securization of life-related traditional premium finance loans

Insurance-Linked Securities Group

Securitization ofLife-Related Traditional Premium Finance Loans

8 June 2016

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2Securitization of Life-Related Traditional Premium Finance Loans

Webinar Overview

• What is a life-related traditional premium finance loan (TPFL)?

• Details of a life-related TPFL

• Securitization of life-related TPFLs

• Main considerations in rating a life-related TPFLs securitization

• Q&A


What Is A Life-Related Traditional Premium Finance Loan (TPFL)?


A life-related TPFL is a cost-effective means to fund the premiums of life insurance policies.

• Utilized by high-net-worth individuals for estate planning

• Utilized by companies for business purposes


What is a Life-Related TPFL?


General Loan Features

• Loan characteristics

– Covers, at a minimum, annual premium

– Includes lender’s commitment – Subject to lender’s discretion

– Interest payment – Periodic interest payment

– Principal repayment – Bullet amount due at redemption

– Loan tenor – Various lengths



General Loan Features (Cont’d)

• Use of loan proceeds

– Pay policy premium

– Refinance an existing loan

– Pay loan related fees and expenses

– Pay loan interest



TPFL vs. Non-Recourse Premium Finance Loan (NRPFL)


TPFL:• Traditional loan• Fully collateralized

• Build up cash value• LE not required• Subject to surrender

NRPFL:• Non-Recourse loan• Life policy trading value

in LS market• Minimum cash value• Requires LE• Subject to foreclosure

Details ofA Life-Related TPFL


Details of A Life-Related TPFL

Collateral Requirement

• Assignment of insurance policy*

– Death benefit

– Cash surrender value (CSV)

• Additional assets

– Cash

– Other liquid assets

*Assignee has the right to surrender the policy but not to take over the ownership



Key Parties and Functions

• Originator/Lender

– Establishes premium finance loan program

– Works with insurance agents/brokers

– Works with insurance company

– Establishes underwriting procedures and guidelines for loan origination process



Key Parties and Functions (Cont’d)

• Borrower

– Usually an irrevocable life insurance trust for an individual, or a master trust for a corporate entity; both cases a “Trust”

– The Trust is the owner of the life insurance policy

– All collateral is transferred to the Trust – Insulated from the estate of the entity establishing the Trust




• Life insurance company

– Issues life policy

– Acknowledges and accepts the premium finance loan program

– Acknowledges the assignment of the policy to the lender

– Provides minimum CSV for a specific time period




• Other Credit Providers

– Utilized to provide additional required collateral other than cash, e.g. letter of credit

– Normally highly rated financial institutions



Repayment of Loan

• At insured’s death – Death benefit

• At loan’s maturity

– Direct payoff from borrower

– Borrower refinance

– Policy surrender (CSV + additional collateral)

• Borrower initiated refinancing


Securitization ofLife-Related TPFLs


Securitization of Life-Related TPFLs

Securitization of Life-Related Traditional Premium Finance Loans 17

Investors

Special-PurposeVehicle (SPV)

(Issuer)

Premium FinanceOriginator

OtherCollateral

Note Proceeds

Payment

Sale of Loans/Participation Interest

Servicers (Trustee,

Verification Agent, etc.)

Borrowers

Life Insurers

Interest & Principal

Simplified Transaction Diagram

Life Insurance Policies

Premiums

Interest Loans


Key Parties

• Premium Finance Originator/Lender

• Special Purpose Vehicle (SPV) - Issuer– Acquires assets that collateralize the issued securities– Issues securities– Performs activities for servicing the transaction

• Investors

• Service Providers – Indenture trustee, calculation agent, verification agent, etc.



Transaction Summary

• Proceeds from the investors are used to purchase a pool of premium finance loans or 100% undivided participation interest in a pool of premium finance loans

• Collateral used to secure the loans are transferred to the SPV and used to secure the issued notes

• Interest and principal payments to the noteholders are derived primarily from (1) interest paid by the borrower and (2) redemption of the loan


Main Considerations In Rating A Life-Related TPFLs Securitization


Main Considerations in Rating a Life-Related TPFLs Securitization

Minimum Information Required

• Data for each premium finance loan showing:

– Loan information

– Insurance policy information

– Additional collateral information




Minimum Information Required (Cont’d)

• Life policy collateral information

– Collateral assignment form

– Minimum CSV for each policy

– Assumptions used for calculation of CSV

– Effective period of the minimum CSV

– Notification requirement in the event of change in the cost of insurance or expense charges



Minimum Information Required (Cont’d)

