CONFIDENTIAL TREATMENT REQUESTED

CONFIDENTIAL TREATMENT REQUESTED
PRELIMINARY OFFERING MEMORANDUM — CONFIDENTIAL
Subject to Completion — Dated October 12, 2022
Quorum Receivables Funding 2022-1 LLC (a Delaware limited liability company)
Issuer
$485,000,000 Asset-Backed Notes
The Notes are secured by a pool of insurance premium finance receivables originated by Quorum Premium Finance LLC ("QPF"), a wholly owned subsidiary of Quorum Insurance Holdings Corp. ("QIH" or the "Sponsor," NYSE: QIHC). The initial pool balance as of the cut-off date of June 30, 2022 (the "Cut-Off Date") is approximately $612,000,000, consisting of approximately 82,400 insurance premium finance loans to commercial policyholders across all 50 states.
Sponsor and Servicer: Quorum Premium Finance LLC, a wholly owned subsidiary of Quorum Insurance Holdings Corp. (NYSE: QIHC)
Structuring Agent and Lead Bookrunner: Ridgeline Capital Markets LLC
Cut-Off Date: June 30, 2022
Legal Final Maturity: 42 months from the Closing Date
Preliminary Ratings by: Brindoval Ratings Inc. (Engagement No. CR-SF-2022-08812) and Pinnacle Rating Services LLC (Engagement No. PRS-2022-ABS-3347)
THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THE NOTES ARE BEING OFFERED ONLY (I) IN THE UNITED STATES TO QUALIFIED INSTITUTIONAL BUYERS ("QIBs") (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN RELIANCE ON RULE 144A AND (II) OUTSIDE THE UNITED STATES TO NON-U.S. PERSONS IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S UNDER THE SECURITIES ACT. PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT THE SELLER OF THE NOTES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Ridgeline Capital Markets LLC Structuring Agent and Lead Bookrunner
October 12, 2022
IMPORTANT NOTICES AND DISCLAIMERS
Preliminary Offering Memorandum. This document constitutes a preliminary offering memorandum (this "Offering Memorandum") of Quorum Receivables Funding 2022-1 LLC (the "Issuer" or "QRF 2022-1") and is subject to completion and amendment. This Offering Memorandum is being delivered to prospective investors on a confidential basis in connection with the proposed offering of asset-backed notes (the "Notes") described herein. The information contained herein is preliminary, has been furnished by the Issuer and the Sponsor solely for the purpose of assisting qualified institutional buyers and non-U.S. persons in evaluating an investment in the Notes, and supersedes any prior or contemporaneous information that may have been furnished for such purpose. No representation or warranty, express or implied, is made by the Issuer, the Sponsor, or Ridgeline Capital Markets LLC ("Ridgeline" or the "Initial Purchaser") as to the accuracy or completeness of the information contained herein, and nothing contained herein is, or shall be relied upon as, a promise or representation as to any matter by the Issuer, the Sponsor, or Ridgeline. This Offering Memorandum may be updated, supplemented, or amended prior to the closing of the offering (the "Closing Date"), and any such updates, supplements, or amendments shall supersede this document to the extent of any inconsistency.
No Registration Under the Securities Act. The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities or "blue sky" laws. The Notes are being offered and sold only (i) in the United States to qualified institutional buyers ("QIBs") as defined in Rule 144A under the Securities Act, in reliance on the exemption from registration provided by Rule 144A, and (ii) outside the United States to non-U.S. persons (as defined in Regulation S under the Securities Act) in offshore transactions in reliance on the exemption from registration provided by Regulation S. The Notes are subject to transfer restrictions as described herein under "Transfer Restrictions." Prospective purchasers of the Notes should be aware that they may be required to bear the financial risks of an investment in the Notes for an indefinite period of time.
No SEC or State Securities Commission Approval. Neither the Securities and Exchange Commission (the "SEC") nor any state securities commission has approved or disapproved of the Notes or passed upon the accuracy or adequacy of this Offering Memorandum. Any representation to the contrary is a criminal offense.
Credit Ratings. The preliminary credit ratings assigned to the Notes by Brindoval Ratings Inc. ("Brindoval," Engagement No. CR-SF-2022-08812) and Pinnacle Rating Services LLC ("Pinnacle," Engagement No. PRS-2022-ABS-3347) reflect each agency's assessment of the creditworthiness of the Notes and are not recommendations to purchase, hold, or sell the Notes. A credit rating is not a guarantee of quality and does not address the likelihood that the market value of the Notes will decline or the adequacy of the price paid for the Notes. Ratings may be revised or withdrawn at any time by the assigning rating agency. The preliminary ratings set forth herein are subject to receipt of final documentation and satisfaction of certain conditions precedent. There can be no assurance that the final ratings assigned to the Notes will be the same as the preliminary ratings set forth herein or that any rating assigned to the Notes will not subsequently be lowered or withdrawn by a rating agency.
Confidentiality. This Offering Memorandum is being furnished on a confidential basis to a limited number of prospective investors who are QIBs or non-U.S. persons for the sole purpose of evaluating an investment in the Notes. By accepting delivery of this Offering Memorandum, each prospective investor agrees that (i) it will not reproduce, distribute, or disclose this Offering Memorandum or any of the information contained herein, in whole or in part, to any other person (other than its legal, tax, and financial advisors who agree to be bound by this confidentiality restriction) without the prior written consent of Ridgeline and the Issuer, (ii) it will use this Offering Memorandum solely for the purpose of evaluating an investment in the Notes, and (iii) it will return or destroy all copies of this Offering Memorandum and any notes or other materials derived from it if it does not purchase any Notes.
Forward-Looking Statements. This Offering Memorandum contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as "anticipate," "estimate," "expect," "intend," "plan," "project," "believe," "may," "will," "should," "would," "could," and similar expressions. These statements reflect current expectations and projections about future events and are subject to risks, uncertainties, and assumptions that are difficult to predict. Actual results may differ materially from those contemplated by any forward-looking statements as a result of a number of factors, including those discussed under "Risk Factors" herein. Neither the Issuer, the Sponsor, nor Ridgeline undertakes any obligation to update or revise any forward-looking statement to reflect events occurring after the date of this Offering Memorandum.
