Life reinsurer Wilton Re is planning to tap the capital markets in the second half of this year to help fund redundant reserves required by Regulation XXX in the U.S., says its chairman and chief executive Chris Stroup.

Under Regulation XXX, insurers and reinsurers have to hold reserves for term life business that are far higher than would be required by actuaries and rating agencies. This has proved a big burden for insurers and reinsurers alike and some have turned to the capital markets to help ease the pressure. Companies can finance the redundant reserves by issuing long-term bonds that closely match the duration of the term-life business, which is often several decades.

“We need to provide a way to finance the XXX reserves that we assume from our clients and we think a smart way to do that is to sell long-dated debt into the capital markets,” says Stroup. “There is a good matching of liabilities and assets. It is a good way to finance or fund the redundant reserves. We are accumulating exposures as we speak and once we reach critical mass we will sell debt in the capital markets.”

It is too early to tell how big Wilton Re’s bond issuance will be, says Stroup. But he adds: “Most of these transactions are not effective unless there is several hundred million dollars of reserves being financed.”

But the bond is likely to be much smaller than recent offerings from companies such as fellow life reinsurer Scottish Re, which has been accessing the capital markets regularly to fund XXX reserves. The Bermudian life reinsurer completed its most recent deal on May 4 this year. It issued $2.1 billion worth of securities through Irish special-purpose vehicle Ballantyne Re to finance the term life reserves of the book of business it acquired from ING on Dec. 31, 2004. This securitization closely followed a $2 billion XXX deal that Scottish completed in December last year.

“We don’t have nearly the exposures that Scottish has so we’re not talking about a $1 billion securitization. It will be well below $1 billion,” says Stroup. But he adds: “It will be a sizeable transaction.”