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.

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Risk Market News.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.