Governing Law. This Offering Memorandum and the rights and obligations of the parties arising hereunder and the Notes shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles (other than Section 5-1401 of the New York General Obligations Law).
Placement Agent Disclaimer. Ridgeline Capital Markets LLC is acting as initial purchaser and placement agent for the Notes. Ridgeline is not making any representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this Offering Memorandum and is not making any recommendation to any prospective investor regarding the purchase of the Notes. Ridgeline has not independently verified the accuracy or completeness of the information contained herein. Each prospective investor should conduct its own investigation and analysis of the Issuer, the Sponsor, the receivables pool, and the Notes and should consult its own legal, tax, financial, and accounting advisors as to the merits and risks of an investment in the Notes.
No Fiduciary Duty. Neither Ridgeline nor any of its affiliates owes or has agreed to owe any fiduciary duty to any prospective investor. The relationship between Ridgeline and any purchaser of Notes is strictly arm's-length and commercial in nature. Each prospective investor should independently evaluate the merits and risks of an investment in the Notes.
Information Sources. The information set forth herein with respect to the Issuer and the receivables pool has been furnished by the Issuer and the Sponsor. The information with respect to the Indenture Trustee, the Back-Up Servicer, and the Liquidity Facility Provider has been furnished by the respective parties. Financial data relating to the Sponsor has been derived from the audited consolidated financial statements of Quorum Insurance Holdings Corp. and from unaudited internal records. Neither Ridgeline nor any of its affiliates has independently verified such information and assumes no responsibility for its accuracy or completeness.
SUMMARY OF TERMS
The following is a summary of certain terms of the Notes and the transactions described in this Offering Memorandum. This summary is not complete and is qualified in its entirety by the more detailed information appearing elsewhere in this Offering Memorandum, including the descriptions of the transaction documents. Capitalized terms used but not defined in this summary have the meanings assigned to them elsewhere in this Offering Memorandum or in the "Glossary of Defined Terms." Prospective investors should carefully read this entire Offering Memorandum, including the section entitled "Risk Factors," before making an investment decision.
The Issuer.  Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer") is a Delaware limited liability company formed on August 3, 2022, and filed with the Delaware Secretary of State under File No. 7894231. The Issuer is a bankruptcy-remote special purpose entity whose sole member is Quorum Receivables Holding LLC ("QRH"), an intermediate bankruptcy-remote special purpose vehicle. The Issuer's sole purpose is to acquire and hold insurance premium finance receivables originated by Quorum Premium Finance LLC ("QPF") and to issue notes backed by such receivables.
The Issuer's independent manager is Timothy R. Callan, provided by Fortbridge Corporate Services LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. The Issuer's registered agent is Ashgrove Services Inc., located at 28 Liberty Street, New York, New York 10005. The Issuer's employer identification number is 88-1247653.
The Issuer has no operating history, no employees, no independent business operations, and no assets other than the receivables and related collateral described herein. The Issuer was formed solely for the purpose of the transactions described in this Offering Memorandum.
The Depositor.  Quorum Receivables Holding LLC ("QRH" or the "Depositor") is a Delaware limited liability company formed on August 3, 2022, and filed with the Delaware Secretary of State under File No. 7894228. The Depositor is a bankruptcy-remote intermediate special purpose vehicle whose sole member is Quorum Premium Finance LLC. The Depositor's independent manager is Eleanor M. Vasquez, provided by Fortbridge Corporate Services LLC. The Depositor's employer identification number is 88-1247619.
The Depositor was formed for the purpose of acquiring receivables from QPF and transferring such receivables to QRF 2022-1. The two-tier SPV structure (QPF → QRH → QRF 2022-1) is designed to enhance the bankruptcy remoteness of the transaction structure and to facilitate the true sale analysis at each transfer level.
The Sponsor and Originator Parent
Quorum Insurance Holdings Corp. ("QIH" or the "Sponsor") is a Delaware corporation publicly traded on the New York Stock Exchange under the ticker symbol "QIHC." QIH's headquarters are located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. The principal officers of QIH are as follows:
QIH operates across three principal business segments: (i) property and casualty insurance distribution, (ii) premium finance lending, and (iii) insurtech software-as-a-service ("SaaS") platforms. For the fiscal year ended December 31, 2021 ("FY2021"), QIH reported consolidated revenue of approximately $3.8 billion. QIH's unsecured long-term credit ratings are BBB by Brindoval Ratings Inc. and Baa2 by Pinnacle Rating Services LLC. QIH's employer identification number is 82-4391067.
QIH serves as the Sponsor of this transaction, as the Administrator under the Administration Agreement, and as the Performance Guarantor under the Performance Guaranty. QIH will retain a horizontal interest in the form of the $15,000,000 overcollateralization / retained interest (representing 3.0% of the total capital structure) in compliance with applicable risk retention requirements. See "Risk Retention" herein.
The Originator and Servicer
Quorum Premium Finance LLC ("QPF" or the "Originator" and the "Servicer") is a Delaware limited liability company and a wholly owned subsidiary of QIH. QPF's principal office is located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. QPF is managed by Sandra Ling-Hwang, in her capacity as Treasurer of QIH. QPF's employer identification number is 84-2653198.
QPF originates and services insurance premium finance loans to commercial policyholders across all 50 states. As of the Cut-Off Date, QPF's total premium finance receivables portfolio was approximately $2.1 billion. The loans originated by QPF have an average original term of approximately 9 months and a portfolio weighted-average annual percentage rate ("APR") of 7.85%. QPF's historical average net loss rate for the three-year period from 2019 through 2021 was 0.42%. QPF is licensed as a premium finance company in all 50 states and the District of Columbia.
