Personal auto securitization northwest actuarial forum
This presentation is the property of its rightful owner.
Sponsored Links
1 / 22

Personal Auto Securitization Northwest Actuarial Forum PowerPoint PPT Presentation


  • 50 Views
  • Uploaded on
  • Presentation posted in: General

Personal Auto Securitization Northwest Actuarial Forum. Parr Schoolman, FCAS, MAAA Vice President & Actuary Aon Re Services September 5, 2008. Agenda Slide. Section 1 Securitization History Section 2 Personal Auto Securitization

Download Presentation

Personal Auto Securitization Northwest Actuarial Forum

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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Personal auto securitization northwest actuarial forum

Personal Auto SecuritizationNorthwest Actuarial Forum

Parr Schoolman, FCAS, MAAA

Vice President & Actuary Aon Re Services

September 5, 2008


Agenda slide

Agenda Slide

Section 1 Securitization History

Section 2 Personal Auto Securitization

Section 3 Personal Auto Securitization Example - Axa Sparc2

Section 4 Conclusion


Section 1 securitization history

Section 1: Securitization History


Securitization history us government sponsored entities

Securitization HistoryUS Government Sponsored Entities

  • 1938 US Congress established The Federal National Mortgage Association (“Fannie Mae”, or FNMA)

    • Original mandate was to buy Federal Housing Administration and Veterans Administration loans from lenders.

  • 1968 US Congress divides Fannie Mae into two organizations:

    • FNMA – Privatized with a mandate to establish a secondary market of conventional mortgages

    • Government National Mortgage Association (“Ginnie Mae” or GNMA) - remained a government entity within the Department of Housing and Urban Development, and used to finance government assisted housing programs

  • 1970 The Federal Home Loan Mortgage Corporation (“Freddie Mac”, or FHLMC) was established as a government-chartered corporation owned by 12 Federal Home Loan banks.

    • Eventually privatized in 1989

  • Though privatized, Fannie Mae and Freddie Mac can borrow directly from the US Treasury.

Source: The Handbook of Fixed Income Securities, Fabozzi, Frank J., 6thEdition, 2001


Securitization history mortgage backed securities

Securitization HistoryMortgage Backed Securities

  • Asset securitization started with Mortgage Backed Securities associated with these GSE’s

    • 1970 GNMA issued the first Mortgage Backed Securitization

    • Freddie Mac followed in 1971, Fannie Mae in 1981

  • GSE’s pooled the mortgages they had purchased, and created securities with the resulting mortgage payment cashflows on these pools

    • GSE’s guaranteed interest and principle payments on these securities

      • GNMA securities had the explicit guarantee of the US government

      • Securities issued by Fannie, Freddie where guaranteed by the GSE.

    • Payments to bond holders on a monthly basis, including both interest and principle payments

  • Securities were pure pass-throughs, with principle and interest payments of the pooled mortgages shared proportionally by all notes

    • Like quota share and pooling agreements for insurance

Source: The Handbook of Fixed Income Securities, Fabozzi, Frank J., 6th Edition, McGraw-Hill 2001


Securitization history cmo innovation

Securitization HistoryCMO Innovation

  • 1983 Freddie Mac and Salomon Brothers created the first multi-class mortgage security – the Collateralized Mortgage Obligation.

  • Created Three Tranches – Short, Intermediate, and Long term obligations

    • Short – Received first principle payments

    • Intermediate – Received principle payments after Short notes were redeemed

    • Long – Last to received principle payments

Source:

1. A Primer on Securitization, Kendall, Leon T., Fishman, Michael J. MIT Press, 2000

2. The Handbook of Fixed Income Securities, Fabozzi, Frank J., 6th Edition, McGraw-Hill 2001


Securitization history other asset backed security innovations

Securitization HistoryOther Asset Backed Security Innovations

  • First ABS Transaction – 1985, Sperry Corporation sold notes backed by computer leases

  • Auto Loans – First transaction in 1986, GMAC raised $4B in notes backed by automobile loans

  • Other Asset Classes:

