankfurt on April 25, is six points off sixth place, the last qualifying spot for the second-tier Europa League.
So-called negative-outcome insurance was banned in English soccer in 2012 to guard against clubs underperforming, according to Rod O’Callaghan, director of Paddy Power Plc’s Airton Risk Management which uses the Dublin-based bookmaker’s sports prices to help set premiums. A German league official said by phone it has no such restriction.
Some insurers are uneasy about providing cover to clubs, according to Philip Hall, managing director in London at HCC Specialty, a unit of HCC Insurance Holdings.
“The moral risk can be significant if a club goes to the market looking for insurance against future negative performance,” Hall said. “The question we’d ask would be: Why are you doing this? What is their motivation?”
A club like Real Madrid, which has reached the Champions League every year since 1997, might pay a premium of as little as 500,000 euros -- or 5% -- to get 10 million euros of cover for not qualifying, according to Mitchell. Dortmund is paying closer to 30 percent of the amount insured, one of the people said.
La Liga Hedging
In Spain, teams have been hedging against relegation from La Liga for years to protect themselves against a fall in revenue that can be crippling, according to former Deportivo La Coruna president Augusto Lendoiro. In 1995, Deportivo had a compensation clause written into its contract with television company Canal+ in the event of it dropping out of the top league, Lendoiro said.
In England, teams can only take out insurance against positive outcomes such as paying players performance-related bonuses. Teams must obtain approval from the Football Association and agree to the policy within the 10 days of the off-season player-trading window closing.
Even so, Hall of HCC Specialty said he’d rather insure a jersey sponsor looking for cover against bonus payments than do business directly with clubs.
Soccer teams are “going to be in a better position than we are to know about the risk involved,” Hall said.