QPF acts as the Servicer of the receivables under the Servicing Agreement. In such capacity, QPF is responsible for billing obligors, processing payments, managing delinquencies, initiating policy cancellations where appropriate, and pursuing recovery of unearned premium refunds from insurance carriers. QPF receives a servicing fee of 1.00% per annum on the outstanding pool balance, payable monthly from collections.
The Notes.  The following table sets forth certain terms of each class of Notes to be issued by the Issuer:
In addition to the rated Notes, the Issuer's capital structure includes a $15,000,000 overcollateralization / retained interest (3.0% of total), which is unrated and will be retained by the Sponsor. The total capital structure of the Issuer is $500,000,000.
The Notes will be issued in a sequential pay structure. During the Amortization Period, principal collections will be applied first to the Class A Notes until paid in full, then to the Class B Notes until paid in full, and finally to the Class C Notes until paid in full. The Legal Final Maturity Date of the Notes is 42 months from the Closing Date.
Credit Enhancement Summary
The following table summarizes the credit enhancement available to each class of Notes:
In addition to the structural credit enhancement provided by subordination and overcollateralization, the transaction benefits from a $25,000,000 liquidity facility provided by Northvane Bank, N.A. The liquidity facility is available to cover temporary shortfalls in interest payments on the Notes but is not available to cover credit losses. The excess spread generated by the portfolio (i.e., the difference between the portfolio's weighted-average APR of 7.85% and the weighted-average coupon rate on the Notes plus fees and expenses) provides additional first-loss protection against credit losses.
The Receivables Pool
The initial receivables pool, as of the Cut-Off Date of June 30, 2022, has the following characteristics:
The receivables pool is highly granular, consisting of approximately 82,400 individual insurance premium finance loans to commercial policyholders. No single obligor represents more than 0.38% of the aggregate pool balance, and the top 10 obligors collectively represent only 2.14% of the aggregate pool balance. Geographic concentration is moderate, with Texas (14.2%), California (11.8%), and Florida (9.6%) representing the three largest state concentrations, aggregating to 35.6% of the pool balance.
Detailed stratification tables are set forth in Appendix B and in the Offering Memorandum Issuer Supplement. The stratification data has been independently verified by Veristead Analytics LLC (Katharine Drummond, Managing Director).
Structural Features Summary Table
Key Dates.  
Key Transaction Parties Summary Table
RISK FACTORS
An investment in the Notes involves significant risks. Prospective investors should carefully consider the following risk factors, together with all other information set forth in this Offering Memorandum, before deciding to invest in the Notes. Each of the following risks could adversely affect the value of the Notes, the timing or amount of distributions on the Notes, or the ability of the Issuer to make payments on the Notes. These risk factors are not exhaustive, and prospective investors should also consider other risks described elsewhere in this Offering Memorandum and the transaction documents and should consult with their own legal, tax, financial, and accounting advisors.
Risks Relating to the Receivables and the Receivables Pool
Credit Risk. The Notes are backed by insurance premium finance receivables originated by QPF. The ability of the Issuer to make payments on the Notes depends on the timely collection of payments from the obligors under such receivables. Obligors may fail to make required payments on their premium finance loans due to range factors, including changes in economic conditions, natural disasters, increases in interest rates, changes in insurance coverage needs, business failures, or other adverse circumstances affecting the obligors or the industries in which they operate. Although QPF's historical average net loss rate for the three-year period from 2019 through 2021 was 0.42%, there can be no assurance that the future net loss rate on the receivables in the pool will be consistent with historical experience. The receivables in the pool may perform differently from QPF's overall portfolio, and macroeconomic conditions, competitive dynamics, and other factors may cause losses on the pool to exceed the historical average. In particular, the current inflationary environment, rising interest rates, and potential economic slowdown may adversely affect the ability of commercial policyholders to make timely payments on their premium finance obligations.
Concentration Risk. Although the receivables pool is highly granular, with approximately 82,400 individual loans and no single obligor representing more than 0.38% of the aggregate pool balance, the pool is subject to certain geographic, obligor, and insurance carrier concentrations. The three states with the largest concentrations are Texas (14.2%), California (11.8%), and Florida (9.6%), which together account for approximately 35.6% of the pool balance. Adverse economic conditions, natural disasters (including hurricanes in Florida and Texas, wildfires in California, and other catastrophic events), or changes in state regulatory environments in any of these states could disproportionately affect the performance of the receivables pool. Additionally, to the extent a significant portion of the receivables in the pool are associated with a limited number of insurance carriers, the financial condition or operational difficulties of any such carrier could affect the ability of the Issuer to recover unearned premiums on defaulted loans. The top 10 obligors represent 2.14% of the pool balance ($13,096,800), and although no individual obligor exceeds the 0.75% concentration limit, the cumulative effect of defaults by multiple large obligors could adversely affect pool performance.
Short-Term Nature of Receivables and Reinvestment Risk. The receivables in the pool have a weighted-average original term of approximately 9.2 months and a weighted-average remaining term of approximately 5.7 months. Consequently, the receivables in the initial pool will amortize relatively quickly and will need to be replaced with newly originated eligible receivables during the 24-month Revolving Period. The ability of QPF to originate sufficient volumes of eligible receivables to maintain the pool balance during the Revolving Period depends on a number of factors, including market conditions, competitive dynamics, QPF's origination capacity, and the availability of commercial insurance policies to finance. If QPF is unable to originate and transfer sufficient eligible receivables to the Issuer during the Revolving Period, the pool balance may decline, which could reduce the excess spread available to protect noteholders and could trigger an Early Amortization Event. Furthermore, newly originated receivables added to the pool during the Revolving Period may have different credit characteristics than the receivables in the initial pool, including potentially higher delinquency rates, different geographic distributions, or lower APRs.
