NEW YORK-Securitization professionals have become much more comfortable with the intricacies involving deals backed by insurance premiums in recent years, which helps explain why deal volumes in that asset class have climbed to $2.8 billion so far this year.
Better structuring techniques and possible regulatory changes might coax a lot more deals out of the asset class than in previous years, said several market professionals at the Bond Market Association's Insurance and Risk-Linked Securities Conference held here last week. According to ASR's deal database, just $529.5 million in ABS secured by insurance premiums were completed in 2005.
Regulation XXX deals, as the transactions are called, are essentially backed by future flows of insurance premiums. They carry that moniker because several issuers use the proceeds to fund insurance companies' regulatory capital reserve requirements under the regulatory policy.
The deals will become easier to do as more issuers come to market with them, said Steven Schreiber, principal and consulting actuary of Seattle-based Milliman Consultants. He added that there are still a fair amount of potential issuers sitting on the sidelines, resulting in a smaller number of deals completed this year than what he expected.
"There is a tendency for people to wait for a better mousetrap, but that better mousetrap has arrived," said Joel Levine, senior vice president and team leader of Moody's Investors Service's life insurance group.
Panelists also expressed varying opinions on the future role of financial guarantors on Regulation XXX deals. Issuers and investors should get accustomed to the presence of a financial guarantor on a lot of the deals, especially because it is still regarded as an emerging asset class whose structuring techniques need to be refined. Yet, financial guarantors will have a more limited role on the deals as time goes on, some participants said.
Because the deals are complex, they require a lot of analysis, said Diana Adams, a managing director at Ambac Assurance Corp., which provided credit enhancement on $900 million of bonds on Scottish Re's $2.1 billion deal, Ballantyne Re. The company usually assembles a team including legal and tax experts and an actuarial consultant to help with the credit analysis.
"That kind of process is not realistic for an investor who will buy a $20 million piece," Adams said. The presence of a triple-A rated monoline insurer on a deal does not mean investors skip their own analysis, but they do carefully examine the deal's underlying assets, the panelists said.
Investors who buy unwrapped portions of Regulation XXX deals also draw a measure of comfort from knowing that a monoline insurer looked over the deal, Schreiber said.
Further, financial guarantors do not have an unlimited capacity to wrap Regulation XXX deals, Levine said.
"From our perspective, it is a non-core business," he said. "Fundamentally, there is a limit to how much any guarantor can do. Ultimately, some paper will go out in unwrapped form."
Dale Mensik, a vice president and capital markets actuary at Scottish Holdings, the holding company that issued Ballantyne Re, agreed.
"We don't care if its wrapped or not," he said. "What is important is good execution."
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