Life insurers already have securitized more than $12 billion in business, and life and annuity securitizations are likely to accelerate in 2007, market watchers predict.
Industry executives, rating analysts and investment bankers talked about near-term prospects for the life securitization market both in interviews with National Underwriter and here at a life insurance industry conference organized by The Conference Group Ltd, a member of the same family of companies that includes National Underwriter Life & Health and the NU Online News Service.
In the insurance industry, securitization is the process of creating securities backed by pools of insurance policies, annuities, life settlements and other financial instruments.
Investors do well when the underlying instruments do well, but returns may suffer if insurance policy claims prove to be higher than expected.
Insurers may give up some potential for earning profits when they securitize blocks of business, but insurers can use the transactions to limit risk and convert anticipated revenue streams into cash.
Life insurers and reinsurers have turned to securitization to cope with Regulation XXX reserve requirements, and life companies also have securitized blocks of disability insurance policies and other types of policies, according to Alex Cowley, a managing director at Lehman Brothers Inc., New York.
Although most of the transactions have involved investment-grade securities, insurers also have completed a BB-rated transaction and an unrated transaction, Cowley says.
Regulation XXX reserve requirements and the complexity of products with embedded guarantees are some of the trends that are pushing life insurers and reinsurers to complete more securitizations, says Julie Burke, a managing director in Fitch Ratings’ Chicago office.
Life insurers and reinsurers can choose between securitizing blocks of business, selling blocks of business outright, or using instruments such as letters of credit.
Securitizing the value of a business may be quicker and cheaper than selling the business, and a securitization may help an insurer or reinsurer get away from the uncertainty of having to renew letters of credit every year, says Joel Levine, a senior vice president at Moody’s Investors Service, New York.
One drawback is the fact that investors can be just as leery of risk as reinsurers and issuers of letters of credit are.
Securitizing relatively volatile assets, such as variable annuities with guarantees, tends to be more difficult than securitizing simpler, more predictable products, Levine says.
In addition, securitizing a block of insurance business is complicated and requires large amounts of expensive advice.
“It is not the kind of deal that you just do once,” says Raymond Eckert, head of Americas life products in the New York office of Swiss Reinsurance Company.
Securitization volume may be relatively light in the first quarter of 2007, but it should accelerate later in the year, Eckert predicts.
In other Conference Group life industry conference news:
Robert Kerzner, president of LIMRA International, Windsor, Conn., told conference attendees that he expects the Chinese insurance market to develop as quickly in the next 15 years as the U.S. insurance market has developed in the past 150 years.
Major Chinese insurers are already able to go public because of their success at importing insurance expertise, Kerzner said.
Insurers in the United States and other mature markets will have to increase the productivity of their distribution efforts to adapt to the growth of the insurance industries in China and other markets in Asia, Kerzner predicted.