    • Credit Card Receivables

    • Student Loans

    • Home Equity Loans

  • Other innovations

    • CDO: Securitization of pools of loans/notes/MBS/ABS

    • CDO2: Securitization of pools of CDO’s

  • Source:

  • Cowan, Cameron, L – Testimony before the United States Howes of Representatives Subcommittee on Housing and Community Opportunity Subcomittee on Financial Institutions and Consumer Credit, November 5, 2003

  • Source: A Primer on Securitization, Kendall, Leon T., Fishman, Michael J. MIT Press, 2000


Securitization structuring

Tranche I

Tranche II

Tranche III

Securitization Structuring

  • Structured Finance Securitizations are very similar to the concept of insurance

    • Credit losses on pooled assets/receivables/cashflows are more predictable than when they are held separately – Law of Large Numbers

    • Re-structuring cashflows of pooled assets allows for the creation of debt securities that have tranches with a lower probability of default than achievable if each asset evaluated separately


Securitization basic structure

Securitization – Basic Structure

  • Sponsor company exchanges asset pool for cash.

  • Collateral Manager purchases and manages assets in accordance with set guidelines.

  • Trustee ensures compliance with guidelines and structure features.

Senior Debt Tranches

Special PurposeVehicle

(SPV)

Sponsor Company

Priciple & Interestt

Future Cashflows

Debt

Proceeds

Asset Pool

Proceeds

DebtInvestors

Priciple & Interestt

Jr Debt Tranche

Debt

Proceeds

Proceeds

Proceeds less Fees

Shares

Preferred Shares

Residual Cashflow

Equity Investors, Sponsor Co

Proceeds

Proceeds

Fees

Trustee

Collateral Manager


Securitization benefits

Securitization Benefits


Section 2 personal auto securitization

Section 2: Personal Auto Securitization


Personal auto securitization proposed structure

Personal Auto SecuritizationProposed Structure

ReinsuranceAgreement

Senior Debt Tranches

  • A Special Purpose Reinsurer is created to issue debt, and provide reinsurance to sponsor insurance company.

  • Reinsurer issued debt is linked to the loss experience of the reinsurance agreement

    • Debt will default if losses exceed threshold

    • Otherwise, premium will be used to pay off debt and interest

  • Allows debt as part of the required capital to support the personal auto premium, reducing the ultimate cost of capital

Sponsor Company

Special PurposeReinsuranceVehicle

Debt

Debt Investors

Ceded Premium

Cash

Senior

Junior

Sliding Scale Ceding Commission, Loss Payments

Jr Debt Tranche

Debt

Debt Investors

Cash


Personal auto securitization tranches

Expected Loss Ratio

Spread above ELR

Debt Trigger Loss Ratio

Personal Auto SecuritizationTranches

  • Debt acts as a collateralized aggregate stop loss reinsurance cover

    • If Loss Ratio > Tranche Attachment Loss Ratio, principle becomes at risk

    • If Loss Ratio < Tranche Attachment Loss Ratio, principle repaid to debt investor

  • The closer the debt attachment loss ratio to the expected loss ratio, the longer the time required to settle.

    • Jr Tranche typically covers a single accident year

    • Sr Tranche can be a multi-year cover


Section 3 personal auto securitization example axa sparc2

Section 3: Personal Auto Securitization Example - Axa Sparc2


Axa sparc2 transaction

Axa: SPARC2 Transaction

4 Reinsurance Agreements

  • Transaction completed June 2007

  • Axa’s second auto (Motor liability) securitization transaction

    • Securitized French motor liability in 2006

    • This transaction securitized a motor liability portfolio of country specific subsidaries

Senior Debt Tranches

Axa Belgium

Nexgen Re

Debt

InstitutionalInvestors

Axa Germany

Cash

Senior

Junior

Jr Debt Tranche

Axa Italy

Debt

InstitutionalInvestors

Cash

Axa Spain

Guaranty by Axa of each insurer‘s obligations under Reinsurance Agreements

Axa


Axa sparc2 transaction debt tranches

Axa: SPARC2 TransactionDebt Tranches

Loss Ratio:

