WO2003021386A2

WO2003021386A2 - Process and system for providing a funded trust structure

Info

Publication number: WO2003021386A2
Application number: PCT/US2002/027280
Authority: WO
Inventors: James D. Maughn; Dale E. Filsinger; Robert L. Buckner; Robert D. Parmley; Steven W. Easson; Ronald D. Peters; Shekar Jannah; Chris Brockwell; Ward Bobitz; Jeff Oller; Mahammed Ashab; Alan Green; Pradip Arval; Sean Wilson; Jennifer Vanbelle; Dan Moyer; Oscar Tengtio; Jimmy Atkins
Original assignee: Ge Financial Assurance Holdings, Inc.
Priority date: 2001-08-28
Filing date: 2002-08-28
Publication date: 2003-03-13
Also published as: AU2002332682A1; WO2003021386A3; WO2003021386A9

Abstract

The present invention relates generally to a process and system for providing a funded trust structure. More particularly, the invention relates to having a trust funded primarily by independent third parties, whereby capital reserves may be more efficiently deployed. One or more securitized notes may be issued based on assets from the trust, and commercial paper may then be issued based on the notes. The process and system (100) may comprise an insurer component (10), reinsurer component (15), holding component (20), reserve credit trust component (25), trustee (30), reserve credit component (35), reserve credit trust (40), third party swap provider (45), third party asset manager component (50), third party equity investor (55), commercial paper issuing component (60), investor (65), swap provider component (70), and liquidity provider component (75).

Description

PROCESS AND SYSTEM FOR PROVIDING A FUNDED TRUST STRUCTURE

[001] This application claims the benefit of U.S. Provisional Application No. 60/315,024, filed on August 28, 2001, which is incorporated herein by reference in its entirety.

BACKGROUND OF THE INVENTION

[002] The present invention relates generally to a process and system for providing a funded trust structure. More particularly, the invention relates to having a trust funded by a third party, whereby capital reserves may be more efficiently deployed.

[003] "Insurance" is a contract or policy whereby, for a stipulated consideration or "premium," one party (an "insurer") agrees to compensate the other party ("a policyholder") for a loss on a specified subject matter caused by specified perils or risks. Insurance policies are a common purchase for many people. Types of insurance policies may include life insurance, automobile insurance, health insurance, or other types of insurance. Pursuant to the terms of an insurance policy, the insurer agrees to pay certain amounts when one or more claims are made by the policyholder against the insurance policy (e.g., pay a certain amount upon the death of a life insurance policyholder, pay for damage to an automobile under an automotive insurance policy, etc.). In exchange, the policyholder pays the insurer premiums. Insurance policies can be "paid-up" where the policyholder has paid all required premiums and there are no further premiums due. Or, alternatively, premiums may be paid periodically in installments where the insurance policy remains in effect as long as the premiums are paid. For some types of insurance, the insurance policy is in effect for a set term, such as twenty years. For example, a term life insurance policy is a form of life insurance providing insurance protection to the insured party for only a specified period of time (i.e., the "term"). The term policy may be renewable, however, from term to term. Premiums may be paid on the term life insurance policy on a periodic basis (e.g., annually, every six months, monthly, etc.). [004] However, various federal, state and/or local insurance regulations may require that the insurer have a specified level of reserves on hand for covering insurable losses of the insurer's policyholders who are parties to policies with fully guaranteed premiums. Some regulations require that the insurer maintain different levels of reserves depending upon the guarantee time period, or may require different disclosures. These additional reserve requirements may be burdensome to the insurer, thereby creating a disincentive to offer policies with fully guaranteed premiums.

[005] These and other drawbacks exist in current systems and processes for providing insurance with guaranteed premium levels.

BRIEF SUMMARY OF THE INVENTION

[006] It is therefore desirable to overcome these and other drawbacks in existing systems and methods.

[007] Further, there is a particular need to provide a system and methodology for more efficiently deploying capital.

