UnumProvident Corp., a group and individual disability insurance provider, completed an insurance-linked ABS deal backed by premiums on long-term disability insurance policies. Proceeds from the transaction will finance a portion of the insurer's capital reserve requirements. The deal closed last Wednesday.
The transaction is an innovative one for the ABS industry. Although insurance-linked notes have been issued previously to finance regulatory capital requirements, this transaction is the first to be secured by premiums on long-term disability insurance policies. Essentially, the deal is a reinsurance agreement between Unum America, the U.S.-based subsidiary of Chattanooga, Tenn.-based UnumProvident, and Tailwind Holdings, LLC, the special-purpose vehicle that will issue the notes. UnumProvident tapped Goldman Sachs to act as lead manager on the $130 million 144a deal. On the strength of an MBIA wrap, Fitch Ratings, Moody's Investor Service, Standard & Poor's and insirance specialist A.M. Best all gave the bonds triple A ratings.
Once Tailwind Holdings gets the $130 million in proceeds from investors, it will use them to buy 23,036 policies from Unum America. Those policies represent about $1.5 billion of statutory reserves, said Fitch Ratings.
"UnumProvident plans to securitize seasoned long-term disability claim reserves on an ongoing basis," Fitch said.
Structurally, the deal is similar to term life insurance-linked notes that were put together to meet Regulation XXX reserve requirements, Fitch noted. As with most insurance-linked note securitizations, there are always risks that investments could earn less than expected or suffer losses and that collateral default rates could reduce the value of the collateral.
Tailwind Holdings, however, carry some particular risks. Specifically, insured policyholders could live longer than expected, or that they do not recover from a disability and continue to receive payments. In an age of increasing talk of Social Security policy reform, reduced payments from that agency are also a risk. Approved payments are offset against insurance benefit payments. Tillinghast, an actuarial consulting firm, estimates that Social Security payments offset disability insurance benefits payments by about 54%, said Fitch.
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