As insurers increasingly transfer their regulatory risk reserves, it’s likely that this year's issuance of so-called "XXX securitizations"—securing held redundant reserves—will eclipse 2011 levels.
Dennis Ho, a director at Deutsche Bank, identified this possibility at Standard & Poor's Ratings Services' recent Insurance 2012 Conference. Ho, one of many panelists at the event, said the crisis created a lot of pent-up demand for people who weren't able to perform such transactions in the past.
Now "the market has been driven to a place where it works from a pricing perspective." And, according to the panelists, the industry will see a lot of activity in this area, as U.S. life insurers continue to use securitization technology to securitize longevity and mortality risks, transfer regulatory reserve requirements to investors and monetize the captured value of a block of business by moving it off balance sheet.
"I think it's universally accepted that reserves are redundant or excessive," said panelist Gregg Clifton, CFO, Aurigen Group.
Embedded value securitizations, in which insurers transfer all the risk from a block of business to investors, are returning after a hiatus during the financial crisis. The main benefit of these transactions is that "you're effectively releasing equity capital," Ho said.
And Miles Kaschalk, an associate director at Standard & Poor’s, said a well-executed embedded value securitization has the potential to have a favorable ratings impact on a company.
Another market that Ho predicted will grow dramatically is longevity securitization, although, Aurigen’s Clifton pointed out that there's "very little market for longevity risk" in the United States and Canada because there's "no regulatory push" driving the market.
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