The wise old sage Benjamin Franklin once observed that the only two things certain in life were death and taxes. For securitization professionals, tax revenue is a pretty well-established asset class and now it seems value will be derived from the other of life's certainties as well.
VIG Capital Management, which specializes in providing alternative investments, is specifically targeting Asian investors to buy a securitization backed by a portfolio of senior and life settlements. These settlements, held by US citizens, give life insurance policyholders the opportunity to receive an immediate payment for an asset that would otherwise lie dormant until death in exchange for the holders waiving all rights to those policies.
Working alongside the Seabury Group, which is acting as collateral manager on the transaction, VIG will shortly finalize the make-up of the underlying portfolio. A source says this should happen next week, as soon potential Asian investors have pledged money for the bonds.
Once the subscriptions have been finalized, it will be easier to tell whether the transaction will be for $60 million or, as observers expect, over $100 million in size.
VIG and Seabury are drawing from the more affluent side of US society, as the average face value of the life policies is around $1 billion. Should the deal be $60 million, the underlying pool will contain between 150 and 200 polices, which would rise to between 250 and 300 if the deal reaches the targeted size.
VIG has already begun warehousing these policies, which have been bought from approximately 40 insurance companies. According to A.M. Best, the agency that all insurance companies globally must be rated by, the minimum rating of the insurance companies included in the transaction is A-, although the average rating will be nearer to A+.
In the same way that mortgage backed deals depend on the performance of the underlying loans, cash flows with this transaction can only be generated when the policy holders, to be perfectly blunt, die. As the deal is split into six tranches with maturities of between three and eight years, the deal makers and rating agencies have to be pretty confident that is going to happen fairly soon.
Consequently, the average age of the policyholders is 70 years, who must also have at least one chronic illness - something that has to be verified by two independent medical examiners. In addition, there is a 10% limit on any one illness included in the deal, as the discovery of a cure for that illness would increase the lifespan of that person and impact the cashflows generated by the underlying pool.
A.M. Best Company has rated all six tranches in the deal AA-, and it is expected that Moody's will rate the transaction around the Aa2 level.
The deal will be issued through the Blue Lake Financial Company, a special purpose vehicle registered in Delaware.