69.0%

72.5%

74.3%

78.9%

89.0%

93.2%

Class C noasfasdfasf

Rating (S&P/Fitch)

Amount

Loss Ratio Spread

Equity Tranche

Retained by Axa

Class C notes

BBB-/BBB

100.1M Eur

+5.3%

Class B notes

A/A+

220.0M Eur

+9.9%

Class D notes

BB/BB-

39.2M Eur

+3.5%

Class A notes

AAA/AAA

91.5M Eur

+20%

  • Class D – Junior Debt Tranche covering a single accident year

  • Class A, B, C – Senior Debt Tranches covering multiple accident years

  • Equity Tranche – Retained by Axa

  • Debt Tranches are the equivalent of an aggregate stop loss reinsurance cover, providing 20.7% loss ratio points of coverage excess a loss ratio of 72.5%.


Axa sparc2 transaction quota share agreements

Axa: SPARC2 TransactionQuota Share Agreements

  • 4 country specific subsidiaries entered into QS reinsurance agreements with Nexgen Re

  • Each subsidiary required to retain 15% of cession

  • Reinsurance treaties will cover claims arising from motor insurance for a period of 1 year only

  • Insurers pay premium to Nexgen Re, recieve back a fixed commission and proportional losses of the pool

  • Individual claim severities capped (varies by country)

  • Minimum average premium per policy guarantee provided by insurers

  • For each year, the sum of each insurer’s planned loss ratio is used to determine the Global Loss Ratio

    • 69.0% for 2007

  • Axa guarantees each insurer subsidiary’s obligations under the reinsurance agreements


Axa sparc2 transaction senior debt tranches

Axa: SPARC2 TransactionSenior Debt Tranches

Senior Debt Tranches

  • Maturity date July 2013, with an expected maturity date of July 2011

  • Three Tranches, with separate debt ratings

  • Covers multiple accident years (although only 1 at a time)

    • If ultimate loss ratio is determined to be less than the senior note trigger, the notes are to roll over to cover the next accident year

    • At the end of each annual cover period, reinsurance treaty may be renewed subject to rating agency affirmation, and that no loss ratio trigger or termination event has occurred

  • If loss ratio exceeds the trigger an appraisal procedure is triggered

    • Auditor review of premium and loss files (open and closed claims)

    • Actuarial review

    • Process could take up to 2 years


Axa sparc2 transaction junior tranche

Axa: SPARC2 TransactionJunior Tranche

Junior Debt Tranche

  • Maturity date July 2010, with an expected maturity date of July 2008

  • Attaches 3.5% loss ratio points above Global Plan Loss Ratio of 69.0%

  • Covers a single accident year

    • Implication is that a separate Junior Tranche would be created for each new accident year

  • If ultimate loss ratio is determined to be less than 72.5%, the notes expected to be redeemed

  • If loss ratio is above 72.5% an appraisal procedure is triggered

    • Auditor review of premium and loss files (open and closed claims)

    • Actuarial review


Axa sparc2 transaction benefits

Axa: SPARC2 Transaction Benefits

Axa Press Release June 4, 2007

This transaction also confirms that insurance-linked securities (ILS) are an effective alternative to the reinsurance market, even for diversified liabilities, while eliminating counterparty risk. In addition the growing ability to transfer risks to the financial markets should contribute to put the insurance industry on a level playing field with banks

“This new transaction further demonstrates AXA’s permanent search for innovation, which is a key driver of our Ambition 2012 program,” said Denis Duverne, AXA’s chief financial officer and member of the management board. “Through this pan-European securitization, AXA intends to crystallize the economic benefits of mutualisation and diversification and to anticipate the expected evolution of the regulatory environment (Solvency II), which will take into account the retained risks.”

“We are confident that the market for ILS will continue to develop, as they are an efficient risk and capital management tool for the insurance industry, as well as a new attractive asset class for investors.”


Section 4 conclusion

Section 4: Conclusion


Personal auto liability securitization potential benefits challenges

Personal Auto Liability SecuritizationPotential Benefits, Challenges


  • Login