RGA completes $300m Chesterfield embedded value life securitisation

U.S. life reinsurer, Reinsurance Group of America Inc. (RGA), has successfully completed its life reinsurance embedded value securitisation transaction, raising $300m from the sale of the notes through issuer Chesterfield Financial Holdings LLC.

The deal, which launched in November proposing the sale of a $200m tranche of notes but grew in size due to demand from investors, allows RGA to realise some of the profits which were embedded in a defined portfolio of life reinsurance business. The transaction covers a closed block of policies assumed by RGA Reinsurance Company, a wholly owned indirect subsidiary of RGA, between 2006 and 2010. The net proceeds made from the sale of the notes will be used by RGA for general corporate purposes.

Chesterfield Financial Holdings LLC, a Delaware domiciled company established by RGA, issued and sold to investors $300m of 4.5% Class A notes. The transaction has a term of 20 years (maturity due in December 2034) but the single tranche of Class A notes have an average life of 4.7 years.

Jack Lay, Senior Executive Vice President and Chief Financial Officer of RGA, commented on the completion of the deal; “We are continually looking for ways to enhance our capital flexibility and efficiency, and this transaction is an attractive option in that regard. In addition, the transaction highlights and monetizes a portion of the embedded value that exists within our broad portfolio of mortality risk. The proceeds will be incorporated into our ongoing capital management plans.”

Being able to recognise value and monetise it from portfolios of insurance risk is one of the use-cases of securitization and embedded value life deals remain an underutilised technique to achieve this. There had been an expectation that European life insurers may embrace embedded value securitisation deals as a way to improve capital in the face of Solvency II, but that has yet to be seen.

Principal repayment on these embedded value notes is linked to the future profits of  the covered closed block of yearly renewable term reinsurance business, which consists of around 600 reinsurance treaties underwritten by RGA Re from over 100 separate life insurance groups.

Investors will receive regular quarterly interest payments and return of principal as long as the expected return of profits and performance of the closed book is as modelled and expected. A rise in mortality experience is the main factor that could erode the performance of the closed book, however these notes are not directly linked to mortality experience or a mortality trigger, making them a similar but different structure to a mortality catastrophe bond.

Standard & Poor’s noted in the transaction pre-sale report that pandemic is the major risk that could impact the notes. Major pandemics, such as a repeat of the 1918 Spanish flu, could cause a default for the notes such as a missed interest payment, but the risk is generally considered to be relatively low with this securitization.

RGA, through an intermediary holding company, formed Chesterfield Financial Holdings LLC and its wholly owned life insurance company subsidiary Chesterfield Reinsurance Company for the purpose of this transaction.

Towers Watson provided independent third-party analysis of the cash flows under various scenarios for the notes.

Credit Agricole Securities, a subsidiary of Credit Agricole Corporate and Investment Bank, was the structuring lead and sole book runner on the transaction.

“We were delighted to advise RGA on this transaction which demonstrates our structuring and placement capabilities in the insurance sector,” commented Vincent Fleury, Global Securitization Head, Credit Agricole CIB.

Standard & Poor’s assigned its ‘A-(sf)’ rating to the Series 2014-1 Class A embedded value notes issued by Chesterfield Financial Holdings LLC (Chesterfield Financial). In its rating announcement S&P explained:

The rating is based on the output of the cash-flow model supplied to us by RGA Reinsurance Co. (RGA Re), which incorporates the financial projections on the ceded business (the baseline scenario) and 19 stress scenarios. In certain scenarios, to make timely payments of principal and interest, Chesterfield Financial depended on the support of RGA Inc. In the event of a mortality event that caused an (approximately) additional 0.82 deaths per thousand in a year, Chesterfield Reinsurance Co. (Chesterfield Re) would need to issue a surplus note to RGA Inc. that would allow Chesterfield Financial to continue to make timely payments of interest and ultimate payment of principal. At 1.32 deaths per thousand, the note would depend on the liquidity support of RGA Inc. under the affiliate note purchase agreement to continue to make timely payments of interest. We view the probability of this event occurring as less likely than RGA Inc. not meeting its obligations at the current rating level.

We would expect a downgrade of RGA Inc. to result in a downgrade of the notes, but an upgrade of RGA Inc. would not necessarily result in an upgrade of the notes because an upgrade would also depend on the actual experience of the subject business.

These embedded-value life insurance securitization transactions provide a useful way that insurers and reinsurers with large, closed books and portfolios can offload some of the performance risk to institutional investors. It allows some of the value and future returns from the business to be realised, while investors take on performance risk, which is ultimately a combination of policy lapse and mortality risk in the main.

These transactions are not common at all, particularly in 144A form. There will likely have been some participation from insurance-linked securities (ILS) investors who invest in life insurance risks, however it won’t have been for everyone as these deals do not have the same clear separation of assets and risk as a mortality bond would, for instance.