Mid-sized life insurance companies looking for ways to finance their statutory Triple-X reserves may have a new option. Today, a reinsurer can provide financing for a sponsor company’s excess Triple-X reserves, freeing up capital while ensuring that required reserves are in place. The financing applies to Triple-X reserves exceeding the level of reserves the sponsor can demonstrate, based on past experience and reasonable future assumptions, will be needed to pay claims.

Triple-X reserves are required for U.S. term life insurance products with long-term guarantees.

Although this type of transaction has the potential to significantly change how mid-sized life insurers manage their reserves, it is still very uncommon.

Triple-X securitization deals expected to grow

Driven by their unique benefits as well as market conditions, such transactions are expected to become more common over the next several years. Competition in the life insurance market will require mid-sized insurers to look for new ways to gain an advantage in the marketplace, including improved premium pricing. In addition, the credit crunch and market volatility will make it harder to access public market financing options.

Further, a properly structured private Triple-X transaction can improve the direct insurer’s statutory results without impacting rating agency debt leverage ratios at the holding company level. The transactions can be attractive for both existing business and business that hasn’t been written yet.

New access to securitization market for mid-sized insurers

While each transaction must be custom-crafted to meet the unique financing and business needs of the insurer, it can also be accomplished fairly quickly and cost-effectively, particularly in comparison to similar public deals. At the heart of the transaction is having an established relationship between the reinsurer and the insurer. This relationship gives the reinsurer a deep understanding of the insurer’s business, including its actuarial and underwriting data. If the reinsurer is already modeling its reinsurance cash flows on the same block, it is relatively inexpensive to extend the work to model the captive company’s cash flows.

Lower transaction expenses typically make it possible for insurers with peak redundant Triple-X reserves in the $100 million range to access this type of financing. Public Triple-X transactions have typically been feasible for insurers with at least $400 million of such peak reserves.

Further, the reinsurer can assist the insurer in securing its regulatory approvals. There is also no requirement that the securities be rated by any of the rating agencies or guaranteed by any of the monoline insurers.

As mid-sized life insurers explore Triple-X reserve funding options, private transactions with their reinsurers may provide a practical, cost-effective, flexible securitization solution.

Chris Brockwell is senior vice president of insurance linked securities for Swiss Re’s Capital Markets division. His e-mail is . Ron Stopher is senior vice president-client markets for Swiss Re Life & Health, North America. His e-mail is