There is no question that Ballantyne Re, a $2.1 billion securitization backed by future flows of insurance premiums, is an innovative structure that taps ABS market savvy to meet regulatory compliance. The real uncertainty lies in whether it can be repeated often enough to become a booming market.
Ballantyne Re priced last Wednesday, and will use the money to fund Scottish Re's capital reserve requirements under Regulation XXX. The regulations require far more capital than rating agencies think is necessary for life insurance companies to carry, said Sylvie Durham, a shareholder in the structured finance and derivatives practice of Greenberg Traurig.
"What is unique about Ballantyne Re is that they combine future flows and existing policies that had [Regulation] XXX reserves with a feature that allows them to add policies that were not part of the structure," Durham said. "That is what makes it really innovative."
Although Scottish Re completed a similar deal last year, which amounted to $850 million, the current deal is much more time consuming and sophisticated, said Durham.
Ballantyne Re's other unique quality is that it will borrow against future insurance premium payments from policyholders, said one market source. The bonds issued from the trust will be repaid as the premiums come in. He added: "This is a weird asset class. We might see more of them, because of this regulation."
Hitches along the way
Although the capital markets offer an attractive alternative for funding capital reserve requirements, small and mid-sized life insurance companies might not have the means to aggregate enough collateral to make a deal worthwhile. Also, few are large and sophisticated enough to pull off such a deal, said Durham.
Ballantyne is divided into eight tranches, with final maturity dates that stretch to 2037, according to a Fitch Ratings presale report. Scottish Annuity & Life Insurance Co., a wholly owned subsidiary of Scottish Re Group, will retain the unrated C notes, and Scottish Re Group will hold onto the D notes.
The three senior classes of the deal have different interest payment schedules. The A-1 and A-2 notes will be paid in on a relatively straightforward monthly schedule. Interest on the A-3 notes will be paid on a so-called Dutch auction scheme every 28 days, according to Fitch.
"This also has the benefit of an MBIA wrap," said Durham. "You don't do transactions like this with them overnight."
Such a deal is not totally out of the question for smaller insurance companies; assuming that the insurance industry or investment banks have the interest and the means to create a conduit structure to package their policies as collateral, said Durham.
"If that innovation could take place, the companies could turn to the capital markets to fund their Regulation XXX reserve requirements," she said.
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