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<span id=”hitDiv2″>June 17, 2010 Thursday
UNDER THE COVER
Banks more willing to finance lifeco redundant reserves
Access to structured financing for redundant reserves, particularly in the XXX and AXXX arena, has been a challenge in the past 18 months, but capital markets are slowly opening up, and new financing alternatives are being devised to provide life insurers with much needed capital relief.
Access to structured financing for redundant reserves, particularly in the XXX and AXXX arena, has been a challenge in the past 18 months, but the capital markets are slowly opening up, and new financing alternatives are being devised to provide life insurers with much-needed capital relief.
Nowadays, these financing deals take longer to get placed, and they are short-dated and more expensive than they were three or four years ago. Most are on the term life side, as opposed to the universal life side, and they can be described as bank-financed structures using medium-term letters of credit, said Duncan Briggs, a managing director at Towers Watson & Co.
Although financing is still hard to obtain, companies are growing confident that access will continue to improve. “The presumption definitely is that they would be able to get something in place,” said Briggs. “There’s guarded optimism.”
In recent months, Mutual of Omaha Insurance Co. has reportedly closed a $150 million, seven-year XXX transaction structured by Credit Agricole Corporate and Investment Bank, and West Coast Life Insurance Co., a subsidiary of Protective Life Corp., is reported to have completed a $505 million, eight-year XXX deal structured by UBS AG. Both the Mutual of Omaha and West Coast Life transactions purportedly provide capital relief for term life insurance reserves.
A resurgence in these financing structures began at the start of the year, when Bermuda-based Karson Management announced the creation of a specialist alternative collateral provider and its very first XXX transaction. Karson teamed with ING Bank NV to arrange $825 million in XXX financing for a large block of life insurance business ceded by Security Life of Denver Insurance Co. to Security Life of Denver International Ltd. The transaction was arranged through Karson Capital Ltd., the newly created entity, and used fully secured demand notes designed to enable the ceding company to take credit for reinsurance or solvency relief under U.S. and U.K. insurance laws and regulations.
According to Karson, the collateral provided will function as a practical alternative to letters of credit and individually funded trusts and will be fully backed by a portfolio of high-quality assets.
Clearly, banks are signaling that they are now more willing to get back into XXX reserve financing. Jeffrey Brown, a vice president with Goldman Sachs Group Inc., said at a conference in New York recently that there have been a number of successful renewals of bank facilities, many opportunistically done in advance by life insurance companies. He noted that LOCs are being offered on the basis of mortality risk analysis similar to what would have been done in a nonrecourse securitization, the only difference being that these deals contain short-dated letters of credit, with no more than a five-year duration. In the past, it was not uncommon to obtain 20-year LOCs.
“We’ve seen roughly $2 billion of that placed in the last 18 months,” Brown said.
There has even been some faint indication that reinsurance companies are upping their appetite for co-insuring XXX reserves, said Robert Hafner, a director at Standard & Poor’s. Hafner said the reinsurers that are accepting new co-insurance on recurring business have, however, increased their prices.
Also, because of regulation changes in Europe, where diversification is becoming more explicitly valued in the regulatory model, some European parents with life reinsurance subsidiaries in the U.S. are a little bit more willing to take on mortality risks, including some XXX, said Hafner.
Still, the potential capital need to fund XXX redundancies exceeds the capital base of the life reinsurance industry as a whole, which means the involvement of capital market solutions is crucial. Ever since long-term letters of credit and access to the securitization market became scarce, life insurers have had to adjust their business accordingly.
Although a number of the key players in the term and universal life markets are pricing products on the assumption that a reserve solution will be available and the cost of that solution might come down over time, many have de-emphasized the more capital-intensive products, Briggs said. They have done so by either withdrawing these products entirely or hiking up the price significantly.
New product designs are also taking these concerns into account. For instance, Genworth Financial Inc. and Protective recently introduced new universal life products that look very much like, and compete with, 20-year term products, but because of the way they are designed, they do not generate nearly as much capital strain as a regular 20-year term product, Briggs said.
Insurers are taking these proactive measures while continuing to engage banks in discussion over their capital needs – an effort that suggests insurers are doing everything on their part to end the dry financing spell.
“I visit with a lot of companies, and it’s not uncommon for them to say they have met with five or six banks over the last two months on this topic,” said Briggs. “There are certainly a lot of companies that are working on deals, doing the actuarial work, the modeling work, with a view to getting something in place by the end of the year.”
June 23, 2010