Royal & SunAlliance (RSA) last week announced the sale of its life insurance business to the privately owned startup company Resolution Life Group. Resolution Life is backed by investors Prudential Insurance, Standard Life and Royal London. With the recent sale under wraps, market sources say it looks less likely that RSA will have a need to securitize.

"RSA's intentions to sell its life business to this group means that there is little reason for the group to consider securitization," said one market source. "But it's impossible to say that just because this option fits the RSA plan that it will be an option that other insurers will follow as well."

The initial word is that companies may be given more credit for surplus embedded within nonprofit life insurance funds, creating less of need to free up capital through the use of a securitization. It's seemingly only an issue for companies that still have an open life business. For closed funds such as RSA, the option of securitization still remains an alternative that's still considered.

"None of the numerous closed U.K. funds are particularly well capitalized, so looking for funding relief is certainly still on the agenda," one market source said. "These companies are pretty much low-risk, whether or not they opt to tap the market really depends on what the owners would want."

Whether Resolution Life steps up to the number of closed life business still present in the U.K. is impossible to predict, market sources said. But it certainly creates a new viable alternative for other insurance companies to consider. "There is a huge number of closed life funds and now with a more credible prospective buyer in the market, companies can weigh their options," another market source said. "Under a securitization structure, companies have to give away some of the value of the funds so a sale may remain more of option for some candidates."

This doesn't mean, however, that securitization will fall by the wayside. Although a pickup in business has been slow to take off - with only two deals done in the past six years - the securitization market continues to be eyed by the numerous life insurance companies looking to offload the closed units of their insurance business.

The market has seen two very different transactions within a five-year gap - the first deal came in 1998 (see ASR 6/17/2002) via National Provident Institution (NPI). Last October, Barclays Capital securitized GBP400 million (US$730 million) of emerging surplus from its closed book of pension and life insurance contracts. The Barclays deal was considered somewhat of a breakthrough in structuring.

Market sources said, however, that the structure is not adaptable to insurance companies across the board. "The Gracechurch deal was important. It was the first one seen in six years and it set a framework that maybe others would like to use but it didn't look at the same types of assets that other issuers would choose to securitize," a market source said. "A number of the companies are looking to securitize with profit policies that might be less adaptable under the Barclays structure and many do not benefit from the parent bank liaison as in the case of Barclays Life and Barclays Capital."

The lag in life insurance deals may have more to do with the numerous regulatory changes insurance companies have been subjected to by the FSA. Until recently, there has been much uncertainty as to whether regulators would give credit surplus capital locked up in nonprofit life funds.

For companies with existing life businesses, how life funds are treated has weighed heavily on whether there's a real need to employ securitization techniques in the future. "The approach is that if regulators allow companies to take credit for these funds, there wouldn't be as much of a need to get the funds off balance sheet, and it's only now that the issue is properly being clarified," a market analyst said.

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