Personal auto securitization northwest actuarial forum
1 / 22

Personal Auto Securitization Northwest Actuarial Forum - PowerPoint PPT Presentation

  • Uploaded on

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

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about ' Personal Auto Securitization Northwest Actuarial Forum' - mikaia

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

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


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


Sponsor Company

Priciple & Interestt

Future Cashflows



Asset Pool



Priciple & Interestt

Jr Debt Tranche




Proceeds less Fees


Preferred Shares

Residual Cashflow

Equity Investors, Sponsor Co





Collateral Manager

Personal auto securitization proposed structure
Personal Auto SecuritizationProposed Structure


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 Investors

Ceded Premium




Sliding Scale Ceding Commission, Loss Payments

Jr Debt Tranche


Debt Investors


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

Axa sparc2 transaction
Axa: SPARC2 Transaction Sparc2

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



Axa Germany




Jr Debt Tranche

Axa Italy




Axa Spain

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


Axa sparc2 transaction debt tranches
Axa: SPARC2 Transaction Sparc2Debt Tranches

Loss Ratio:







Class C noasfasdfasf

Rating (S&P/Fitch)


Loss Ratio Spread

Equity Tranche

Retained by Axa

Class C notes


100.1M Eur


Class B notes


220.0M Eur


Class D notes


39.2M Eur


Class A notes


91.5M Eur


  • 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 Transaction Sparc2Quota 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 Transaction Sparc2Senior 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 Transaction Sparc2Junior 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 Sparc2 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.”

Personal auto liability securitization potential benefits challenges
Personal Auto Liability Securitization Sparc2Potential Benefits, Challenges