[008] Additional advantages of the invention will be set forth in part in the description, or may be learned by practice of the invention. The advantages of the invention may be realized and attained by means of instrumentalities and combinations particularly pointed out in the appended claims.

[009] To achieve these advantages and in accordance with the purpose of the invention, as embodied and broadly described herein a system for a third party funded trust structure provides a reinsurer component which creates a reserve credit trust, where the reserve credit trust has an insurer component as the sole beneficiary pursuant to a reinsurance agreement between the reinsurer component and the insurer component, and a reserve credit component which receives an assignment of the reinsurer component's interest in the reserve credit trust in exchange for an agreement to contribute proceeds to the reserve credit trust.

[010]By way of another exemplary embodiment of the invention, a process for a third party funded trust structure provides entering into a reinsurance agreement with at least one insurer component, creating a reserve credit trust with at least one insurer component as the sole beneficiary, and assigning all interest in the residual rights in the reserve credit trust to a reserve credit component, where the reserve credit component agrees to fund the reserve credit trust.

[Oil] According to a further exemplary embodiment of the invention, a process for a third party funded trust structure provides receiving all interest in residual rights in a reserve credit trust created by a reinsurer component, where at least one insurer component is the sole beneficiary of the reserve credit trust based on a reinsurance agreement, issuing at least one note to a commercial paper issuing component in exchange for funds, where the commercial paper creating component issues asset backed commercial paper based at least in part of the issued note, and funding the reserve credit trust at least partially from the funds received in exchange for the at least one note.

[012] The accompanying drawings, which are incorporated in and constitute a part of this specification, illustrate an embodiment of the invention and, together with the description, serve to explain the principles of the invention.

BRIEF DESCRIPTION OF THE DRAWINGS

[013] Figure 1 is schematic representation of a system for providing a third party funded trust structure according to an embodiment of the present invention;

[014] Figure 2 is a flowchart illustrating a process for providing a third party funded trust structure according to an embodiment of the present invention; and

[015] Figure 3 is a schematic representation of cash-flows and relationships for a system for providing a third party funded trust structure according to an embodiment of the present invention.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS [016] Reference will now be made in detail to the present preferred embodiment of the invention, an example of which is illustrated in the accompanying drawings, in which like reference characters refer to corresponding elements.

[017] Fig. 1 is a schematic representation of a system 100 for implementing an embodiment of the invention. According to an embodiment of the invention, system 100 may comprise insurer component 10, reinsurer component 15, holding component 20, reserve credit trust component 25, trustee 30, reserve credit component 35, reserve credit trust 40, third party swap provider 45, third party asset manager component 50, third party equity investor 55, commercial paper issuing component 60, investor 65 swap provider component 70, and liquidity provider component 75. As illustrated in Fig. 1, various components may interact with other components by transmitting information between components via network connections, such as, for example, intranet connections, internet connections, satellite connections, dial-up access lines or the like. According to a preferred embodiment of the invention, components may be connected in a network configuration to form a system of components, where components interact with each other by exchanging data and initiating transactions. While the present embodiment illustrated in Figure 1 is described in reference to a certain number of each type of component, it should be understood that a different number of components than are illustrated in Figure 1 may be used in the system 100 without departing from the scope and spirit of the present invention. The system 100 will now be described in more detail.

[018] According to an embodiment of the invention, reinsurer component 15 may be wholly owned by holding component 20. As a wholly owned subsidiary of holding components 20, reinsurer component 15 may enable holding component 20 to prevent risk-based capital requirements from rolling up to an operating entity with the insurance operating structure. Thus, according to the example illustrated in Fig. 1, reinsurer component 15 may be a computer program used by a corporation owned by companies using holding component 20. Further, reinsurer 15 may be an off-shore reinsurance company not domiciled in the United States, and may further not be admitted into the United States as reinsurer. Under such circumstances, it may be necessary for holding component 20 to issue a keepwell agreement, thereby pledging a certain level of capital for reinsurer 15. Other forms of reinsurer components 20 may also be used.

