1 / 17

Jean-Christophe MENIOUX Director of Financing / AXA Group Treasurer

Securitisation: a tool for improving capital management and risk management in the European Insurance industry. Jean-Christophe MENIOUX Director of Financing / AXA Group Treasurer. A.L.A.C. Seminar Luxembourg, October 16th 2007. Table of contents.

casta
Download Presentation

Jean-Christophe MENIOUX Director of Financing / AXA Group Treasurer

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Securitisation: a tool for improving capital management and risk management in the European Insurance industry Jean-Christophe MENIOUXDirector of Financing / AXA Group Treasurer A.L.A.C. Seminar Luxembourg, October 16th 2007

  2. Table of contents 1 : The transformation of the insurance business model 2: AXA, a pioneer in the transformation of the model 3: How to develop further the ILS market ? 4: Case study: SPARC Europe (June ’07)

  3. The transformation of the insurance business model From warehousing risks ... Insurance business model based on warehousing risks: Risks taken from policyholders Risks pooled and borne by the insurers Traditional reinsurance programs Requiring large diversificationand good underwriting Requiring a relatively large amount of capital, not always efficiently used The Old World • Focus on product returns without properly measuring risk/volatility • Management of assets independent from management of liabilities • Accounting rules far from “marked-to-market” • Few rated companies • Few institutional investors

  4. The transformation of the insurance business model ... to understanding, restructuring and transferring risks (1/2) Business model evolving towards management &intermediation of risks: • Risks taken from policyholders • Risks pooled and structured by the insurers • Risks externalized through reinsurance programs & financial markets Requiring efficient diversification Requiring moderate amount ofcapital with appropriate capital management The New World • Focus on products’ risks / value • Integrated assets / liabilities management • Accounting rules closer to “marked-to-market” • Many rated companies • More institutional investors

  5. The transformation of the insurance business model ... to understanding, restructuring and transferring risks (2/2) Risks can be insured = Risks can be restructured Market risks being more dynamically managed through the use of suitable hedges (bought or built): UL with guarantees General Account embedded options Insurance risks being externalized through: Financial markets Reinsurance markets Other risks still being kept and borne by insurers: Scale (mutualisation of risks) Requirement of a specific expertise Prohibitive market prices

  6. Table of contents 1 : The transformation of the insurance business model 2: AXA, a pioneer in the transformation of the model 3: How to develop further the ILS market ? 4: Case study: SPARC Europe (June ’07)

  7. Securitisation: a modern tool to improve risk and capital management (1/2) Banks have started to actively use securitisation as a risk management or a capital management tool since the eighties, which led to a successful transformation of the banking industry. Commercial banking ROE(1984 – 2004) ABS/MBS Outstanding in the USin USDbn Non-mortgage ABS outstanding MBS and Mortgage ABS outstanding Source: Morgan Stanley Note: Non-mortgage ABS only included from 1995 Source: Stone Point Capital

  8. Securitisation: a modern tool to improve risk and capitalmanagement (2/2) Securitisation of insurance risk is a recent phenomenon, beginning slowly in the mid-nineties with the issuance of the first catastrophe bonds, and continuing in the 2000’s with some securitisations of embedded value. Most recently, risk securitisation continued to expand with some innovative transactions: • Mortality risk (Vita I in 2003 from Swiss Re ; Vita II in 2005 ; Osiris from AXA and Tartan from Scottish Re in 2006 ; Vita III in 2007) • P&C insurance risk (Sparc France in 2005 and Sparc Europe in 2007 on AXA’s motor portfolio)  But the insurance sector is lagging behind the banking industry (in Europe, in 2006, € 450bn new issues for ABS/CDO vs around $ 9bn Insurance Linked securities worldwide) Total ILS outstanding as of 25 Jun 07, in USDbn Source: Swiss Re

  9. A+ to BB+ Private SPARC France AURA Re OSIRIS AAA to BB- AXA is a pioneer in risks restructuring & risk transfer • Securitization and dynamic Asset Liabilities Management are the new tools for risk management and capital management, aiming to : • Improve capital utilization in the insurance industry • Broaden the range of available tools for risk management and balance sheet optimization • Diversify reinsurance sources away from traditional reinsurance market while eliminating counterparty risk • Develop Insurance Linked Securities as a new asset-class for investors • Examples of AXA’sinnovative Life & P&Cinsurance-linked securities (ILS) transactions • AURA Re (2005): European storm Cat bond (€68m) • Protects the group against low frequency-high severity European Windstorm events • SPARC France (2005): 1st securitization of a motor insurance portfolio (€200m) • Transfers the risk of deviation above a certain threshold of the loss ratio of the securitized portfolio • OSIRIS (2006): 1st extreme-mortality risk coverage program from an insurance company (€300m) • Protects from a sudden jump in the mortality rate in 3 countries (France, Japan, US) which would accelerate payments on our term life policies • SPARC Europe (2007): 1st securitization of a multi-jurisdiction motor insurance portfolio (€450m) • Transfers the risk of deviation of the loss ratio on a diversified portfolio of motor books in Germany, Belgium, Spain and Italy AAA to BBB SPARC Europe

  10. Table of contents 1 : The transformation of the insurance business model 2: AXA, a pioneer in the transformation of the model 3: How to develop further the ILS market ? 4: Case study: SPARC Europe (June ’07)

