Securitization of Insurance Liabilities

1. Securitization of Insurance Liabilities IP-34 CIA Annual Meeting Michael Taht June 29, 2007

2. Mortgage Company Bond Investors Payment Stream LumpSum SPV $ $ Time (years) Time (years) Securitizations, at their highest level, are an exchange of cash flows

3. Originator Motives “Origination is my business, not long- term investment” • Lower cost of capital • Accelerate growth • No impact on ratings • Releasing capital Reasons for securitization — A marriage of convenience? Investor Motives “I’d like to convert a lump sum into an income stream” • Portfolio diversification • Potential upside • Transparent risks • Selected risks

4. Why are insurance companies increasingly seeking out alternative sources of risk capital? • Redundant reserves beyond economic levels create capital inefficiencies • Securitizations and other alternatives are ways to get back some of the efficiencies (i.e., cost of capital relative to risk undertaken) • Another rationale driving this activity is portfolio risk management • Transfer of risk in closed block, embedded value or catastrophic mortality experience

5. Why are insurance companies increasingly seeking out alternative sources of risk capital? • There have been securitizations of non-life risks for roughly ten years now • There is a fairly robust market today for these securitizations, driven primarily by the search for more credit-worthy capital to put behind extreme risks • The market for life securitizations has expanded greatly in the recent past, and will be the focus of this presentation

6. Life insurance securitization landscape

7. In the U.S. the greatest activityhas been in financing redundant reserves • Term/XXX • Many deals have already closed and a number of other deals are in process • There appears to be a potential market for mid-size to smaller term players to join together for a combined transaction • First transaction in 2003 by Genworth, subsequent transactions by Banner, Scottish Re, and RGA • Universal Life/AXXX • Only one transaction (Genworth, October 2006) has closed, with other deals in progress • Many other insurers are pursuing securitization-related deals involving alternative solutions

8. The drivers of U.S. redundant reserve securitizations have been unique to the U.S. market • Prior to the first securitization, the primary method of managing Regulation XXX reserves was through reinsurance • In 2002, the life reinsurance market began to tighten in the U.S. • Concerns were raised over the letters of credit market capacity • Especially given the limited guarantees associated with letters of credit at that time • In addition, concerns were raised over the credit risk taken on by insurers related to negative reserve credits on their balance sheets

9. The drivers of U.S. redundant reserve securitizations have been unique to the U.S. market (cont.) • Securitizations provided a long-term solution to financing redundant statutory reserves • Tapping the broader capital markets provided significantly more capacity • Transactions received favorable debt treatment • As the market developed, insurers discovered that there were other benefits to securitizations • Especially with on-shore transactions, the tax treatment of these transactions was considered favorable

10. The drivers of U.S. redundant reserve securitizations have been unique to the U.S. market (cont.) • Competition among banks and insurance wrappers have made these transactions more attractive • Costs have decreased due to competition • Long term letters of credit are now available • Letters of credit trusts are now admitted as assets in certain states

11. Prior to the redundant reserve securitizations, there were two large closed block securitizations • First securitization: Prudential in 2001, raising $1.75 billion in capital • Second securitization: MONY in 2002, raising $300 million • Both companies had formed closed blocks to protect dividend interests of participating policyholders as part of the demutualization process • Closed blocks were funded with assets equal to 80% to 90% of statutory liabilities • Assets supporting remaining liabilities plus target surplus inure to shareholders over time

12. Prior to the redundant reserve securitizations, there were two large closed block securitizations (cont.) • Prudential and MONY issued bonds secured by the earnings on and release of the “additional” assets • Bonds were actually issued by newly formed intermediate holding companies • Bond repayments are limited by the ability of the life company to pay dividends to the holding company

13. Statutory Assets Statutory Liabilities Required Capital (1) Surplus Assets (1), (4) Available for Securitization Related Assets (4) Closed Block Liabilities (2) Closed Block Assets (3) Specific Securitization Examples – Closed Blocks (1) Surplus assets/required capital are based on RBC calculations and target RBC ratio (2) Closed Block Liabilities are based on statutory reserving rules (3) Closed Block Assets were calculated at the time of demutualization as the amount needed to mature liabilities and maintain the current dividend scales assuming a continuation of experience underlying the scale (4) Surplus and Related Assets provide for adverse deviation over and above that absorbed by policyholder dividends

14. Key issue with any securitization is rating agency treatment • For closed block securitizations, Moody’s questioned whether or not the structures would qualify as operational leverage (as opposed to financial leverage) • Key issue was that a stable set of cash flows was being exchanged for a more uncertain set of cash flows • The question of debt treatment, and a rather limited market, ended this form of transaction after 2002 • However, as technology has evolved these concerns have been alleviated; the agencies now consider closed block transactions similar to other embedded value deals

15. Embedded value securitizations have received increased attention recently • Embedded Value (multiple product lines) • There have been a small number of EV securitizations (Barclay’s Life UK deal, Swiss Re) • We are seeing an increase in potential activity, representing a broad array of products • An EV securitization effectively monetizes future profits • As compared to selling off a line of business, the company maintains control of the business

16. Assets $ Assets Time (years) Tranching and subordination in an EV securitization is a key component in developinga transaction that can compete against an M&A Liabilities Bond Investors AAA Risky Payment Stream Debt A BBB Unrated Equity Originators/Equity Investors • Subordination Þ over collateralization Þ credit enhancement • Other forms of credit enhancement: cash reserves, excess spreads, financial guarantees

17. Specific Securitization Examples – Embedded Value • In late 2003 Barclays securitized the embedded value of its life business • Objective was to refinance contingent loan from Barclays Bank to Barclays Life • GBP400m raised from capital markets at LIBOR plus 0.4% • Principal and interest under notes guaranteed by AMBAC • Notes listed on Irish Stock Exchange • Notes of GBP400m secured by base case PV surplus of GBP915m (on limited recourse basis)

18. In 2006, one health securitization transaction occurred • One securitization transaction has closed (Unum, November 2006) relating to group long-term disability claim reserves • Unum has announced it is also considering a possible transaction relating to a closed block of individual disability insurance business • Significant potential for other health securitization and related transactions in these and other product lines (e.g., long-term care) • The transaction was attractive as it provided Unum with more favorable capital treatment

19. Securitizations can also be used to address catastrophic risks • Catastrophic mortality bonds (Swiss Re — VITA) have been issued to provide protection against the risk of events such as pandemics and terrorism • Key elements of the transaction are as follows: • Provide short term protection • Tied to general population mortality • Pandemic risk dominates • Questions have been raised about feasibility of morbidity cat bonds