Delinquency Risk. As of the Cut-Off Date, the 60-or-more-day delinquency rate on the receivables in the pool was 0.87%. Although this delinquency rate is consistent with QPF's historical experience, there can be no assurance that delinquency rates will not increase in the future. An increase in the delinquency rate could indicate deteriorating credit quality in the pool and could precede an increase in net losses. If the 60-or-more-day delinquency rate exceeds 3.50%, an Early Amortization Event will be triggered, causing the Revolving Period to terminate and the Amortization Period to commence. Delinquency rates may increase as a result of adverse economic conditions, rising interest rates, natural disasters, or other factors beyond the control of the Issuer or the Servicer.
Unearned Premium Refund Risk. Insurance premium finance loans are secured by the obligor's assignment to the lender of the right to receive unearned premium refunds from the applicable insurance carrier in the event the obligor defaults on the loan and the insurance policy is cancelled. The ability of QPF to recover losses on defaulted loans depends on the timely cancellation of the underlying insurance policy and the receipt of the corresponding unearned premium refund from the insurance carrier. The amount of the unearned premium refund depends on the remaining term of the insurance policy at the time of cancellation and the applicable short-rate or pro rata cancellation schedule. If the insurance carrier delays the processing of cancellation requests or the remittance of unearned premium refunds, or if the unearned premium refund is insufficient to cover the outstanding loan balance (due to earned premium, minimum premium provisions, or cancellation penalties), the actual recovery on a defaulted loan may be less than expected. In certain cases, the obligor may have obtained the policy from an insurance carrier that subsequently becomes financially impaired or insolvent, in which case the unearned premium refund may be reduced, delayed, or unavailable.
Insurance Carrier Counterparty Risk. The ability of QPF to recover unearned premiums on defaulted loans depends on the financial condition and operational capabilities of the insurance carriers that issued the underlying policies. Insurance carriers may experience financial difficulties, regulatory actions, or insolvency proceedings that impair their ability to process cancellation requests and remit unearned premium refunds in a timely manner. Although QPF maintains underwriting criteria that include an assessment of the financial quality of the insurance carrier, there can be no assurance that any particular carrier will remain financially sound throughout the term of the transaction. The receivables pool may have concentration to particular insurance carriers, and the deterioration of any such carrier's financial condition could adversely affect the Issuer's ability to recover on defaulted loans associated with policies issued by that carrier.
Regulatory Risk. QPF originates insurance premium finance loans subject to the regulatory requirements of all 50 states and the District of Columbia. State premium finance statutes and licensing requirements vary by jurisdiction, and changes in applicable laws, regulations, or regulatory interpretations could adversely affect QPF's ability to originate or service receivables in one or more states. In particular, changes in usury laws, interest rate caps, or fee limitations could reduce the APR at which QPF can originate new receivables, thereby reducing the excess spread available to protect noteholders. If QPF's license to operate as a premium finance company in any state were to lapse, be suspended, or be revoked, receivables originated in that state during the period of noncompliance might not satisfy the Eligible Receivable Criteria and could be subject to repurchase or substitution. Additionally, increased regulatory scrutiny of premium finance lending practices, whether at the state or federal level, could increase QPF's compliance costs or constrain its lending activities.
Seasonal and Cyclical Fluctuations. The volume of insurance premium finance originations is subject to seasonal and cyclical fluctuations related to the commercial insurance market. Commercial insurance policies are typically renewed on annual cycles, with certain periods of the year (such as January and July) experiencing higher volumes of policy renewals and, consequently, higher volumes of premium finance originations. Conversely, other periods may experience lower origination volumes. These fluctuations may affect the ability of QPF to replenish the receivables pool during the Revolving Period at consistent levels and with consistent credit quality. Broader cyclical trends in the insurance market, including "hard" and "soft" market cycles, may also affect origination volumes, premium levels, and the credit characteristics of the obligor base.
Commingling Risk. QPF, as Servicer, collects payments on the receivables in the pool on behalf of the Issuer. Collections are received into accounts maintained by QPF and are required to be segregated from QPF's own funds and deposited into the Collection Account within two business days of receipt. If QPF fails to comply with these segregation requirements, collections on the receivables may become commingled with QPF's general funds. In the event of QPF's insolvency, any commingled funds could become subject to claims by QPF's creditors, which could result in delays or losses in the receipt of collections by the Issuer. Although the transaction documents contain provisions designed to mitigate commingling risk, including requirements for daily segregation of collections and back-up servicer monitoring, there can be no assurance that commingling will not occur or that it will not adversely affect noteholders.
Dilution Risk. The receivables in the pool may be subject to dilution as a result of premium adjustments, endorsements, policy modifications, or cancellations that reduce the outstanding balance of a receivable without a corresponding payment by the obligor. For example, if an obligor cancels an insurance policy during its term and receives a refund of unearned premiums directly from the insurance carrier (rather than through QPF as the assignee), the outstanding balance of the related premium finance loan may be reduced without QPF receiving the corresponding collections. Although QPF's underwriting and servicing procedures are designed to minimize dilution risk, including obtaining irrevocable assignments of unearned premium refund rights and notifying insurance carriers of such assignments, dilution may nonetheless occur and could reduce the collections available to the Issuer.
Risks Relating to the Notes and the Offering
Limited Liquidity. The Notes have not been and will not be registered under the Securities Act and are being offered only to QIBs under Rule 144A and to non-U.S. persons under Regulation S. There is no public market for the Notes, and there can be no assurance that a secondary market for the Notes will develop or, if one develops, that it will be sustained. Ridgeline is not obligated to make a market in the Notes and may discontinue any market-making activities at any time without notice. The lack of liquidity may adversely affect the market value of the Notes and the ability of holders to sell the Notes prior to maturity. Holders of the Notes may be required to bear the economic risks of an investment in the Notes for an indefinite period of time.