  11. Indemnity securitization • rated • public placement EV securitization • rated • public placement • cash proceeds + collateral From traditional reinsurance to the full spectrum of capital market solutions “Pure traditional” solutions “Pure ILS” solutions Industry loss securitization • rated • collateralized • customized industry loss Traditional reinsurance • not rated • not collateralized • indemnity based ILW or derivatives • not rated • modelled loss or parametric index • maybe collateralized Parametric securitization • rated • public placement • customized parametric index Source: Swiss Re

  12. Key advantages of securitization Capital markets have significantly greater capacity than insurance markets Better pricing in some cases where insurance market has a limited number of providers Removes counterparty credit risk Increases the diversification of protection sources and offers multi-year protection Improves the cost of capital, i.e. the reduction in the cost of capital achieved through securitisation is greater than the cost of servicing the securitisation structure  There is a considerable potential market for ILS, as the need for risk transfer from insurance companies matches the desire for diversification from investors as insurance risk is an uncorrelated new asset-class

  13. Key success factors for developing securitization • Need to fully recognize risk transfer and allow capital relief • Not differentiate b/w reinsurance, ILS or derivatives at equal risk transfer • Accept SPVs as valid counterparties not subject to stringent solvency requirements • No restrictions on institutional ILS investments Regulators: • Need to fully recognize risk transfer and allow capital relief • Value securitization and other forms of risk transfer in their assessment of quality of risk management • Increase transparency on process for rating notes Rating agencies: • Education of market participants to transfer and to accept more and more sophisticated risks • Increased transparency on modelling, documentation, data (standardization of contracts, SPVs, triggers) • ILS indices to develop derivatives and secondary market Capital markets:

  14. Table of contents 1 : The transformation of the insurance business model 2: AXA, a pioneer in the transformation of the model 3: How to develop further the ILS market ? 4: Case study: SPARC Europe (June ’07)

  15. SPARC Europe - Objective and outcome The objective is to securitize the risk of deviation of the cost of claims of AXA individual motor portfolio in 4 countries • € 2.6bn earned premiums, 6 million contracts • High granular portfolio: high frequency, low severity and low volatility • Around 1,500,000 claims p.a. Key outcome for AXA • Transfer of € 450 million risks over 4 independent cover periods (2007 to 2010) • Average margin in line with similarly rated synthetic Asset Backed Securities (ABS) securitizations • Diversification of the sources of reinsurance outside of traditional markets while eliminating counterparty risk • New asset-class offered to traditional ABS investors in 4 tranches (from AAA to BB) • Improved balance sheet efficiency and capital management

  16. SPARC Europe – Deviation of the Loss Ratio The transaction, structured via two SPVs, is similar to a synthetic securitisation by which the risk of performance of the 4 mutualised motor insurance portfolios (forming the Global Portfolio) is transferred to investors at certain defined levels The performance is measured via the Global Loss Ratio: The main risk for investors is the deviation of the Global Loss Ratio above the Global Loss Ratio Trigger Level ∑ Claims ∑ Earned Premiums Principal for each class of notes is at risk in the event of Global Loss Ratio exceeding an annual Global Loss Ratio Trigger Level. G l o b a l L o s s R a t i o Notes issued by SPARC EUROPE Assets held by SPARC EUROPE 4 Senior deposits EUR 91,500,000 Class A AAA/AAA S&P/Fitch Target Global Loss Ratio + 20.0% EUR 220,000,000 Class B A/A+ S&P/Fitch SPARC EUROPE (Senior Issuer) Target Global Loss Ratio + 9.9% EUR 100,100,000Class C BBB-/BBB S&P/Fitch Target Global Loss Ratio + 5.3% EUR 39,200,000 Class D BB/BB- S&P/Fitch 1 Joint Junior deposit SPARC EUROPE (Junior Issuer) Target Global Loss Ratio + 3.5% Equity Notes Target Global Loss Ratio equal to 69.0%

  17. FCC SPARC SPARC Europe - A structure similar to a synthetic securitisation AXA S.A NATIXIS GROUP Direct payments in advance for cost of funds of the Senior and Junior Issuers Quota share treaty Secured Financial Instruments/Guaranteed Investment Contract Premiums AXA Germany Claims + reinsurance commission Senior + Joint Junior Deposit Sale of the receivables Placement Quota share treaty Premiums Recoverable on each Insurer against the Senior Secured Deposits FCC SPARC Senior Issuer AXA Belgium Claims + reinsurance commission Notes AAA/AAA Notes AAA/AAA Notes Qualified A/A+ Notes A/A+ Notes investors Senior + Joint Junior Deposit BBB-/BBB Notes Euro 411,6 Million Proceeds Euro 411,6 Million BBB/BBB - Notes Quota share treaty Premiums NEXGEN RE Claims + reinsurance commission AXA Italy Recoverable on the Insurers against the Joint Junior deposit Notes Qualified investors Junior Issuer Senior + Joint Junior Deposit Proceeds Euro 39,2 Million Quota share treaty BB/BB- Notes Equity tranche Premiums Euro 39,2 Million AXA AXA Spain Claims + reinsurance commission Senior + Joint Junior Deposit

More Related