IPFS Financing Corp. plans to issue a $400 million securitization that is backed by insurance premium finance loans.
The deal, Series 2013-A, issued class A notes that are rated ‘AAA’/ ‘Aaa’ by Standard &Poor’s and Moody’s Investors Service respectively. The ‘A’- rated, class B notes are only rated by S&P.
These short duration loans are made to businesses and individuals to pay for property and casualty insurance coverage. The premium finance loan enables the insurance policy holder, often called the insured, to spread payments over the course of the policy instead of paying the entire premium up front.
The security for the loans is the unearned premium balance that the insurance carrier owes in the event that the borrower fails to pay the amounts due on the premium finance loans and the underlying policies are canceled, explained S&P in the presale report.
“We believe the main source of repayment is the insurance carrier because if the insurer remits the unearned premium payment on time, there should be no loss,” explained S&P analysts in the report.
For the loans to experience a loss, both the borrower and the insurance carrier would have to default, explained S&P. The insurance carrier is obligated to refund unearned premiums if the borrower were to default on the loan and lead to the underlying policy's cancellation.
The ratings agency said in the presale report that the small business need for premium financing provided by the sellers generally increases during a recession. Commercial insurance pricing and the overall state of small business obligors are also key drivers for this financing.
“Although rates vary among market segments, product lines, and business classes, we expect most commercial line insurers will experience measured-rate (single-digit) increases this year,” said analysts in the report. “We expect that some momentum will continue, with companies with strong competitive positions and capital, as well as healthy reserves, best-positioned to take advantage of improved pricing.”
Moody’s said that the 2013-A Notes will be one of several series of notes of the issuer outstanding under a master trust indenture.