Market sources report that Nomura Securities is structuring its first term offering backed by life settlements, although it is unclear when the transaction might be completed.
Nomura has been warehousing life settlements, market sources said, and the deal is thought to be structured similarly to the $70 million Legacy Benefits Corp. offering which priced via Merrill Lynch in March. Bankers at Nomura declined to comment.
The Legacy deal was made up primarily of senior settlements with a smattering of annuities mixed in, and is the only transaction successfully securitizing such a pool, ratings analysts said. Moody's Investors Service provided the sole rating for the Legacy transaction. The 35-year class A notes were rated A1', while the 35-year B notes received a Baa2'.
Meanwhile, a $100 million offering from International Life Settlement Funding is circulating in the private 144A market. The pool consists of insurance policies purchased from single-A or higher-rated U.S. domestic insurance carriers, according to Bloomberg. Sterne, Agee & Leach, a Birmingham, Ala.-based firm with operations throughout the Southeast, is providing cashflows. Further details on the collateral were unavailable.
It has proved difficult to achieve a structure for senior settlements transactions - such as the Legacy Benefits offering - that investors and rating agencies can get comfortable with. Fitch Ratings Managing Director Kevin Duignan said that while the rating agency has been able to accept the actuarial assumptions behind some of these pools, there are other obstacles. "We have not been able to get comfortable with the risk that an operational event could cause a premium payment to be missed, which could cause the policy value to go to zero," Duignan said. Furthermore, these issuers are generally thinly capitalized start-ups with limited historical data, he added.
Standard & Poor's analyst Ellen Welsher expressed similar concerns over extension risk. "Insurance policies can cover a couple of years of extension risk, but you never know how much extension risk you're going to have," Welsher said. "If you extend beyond the amount of cash you have allocated for the extension period, you stop having an insurance premium to make a payment; the policy is cancelled and you get zero back when the person passes away."
The small number of policies in the pools can also stand in the way of a rating, Welsher said. Indeed, the Legacy pool was less than 50 deep. Because of this shallow sampling, mortality was stressed on a life-by-life basis rather than on a pool analysis, Moody's analysts said.
Despite these hurdles, ratings analysts have reported a surge in inquiries regarding life insurance transactions.
Life Insurance Life Annuities Backed Charitable Securities (LILACS) arbitrage transactions are more common than senior settlements at this point. LILACS match annuities against individuals in the pool, mitigating the need for the kind of mortality analysis needed with straight senior settlement deals. Patron's Legacy has completed four LILACS to date. "We have people talking to us about both types of transactions all the time," said Moody's analyst Rochelle Tarlowe, adding that she expects to see several new entrants over the next year.
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