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Converium Life - Life Securitization: Innovative Financing Supports Growth in Life Business


Converium Life was experiencing rapid growth in its global life reinsurance business, particularly from the European markets. Much of the increased demand in Europe is related to its aging population, which can no longer be adequately supported by weakening state pension systems. As a result, life insurance has become a popular and effective means of retirement savings, especially in light of the favorable tax treatment afforded life insurance-related retirement plans in some European countries.

The increase in consumer demand for unit-linked life insurance products places considerable new business financing, expense, and surplus strain on the life insurance companies offering the products. In response, life insurers have turned to the traditional life reinsurance market for cash, income statement and statutory surplus relief, which has, in the case of German reinsurers, merely transferred the adverse financing and accounting impact to the supporting reinsurance companies' books.

Converium Life has been very active in supporting its European life insurance company clients and continues to provide the reinsurance and refinancing capacity required to maintain its valued client relationships. Mr. Reinhard Dehlinger, Head of Converium Life explains, "life insurers are seeking reinsurance treaties to provide surplus relief and to minimize the impact of large up-front acquisition costs. By purchasing reinsurance, the life insurer is able to transfer some or all of the surplus requirement to the reinsurer. At the same time, the life insurer is able obtain cash financing and to share the expense of acquiring the business such as the large commissions paid to agents in the first year of a new policies."

"Acquiring the business isn't the difficult part", says Mr. Dehlinger. "Given our strong client relationships around the world and market reputation, life insurers are keen to work with Converium Life as their lead life reinsurer." The challenge for Converium Life has been to develop a solution for managing the large first-year commissions, which, according to Mr. Dehlinger, required a more creative approach to financing this business.

"Securitization was the answer," says Mr. Dehlinger. "Working with The RISConsulting Group ("RISConsulting") we were able to develop a capital markets-driven strategy to support the Group's continued life reinsurance business expansion that culminated in the completion of its first life reinsurance securitization transaction in 2001. The transaction structure developed by RISConsulting provided EURO 80 million in initial committed support and an additional 170 million in uncommitted capacity to support Converium Life's new business activity over a four-year period. The transaction makes Converium one of only a handful of companies worldwide to securitize life reinsurance business.

The securitization gave the Group the capital it needed to provide selected life insurers with the refinancing support they required for the 2000, 2001, 2002 and 2003 years of account. In addition to securing the desired financing and accounting relief sought by Converium, the transaction also provided a first-of-a-kind non-recourse transfer of life reinsurance risk in a flexible package that gives Converium the right to expand the overall transaction amount up to EURO 250 million and to prepay investors if underlying business results exceed expectation.

"Under the transaction, Converium Life actually retroceded the subject life reinsurance business to a reinsurer in Dublin," Mr. Dehlinger says. "¡­and the Dublin-based reinsurer raised financing through an asset-backed commercial paper program arranged in advance by Converium." The Dublin reinsurer also arranged a stop-loss facility to manage its net position with respect to the underlying reinsurance risk.

"By leveraging Converium's expertise, its international reach, and its willingness to look beyond conventional solutions and to engage outside expertise of RISConsulting, the challenges were overcome", Mr. Dehlinger says proudly. "Reinsurance is all about innovation, and we found a way to engineer an innovative solution for a complex but significant market opportunity. By working together with our internal and external market partners, we were able to structure a transaction that met everybody's requirements, and that allows Converium to grow."
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