Download Michael S. Taht

2007 Annual Meeting
Assemblée annuelle 2007
Securitization of
Insurance Liabilities
IP-34
CIA Annual Meeting
Michael Taht
June 29, 2007
2007 Annual Meeting
Assemblée annuelle 2007
Securitizations, at their highest level,
are an exchange of cash flows
Mortgage
Compan
y
Payment
Stream
Lump
Sum
SPV
$
Bond
Investors
$
Time (years)
Time (years)
1
2007 Annual Meeting
Assemblée annuelle 2007
Reasons for securitization —
A marriage of convenience?
Originator Motives
“Origination is my
business, not longterm investment”
 Lower cost of capital
 Accelerate growth
 No impact on ratings
 Releasing capital
Investor Motives
“I’d like to convert a
lump sum into an
income stream”
 Portfolio
diversification
 Potential upside
 Transparent risks
 Selected risks
2
Why are insurance companies increasingly
seeking out alternative sources of risk
capital?
2007 Annual Meeting
Assemblée annuelle 2007
•
•
•
Redundant reserves beyond economic levels
create capital inefficiencies
Securitizations and other alternatives are ways to
get back some of the efficiencies (i.e., cost of
capital relative to risk undertaken)
Another rationale driving this activity is portfolio
risk management
•
Transfer of risk in closed block, embedded value or
catastrophic mortality experience
3
Why are insurance companies increasingly
seeking out alternative sources of risk
capital?
2007 Annual Meeting
Assemblée annuelle 2007
•
There have been securitizations of non-life risks
for roughly ten years now
•
•
There is a fairly robust market today for these
securitizations, driven primarily by the search for
more credit-worthy capital to put behind extreme
risks
The market for life securitizations has expanded
greatly in the recent past, and will be the focus of
this presentation
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2007 Annual Meeting
Assemblée annuelle 2007
Life insurance securitization landscape
Date
Insurer
Ceding Company
Size
Regulation XXX / AXXX
Securitizations
Oct-06
Aug-06
Jun-06
May-06
Jan-06
Dec-05
Oct-05
Aug-05
Jun-05
Feb-05
Dec-04
Nov-04
Dec-03
Jul-03
Rivermont Life Ins Co
First British American II / Shenandoah
Timberlake Financial LLC
Ballantyne Re
River Lake Ins Co III
Orkney Re II Plc
River Lake Ins Co II
Golden Gate Re
River Lake Ins Co
Orkney Re
River Lake Ins Co II
First British American Reins Co
River Lake Ins Co
River Lake Ins Co
First Colony Life Ins Co
Legal & General America / Banner Life
RGA Insurance Co
Scottish Re (U.S.) Inc
First Colony Life Ins Co
Scottish Re (U.S.) Inc
First Colony Life Ins Co
Protective Life Ins Co
First Colony Life Ins Co
Scottish Re (U.S.) Inc
First Colony Life Ins Co
Legal & General America / Banner Life
First Colony Life Ins Co
First Colony Life Ins Co
$315 MM
$450 MM
$850 MM
$1,700 MM
$750 MM
$455 MM
$300 MM
$100 MM
$200 MM
$850 MM
$300 MM
$550 MM
$300 MM
$300 MM
Embedded Value
Securitizations
Dec-06
Oct-06
Dec-05
Jan-05
Dec-04
Jun-04
Oct-03
Apr-02
Dec-01
FLAC Holdings LLC
Tailwind Holding LLC
Alps Capital II Ltd
Queensgate
Box Hill Life Finance Plc
FLAC Holdings LLC
Gracechurch Life Finance Plc
MONY Holdings LLC
Prudential Holdings LLC
Forethought Financial Serv LLC
Unum Life Ins Co of America
Swiss Re
Swiss Re
Friends Provident Life
Forethought Financial Serv LLC
Barclays Life
MONY Life
Prudential Financial Inc
$134 MM
$130 MM
$370 MM
$245 MM
£380 MM
$150 MM
£400 MM
$300 MM
$1,750 MM
5
In the U.S. the greatest activity
has been in financing redundant reserves
2007 Annual Meeting
Assemblée annuelle 2007
•
Term/XXX
•
•
•
•
Many deals have already closed and a number of
other deals are in process
There appears to be a potential market for midsize to smaller term players to join together for a
combined transaction
First transaction in 2003 by Genworth, subsequent
transactions by Banner, Scottish Re, and RGA
Universal Life/AXXX
•
•
Only one transaction (Genworth, October 2006)
has closed, with other deals in progress
Many other insurers are pursuing securitizationrelated deals involving alternative solutions
6
The drivers of U.S. redundant reserve
securitizations have been unique to the U.S. market
2007 Annual Meeting
Assemblée annuelle 2007
•
Prior to the first securitization, the primary method
of managing Regulation XXX reserves was
through reinsurance
•
•
In 2002, the life reinsurance market began to tighten
in the U.S.
Concerns were raised over the letters of credit
market capacity
•
•
Especially given the limited guarantees associated
with letters of credit at that time
In addition, concerns were raised over the credit risk
taken on by insurers related to negative reserve
credits on their balance sheets
7
The drivers of U.S. redundant reserve
securitizations have been unique to the U.S. market
(cont.)
