Developments in Reserve Financing

Jeff Poulin

Canada Life Reinsurance

November 20

Changes Are Occurring Faster

2

How many years did it take radio to reach 50M users?

38 years

How many years did it take Google to reach 50M users?

6 years

How many years did it take Facebook to reach 50M users?

3.5 years

How many years did it take iPad to reach 50M users?

1.5 years

How many years did it take Google + to reach 50M users?

88 days

Regulatory Changes

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Life reserve Financing

8

In the US has large amounts of redundant XXX and AXXX reserves are generated- $10 to $15B per year is being financed – Reinsurers cannot handle all the strain – Banks got involved

VIF financing - purchasing business via reinsurance – essentially selling a portion of your block of business for upfront price in cash

Closed blocks (participating business) have need for financing. Reinsurers have helped with the same type of structures

Credit insurance industry has typically use reserve financing for their large upfront reserves

US Life Insurance Has Redundant Statutory Reserves

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Mortality to be used for statutory reserve is approximately 3 times the expected mortality Lapse are forced at 0.

0

1

2

3

4

5

6

7

8

0 5 10 15 20 25 30 Year

Stat Reserve

GAAP Reserve

Evolution of Financing the Reserves

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Originally – simple quota share of the business – pass the problem to the reinsurer but lose the tax reserves

CEDING COMPANY

REINSURER

OFFSHORE AFFILIATE

LOC

COINSURANCE

Some reinsurers would retrocede to an affiliate offshore and finance the redundant reserves with an LOC

COINSURANCE

Creation of Captives Within the Ceding Company’s Group

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HOLDCO OR PARENT

CEDING CO (LOC BENEFICIARY)

CAPTIVE

BANK LOC

ECONOMIC

RESERVE

CAPITAL

GUARANTEE or RECOURSE

LOC PAYMENTS

QS

Recourse to a Parent is an issue, so went to Monoline Guarantors

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MONOLINE

CEDING CO (LOC BENEFICIARY)

CAPTIVE

BANK

LOC or ASSETS In TRUST

ECONOMIC

RESERVE

CAPITAL

GUARANTEE or RECOURSE

LOC PAYMENTS

QS

Creation of Transformers to Have Reinsurers Take the Insurance Risk of Draw

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OPTIONAL GUARANTEE ONLY

FOR DEFAULT

CELL 1

CELL 2

REINSURER

DERIVATIVE COVERING LOC

DRAW

REINSURANCE

COVERING DRAW

INSURANCE

HOLDCO OR PARENT

CEDING CO (LOC BENEFICIARY)

CAPTIVE

BANK LOC ECONOMIC

RESERVE

CAPITAL

LOC PAYMENTS

QS

GUARANTEE or RECOURSE

Note Swap Deal Diagram

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CAPTIVE

CEDING CO. 3rd PARTY REINSURANCE

TRUST OR LLC

REINSURER

CEDING HOLDCO

CLN SN

QS

YRT

DERIVITAVE

RA

LEGEND: SN: Surplus Note issued to Trust CLN Credit-Linked Note from Trust, with Reinsurer specified as risk taker RA: Optional Reimbursement Agreement NWMA: Optional Net-Worth Maintenance Agreement or Guarantee QS: Quota Share Reinsurance Agreement YRT: YRT Agreements with 3rd Party Reinsurers, deemed in place

NWMA

Stop Loss

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CEDING COMPANY

CAPTIVE

REINSURER

COINSURANCE FUNDS WITHELD

STOP LOSS OVER A DEFINED PERIOD THAT GUARANTEES PAYMENT IF THE CAPTIVE RUNS

OUT OF MONEY

Some regulators have now agreed to a simple stop loss

XXX/AXXX Captive Update

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Rector (AG38) is applied through the valuation manual (Actuarial Opinion) and essentially brings in PBR early for XXX and AXXX captives.

Effective 1/1/2015 for policies issued after 1/1/2015 that are subject to XXX or AXXX reserving.

Exemptions:

Reserves under YRT reinsurance

Business ceded to Certified Reinsurers

Business ceded to licensed or accredited reinsurers (unless they have a permitted practice or are in an RBC driven regulatory event).

Ceding company’s state of domicile can exempt other reinsured business if it is covered under AG48 only by a technicality after consulting with FAWG.

XXX/AXXX Captive Update 2

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Business ceded under a non-exempt reinsurance transaction as of 12/31/2014 is exempt

The “economic reserves” calculated using VM 20 must be backed by Primary Security equal to:

Cash

SVO listed securities (excluding any synthetic LOC, contingent note, credit-linked note or similar security

Commercial loans CM3 or higher, policy loans, and Derivatives used for hedging can also be used if backing funds withheld or modco reserves.

Any assets acceptable to the commissioner can back the excess of the statutory reserve over the VM 20 reserve

RBC? What will RBC requirement be for assets that are not Primary Security?

M&A Via Reinsurance

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Hard to buy a block of business outright – need policyholders agreement to move the policies to another insurer’s books

Permanent reinsurance is the solution

example: XL sold their UK/Irish Annuity block to GreyCastle via a permanent reinsurance agreement

Banks and reinsurers are getting more sophisticated in the way they can help financing the transactions for buyers

Purchasing a block - Typical Structure

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SELLER

BUYER / REINSURER

CASH ALLOWANCE

FOR THE BLOCK

TPA

BANK

INITIAL FINANCING

REPAYMENT OF LOAN

ON AGREED TERMS

REINSURANCE CASHFLOWS

Alternate Structure 1

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SELLER

BANK OWNED REINSURER

TPA

BANK

BUYER

INITIAL FINANCING

REINSURANCE CASHFLOWS

CASHFLOWS WITH MIN

GUARANTEE INITIAL FINANCING

REPAYMENT OF LOAN ON AGREED TERMS

CASH ALLOWANCE

FOR THE BLOCK

Bank Owned Reinsurer

Bank

Alternate Structure 2

20

SELLER

BANK OWNED REINSURER

TPA

BANK

TRUST

BUYER

MINIMUM GUARANTEED

PAYMENTS

REINSURANCE CASHFLOWS

REINSURANCE CASHFLOWS

INITIAL FINANCING

REPAYMENT OF LOAN ON AGREED TERMS

CASH ALLOWANCE

FOR THE BLOCK

Considerations

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Considerations

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Data management/Security

Documentation / Lawyer up!

Regulations – relationship with regulators

Representations and Warranties

Credibility of the structure

Good Reinsurer with Experience