New Life Collateral Program “Rules Out” Cash

Chris Westfall
Chris Westfall

Bermuda-based Karson Management has launched a new collateral program for the Triple X securitization marketplace that the firm says will remove investment uncertainty that has rocked the industry.

The Karson Collateral Program was launched last week with an initial $825 million collateral transaction arranged by ING Bank and backed by BNY Mellon. The deal will cover a block of life business ceded by Security Life of Denver Insurance Company.

The collateral program will look to simplify and minimize the investment risk of Triple X securitization, says Derrell Hendrix, CEO of Karson Management (Bermuda) Limited.

“We put together a structure that has no ancillary credit risk, where the parties that are providing the risk capacity are not putting up cash,” Hendrix says. “We have systematically ruled out taking people’s cash, which prevents any surprises down the road.”

Hendrix argues that the issue with previous Triple X securitizations is the fact that investors were caught off guard by the non-insurance investment risk embedded in the transactions.

“The problem was that the market took cash from investors and used that money to invest in what I would describe as questionable securities,” Hendrix says. “When the underlying markets went bad, the investors lost principal from causes unrelated to the underlying insurance risk.”

Guideline XXX (Triple X) requires insurance companies to substantially boost the amount of cash reserves for any guaranteed term insurance premiums. Many life insurers have securitized these reserves to make additional room on their balance sheets.

But in 2008, a combination of investment losses in collateral programs and the collapse of the monoline insurers that often “wrapped” Triple X deals brought the industry to a screeching halt.

Hendrix says his outlook for public Triple X deals remains positive, if conditional.

“The prospects for the development of a public market is good if you tick certain boxes, such as non Triple X investment risk, and you avoid unnecessary complexity,” he says. “The deals need to be sold on the merits of their low risk.”