Interest Rate Risk. The Notes are floating rate instruments that bear interest at a rate equal to SOFR plus the applicable margin for each class. Changes in SOFR will directly affect the amount of interest payable on the Notes. In a rising interest rate environment, the interest expense on the Notes will increase, which will reduce the excess spread available to absorb credit losses and may reduce the residual income available to the Sponsor. Conversely, in a declining interest rate environment, the interest income on the Notes will decrease, which may reduce the return to noteholders. Although the receivables in the pool also bear interest at rates that are generally influenced by prevailing market interest rates, the APR on existing receivables is fixed for the life of each loan. During the Revolving Period, new receivables added to the pool may bear APRs that reflect then-current market conditions, which may or may not keep pace with changes in SOFR. There can be no assurance that the excess spread on the pool will remain positive under all interest rate scenarios.
SOFR Transition Risk. The Secured Overnight Financing Rate ("SOFR") is a relatively new benchmark interest rate that was introduced as a replacement for the London Interbank Offered Rate ("LIBOR"). Although SOFR is the preferred alternative reference rate recommended by the Alternative Reference Rates Committee ("ARRC"), SOFR has a limited history and may not perform in the same manner as LIBOR or other established benchmark rates. SOFR is based on overnight secured lending transactions in the U.S. Treasury repurchase agreement market and may be more volatile than LIBOR in certain market conditions. The limited historical data on SOFR makes it difficult to predict how SOFR will perform over the life of the Notes. The fallback provisions in the Indenture, which are based on the ARRC's recommended fallback language, may not operate as intended in all circumstances, and any transition from SOFR to an alternative benchmark rate could adversely affect the value of the Notes or the amount of interest payable on the Notes.
Credit Enhancement May Be Insufficient. The credit enhancement available to each class of Notes consists of subordination from the lower-ranking classes, overcollateralization, and the excess spread generated by the portfolio. The total credit enhancement for the Class A Notes is 25.0%, for the Class B Notes is 10.0%, and for the Class C Notes is 3.0%. There can be no assurance that these levels of credit enhancement will be sufficient to protect noteholders against all loss scenarios. If cumulative net losses on the receivables pool exceed the available credit enhancement for a particular class of Notes, holders of that class will bear the shortfall. The credit enhancement levels were sized based on the rating agencies' analyses of the receivables pool and the transaction structure, which incorporate assumptions about future performance that may not be realized. Actual losses may exceed the assumptions used in such analyses due to adverse economic conditions, changes in the performance characteristics of the receivables, or other unforeseen events.
Sequential Pay Structure. The Notes are structured on a sequential pay basis. During the Amortization Period, principal collections are applied first to the Class A Notes until paid in full, then to the Class B Notes, and finally to the Class C Notes. As a result, holders of the Class B Notes and Class C Notes will not receive any principal payments until the Class A Notes have been paid in full. The sequential pay structure provides credit enhancement to the Class A Notes at the expense of the Class B Notes and Class C Notes. In the event of significant losses on the receivables pool, the Class C Notes would bear the first loss (after the overcollateralization is depleted), followed by the Class B Notes and then the Class A Notes.
Overcollateralization Risk. The overcollateralization amount of $15,000,000 represents only 3.0% of the total capital structure. This amount may be insufficient to absorb losses on the receivables pool in excess of the excess spread. If losses exceed the overcollateralization amount and the available excess spread, holders of the Class C Notes and, subsequently, holders of the Class B Notes and Class A Notes may experience losses. The overcollateralization target is maintained through step 9 of the payment waterfall, and if the overcollateralization is depleted, the Issuer may not have sufficient funds to restore it to the target level.
Early Amortization Risk. The occurrence of an Early Amortization Event (as described under "Early Amortization Events") will cause the Revolving Period to terminate and the Amortization Period to commence. In such event, the Issuer will no longer purchase additional receivables, and all principal collections will be applied to repay the Notes in sequential order. An early termination of the Revolving Period could result in the Notes being repaid earlier or later than originally expected, depending on the pace of collections. If an Early Amortization Event occurs during a period of deteriorating pool performance, the accelerated amortization may not be sufficient to repay the Notes in full before the Legal Final Maturity Date.
Extension Risk. If collections on the receivables pool are insufficient to repay the Notes in full during the Amortization Period, the Notes may remain outstanding until the Legal Final Maturity Date, which is 42 months from the Closing Date. Extension of the Notes beyond the expected repayment date could adversely affect the value of the Notes and the return to noteholders. Although the Legal Final Maturity Date provides an absolute outside date for repayment, there can be no assurance that the Issuer will have sufficient funds to repay the Notes in full by the Legal Final Maturity Date in all scenarios.
Ratings Are Not Guarantees. The preliminary ratings assigned to the Notes by Brindoval Ratings Inc. and Pinnacle Rating Services LLC are not guarantees of the creditworthiness of the Notes or the performance of the receivables pool. Ratings are based on information and assumptions available at the time the ratings are assigned and may be revised or withdrawn at any time by the assigning rating agency. A downgrade or withdrawal of a rating could adversely affect the market value and liquidity of the Notes. Additionally, each rating agency may change its methodology for rating asset-backed securities, which could result in a downgrade of the Notes even if the performance of the receivables pool has not changed. The preliminary ratings set forth herein are subject to receipt of final documentation and satisfaction of certain conditions precedent. There can be no assurance that the final ratings will be the same as the preliminary ratings.
Risks Relating to the Transaction Structure
Bankruptcy Remoteness. QRF 2022-1 and QRH have been structured as bankruptcy-remote special purpose entities, with independent managers, non-petition covenants, separateness covenants, and limited purposes designed to minimize the risk of a voluntary or involuntary bankruptcy filing. However, there can be no assurance that a court would respect the bankruptcy-remote structure of the Issuer or the Depositor. If the Issuer or the Depositor were to become subject to a bankruptcy proceeding, the automatic stay provisions of the Bankruptcy Code could delay the Trustee's ability to enforce its security interest in the receivables and other collateral, and the priority of payments on the Notes could be altered.