2007 Annual Meeting
Assemblée annuelle 2007
•
Securitizations provided a long-term solution to
financing redundant statutory reserves
•
•
•
Tapping the broader capital markets provided
significantly more capacity
Transactions received favorable debt treatment
As the market developed, insurers discovered that
there were other benefits to securitizations
•
Especially with on-shore transactions, the tax
treatment of these transactions was considered
favorable
8
The drivers of U.S. redundant reserve
securitizations have been unique to the U.S. market
(cont.)
2007 Annual Meeting
Assemblée annuelle 2007
•
Competition among banks and insurance
wrappers have made these transactions more
attractive
•
•
•
Costs have decreased due to competition
Long term letters of credit are now available
Letters of credit trusts are now admitted as assets in
certain states
9
Prior to the redundant reserve securitizations,
there were two large closed block securitizations
2007 Annual Meeting
Assemblée annuelle 2007
•
•
•
First securitization: Prudential in 2001, raising
$1.75 billion in capital
Second securitization: MONY in 2002, raising
$300 million
Both companies had formed closed blocks to
protect dividend interests of participating
policyholders as part of the demutualization
process
•
•
Closed blocks were funded with assets equal to
80% to 90% of statutory liabilities
Assets supporting remaining liabilities plus target
surplus inure to shareholders over time
10
Prior to the redundant reserve securitizations,
there were two large closed block securitizations
(cont.)
2007 Annual Meeting
Assemblée annuelle 2007
•
Prudential and MONY issued bonds secured by
the earnings on and release of the “additional”
assets
•
•
Bonds were actually issued by newly formed
intermediate holding companies
Bond repayments are limited by the ability of the life
company to pay dividends to the holding company
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2007 Annual Meeting
Assemblée annuelle 2007
Specific Securitization Examples –
Closed Blocks
Available for
Securitization
Statutory Assets
Statutory Liabilities
Surplus Assets
(1), (4)
Required Capital
(1)
Related Assets
(4)
Closed Block
Assets
(3)
Closed Block
Liabilities
(2)
(1) Surplus assets/required capital are based on RBC calculations and
target RBC ratio
(2) Closed Block Liabilities are based on statutory reserving rules
(3) Closed Block Assets were calculated at the time of demutualization as
the amount needed to mature liabilities and maintain the current
dividend scales assuming a continuation of experience underlying the
scale
(4) Surplus and Related Assets provide for adverse deviation over and
above that absorbed by policyholder dividends
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Key issue with any
securitization is rating agency treatment
2007 Annual Meeting
Assemblée annuelle 2007
•
For closed block securitizations, Moody’s
questioned whether or not the structures would
qualify as operational leverage (as opposed to
financial leverage)
•
•
•
Key issue was that a stable set of cash flows was
being exchanged for a more uncertain set of cash
flows
The question of debt treatment, and a rather
limited market, ended this form of transaction after
2002
However, as technology has evolved these
concerns have been alleviated; the agencies now
consider closed block transactions similar to other
embedded value deals
13
Embedded value securitizations have
received increased attention recently
2007 Annual Meeting
Assemblée annuelle 2007
•
Embedded Value (multiple product lines)
•
•
•
There have been a small number of EV
securitizations (Barclay’s Life UK deal, Swiss Re)
We are seeing an increase in potential activity,
representing a broad array of products
An EV securitization effectively monetizes future
profits
•
As compared to selling off a line of business, the
company maintains control of the business
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2007 Annual Meeting
Assemblée annuelle 2007
Tranching and subordination in an EV
securitization is a key component in developing
a transaction that can compete against an M&A
Liabilities
Assets
Bond
Investors
AAA
Debt
$
Risky Payment Stream
A
Assets
BBB
Equity
Originators/Equity
Investors
Unrated
•
•
Time (years)
Subordination over collateralization cred
enhancement
Other forms of credit enhancement: cash
reserves, excess spreads, financial
guarantees
15
Specific Securitization Examples –
Embedded Value
2007 Annual Meeting
Assemblée annuelle 2007
•
•
•
•
•
•
In late 2003 Barclays securitized the embedded
value of its life business
Objective was to refinance contingent loan from
Barclays Bank to Barclays Life
GBP400m raised from capital markets at LIBOR
plus 0.4%
Principal and interest under notes guaranteed by
AMBAC
Notes listed on Irish Stock Exchange
Notes of GBP400m secured by base case PV
surplus of GBP915m (on limited recourse basis)
16
In 2006, one health
securitization transaction occurred
2007 Annual Meeting
Assemblée annuelle 2007
•
•
•
•
One securitization transaction has closed (Unum,
November 2006) relating to group long-term
disability claim reserves
Unum has announced it is also considering a
possible transaction relating to a closed block of
individual disability insurance business
Significant potential for other health securitization
and related transactions in these and other
product lines (e.g., long-term care)
The transaction was attractive as it provided Unum
with more favorable capital treatment
17
Securitizations can also be
used to address catastrophic risks
2007 Annual Meeting
Assemblée annuelle 2007
•
•
Catastrophic mortality bonds (Swiss Re — VITA)
have been issued to provide protection against the
risk of events such as pandemics and terrorism
Key elements of the transaction are as follows:
•
•
•
•
Provide short term protection
Tied to general population mortality
Pandemic risk dominates
Questions have been raised about feasibility of
morbidity cat bonds
18