Capital Markets Leader Swiss Re Picks Retro Over Securitization
Swiss Re ruled out an embedded value securitization for a large chunk of its life reinsurance business and instead is relying on a traditional retrocession agreement.
The global reinsurer announced yesterday it was transferring a $1.268 billion block of its life reinsurance business to Berkshire Hathaway in a retrocession deal.
An embedded value securitization sells a block of life reinsurance to investors, as opposed to a retrocession agreement in which the block is transferred through a reinsurance agreement.
In a presentation to analysts and investors yesterday, Swiss Re said an embedded value securitization was ruled out for a number of reasons.
“In a securtization you basically take a block of life and health business, isolate it in a special purpose vehicle and then issue debt to the investors, and what remains is a leveraged equity tranche of the business,” said Christian Mumenthaler, head of life & health for Swiss Re. “The consequences [of an embedded value securitization] is that the capital relief is limited because you keep the equity tranche and not all risks get transferred.”
By using a retrocession agreement, Swiss Re says it will be able to free up around $292.5 million in capital.
Embedded value securtizations have stalled over the past 18 months as investors shied away from the larger insurance linked securities markets.
Only two deals — Hanover Re and Aegon — have taken place since 2008.
Prior to the market crash, embedded value deals had grown from $1.8 billion in 2001 to $6 billion in 2007, according to Lehman Brothers.
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