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Securitization Piquing Reinsurers' Interest

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Reinsurers’ growing interest in securitization was evident during a recent industry conference that examined the role the capital market is coming to play in the reinsurance market.

Reinsurers are becoming aggregators of business that in turn is being securitized in the capital markets, said Craig Baldwin, co-chair of ReFocus and a member of the SOA Reinsurance Section Council of the Society of Actuaries, Schaumburg, Ill.

In an interview, Baldwin spoke with National Underwriter about developments in securitizing.

Most of the securitizations being done today, Baldwin said, are aggregations of Triple-X business. These securitizations free direct writers of redundant reserving, he added.

Securitization of A-Triple-X business, largely universal life business with secondary guarantees, is very different, he said. There is a “different nature to it” because “there is some question as to whether the reserves are truly redundant.”

A lot more modeling is necessary, and actuaries have to prove to the company’s management, regulators and investors that there is indeed a redundancy, according to Baldwin.

The reason, he explained, is that there is significantly more mortality data for term insurance than for UL with secondary guarantees, which has just come onto the marketplace in the last 5-6 years.

Baldwin said the panelists’ discussion on the issue at the ReFocus meeting suggests that securitizations are becoming easier to accomplish as they become more commonplace.

Currently, he said, the process takes 6-9 months. Although costs are coming down, in order to achieve economies of scale, transaction size usually ranges from $200 million on the low end to around $1 billion on the upper end, Baldwin said.

Reinsurers provide an important role as aggregators, he asserted, because they not only remove anti-trust concerns but also eliminate concerns over confidentiality in relation to business being ceded. For these reasons, Baldwin added, it is unlikely that direct writers would come together and create their own mutual-fund-like pool of policies as a source for securitization.

In turn, he said, it is unlikely that reinsurers will set up their own securitization facilities. Rather, Baldwin added, they will continue to rely on the capital markets to securitize ceded life insurance contracts.

Even if the principles-based reserving project that was discussed during the meeting is completed and becomes effective, Baldwin said there will still be a need for securitizations.

The reason, he explained, is that while reserving requirements could be reduced using principle-based reserving, there may be additional capital requirements. Securitizations could lessen those requirements, he said.

A session on the convergence of capital–which included panelists Chris Stroup, chairman and CEO of Wilton Re, Wilton, Conn., and Chris Brockwell, senior vice president-insurance linked securities with Swiss Re Capital Markets, New York–looked at the growth of the life insurance securitization market.

According to the discussion, issuance amount has grown from $1.8 billion in 2001 to $12.6 billion in 2006.

Slides presented by the panel broke out the issuance amount as follows: $7.8 billion in Triple-X reserve securitization; $300 million in A-Triple-X reserve securitization; and $4.5 billion in embedded value securitization. If $1.4 billion in mortality cat bond securitization is included, the total comes to $14 billion, the slides indicate.

Part of the reason for this growth, according to slides, is because of the increased competitiveness of the marketplace. This is playing out as follows:

–New financing cost has declined as spreads have tightened.

–Financial guarantor premium has declined as competition has increased.

–Amortized fees and expenses have decreased as transactions have become more standardized.

The number of financial guarantors focused on life insurance securitizations has tripled since 2003, the slides show.

ReFocus is the first of what is anticipated to be an annual conference sponsored by the SOA and the American Council of Life Insurers, Washington. The first conference drew approximately 270 attendees, according to Baldwin.


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