Life Settlement Securitization
By GREG MARTIN
OLDWICK, N.J.--(BUSINESS WIRE)--Sept. 1, 2005--A.M. Best Co. has released its revised rating methodology on life settlements, Life Settlement Securitization, which describes the criteria for rating securities backed by life settlements.
A life settlement is an insurance policy sold by the owner--typically the insured or a trust --for an amount greater than the surrender value of the policy but lower than the face amount of the policy. The purchaser of the life settlement becomes the new owner and beneficiary of the life insurance policy and is responsible for making future premium payments and collecting the death benefits of the insured.
Life settlement securitization has generated a lot of interest in the capital markets. Indeed, some financial institutions have been financing the accumulation of life settlement portfolios they intend to securitize in the future. The growth of life settlement securitization will depend on increased standardization of general methods for establishing life expectancies of insureds; the transparency of the pricing of life settlements; the adoption of more favorable accounting treatment of life settlements; effective industry regulatory oversight and self-policing; and the establishment of rating agency standards for assessing the credit risks associated with such transactions.
Life Settlement Securitization describes the three types of analyses performed by A.M. Best on securities backed by life settlements: a Preliminary Assessment, an Indicative Rating and a Long-Term Debt Rating. These analyses represent increasing levels of certainty associated with the parameters of the transactions.
Life Settlement Securitization also outlines the rating considerations and requirements including the policy eligibility criteria; life expectancy estimates and mortality ratings provided by medical examiners; the efficacy and skill of the service providers, such as policy providers, tracking agents and collateral managers; the number of life settlement policies in the transaction; the diversity of diseases; financial strength ratings of the insurance companies in the collateral pool; insurance company impairments and the recovery of death benefits after such impairments; liquidation value of life settlement policies; the modeling of the transaction by the issuer or its representatives; legal and tax opinions required for the securitization; compliance with all applicable insurance laws; compliance with state and federal patient confidentiality laws; the availability of data associated with each life settlement; and other factors that may affect the rating of securities collateralized by life settlements.
Life Settlement Securitization also generally describes the data requirements for A.M. Best's proprietary life settlement securitization model, which applies the Monte Carlo simulation technique to assess the default probabilities of the securities being rated.
For more information on A.M. Best's Rating Methodologies or to download a copy of this full methodology report, visit http://www.ambest.com/ratings/methodology.html.
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.
Source: Business Wire
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