UK: Is There Still Life in Securitisation?

It was the first time that a European bank had used the capital markets to refinance an investment in a life subsidiary, and it was only the second securitisation of life insurance in the UK, the first being that undertaken by NPI in 1998. At the time of the NPI transaction, it was widely thought that this type of capital raising might prove a useful tool for life companies, providing an immediate and efficient source of funding and a reduction in the risk that the future surplus does not emerge. Indeed the Swiss Re sigma report of the time suggested that securitisation lent itself to the financing of new business. Nevertheless credit risks, ratings issues and the substantial costs involved meant that no other securitisations had been implemented since then.

The structure used by NPI now looks remarkably simple in the light of the Barclays structure. Adding a parent bank into the equation meant that there was more scope for accelerating the surplus out of the life insurer to meet the parent company’s financial requirements. As will be familiar from the NPI securitisation, the idea was for the proceeds of the notes issued to be on-lent to the parent company by way of contingent loan.

However, the Barclays plan involved an earlier set of transactions in order to pass the right to the emerging surplus and the value of that right out of the hands of the life companies. It would appear that Barclays made initial contingent loans amounting to £750 million to each of Woolwich Life and Barclays Life. These original contingent loans were then repaid to Barclays using proceeds generated from the transfer of the life assets (through the Part VII transfer) and through an Irish-incorporated special purpose reinsurer. This reinsurer was a subsidiary of Woolwich Life, called Barclays Reinsurance Dublin Limited ("BRDL"). BRDL entered into a reinsurance agreement with the life companies through which it has the right to receive the future surplus – an asset worth £750 million and providing the life companies with sufficient funds to enable the contingent loan of £750 million to be repaid. In order to fund BRDL, Barclays then made a further contingent loan of £750 million, BRDL having a receivable in the shape of its right to the BLAC emerging surplus. The stage was then set for the securitisation.

Briefly, Gracechurch Life Finance p.l.c. ("Gracechurch") issued £400 million notes, and received a subordinated loan of £350 million from Barclays. The notes were guaranteed by Ambac Assurance UK Limited, and supported by the £750 million of expected surplus (the rights to which were in the hands of BRDL). The bonds were given a AAA rating. The proceeds of the issue of notes and the loan were in turn lent by Gracechurch to BRDL enabling it to repay the contingent loan to Barclays. Under its reinsurance agreement with BLAC, the cash stream created from the future profits on the closed books of business of BLAC is paid via BRDL to Gracechurch as the issuer of the notes. Payment of principal and interest on the £400 million notes is thus to be made entirely out of the cash stream so created.

In determining its regulatory solvency position, BLAC is able to take into account the reinsurance effected under the reinsurance agreement, while transferring some of its risk. The anticipated surplus arising is considerably in excess of the value of the bonds, providing a further level of security to the bond holders. Claims are to be paid first by BLAC and only when its appropriate funds have been exhausted will the reinsurance be accessed.

Whereas the NPI arrangements had securitised only the surplus emerging on a specific book of unitlinked and unitised with profits policies, BLAC (whose business was in run off) securitised the surplus emerging on its entire closed book of business. A wider variety of insurance contracts were therefore covered needing substantial analysis of the financial consequences for each type of policy and risks relating to the emergence of a stream of surplus. The Barclays securitisation therefore extended the principles established by the NPI securitisation to other forms of long term business.

Thanks to the transaction, it would appear that Barclays was able to reduce the amount of regulatory capital it was required to maintain at the bank level in relation to its life subsidiaries, since following the securitisation, Barclays is only providing £350 million subordinated loan notwithstanding that £750 million worth of future surplus has in effect been accelerated.

Once again, it could be that securitisation may offer European insurance and bancassurance groups looking to find new ways of raising capital an alternative to subordinated debt and equity. 

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