After a bumpy start, the U.K insurance securitization market has ironed out some of the major kinks in embedded value or Value of In-Force (VIF) securitization structures. Market sources say the pieces are falling into place to get this market off the ground and are hopeful that an increasing number of U.K. insurers will turn to securitization as a way to manage capital more efficiently.
"I think that when you look at how this market is developing, it's not exciting in terms of how many deals we will see a year but what's exciting is the fact that the [insurance industry] doesn't look at securitization as a means to manage the balance sheet," said one market source. Banks have historically been more aggressive than insurance companies in developing financial engineering and capital markets solutions to manage both their risks and capital, but life insurers are increasingly exploring these techniques.
Over the past eight months the industry has seen examples of two products that do very different things (see ASR 12/4/04). Norwich Union's October 2004 Aviva transaction was a way for the company to finance a new business strain, but this transaction relied more on mortgage securitization techniques. Although it is an example of life insurance securitization, it is not directly comparable to VIF securitization structures because of the peculiarities of the underlying products, which were equity-release products and not regular insurance, explained Fitch analysts.
Friends Provident raised GBP380 million last December by securitizing the embedded value of their existing book of business. The deal was public and came a year after Barclays Bank's embedded value securitization of its insurance business. Industry players report that there has been a lot of activity for both products. Insurance feasibility studies are currently being conducted to see how these structures can be applied to suit the needs of other U.K. insurers.
"Insurers are much more interested than they were even a year ago and there are a lot more investment banks trying to convince insurers that this is the way to go," said Jim Rice, a partner on the structured finance team at Linklaters who spoke this year on the insurance ABS panel at the recent Global ABS conference in Barcelona. "The FSA is supportive of these structures and the ratings agencies have a better understanding," Rice added. "A whole bunch of us are hopeful this market will continue to develop."
Rice said that insurers are very interested in exploring ways in which regulatory capital can be raised as well as diversifying funding, something insurance companies have historically turned to reinsurance for. The global reinsurance market grew by a compound rate of 11% between 1990 and 2003, according to the Association of Insurance Supervisors.
"The insurance companies have limits on the subordinated debt they can raise and some companies are reaching these limits. To raise capital through a debt securitization is an alternative way to go," said Franz Lathuillerie, an analyst at Fitch Insurance.
Interest in these types of securitizations is further propelled by a better understanding of the product on the investment banking side. "You can't point to any change of law or FSA rule that make it any easier to understand, but if you're a finance director at an insurance company and you see a deal on the Aviva level or Friends Provident level - these are your direct competitors doing these securitizations," said Rice. There is also a much greater willingness among investors. Particularly for those chasing yield, this could be a good way to get it, said Lathuillerie.
But with no detailed legislation dictating how regulators ought to assess these deals, the market largely runs on a transaction-by-transaction basis. There has been no substantial standardization and tailoring deals to meet the needs of each insurer takes time. Rice said that at the moment he is working on potential transactions and deals would continue coming out a rate of one or two a year.
"Ideally the market needs to find a template, otherwise it won't really take off - the Friends Provident deal is the closest we've come to that [in Europe]," said Lathuillerie. Although the U.S. insurance market is characterized by triple-X securitisations, the closest replicable VIF securitization structure was executed by Swiss Re in the U.S. securitization market earlier this year. The Friends Provident transaction employed a slightly different structure, according to Lathuillerie.
"Although there are regulatory hurdles and high structuring costs, VIF securitization represents an alternative way to raise capital that most insurance companies are likely to assess in the next couple of years," Lathuillerie said. "It appears that a few companies are already seriously considering it."
And before anything happens in the European market, a regular flow of U.K. deals needs to occur, industry sources said. Only then will European insurers follow suit.
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