ATLANTICLUX in novel Salam III Sukuk life insurance-linked securitization

ATLANTICLUX, the Luxembourg based life insurer which is an an affiliate of the Munich based FWU Group, has brought to market another novel securitization of in-force life insurance policies and this time it’s wrapping the life insurance-linked securities within an Islamic bond, or Sukuk, called Salam III Limited.

The Salam III Limited programme is a $100m insurance-linked Sukuk, according to Fitch Ratings who have reviewed the deal and assigned an expected rating. A first $20m tranche issuance is currently planned to be issued in September and will see ATLANTICLUX transfer the policyholder lapse risk associated with a defined block of in-force life insurance policies through securitization as a tranche of notes to be sold to investors. The deal also facilitates transfer of the majority of the mortality risk associated with the policies involved through a retrocessional reinsurance contract.

It’s a very interesting example of a value-in-force life insurance ILS transaction, something ATLANTICLUX is no stranger to having executed on a life VIF ILS deal called SQ ReVita before. This time the transaction is being structured within a Sukuk (Islamic bond) programme, which we can only imagine is due to efficiencies that can be achieved in that kind of securitization and potentially a need for the transaction to be compatible with Sukuk structures to meet the needs of specific investors. We can’t confirm that at this stage and will hope to bring you more information on the reasons for using a Sukuk as the deal nears execution.

According to Fitch Ratings, the first tranche of $20m of notes to be launched under the Sukuk will have a five year duration to maturity. Salam III is a Guernsey domiciled non-cellular company established to issue the Sukuk programme and enter into a swap agreement with Salam III A IC Limited, an incorporated cell of a special purpose reinsurance vehicle, Salam ATL Re ICC Limited.

The cell is 100% owned by AON Services (Guernsey) Limited, who must be administering the special purpose reinsurance vehicle for ATLANTICLUX. Salam III A IC Limited will act as a transformer and will enter into a reinsurance contract with ATLANTICLUX.

The underlying reinsurance contract will see ATLANTICLUX cede 90% of the mortality risk from the defined book to the cell Salam III A IC Limited as well as part of the lapse risk from the book of life business.

A separate retrocessional reinsurance contract will be in place between the cell Salam III A IC Limited and reinsurer Partner Reinsurance Europe Ltd. transferring all of the mortality risk in the designated portfolio to Partner Reinsurance and leaving Salam III A IC Limited retaining only lapse risk which is then transferred using a swap agreement to Salam III Limited.

It’s a complex deal, but allows ATLANTICLUX to transfer the lapse risk on the in-force policies while also reinsuring its mortality risk via the retro agreement with Partner Reinsurance. In this way it is transferring the bulk of the risks associated with this new business block of life insurance policies.

Fitch says that there can be another four tranches of this deal, taking it up to the $100m Sukuk programme limit. SO ATLANTICLUX can repeat the deal if it chooses for further defined blocks of in-force life business.

We don’t have details of the trigger in this transaction but it is likely indemnity based, perhaps measured according to lapse rate on the defined block of life insurance policies, meaning that when ATLANTICLUX faces a certain amount of losses from the portfolio SALAM III would pay out. Again, we will attempt to confirm.

Fitch Ratings has given Salam III Limited’s $100m insurance-linked Sukuk (Islamic bond) programme an expected rating of ‘BBB-(EXP)’. Fitch has also assigned a rating of ‘BBB-(EXP)’ to the proposed first $20m tranche of life insurance-linked securities to be issued under the programme. ATLANTICLUX Lebensversicherung S.A. (ATL) acts as the ultimate obligor in the programme, which is sponsored by ATLANTICLUX’s parent company FWU AG.

Salam III Limited is a very interesting ILS transaction and its good to see ATLANTICLUX continuing to innovate in this space of value-in-force life insurance-linked securities. We’ll try to bring you more information if and when it becomes available.