Legacy Benefits Corp. recently closed what may be the first true senior settlements securitization, a $70 million transaction led by Merrill Lynch.

In all, $61.5 million of class A notes were rated A1' and $8.5 million of class B notes were rated Baa2' by Moody's Investors Service. The 35-year class A notes carried a 5.35% coupon and the 35-year class B notes carried a 6.05% coupon.

According to Moody's analyst Rochelle Tarlowe, this is the first of many stabs at a senior settlement securitization based primarily on mortality analysis. The pool is backed by policies associated with fewer than 50 individuals. Because of the small pool size, mortality was stressed on a life-by-life basis, as opposed to a pool analysis.

"We've seen a lot of activity in the senior settlement market," Tarlowe said. "Very few people have arrived at a structure that works."

The previous life insurance securitizations, which have involved new policies, have matched annuities against the individuals in the pool, which mitigates the need for a true mortality analysis (see ASR 12/10/03). There have been about four of these deals. Referred to as Life Insurance Life Annuities Backed Charitable Securities (LILACS), these transactions need to address contestability risk, where a policy can be negated if a death occurs within a two-year timeframe. Conversely, in the senior settlement market, the life insurance policies are purchased after their contestability period. Although Legacy Benefits does contain a

portion of annuities, these step down toward the tail end of the

transaction.

Legacy purchased the policies from senior citizens with an approximate average age of 77 (the insureds). The average policy size is about $2 million. A Monte Carlo simulation was used to estimate mortality on each individual using a variety of

scenarios.

The ratings were based on "the mortality projections on the individual insured lives, the credit quality of the insurance and annuity providers, most of which currently hold a Moody's financial strength rating of Aa3 or better, subordination, and amounts on deposit in the Interest Reserve Account," said Tarlowe in a press release.

U.S. Bank National Association will act as the servicer and administrator. KPMG LLP will serve as backup tracking agent.

Legacy Benefits was established in 1991 to acquire life policies of persons diagnosed with terminal or chronic illnesses and/or persons 65 years or older.

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