Chesterfield Financial Holdings LLC (Series 2014-1)

This 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.

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.