[019] Insurer component 10 enters into a reinsurance agreement with reinsurer component 15. Insurer component 10 may be a life insurance company located in a state within the United States. A reinsurance agreement may enable mortality risk and applicable reserves to be transferred from one entity to another, such as an off- balance sheet transfer. According, to an embodiment of the invention, the reinsurance agreement may be a co-modco (co-insurance/modified co-insurance) reinsurance agreement. Reserve credit trust 25 is created and maintained where reinsurer component 15 acts as the legal grantor and insurer component 10 is the sole beneficiary of the trust. According to an embodiment of the invention, reserve credit trust 25 (and reserve credit trust 40 described below) may be a New York Regulation 114 trust. Other legal relationships and/or types of trusts may also be used. According to an embodiment of the invention, communication and interaction between various components within system 100 may be performed via the internet or by a more conventional method such as telephone, facsimile and mail. Reserve credit trust 25 may, as an example, be implemented as software running on a personal computer which is preferably networked with other computers. According to an embodiment of the invention, reinsurer component 15 may be a computer program used by a corporate entity, such as an reinsurance company. Other entities involved in the overall transaction may also be included, in accordance with applicable federal, state, and local laws and regulations.

[020] According to an embodiment of the invention, reinsurer component 15 provides instructions, to trustee component 30. Trustee component 30 may be a bank or any other entity that may act as trustee for the reserve credit trust. By way of example, trustee component 30 may be a commercial bank that receives a set of irrevocable instructions for administering the trust.

[021] Reinsurer component 15 transfers its interest in reserve credit trust 25 to reserve credit component 35. Reinsurer component 15 may also pay one or more fees to reserve credit component 35. In exchange, reserve credit component 35 takes over reserve credit trust 25, now referred to as reserve credit trust 40, and agrees to fund it, such as with cash or other assets. Such a transaction may prevent debt treatment in the trust. According to an embodiment of the invention, reserve credit component 35 enters into a total rate of return swap with third party swap provider 45. Reserve credit component 35 pays the total return of the assets and the residual to third party swap provider 45, in exchange for an interest amount (e.g., London Inter-Bank Offered Rate ("LIBOR")) less same. By entering into a swap, reserve credit component 35 may remove investment income risk, including reducing and/or removing credit risks.

[022] Further, according to an embodiment of the invention, reserve credit component 35 may irrevocably appoint third party asset manager component 50 as an asset manager during the duration of the swap between third party swap provider 45 and reserve credit component 35. Third party swap provider 45 and third party asset management component 50 may be the same entity, related entities or separate and distinct entities. The swap to third party swap provider 45 may be settled on a periodic basis (e.g., monthly, quarterly, etc.).

[023] Equity investors 55 may maintain a controlling ownership of reserve credit component 35. In exchange, reserve credit component 35 may)pay a dividend to equity investors 55. Equity investors 55 may comprise one or more persons and/or companies that have an ownership stake in reserve credit component 35. According to an embodiment of the invention, the owner of reserve credit component 35 is separate and distinct from the owner of reinsurer component 15, and thus reserve credit component 35 and reinsurer component 15 are not owned by the same person, group or entity.

[024] According to an embodiment of the invention, commercial paper issuing component 60 issues asset backed commercial paper to investors 60 in exchange for cash. Reserve credit component 35 receives cash from commercial paper issuing component 60 in exchange for a note, such as a securitized note. According to an embodiment of the invention, the issued note may be for the amount of cash as well as a set interest rate (e.g., "LIBOR") and a fee. Reserve credit component 35 may cause a securitized note to be issued to a company using a commercial paper issuing component 60 in exchange for cash. According to an embodiment of the invention, commercial paper issuing component 60 may be computer software running on a computer which is networked with other computers and is operated by a company. Commercial paper issuing components 60 may cause commercial paper to be issued based on the securitization note, and commercial paper to be sold on a commercial paper market, such as, for example, the U.S. commercial paper market. Issuing commercial paper based on the securitization note may be similar to issuing commercial paper based on other securitized assets. Thus, according to the example of Fig. 1, commercial paper issuing component 60 may be a computer program used by a company which issues commercial paper based on securitization notes. Other configurations may also be used.