True Sale Risk. The transfers of receivables from QPF to QRH and from QRH to QRF 2022-1 are intended to be true sales for bankruptcy law purposes. Calderwood & Harkness LLP will deliver true sale opinions with respect to each transfer. However, a bankruptcy court could recharacterize one or both of such transfers as secured loans rather than true sales, in which case the receivables would remain property of QPF's or QRH's bankruptcy estate, and the Trustee's security interest in the receivables would be subject to the claims of QPF's or QRH's creditors and the automatic stay. A recharacterization of the transfers could also subject the receivables to avoidance claims under the Bankruptcy Code's preference and fraudulent transfer provisions. Although the transaction documents include back-up security interest grants designed to provide the Trustee with a perfected security interest in the receivables even if the transfers are recharacterized, such back-up security interest may be subject to competing claims and the automatic stay.
Substantive Consolidation Risk. In the event of a bankruptcy of QPF or QIH, a bankruptcy court could, in certain circumstances, order the substantive consolidation of the assets and liabilities of QRF 2022-1 with those of QPF or QIH. If substantive consolidation were ordered, the receivables would become available to satisfy claims of QPF's or QIH's creditors, and the priority and timing of payments on the Notes could be adversely affected. The transaction structure includes separateness covenants, non-consolidation opinions from Calderwood & Harkness LLP, and other features designed to minimize the risk of substantive consolidation. However, there can be no assurance that a court would not order substantive consolidation despite these protections, particularly if the court determines that the Issuer or the Depositor failed to observe the required separateness formalities.
Servicing Risk. QPF is the sole servicer of the receivables in the pool. If QPF experiences financial difficulties, operational disruptions, or personnel changes, the quality of servicing may decline, which could adversely affect collections and increase losses on the receivables. Although Northvane Bank, N.A. serves as the Back-Up Servicer and is required to maintain warm standby capabilities and to receive regular data transfers from QPF, the transition of servicing from QPF to Northvane Bank is expected to take a period of time (currently estimated at [●] business days), during which collections may be disrupted or delayed. There can be no assurance that Northvane Bank will be able to service the receivables as effectively as QPF or that the transition will be completed without disruption. The Servicing Agreement provides for servicer default events and termination provisions, but the exercise of such provisions and the appointment of a successor servicer may be subject to delays, costs, and uncertainties.
Servicer Termination Events and Replacement. The Servicing Agreement specifies certain events that constitute Servicer Default Events, including (among others) failure to make required deposits or remittances, material breaches of representations or covenants, and insolvency or bankruptcy of the Servicer. Upon the occurrence of a Servicer Default Event, the Trustee (acting at the direction of the requisite noteholders) may terminate QPF's appointment as Servicer and appoint the Back-Up Servicer (or another qualified successor servicer) in its place. However, the replacement of the Servicer is a complex process that may take time and may result in temporary disruptions to collections and servicing operations. There can be no assurance that a successor servicer will service the receivables as effectively as QPF or at the same cost.
Performance Guaranty Limitations. QIH has provided a Performance Guaranty guaranteeing certain servicing and seller obligations of QPF. The Performance Guaranty is limited in scope and does not constitute a full credit guaranty of the Notes or a guaranty of the payment of principal or interest on the Notes. The Performance Guaranty is only as reliable as the creditworthiness of QIH itself. QIH's current unsecured credit ratings are BBB by Brindoval and Baa2 by Pinnacle, which are investment-grade ratings but which could be downgraded in the future. A deterioration in QIH's financial condition or a downgrade of QIH's credit ratings could impair the value of the Performance Guaranty and the ability of QIH to perform its obligations thereunder.
Conflicts of Interest. QIH and QPF serve in multiple capacities in this transaction. QIH is the Sponsor, the Administrator, and the Performance Guarantor. QPF is the Originator, the Seller, and the Servicer. These multiple roles may create conflicts of interest between the interests of QIH and QPF, on the one hand, and the interests of the noteholders, on the other hand. For example, QPF, as Servicer, has the authority to determine the collection and workout strategies for delinquent receivables, and QPF's decisions in this regard may be influenced by its own financial interests rather than the interests of the noteholders. Similarly, QIH, as Sponsor, has an interest in maximizing the residual cash flow from the transaction, which may conflict with the interests of noteholders in maximizing recoveries. Although the Indenture and the Servicing Agreement contain provisions designed to mitigate these conflicts, including the Trustee's oversight role and the noteholders' right to direct certain actions, there can be no assurance that such provisions will be effective in all circumstances.
Independent Manager Limitations. The appointment of independent managers (Timothy R. Callan for the Issuer and Eleanor M. Vasquez for the Depositor) is intended to ensure that the Issuer and the Depositor do not file voluntary bankruptcy petitions without the affirmative vote of the independent manager. However, the independent manager may not be able to prevent all adverse actions by the Issuer or the Depositor, and there can be no assurance that the independent manager will act in the best interests of the noteholders in all circumstances. Additionally, the effectiveness of the independent manager provision has not been definitively tested in bankruptcy proceedings, and a court could decline to enforce such provisions.
Risks Relating to Legal and Regulatory Matters
No SEC Registration. The Notes have not been and will not be registered under the Securities Act. Consequently, holders of the Notes do not have the protections afforded by the registration requirements of the Securities Act, including the availability of the remedies provided under Sections 11 and 12 of the Securities Act for material misstatements or omissions in a registration statement. The Issuer's ongoing disclosure obligations are limited to those set forth in the Indenture and the other transaction documents and do not include the periodic reporting obligations that would apply to a registrant under the Securities Exchange Act of 1934.
Volcker Rule. The Volcker Rule (Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) generally prohibits "banking entities" (as defined in the Volcker Rule) from sponsoring or investing in "covered funds" (as defined in the Volcker Rule). Banking entity investors should carefully analyze whether QRF 2022-1 constitutes a "covered fund" under the Volcker Rule. The Issuer expects that the "loan securitization" exclusion from the definition of "covered fund" may be available with respect to QRF 2022-1, but there can be no assurance that QRF 2022-1 will satisfy all requirements of such exclusion. Banking entity investors should consult with their legal counsel regarding the applicability of the Volcker Rule to an investment in the Notes.
