IPFS deal’s risk may be low but complications lurk for future deals
IPFS Corp. is approaching the asset-backed securities market with its seventh deal in 2020 backed by a revolving pool of insurance premium finance loans, an asset class posing relatively little risk to investors, at least for now.
The two-tranche PFS Financing Corp. (PFSFC) 2020-G deal, split into a $282 million Class A portion and an $18 billion Class B piece, is structured the similarly to the issuers’ transaction completed in early August. In that deal, according to Finsight, J.P. Morgan and Citi held structuring lead titles and BNP acted as joint lead; the Class A portion priced at swaps plus 75 basis points, and the smaller piece at swaps plus 125 basis points.
Moody’s Investors Service noted in a recent pre-sale report that in response to the pandemic, many states have either ordered or mandated premium finance companies to not cancel insurance policies temporarily. Any delay in the cancellation of a policy following a borrower default, the rating agency notes, could result in losses due to the amortization of the unearned premium.
“However, the losses will be minimal due to the faster amortization of the loans, compared with that of the unearned premium, and the temporary nature of the cancellations,” the report says. Moody’s calls the deal’s ESG risk “low.”
S&P notes a potential if unlikely risk stemming from the pandemic. It says several states are considering legislation that would retroactively expand business interruption insurance coverage to lessen the economic impact of the Covid-19 pandemic.
“We believe those efforts would be largely unsuccessful in any state, unless the state government provides resources to insurers to meet those obligations,” the report says.
However, there may be future risk from pandemics. The proposed Pandemic Risk Insurance Act (PRIA) at the federal level would provide insurers with a backstop in the event a pandemic causes a economic fallout, similar to the Terrorism Risk Insurance Act from 2002. S&P says the current proposal under consideration includes an event trigger of $250 million of losses. The federal government would cover 95% of losses above the deductible, with the insurer retaining remainder, up to an annual cap of $500 billion.
“PRIA funding will build over time, and its coverage is prospective rather than retrospective,” S&P says, adding, “This federal backstop would require insurers to include business interruption coverage for communicable diseases, which cannot be diversified and would be a new challenge for the industry.”
S&P Global says the PFSFC deal’s strengths include IPFS’s strong history of originating, underwriting and service the collateral, as well as recoveries for defaults on insurance premium loans remaining relatively high. Excess spread available as additional credit enhancement and other elements of the deal’s structure favor investors.
Weaknesses, the agency says, include the issuer having to redeem the notes in full on the scheduled pay-out commencement date through a refinancing, which may face challenges depending on market circumstances. In addition, future issuances may affect the notes’ subordination and change the pool’s concentration limits, which would affect the pool’s credit quality.