As reported in last week's ASR, the second-ever life-insurance commission securitization from Clark Consulting Inc. is out in the Rule 144A market, with pricing seen in the coming weeks, sources said. Led by Banc One Capital Markets' Dallas branch, with help from co-manager Bear Stearns, CBC Insurance Revenue Securitization LLC 2003-A could close by late September, although some speculated it could be pushed to next month.
Backed by 20,750 acquired life insurance policies, with an average seasoning of 55 months, the cash flows stem from commissions that are a function of the asset growth of the policy's principal. This transaction was rated assuming a 3.1% weighted average guaranteed asset growth assumption, below the historical average, noted Moody's Investors Service senior analyst Rochelle Tarlowe. More than 90% of the cash flows are based on this asset growth.
Clark Consulting, founded in 1967, is an integrated consultancy with expertise in compensation, benefits, investments, tax and administration and has more than 4,800 corporate, healthcare and banking clients. Clark sold a similar $400 million BOLI commission ABS in November 2002, a deal that funded the acquisition of former competitor Long, Miller & Associates, making Clark the largest BOLI broker.
The bank owned life insurance (BOLI) policy cash flows, which typically fund future benefit obligations for company executives, are rated to address three specific rating agency concerns: the policyholder's mortality, the bank's surrender or exchange of the policy and an erosion of the investment principal.
While nobody can prevent the inevitable, the policies are, on average, only 4.5-years old and have an average remaining maturity of 30 years. Also, policies have rarely been surrendered over the past 10 years and may only be exchanged in-kind, while the insured employees are still employed at the bank, something bolstered by high employee turnover of late.
The capital structure has 70% subordination - $25 million single-A and $10 million triple-B supporting $15 million of senior notes. The reserve account is equal to either four months of interest payments or 1.25% of the $4.779 billion total pool balance, roughly $59.741 million.
One threat to the cash flows is the tax-free status of the asset growth, which has been threatened "several" times since 1998, according to Moody's presale report for the offering. "At this point there does
not seem to be much support for this legislation in Congress," Moody's pens.
The potential for growth in the insurance commission sector is limited, Tarlowe added, as there are a small number of brokers trafficking BOLI policies. At best, Tarlowe speculates that the term ABS market could see two-to-three such deals in a given year, with one competitor of Clark's currently contemplating a BOLI commission securitization.
There is, however, the likelihood that various other insurance receivables could see growth in the ABS market in the near term. To date, AIG has been the leading securitizer of insurance-related receivables, having priced two transactions in the past two years, totaling just over $1 billion, although AIG securitized receivables associated with property and casualty insurance, rather than life insurance receivables.