Risk Retention. QIH, as Sponsor, intends to retain a horizontal interest in the form of the $15,000,000 overcollateralization / retained interest (representing 3.0% of the total capital structure) in compliance with the risk retention requirements of Section 941 of the Dodd-Frank Act and the implementing regulations thereunder. Changes in risk retention rules or interpretations could require QIH to retain additional interests or could affect the economics of the transaction. Any failure by QIH to comply with the risk retention requirements could adversely affect the legality of certain investors' holdings and could trigger adverse regulatory consequences.
Regulation AB II. Regulation AB II, adopted by the SEC in August 2014, imposes certain registration, disclosure, and reporting requirements for publicly registered asset-backed securities transactions. Although Regulation AB II does not apply to this offering (because the Notes are not registered under the Securities Act), the best-practice standards and market expectations for asset-backed securities may continue to evolve in response to Regulation AB II and other regulatory developments. To the extent that market expectations for disclosure and reporting increase, the Issuer's current disclosure framework may be viewed as inadequate by some investors, which could adversely affect the market value and liquidity of the Notes.
ERISA Considerations. Prospective investors that are employee benefit plans or other plans subject to the Employee Retirement Income Security Act of 1974 ("ERISA") or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or entities whose underlying assets include the assets of any such plan, should carefully consider whether an investment in the Notes is consistent with their fiduciary duties and whether the Notes constitute "plan assets" within the meaning of ERISA. If the Notes were deemed to constitute "plan assets," the transaction parties could be subject to the fiduciary duty and prohibited transaction provisions of ERISA and the Code. See "Material U.S. Federal Income Tax Considerations — ERISA Considerations."
FATCA Withholding. The Foreign Account Tax Compliance Act ("FATCA"), enacted as Sections 1471 through 1474 of the Code, imposes a 30% withholding tax on certain payments made to non-U.S. financial institutions and other non-U.S. entities that fail to comply with certain information reporting and due diligence requirements. Payments of interest and, in certain circumstances, principal on the Notes to non-compliant holders or holders that hold Notes through non-participating financial intermediaries may be subject to FATCA withholding. The Issuer will not be obligated to pay any additional amounts to compensate holders for any such withholding.
State Licensing. QPF is licensed as a premium finance company in all 50 states and the District of Columbia. Any lapse, suspension, or revocation of QPF's license in any state could create eligibility issues for receivables originated in that state during the period of noncompliance. If a receivable was originated in a state in which QPF was not properly licensed at the time of origination, such receivable may not satisfy the Eligible Receivable Criteria and may be subject to repurchase or substitution by QPF. Additionally, a loss of licensing in one or more states could reduce QPF's origination capacity and its ability to replenish the receivables pool during the Revolving Period.
UCC Perfection. The security interests in the receivables and other collateral granted under the transaction documents are perfected through the filing of UCC-1 financing statements with the Delaware Secretary of State. If such financing statements are not properly filed or maintained (including the timely filing of continuation statements prior to the five-year lapse period), the security interests could become unperfected, which could result in a loss of priority. If the Issuer's security interest in the receivables becomes unperfected, the Trustee's security interest on behalf of the noteholders would also become impaired. Although the transaction documents require the parties to make all necessary UCC filings and to file continuation statements prior to lapse, there can be no assurance that such filings will be made timely or accurately in all cases.
Risks Relating to Tax Matters
Recharacterization of Notes as Equity. The Notes are intended to be treated as debt for U.S. federal income tax purposes. However, there is no certainty that the Internal Revenue Service (the "IRS") will not challenge the characterization of the Notes as debt and argue that the Notes should be treated as equity interests in QRF 2022-1. If the Notes were recharacterized as equity, the income of QRF 2022-1 would be allocated to the holders of the Notes, and distributions on the Notes might not be deductible by QRF 2022-1, potentially resulting in an entity-level tax liability. Additionally, the character and timing of income recognized by holders could be adversely affected. Calderwood & Harkness LLP will deliver an opinion regarding the debt characterization of the Notes, but such opinion is subject to customary assumptions and qualifications and is not binding on the IRS or any court.
Tax Treatment of QRF 2022-1. QRF 2022-1 is intended to be treated as a disregarded entity (or qualifying special purpose entity) for U.S. federal income tax purposes, such that no entity-level federal income tax should be imposed on QRF 2022-1. However, if QRF 2022-1 were treated as a taxable entity (such as a corporation or a partnership), the income of QRF 2022-1 could be subject to entity-level taxation, which would reduce the funds available to make payments on the Notes. The IRS could argue that QRF 2022-1 should be treated as a taxable entity if, for example, the IRS were to challenge the debt characterization of the Notes or to assert that the transfers of receivables to QRF 2022-1 should be recharacterized as secured financings.
Changes in Tax Law. U.S. federal, state, and local tax laws and regulations are subject to change at any time, and such changes could adversely affect the tax treatment of the Notes, the Issuer, or holders of the Notes. For example, changes in the tax treatment of asset-backed securities, changes in the rules governing the taxation of limited liability companies or disregarded entities, or changes in withholding tax requirements could affect the after-tax return on the Notes. Prospective investors should consult their own tax advisors regarding the potential impact of changes in tax law on their investment in the Notes.
State and Local Tax Considerations. QRF 2022-1 is organized as a Delaware limited liability company and will be subject to the Delaware annual franchise tax. QRF 2022-1 is designed to avoid state-level franchise or income tax in states other than Delaware based on its limited activities and bankruptcy-remote structure. However, there can be no assurance that one or more states will not assert that QRF 2022-1 has sufficient nexus to be subject to state-level taxation in such state. QPF is licensed and conducts business in all 50 states, and the receivables in the pool are secured by insurance policies issued in all 50 states, which could create nexus issues for QRF 2022-1 in certain jurisdictions. State and local tax obligations could reduce the funds available to make payments on the Notes. Investors should consult their own tax advisors regarding state and local tax implications of an investment in the Notes.