[025] Commercial paper issuing component 60 may enter into a swap with swap provider 70. In such a swap, commercial paper issuing component 60 pays the floating received from the underlying assets in exchange for the cost of the funds. This swap may be used as a hedge for interest rate exposure. A company using swap provider component 70 may allow commercial paper issuing component 60 to exchange obligations of different types of interest rates. Swap provider component 70 creates a swap which exchanges variable cash flows for fixed cash flows. According to an embodiment of the invention, a company operating commercial paper issuing component 60 may exchange an obligation to pay a variable interest rate for an obligation to pay a fixed interest rate with a company operating swap provider component 70 in each case based on one or more notional principal balances. Other services may also be provided by swap provider component 70.

[026] A company operating liquidity provider component 75 may provide various services to commercial paper issuing component 60. According to an embodiment of the invention, liquidity provider component 75 may provide operating services, collateral, credit and liquidity. Operating services may include maintaining records of transactions, and assisting in financial transactions. Collateral services may include handling collateral for transactions performed by commercial paper issuing component 60. Credit services may include issuing letter of credit for commercial paper issuing component 60. According to an embodiment of the invention, liquidity provider component 75 may issue a letter of credit for commercial paper issuing component 60 as required by a rating agency. Liquidity services may include providing services to provide liquidity for commercial paper issuing component 60 to interact with investors 65, or if trust assets are drawn on, such as due to a mortality event. Other services may also be provided

[027] Figure 2 is a flowchart illustrating a process for providing a third party funded trust structure according to an embodiment of the present invention. At step 205, reinsurer component 15 enters into a reinsurance agreement. According to an embodiment of the invention, reinsurer component 15 enters into a reinsurance agreement with insurer component 10. At step 210, reinsurer component 15 creates reserve credit trust 25, and appoints a trustee, such as trustee component 30, at step 215. As described previously, trustee component 30 may be a commercial bank which has received irrevocable instructions for administering the trust. Further, insurer 10 is the sole beneficiary of reserve credit trust 25.

[028] At step 220, equity investors 55 may invest in reserve credit component 35. According to an embodiment of the invention, equity investors 55 may have a controlling interest in reserve credit component 35, whereby reserve credit component 35 has a different owner than reinsurer 15. At step 225, reserve credit trust 25 is assigned to reserve credit component 35. Reinsurer component 15 assigns its rights in reserve credit trust 25 to reserve credit component 35, in exchange for reserve credit component 35 agreeing to fund reserve credit trust 40. At step 230, reserve credit component 35 issues a securitized note to commercial paper issuing component 60. In exchange, reserve credit component 35 receives cash or other proceeds from commercial paper issuing component 60.

[029] At step 235, reserve credit component 35 funds reserve credit trust, at least partly on the proceeds, such as cash, received from the issuance of the securitized note to commercial paper issuing component 60. At step 240, commercial paper issuing component 60 issues asset backed commercial paper to investors 65. According to an embodiment of the invention, the asset backed commercial paper is based on the securitized note.

[030] Fig. 3 is a schematic representation of cash-flows and relationships for a system for providing a third party funded trust structure according to an embodiment of the present invention. According to an embodiment of the invention, system 300 may comprise insurer component 310, reinsurer component 315, holding component 320, reserve credit trust component 325, trustee 330, reserve credit component 335, reserve credit trust 340, third party swap provider/ asset manager component 350, equity investor 355, commercial paper issuing component 360, investor 365 swap provider component 370, and liquidity provider component 375. For purposes of this exemplary embodiment, components with functions similar to those in Fig. 1 have retained similar numerical designations (e.g., insurer component 310 has similar functions as insurer component 310).

