Swiss Re Insurance-Linked Fund Management

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Potential growing for life insurance-linked securitization: S&P


You’d be forgiven for thinking that the insurance-linked securities market was only about catastrophe risk securitization if you looked at our Deal Directory and in recent months it has been. However, according to panelists at ratings agency Standard & Poor’s recent Insurance 2012 Conference there’s life in life insurance-linked securitization yet, particularly in the securitization of longevity and mortality risks to help life insurers deal with regulatory reserve requirements and to monetize books of life business.

U.S. life insurers continue to use securitization technology to securitize both longevity and mortality risks in transactions designed to help them meet regulatory reserve requirements and to capture the value of a book of business by transferring the risks off-balance sheet, according to the panelists at the S&P conference.

There hasn’t been a single transaction so far this year which we have listed in our Deal Directory which meets this specification, the last life insurance-linked securitization transaction we covered was Aurigen’s Vecta I Ltd. which was transacted in December 2011. Prior to that was Swiss Re’s Vita Capital IV Ltd. (Series V and VI) in July 2011. It’s a smaller part of the market but one which consistently shows promise and is discussed as underperforming by industry participants.

Dennis Ho from Deutsche Bank participated in S&P’s event and said that he expects this year’s issuance of so-called “XXX securitizations” to surpass 2011 levels as insurers increasingly transfer their regulatory risk reserves. “The crisis created a lot of pent-up demand for people who weren’t able to do such transactions in the past”, he said. “Now the market has been driven to a place where it works from a pricing perspective.”

The issue of regulatory reserve requirements are an often discussed point in the industry. There was a time when everyone believed that securitization was the natural way to deal with these but the market hasn’t lived up to the promise many thought it showed. Gregg Clifton, CEO of Aurigen Group, said; “I think it’s universally accepted that reserves are redundant or excessive.”

Embedded value (EV) securitizations are the one area that is often talked up as having the most promise in recent years as they allow an insurer to transfer all of the risk for a defined block of business to investors. These transactions stopped after the financial crisis but are showing signs of returning more meaningfully. Mr. Ho explained the that with EV securitization transactions “You’re effectively releasing equity capital.”

Miles Kaschalk, an associate director at Standard & Poor’s, provided the rating agencies perspective. “We feel a well-executed embedded value securitization has the potential to have a favorable ratings impact on a company.”

On longevity risk securitization, an area which has only seen one pure ILS transaction in Swiss Re’s Kortis Capital Ltd. deal, Mr. Ho said that he believes the market will “Grow pretty dramatically”.

Mr. Clifton had a different opinion, saying that there’s “Very little market for longevity risk” in the U.S. and Canada because there’s “no regulatory push” driving the market.

Mr. Kaschalk added that “The length of these transactions is greater than what we currently think the modeling can accurately represent.” This is an interesting point and again suggests that benchmark indices may be a better way to go for longevity risk transfers.

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