Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Ballantyne Re life insurance securitization default almost inevitable


Scottish Re’s $2.1 billion 2006 life insurance securitization transaction seems headed for an inevitable default according to Fitch Ratings. The Regulation XXX type life insurance linked transaction has been finding it increasingly difficult to pay investors interest payments and now Fitch says that payment of principal is increasingly unlikely as well.

Fitch affirmed the ratings of all three tranches of the transaction. The Class A-1 notes are still able to make interest payments to investors, while the Class B-1 and B-2 notes are unlikely to manage that.

The reason for the difficulties faced by Ballantyne Re is the type of collateral selected to invest the proceeds of the sale of the notes in. The proceeds were invested in subprime residential mortgage-backed securities and some asset backed securities. These have all lost significant value meaning that interest payments are now difficult to impossible to make. Scottish Re had themselves been making up the missing interest on the payments for some time.

Fitch say that they see it as unlikely that any investors in the Class B-1 and B-2 notes will receive any further interest payments or return of principal, these two tranches will inevitably default they say. The Class A-1 notes will continue to pay interest for the forseeable future but Fitch believes it’s probably that this tranche of notes will also eventually be unable to pay interest or full principal as well.

Ballantyne Re seems destined for default, but that shouldn’t reflect badly on life insurance securitizations, just on the selection of collateral assets. It shows that careful selection of assets and management of those assets is essential for any securitization of this type. We feel it’s unlikely that RMBS would ever be used as collateral for an insurance-linked security again as the market has learned its lessons on this and now uses highly rated treasuries and money market funds for that purpose.

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