[031] Reinsurer component 315 enters into a co-modco reinsurance agreement with insurer component 310, which may be a U.S. life insurance company, at relationship 1. Reinsurance component 315 as a wholly owned life reinsurance company owned by holding component 320 and located outside the United States at relationship 2. According to an embodiment of the invention, reinsurer component 315 may be located in a foreign country (e.g., Bermuda) and be considered a U.S. taxpayer. Holding company 320 issues a Keepwell agreement to ensure the solvency of reinsurer 315.

[032] At relationship 3a, reinsurer 315 creates reserve credit trust 325. According to an embodiment of the invention, creation of reserve credit trust 325 may include a nominal capital infusion into reserve credit trust 325. Insurer 310 is named the sole beneficiary of reserve credit trust 325. At relationship 3b, reinsurer component 315 delivers irrevocable instructions to trustee component 330 regarding reserve credit trust 325. At relationship 3c, trustee component is further retained to perform trustee services in exchange for a trustee fee. Trustee services may include managing the administration of the trust. Reinsurer component 315 assigns its residual rights in reserve credit trust 325 to reserve credit component 335 at relationship 3d, including trust income and residual funds released from the reserve credit trust 325, thereby transferring the reserve credit trust 325 to reserve credit trust 340. Further, reinsurer component 315 provides a fee to reserve credit component 335 at relationship 3e. According to an embodiment of the invention, the fee may be structured so as to pay the dividend to equity investor(s) 355, as well as any other fees associated with reserve credit trust 340. In exchange for the assignment and the fee, reserve credit component 335 agrees to contribute funds (e.g., cash) to reserve credit trust 340.

[033] At relationship 4, equity investor(s) 355 invest in reserve credit component 335 and obtain a controlling interest. In exchange, equity investor(s) 355 receive a dividend payable over a determined time frame (e.g., the life of the deal). At relationship 5, reserve credit component 335 enters into swap, such as a total rate of return swap, with a third party swap provider/asset manager 345. According to an embodiment of the invention, third party swap provider/asset manager 345 receives all trust income and gains, such as capital gains. In exchange, third party swap provider/asset manager 345. provides a reserve credit, such as a LIBOR credit. The third party swap provider/asset manager 345 may assume the asset risk and mortality risk in the reserve credit trust 340. Further, third party swap provider/asset manager 345 may manage the assets within the trust for reserve credit component 335.

[034] At relationship 6, reserve credit component 335 issues a note, such as a securitized note, to commercial paper issuing component 360 in exchange for proceeds, such as cash and/or other assets. Commercial paper issuing component 360 enters into a swap with swap provider component 370 at relationship 7. Commercial paper issuing component 360 may pay a floating rate (e.g., LIBOR) received from the underlying assets (e.g., the note) in exchange for commercial paper issuing component's 360 cost of funds.

[035] At relationship 8, commercial paper issuing component 360 issues asset backed commercial paper ("ABCP") to ABCP investors 365 in exchange for cash. At relationship 9, liquidity provider 375 provides structure liquidity to commercial paper issuing component 360. Other cash flows and relationships may also be used in system 300. [036] According to another embodiment of the invention, a computer-usable medium having a computer-readable program code embodied therein for conducting an electronic computation may be provided. For example, the computer-usable medium may comprise a CD ROM, a floppy disk, a hard disk, or any other computer- usable medium. One or more of the components of the system may comprise computer-readable program code that is provided on the computer-usable medium such that when the computer-usable medium is installed on a computer system, those components cause the computer system to perform the functions described.