THE SPONSOR — QUORUM INSURANCE HOLDINGS CORP.
Overview.  Quorum Insurance Holdings Corp. ("QIH" or the "Sponsor") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange under the ticker symbol "QIHC." QIH's corporate headquarters are located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901.
QIH is a diversified insurance services company operating across three principal business segments:
Property & Casualty Insurance Distribution. QIH operates one of the largest networks of commercial insurance distribution platforms in the United States, providing wholesale and specialty brokerage, managing general agency, and retail brokerage services to commercial clients across a broad range of industries.
Premium Finance Lending. Through its wholly owned subsidiary, Quorum Premium Finance LLC ("QPF"), QIH provides premium finance loans to commercial policyholders, enabling them to finance the payment of insurance premiums over the policy period rather than paying the full annual premium at inception. This business segment generates interest income and fees on the premium finance loan portfolio.
Insurtech SaaS Platforms. QIH develops and operates software-as-a-service platforms that serve the insurance distribution and premium finance industries, including digital quoting platforms, policy management systems, and premium payment processing tools.
For the fiscal year ended December 31, 2021, QIH reported consolidated revenue of approximately $3.8 billion. QIH's unsecured long-term credit ratings are BBB by Brindoval Ratings Inc. and Baa2 by Pinnacle Rating Services LLC. QIH's employer identification number is 82-4391067.
The principal officers of QIH are as follows:
Premium Finance Operations
QIH's premium finance operations are conducted exclusively through QPF, its wholly owned subsidiary. QPF originated its first insurance premium finance loan in 2009 and has grown to become one of the largest independent premium finance lenders in the United States, with a total receivables portfolio of approximately $2.1 billion as of the Cut-Off Date.
QPF originates insurance premium finance loans to commercial policyholders in all 50 states and the District of Columbia. These loans are used by commercial policyholders to finance the payment of insurance premiums across range property, casualty, and specialty lines of insurance, including general liability, workers' compensation, commercial auto, commercial property, professional liability, directors and officers liability, and excess and umbrella coverage.
The typical premium finance loan originated by QPF has the following characteristics:
•  Borrower: A commercial entity (corporation, LLC, partnership, or similar) that has purchased a commercial insurance policy and elects to finance the premium payment over the policy period.
•  Loan Amount: The unpaid balance of the insurance premium after any down payment (typically 15% to 25% of the total premium).
•  Interest Rate: A fixed annual percentage rate ("APR") for the life of the loan, determined at origination based on prevailing market conditions and the credit profile of the borrower. The portfolio weighted-average APR as of the Cut-Off Date was 7.85%.
•  Loan Term: The original term of the loan corresponds to the remaining period of the insurance policy, typically ranging from 6 to 12 months, with an average original term of approximately 9 months.
•  Security: Each loan is secured by an irrevocable assignment of the borrower's right to receive any unearned premium refund from the insurance carrier in the event of policy cancellation. This assignment provides QPF with a recovery mechanism in the event the borrower defaults on the loan.
•  Payment Schedule: Monthly installments of principal and interest, payable by the borrower through automated clearing house ("ACH") debits or check payments.
QPF's underwriting process incorporates an assessment of the creditworthiness of the borrower, the financial quality of the insurance carrier issuing the underlying policy, and the adequacy of the unearned premium refund as collateral for the loan. QPF's underwriting team evaluates each loan application using proprietary scoring models and manual review procedures. QPF maintains minimum underwriting standards that include, among other criteria, verification of the insurance policy, confirmation of the insurance carrier's financial strength rating, and analysis of the borrower's payment history and financial condition.
QPF is licensed as a premium finance company in all 50 states and the District of Columbia and maintains active compliance programs to ensure adherence to applicable state premium finance statutes, usury laws, and regulatory requirements. QPF's licensing and compliance function is overseen by QPF's manager, Sandra Ling-Hwang, and is supported by a dedicated team of compliance professionals.
Historical Performance Data
QPF has maintained consistent and favorable loss performance across its premium finance receivables portfolio over the three-year period from 2019 through 2021. The following table sets forth the annual net loss rates for QPF's total premium finance receivables portfolio:
The slight increase in net losses during 2020 reflected the impact of the COVID-19 pandemic on certain commercial policyholders, particularly in the hospitality, retail, and entertainment sectors. However, the pandemic's impact on QPF's portfolio was modest due to the essential nature of commercial insurance coverage and the relatively short-term nature of premium finance loans. Net losses declined to 0.37% in 2021 as economic conditions improved and QPF's underwriting criteria were refined.
QPF's recovery process on defaulted loans relies primarily on the cancellation of the underlying insurance policy and the recovery of the unearned premium refund from the insurance carrier. QPF's historical recovery rates on defaulted loans have averaged approximately 85% to 90% of the outstanding loan balance at the time of default, reflecting the strong collateral coverage provided by unearned premium refund rights.
The following table sets forth the delinquency migration data for QPF's total premium finance receivables portfolio:
Additional historical performance data, including static pool data, vintage analysis, and recovery rate information, is set forth in Appendix C to this Offering Memorandum.
Selected Financial Information of QIH
The following table sets forth selected consolidated financial data for QIH for the fiscal years ended December 31, 2019, 2020, and 2021. The financial statements of QIH have been audited by Meridian Ledger LLP (engagement partner: Robert Falcone), an independent registered public accounting firm.
The financial data presented above is summary in nature and should be read in conjunction with QIH's audited consolidated financial statements and related notes, which are publicly available through QIH's filings with the SEC. Neither QRF 2022-1 nor QRH has any independent operating history, and the financial condition and results of operations of QIH are presented solely for the purpose of providing information about the Sponsor. The Notes are obligations solely of QRF 2022-1 and are not obligations of or guaranteed by QIH, QPF, or any affiliate, except to the limite