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Life Health > Life Insurance

Rating Agency Prepares For Life Securitization Boom

By Steve Tuckey

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Rating analysts at Standard & Poor’s Ratings Services, New York, are expecting to see a big increase in life insurance securitizations.[@@]

Securitization is the process of packaging risk in securities and selling the securities to investors.

Up till now, insurers have securitized $7.3 billion in natural peril catastrophe risk but only about $1.6 billion in life insurance risk.

But regulators’ efforts to increase the level of capital backing life and annuity contract guarantees should favor growth in life securitizations, according to Grace Osborne, an S&P managing director.

On the life side, “these transactions are largely fueled by companies responding to reserving requirements,” Osborne said during a recent conference sponsored by Standard & Poor’s, according to S&P’s note on the conference.

Any easing of actuarial requirements could slow growth in life securitizations, but but the trends favor stricter rules, Osborne said.

Other S&P analysts talked about life securitization rating considerations.

Jose Siberon, an S&P director, said the rating agency will look closely to see whether securitization efforts have placed additional financial burdens on the securitizing companies.

One ongoing concern is any sign that funding terms are failing to match liability durations, Siberon said.

James Doona, another S&P director, said analysts will consider qualitative criteria as well as the numbers when looking at the notes used to securitize life insurance risk.

“Some elements, such as policyholder behavior, are not easy to quantify,” Doona said. “As a result, the rating on the note is constrained to the financial strength rating on the life insurance company,” Doona said.

When S&P is considering the size of a securitization, it also will consider the possible effects of the deal on the insurer’s overall level of leverage, Doona said.

“It is possible that in some cases the liability may come back onto the balance sheet, and we will also want to make sure that the capital is permanent,” Doona said.

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