The insurance securitisation market ended on a high note in 2005. Two new deals were announced just before the end of the year. Bermudian reinsurer Montpelier Re closed a $90 million catastrophe bond transaction on Dec. 22 and Swiss Re completed its second securitisation of future cash flows from closed blocks of life insurance business on Dec. 28.
Montpelier's catastrophe bond provides the company with $90 million in protection against earthquake and hurricane losses. The coverage will last three years.
Unlike standard reinsurance protection, payment on the bonds is not triggered by actual losses. It is triggered by modelled losses to a theoretical portfolio, which matches Montpelier's real portfolio. This is known as a notional portfolio.
If a covered event occurs, risk models determine how it would affect the notional portfolio, given the event's intensity and characteristics. If these modelled losses exceed a predetermined point, Montpelier will be paid by Champlain, the Cayman Islands-based special-purpose vehicle that issued the bonds.
The deal comprises two transactions, which provide Montpelier with two types of coverage. The first will provide the firm with up to $75 million of protection from U.S. or Japanese earthquake losses. The second will provide $15 million of coverage for hurricane and/or earthquakes in the U.S., excluding Alaska and Hawaii. This second transaction provides second-event coverage, which means that an event of a specified size has to occur before the bond becomes active and can be triggered by a subsequent event.
Swiss Re's latest securitization, known as Alps, securitises future cash flows from four closed blocks of life business it owns. It acquired the business through its Admin Re program, under which it buys and runs off closed blocks of in-force life and health policies.
By packaging expected future cash flows from these blocks of business and selling them to capital markets investors as bonds, Swiss Re can collect money now that it would otherwise have had to wait years for, and put that capital to work.
Proceeds from the Alps transaction were $370 million. Of this, $45 million will go into a reserve fund and $325 million will be paid to Swiss Re as a ceding commission. Investors' returns depend on several variables connected with the risks of the underlying business, including mortality, persistency and investment risks.
Alps has four tranches – series A, B, C and D. Series A comprises $220 million-worth of securities, has an average maturity of 2.3 years, and is rated AAA by Standard & Poor's and Aaa by Moody's. Series B is worth $90 million, has an average maturity of 6.6 years and is rated the same as series A. Both series A and B have such high ratings because they are covered by a financial guarantee policy provided by XL Capital Assurance (U.K.).
The other two tranches are not protected by a financial guarantee policy. Series C is worth $30 million, has a maturity of 9.2 years and is rated BBB by S&P and Baa1 by Moody's. Series D is the same size as series C, has a maturity of 10.4 years and is rated BB and Ba1 by S&P and Moody's respectively.
The Alps transaction is the second time Swiss Re has securitised future cash flows from its Admin Re portfolio. Its first, a $245 million deal called Queensgate, was completed last January.
The latest transaction is larger for a number of reasons. "Firstly, investor demand permitted a larger issue. Secondly, the blocks chosen added up to that amount," says Dan Ozizmir, senior managing director at Swiss Re Capital Markets. He adds that the Queensgate transaction was not limited by investor demand but by other constraints, such as the availability of suitable blocks of business to securitise.
Ozizmir says Alps bonds were sold globally, and that investors included traditional money managers and hedge funds.
He declined to comment on whether Swiss Re was planning any more securitisations from its Admin Re book. But he adds: "Securitization is a core part of Swiss Re's strategy and we will always look at opportunities to bring more products into the market. We continue to see high demand for the products."
There are indications that the industry could see many more life insurance-related securitisations in the near future. Europe could be a hotbed of life securitization activity, according to a recent report by S&P.
"We consider that the potential for further development of life insurance securitisation remains high in Europe and the number of transactions is expected to increase," the report said. "Key drivers of the market are regulatory changes, the availability and price of reinsurance, and the state of profitability in the sector as a whole."
