Swiss Reinsurance Co. is expected to bring a $245 million deal backed by the future profits on a life insurance portfolio via affiliate Swiss Re Capital Markets later this month, according to market sources. The deal marks one of the first such embedded value securitizations in the U.S., Moody's Investors Service analysts said.

The fixed-rate offering, dubbed Queensgate, is comprised of $175 million in single-A plus rated class A notes, $45 million in triple-B plus rated class B notes and $25 million in double-B plus rated class C notes, according to a Moody's presale report. All the classes have a Jan. 15, 2025 maturity date. The bonds will be placed privately under Rule 144A.

Swiss Re subsidiary Reassure America Life Insurance Co. (REALIC) owns the five closed blocks of life insurance, which will generate the cash flows for the transaction. Those five blocks consist of business resulting from Swiss Re's acquisitions of Guarantee Reserve Life Insurance Co., Royal Macabees Life Insurance Co., The Midland Life Insurance Co., Allied Life Insurance Co. and American Merchants Life Insurance Co.

In order to meet certain regulatory requirements, Aldgate Reinsurance Co. was created to act as the intermediary between REALIC and the Bermuda-based Queensgate special purpose entity. Without Aldgate, Queensgate would have had to be incorporated as a reinsurance company, a ratings analyst said.

Aldgate will retain $30 million of the proceeds in a reserve account to cover possible losses under the reinsurance agreement. The account will become available over 20 years to amortize the Aldgate securities.

The aggregate amount of credit protection of the class 2005-C notes is approximately 13% based upon base case projections. Credit protection of the class 2005-B notes is 22%, and for the class 2005-A notes is 38% at inception, according to the Moody's report.

Cashflows on the transaction are expected to be stable due to an average seasoning of 12 years and the diversified geographic, policy size and age distribution. In addition, the book is closed to new business, analysts noted. REALIC has retained a 10% proportional participation in the profits of the blocks and residual cash flows to better align the interests of the sponsor and the investors.

Furthermore, policyholder litigation risks, and other non-contractual liabilities, are specifically excluded from the determination of expenses and costs used to determine profits under the insurance blocks. Costs of administering the insurance policies are stipulated in the reinsurance agreement, so noteholders are not exposed to the risks of increased servicing costs.

Mortality rates on the subject business averaged less than 1% above expected levels over the past four years, according to an independent risk analysis. Taking into account the impact of HIV/AIDS on the industry as a whole between 1990 and 2001 - an average 1% to 2% per year mortality increase - the figures for REALIC are stable, the analysts found. The Queensgate transaction was stressed using mortality increases as high as 10% per year.

Reinvestment risk in a rising interest rate environment, lapse risk, and default risk were also figured into stress scenarios.

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