A number of Wall Street firms, led by Merrill Lynch, are looking at creating the first synthetic securitizations in which life insurers hedge out the risk that policy holders die prematurely. A Merrill official said it is looking at the asset class and would aim to complete a deal in the summer if it can iron out potential pitfalls. The main problem is creating a structure that transfers the risk and is transparent and simple enough for investors to understand, the official said. Mitchell Lench, co-head of structured finance at Fitch in London, said the rating agency has been approached by a couple of investment banks about structuring securitizations on life insurance assets, but he declined to name the firms.
In a likely structure, insurers would receive a payout if the actual mortality rate exceeds an index of average life expectancy, according to rating agency analysts. Investors would be paid via the premium life insurers pay to protect their portfolios. The structure is aimed at Baa or A rated life insurers. Securitizations are likely to be synthetic since it would be difficult to physically transfer the underlying assets.
Credit derivatives structurers at several firms said they are starting to receive more enquiries about synthetic securitization from insurance companies because of the rising price of reinsurance. The credit derivatives markets are also becoming cheaper as credit spreads come in and the number of players and their expertise increases supply. Fitch's Lench said this is also part of the convergence of the insurance and investment banking industries.
