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Rating Action:

Moody's downgrades Lottery Receivables ABS sponsored by Western United Life Assurance Company

17 Dec 2010

New York, December 17, 2010 -- Moody's has downgraded two lottery receivables asset backed note deals sponsored and serviced by Western United Life Assurance Company (WULA, unrated). The notes are each backed by cash flows from distinct pools of specified lottery winnings from various state lotteries (lottery receivables). The complete rating action is as follows:

Issuer: Western United Life Assurance Company - Lottery Receivable Transaction

Tekoa Certificate, Downgraded to Baa1 (sf); previously on Feb 26, 2007 Assigned A3 (sf)

Fernwood Certificate, Downgraded to Baa1 (sf); previously on Feb 26, 2007 Assigned A2 (sf)

Today's rating actions are motivated primarily by changes in the ratings of the states whose lottery commissions owe the securitized lottery receivables, and solely in the case of Pennsylvania, the ratings of the responsible annuity providers if an annuity provider was earmarked by that state's lottery commission to pay the lottery receivables. To a lesser extent, the rating actions are also the result from the shifting concentration of the states and annuity providers represented in the remaining pool over time, as the underlying lottery receivables have varying tenors. The affected transactions, while collateralized by pools with high-grade payors, have no enhancement for credit or liquidity.

The principal methodology used in these rating actions is described below. Other methodologies and factors that may have been considered in the process of rating this issue can also be found at www.moodys.com in the Rating Methodologies sub-directory.

PRINCIPAL METHODOLOGY

The collateral backing the notes consist of entitlements to lottery winnings indirectly owned by the issuers. The issuers are Delaware business trusts that hold 100% of the beneficial interest in certain other grantor trusts that directly own lottery winnings entitlements that are obligations of several state lottery commissions. Each receivable, as required by the law of the relevant state, is transferred to a grantor trust pursuant to a court order which details the payments assigned and concludes that the transfer is in accordance with the relevant state statute. We view this process as important because it provides comfort that the transfer is valid. A relatively small percentage of the receivables in these pools consist of lottery loans (loans made to lottery winners secured by the lottery payments rather than sales of the lottery winnings). While we view this type of receivable is riskier due to potential exposure to a borrower's bankruptcy, the low amount of exposure mitigates its impact on the rating.

The lottery receivables cash flows are not differentiated into principal or interest. The balance of the notes when issued represented the cumulative amount of cash flow scheduled to be received from the pooled lottery receivable minus expected expenses, and all cash flow received after expenses is applied as principal to pay down the notes. Moody's rating addresses payment of the notes by their legal final maturity date.

The lottery commissions' payment obligations on the lottery receivables are backed by monies that are set aside and invested by the commissions pursuant to their investment guidelines as in effect from time to time. However these monies does not secure the lottery receivables or the ABS notes, they merely help assure the ability of the respective commissions to honor their obligations. Further, such investment guidelines may change through the ABS transaction's life.

To evaluate lottery receivables backed ABS, we use a weighted average probability of default approach to determine the likelihood that the lottery receivables will be paid, which equates to the likelihood of a default on the notes where there is no overcollateralization or other credit enhancement. The probability of default of the state lottery commission's payment obligations in all cases except Pennsylvania, is estimated based on its state's current rating, reduced by three notches to account for (1) reductions in the financial strength of the states during recessions during the transaction's life and (2) the fact that some of the lottery commissions are not able to access general revenue of the state but instead can only rely on the value of their state-granted monopoly franchise to conduct the lottery.

In the case of Pennsylvania, accounts are backed either by annuities acquired by the state lottery commission or, for lotteries receivables arising dating prior to 1986, U.S. treasuries. If a lottery receivable is expressly backed by treasury strips, does the state lottery commission probability of default, estimated as per the above procedure, serve as the default risk reference point. Otherwise, the lottery receivables will have been earmarked as obligations of specific annuity providers, so we reference the probability of default of the annuity provider based on its insurance financial strength rating, and lower this result by one notch to provide a limited degree of de-linkage to the rated ABS.

After determining the estimated probability of default (or rating equivalent) of each lottery receivable as above, we calculate the weighted average probability of default (or rating equivalent) for the entire pool. In the case of the an unrated or low rated servicer, we may further notch down this calculated model output to account for operational risk associated with the servicer's obligations to monitor the lottery receivables payments and to properly apply such payments to the trusts, resulting in a servicer-adjusted model output. In the case of WULA-serviced transactions the reduction is two notches.

Lastly, in cases where there is no enhancement, such as the WULA-sponsored transactions, the servicer adjusted model output may be further adjusted downward as and if necessary so that it is no more than three notches higher than the lowest rating of any state or annuity provider associated with the securitized pool of lottery receivables. This adjustment is performed because a default on any of the underlying lottery receivables will result in a principal reduction on the ABS notes given a lack of overcollateralization or other loss absorbing mechanism to cover losses on the lottery receivables.

Moody's Investors Service did not take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

ADDITIONAL RESEARCH

The original press release for the above transactions is available on moodys.com.

In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

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For more information please see www.moodys.com.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Suilan Mo-Escowitz
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Lottery Receivables ABS sponsored by Western United Life Assurance Company
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