[037] According to one embodiment of the invention, one or more of the insurer component 10 reinsurer component 15, holding component 20, created reserve credit trust 25, trustee 30, reserve credit component 35, reserve credit trust 40, third party swap provider 45, third party asset manager component 50, third party equity investor 55, commercial paper issuing component 60, investor 65 and swap provider 70 may be comprised of computer-readable code such that, when installed on a computer, the computer-readable code perform the functions described above with respect to each component. Additionally, various entities and combinations of entities may employ a computer to perform the above described functions. The computer used for such embodiment may be a standard computer comprising an input device, an output device, a processor device, and a data storage device. According to other embodiments of the invention, various components may be comprised of computers from different departments within the same corporation or entity. Other computer configurations may also be used. According to another embodiment of the invention, various components may be separate entities, such as separate corporations or limited liability companies. Other embodiments, in compliance with applicable laws and regulations, may also be used.

[038] According to one specific embodiment of the present invention, the system may operate on a network and may be connected to other systems sharing a common database. Other hardware arrangements may also be provided.

[039] As can be appreciated from the above description, the invention enables a process and system for providing a funded trust structure. More particularly, the trust may be funded primarily by one or more independent third parties, thereby allowing capital reserves may be more efficiently deployed and maintaining regulatory capital requirments.

[040] Other embodiments, uses and advantages of the present invention will be apparent to those skilled in the art from consideration of the specification and practice of the invention disclosed herein. The specification and examples should be considered exemplary only. The intended scope of the invention is only limited by the claims appended hereto.

Claims

WHAT IS CLAIMED IS:

1. A system for providing a third party funded trust structure comprises: a reinsurer component which creates a reserve credit trust, where the reserve credit trust has an insurer component as the sole contingent beneficiary pursuant to a reinsurance agreement between the reinsurer component and the insurer component; and a reserve credit component which receives an assignment of the reinsurer component's residual interest in the reserve credit trust in exchange for an agreement to contribute proceeds to the reserve credit trust.

2. The system according to claim 1, wherein the insurance component issues at least one term life insurance policy.

3. The system according to claim 1, wherein the system further comprises: a commercial paper issuing component for issuing asset backed commercial paper, where the asset includes at least one securitized note issued by the reserve credit component.

4. The system according to claim 1, where the reinsurer component is a reinsurance company domiciled outside the United States; and where the system further comprises: a holding component which owns the reinsurer component, where the holding component is a holding company based in the United States.

5. The system according to claim 1, where the reserve credit component is owned by third party equity investors, and where the reinsurer component is owned by different entity than owns the reserve credit component.

6. A process for providing a third party funded trust structure comprises: entering into a reinsurance agreement with at least one insurer component; creating a reserve credit trust with at least one insurer component as the sole beneficiary; assigning all interest in the residual rights in the reserve credit trust to a reserve credit component, where the reserve credit component agrees to fund the reserve credit trust.

7. The process according to claim 6, where creating the reserve credit trust is in response to the reinsurance agreement.

8. The process according to claim 6, where the reserve credit component is owned by third party equity investors, and where the reinsurer component is owned by different entity than owns the reserve credit component.

9. The process according to claim 6, where the reinsurer component is a reinsurance company domiciled outside the United States; and where a holding component based in the United States owns the reinsurer component.

10. A process for providing a third party funded trust structure comprises: receiving all interest in residual rights in a reserve credit trust created by a reinsurer component, where at least one insurer component is the sole beneficiary of the reserve credit trust based on a reinsurance agreement; issuing at least one note to a commercial paper issuing component in exchange for funds, where the commercial paper creating component issues asset backed commercial paper based at least in part of the issued note; and funding the reserve credit trust at least partially from the funds received in exchange for the at least one note.

11. The process according to claim 10, where the note is a securitized note.

12. The process according to claim 10, where the reserve credit component is owned by third party equity investors, and where the reinsurer component is owned by different entity than owns the reserve credit component.

13. The process according to claim 10, where the reinsurer component is a reinsurance company domiciled outside the United States; and where a holding component based in the United States owns the reinsurer component.