• Other collateral information

– Cash

– Other than cash

• Other securitization related documents



Key Rating Drivers – Quantitative Considerations

• Review cash flow sufficiency to service the notes and to pay applicable operational expenses

• Review credit quality of the insurance carriers issuing the underlying life policies

• Review credit quality of the credit providers providing additional collateral

• Determine the weakest link which is used to benchmark the maximum rating of the issued securities



Key Rating Drivers – Qualitative Considerations

• Insurers’ acknowledgement of the assignment of insurance policies

• Collateral information provided by the insurance carriers and credit providers

• Operational review

• Structural review

• Document review – Legal and Transaction related



Assign AM Best Rating

Rating assigned is Best’s Issue Rating (IR)An opinion of the issuer’s ability to meet its ongoing financial obligations to security holders when due

Rating Assignment

• Quantitative Considerations – Base Rating

• Qualitative Considerations – Final Rating



Rating Scheme

Base Rating:Lowest Credit Rating of The Collateral Providers

Qualitative Considerations:Notching Applied to Base Rating for Qualitative Concerns And Issues

Final Rating



Rating Categories

Rating Symbols

Rating Notches*

Category Definitions

Exceptional aaa - Assigned to issues where, in our opinion, there is an exceptional ability to meet the terms of the obligation.

Superior aa aa+ / aa- Assigned to issues where, in our opinion, there is a superior ability to meet the terms of the obligation.

Excellent a a+ / a- Assigned to issues where, in our opinion, there is an excellent ability to meet the terms of the obligation.

Good bbb bbb+ / bbb- Assigned to issues where, in our opinion, there is a good ability to meet the terms of the obligation; however, the issue is more susceptible to changes in economic or other conditions.

Fair bb bb+ / bb- Assigned to issues where, in our opinion, fair credit characteristics exist, generally due to a moderate margin of principal and interest payment protection or other issue-specific concerns that may be exacerbated by a vulnerability to economic changes or other conditions.

Marginal b b+ / b- Assigned to issues where, in our opinion, marginal credit characteristics exist, generally due to a modest margin of principal and interest payment protection or other issue-specific concerns that may be exacerbated by an enhanced vulnerability to economic changes or other conditions.

Weak ccc ccc+ / ccc- Assigned to issues where, in our opinion, weak credit characteristics exist, generally due to a minimal margin of principal and interest payment protection or other issue-specific concerns that may be exacerbated by a limited ability to withstand adverse changes in economic or other conditions.

Very Weak cc - Assigned to issues where, in our opinion, very weak credit characteristics exist, generally due to an extremely minimal margin of principal and interest payment protection or other issue-specific concerns that may be exacerbated by a limited ability to withstand adverse changes in economic or other conditions.

Poor c - Assigned to issues where, in our opinion, poor credit characteristics exist, generally due to an extremely minimal margin of principal and interest payment protection or other issue-specific concerns that may be exacerbated by an extremely limited ability to withstand adverse changes in economic or other conditions.

* Best’s Long-Term Issue Rating Categories from “aa” to “ccc” include Rating Notches to reflect a gradation within the category to indicate whether credit quality is near the top or bottom of a particular Rating Category. Rating Notches are expressed with a “+” (plus) or “-” (minus).

Best’s Long-Term Issue Rating (IR) Scale



Best’s Long-Term Issue Rating (IR) ScaleLong- Term IR Non-Rating Designations

Designation Symbols

Designation Definitions

d Status assigned to issues in default on payment of principal, interest or other terms and conditions, or when a

bankruptcy petition or similar action has been filed and made public; or where the issuing entity has been designated as impaired (e/f [ICR] or E/F [FSR] designations) or in default (d [ICR] designation).

s Status assigned to rated issues to suspend the outstanding IR when sudden and significant events have

occurred and rating implications cannot be evaluated due to a lack of timely or adequate information; or in cases where continued maintenance of the previously published rating opinion is in violation of evolving regulatory requirements.

nr Status assigned to issues that are not rated; may include previously rated issues or issues that have never been

rated by AMB.



Applicable AM Best rating methodology and criteria related to this webinar can be found at www.ambest.com

• The principal methodology used in assigning an issue rating is: Best’s Credit Rating Methodology (BCRM) - Global Life and Non-Life Insurance Edition

• The principal rating criteria used in this webinar to assign an issue rating is: Rating Life-Related Premium Financing Loan Securitizations



Q&A

Contact Information


Elmo Chin ([email protected]) ext. 5227Assistant Vice President – Insurance-Linked Securities

Yuhmei Chen ([email protected]) ext. 5236Senior Financial Analyst – Insurance-Linked Securities

mailto:[email protected]

mailto:[email protected]

securization of life-related traditional premium finance loans

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