Securization of Life-Related Traditional Premium Finance Loans

Insurance-Linked Securities Group
Securitization of
Life-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 of
A 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 of
Life-Related TPFLs

Securitization of Life-Related TPFLs
Securitization of Life-Related Traditional Premium Finance Loans 17
Investors
Special-Purpose
Vehicle (SPV)
(Issuer)
Premium Finance
Originator
Other
Collateral
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
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) Scale
Long- 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 (elmo.chin@ambest.com) ext. 5227
Assistant Vice President – Insurance-Linked Securities
Yuhmei Chen (yuhmei.chen@ambest.com) ext. 5236
Senior Financial Analyst – Insurance-Linked Securities

Securization of Life-Related Traditional Premium Finance Loans

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