CrÉdit Agricole Corporate and Investment Bank has been active in capital management and capital relief for life insurance companies since 2003. Embedded-value securitisations are a particular area of strength for the bank and its work as lead structurer on the C$120 million (£75 million) life embedded-value securitisation for reinsurer Aurigen Reinsurance stands out.
The transaction has a number of innovative elements. It was the first insurance-linked security (ILS) issuance denominated in Canadian dollars. It was also the first Canadian market life insurance embedded-value securitisation, as well as the first execution of a life embedded-value securitisation since the 2006 financial crisis.
The securitisation also achieved a BBB+ rating from Standard & Poor’s despite the sponsor not being publicly rated by S&P. Additionally, it was the first capital market issuance for Aurigen.
The transaction, sponsored by Aurigen Reinsurance, covered a closed block of policies reinsured by Aurigen Reinsurance Limited (ARL) between 2008 and 2010. Aurigen wanted to diversify its capital and an embedded-value securitisation was viewed as the most appropriate way to achieve this, according to Jorge Fries, managing director in the securitisation group at Crédit Agricole CIB in New York.
“Aurigen, a Bermudan life reinsurer formed in 2007 underwriting Canadian life insurance business, wanted to increase its capital while diversifying its capital sources. An embedded-value securitisation, by monetising the value of Aurigen’s in-force business, allowed the company to achieve this goal,” says Fries.
The transaction presented a number of challenges. Significantly, the liabilities were in Canadian dollars and Aurigen wanted the proceeds of the transaction to be denominated in that currency to match its liabilities. Swapping the liabilities into US dollars was deemed too expensive given the uncertain amortisation schedule of the securitisation, says Fries. “So there was a challenge in terms of finding the right investor base that had a need for Canadian dollars. This was the most challenging aspect of the marketing.”
While there were Canadian investors who were interested in investing in Canadian-dollar liabilities, Credit Agricole was also able to attract global reinsurers as well as dedicated ILS funds and asset managers. “These reinsurers and asset managers manage their foreign exchange risk on a global basis, so taking incremental Canadian-dollar exposure was acceptable to them. Some dedicated ILS funds saw the foreign exchange risk as incremental risk compensated by the total return offered by the securitisation,” says Fries.
A further challenge was that the market had not seen any life securitisations executed under Rule 144A of the US Securities Act 1933 since before the 2008 financial crisis. In addition, since there had not been a previous embedded-value securitisation for the Canadian market, past structures needed to be adapted to that.
To overcome these challenges, Crédit Agricole and Aurigen crafted a pass-through structure that allowed investors to ‘look through’ Aurigen’s credit risk and focus on the credit risk of the underlying cedents. The principles-based reserving methodology promulgated by the Canadian regulatory framework also required a different modelling approach than used in past securitisations. The robust structure and modelling resulted in S&P assigning a BBB+(sf) rating to the transaction, even though Aurigen was not publicly rated by S&P.
The transaction was structured so that Aurigen’s Canadian-domiciled Aurigen Reinsurance Company (ARC) would retrocede substantially all of its underwritten business to ARL in Bermuda. As part of the reinsurance agreement ARL would maintain a reinsurance security account for the benefit of ARC to enable ARC to secure reserve credit for its Canadian operations. ARL would then enter into a retrocession agreement with Vecta I, a single-purpose reinsurer, retroceding 100% of ARL’s reinsured business up to December 31, 2010.
Under certain events, unrelated to the performance of the block, holding company Aurigen Capital Limited could be asked to support Vecta to ensure the notes are redeemed at a pre-agreed redemption price. Vecta I raised C$120 million from investors of which C$20 million was put into a stabilisation (claims/interest reserve) account and C$100 million was paid to ARL as a ceding commission in consideration for retroceding the securitised business.
Gregg Clifton, chief financial officer at Aurigen Reinsurance in Toronto, comments: “Crédit Agricole demonstrated a well-developed knowledge of the marketplace. Their people worked diligently over the entire development and marketing period to support the execution of the transaction.
“There were several areas where Canadian market practice and regulation were different than in the US and Crédit Agricole was very helpful in finding unique solutions.”
The week on Risk.net, December 2–8, 2017Receive this by email