Fitch Affirms SBLI Re’s $160MM Series A & $80MM Series B Surplus Notes at ‘Asf’; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed SBLI Re, LLC's (SBLI Re) $160,000,000 series A surplus notes due 2039 and $80,000,000 series B surplus notes due 2041 (together, the surplus notes) at 'Asf'. The Rating Outlook is Stable. The two series of surplus notes rank equally. Approximately $105 million of the series A surplus notes and $24 million of the series B surplus notes are currently issued and outstanding. The remainder is expected to be issued over time.

The affirmation of these notes reflects the performance characteristics over the past nine months ending March 31, 2011. Fitch recognizes the structure has generated good economic profits. Retention of these profits along with the paid-in capital contribution from the transaction sponsor and ceding insurer, Savings Bank Life Insurance Company of Massachusetts (SBLI of MA) represents a 46% cushion for the notes. Risk based capital ratios for SBLI Re is very strong and exceeds 400%.

The defined block of business, which started in late 2007, has shown favorable mortality experience. The business currently covers over 50,000 policyholders. In addition, the tightly managed Reinsurance Trust and Capital Accounts have performed well and generated sufficient investment income to meet its spread costs. The portfolio market value exceeds the amount of notes outstanding.

Finally, the rating considers Fitch's opinion of SBLI of MA's financial strength which is unchanged from the prior year. At year-end 2010, SBLI of MA reported statutory surplus of $159 million.

Fitch has placed the 'sf' designation to these esoteric notes to signify to investors that, although it may not be a true structured finance security, it contains several transaction elements and risk mitigants to resemble a structured finance transaction.

Fitch's ratings consider the transaction structure, the strength of the expected cash flows from the ceded blocks of business and the financial strength of the ceding insurer. If either the actual cash flows vary materially from expectation or Fitch's opinion of the ceding insurer's financial strength changes, the ratings on the notes may change.

SBLI Re is a limited liability company domiciled under the laws of the State of Arizona. It is a licensed insurer and was established for the limited purpose of issuing the surplus notes and entering into reinsurance agreements with SBLI of MA. SBLI Re is a wholly owned subsidiary of SBLI of MA.

SBLI of MA ceded two blocks of business to SBLI Re on a co-insurance basis. Block A, which is associated with the series A notes, represents level premium term life insurance policies issued from Sept. 1, 2007 through Dec. 31, 2009. Block B represents similar policies issued starting Jan. 1, 2010 and ending March 31, 2011, and is associated with the series B notes. SBLI of MA maintains other reinsurance with various third-party reinsurers and cedes only the portion of the policy not covered by third-party reinsurance to SBLI Re.

The rating of the surplus notes considers the strength of the structure's equity which consists of an initial capital contribution by SBLI of MA into SBLI Re and any retained earnings from the ceded blocks of insurance policies. Certain performance metrics and legal documents restrict experience refunds and dividends to SBLI of MA.

Cash flow modeling addresses the likelihood that note holders will receive full payments of principal and interest in accordance with the terms of the transaction documents. For this transaction, Fitch focused primarily on the effects of higher than expected mortality and insufficient investment income. Mortality risk can occur due to policyholder life-style changes, annual fluctuations or catastrophic events (such as the 1918 influenza epidemic). Investment risk can occur either with higher than expected defaults or an overly-conservative asset portfolio that depresses investment income. In either circumstance (or in combination), these risks could produce results whereby the equity and retained earnings of the reinsurance credit trust are insufficient to repay the notes.

The model used to estimate policyholder cash flow projections was developed by an internationally-recognized actuarial firm that also reviewed the ceded blocks and produced an analysis of the reserves. In addition, Fitch was supplied a cash flow model that applied the priority of payments to the policyholder cash flow projections and investment income estimates. Fitch stochastically varied the mortality and rate of return assumptions in the cash flow model to develop 10,000 alternative scenarios.

Fitch's stochastic modeling based on prudent assumptions produced a cumulative modeled loss curve that Fitch compared to its published default rate grid. The modeled results indicated that from 2010 to 2020, the likelihood of default of the notes was less than 3%. From 2021 to the final note maturity, the likelihood of default increased to a range from 3% to 7%. The change in default estimates stems from the significant equity position that exists at the start of the transaction until shortly after reaching the reserve peak levels in 2016 for series A and 2019 for series B. Following the reserve peak, the notes begin amortizing, which increases the recovery rate to note holders if a default event occurs after those dates.

Fitch also tested several alternative assumptions for sensitivity. A key contributor to the repayment of the notes is the ability of the asset portfolio to generate sufficient income to help offset the spread offered on the notes. The co-insurance agreement requires the asset portfolio to maintain an 'A-' or higher credit profile with limitations on single name issuers, sectors and duration. Increasing the mortality stresses had a slight effect on the above results. Lapses, either higher or lower, did not materially affect the results. However, an unfavorable combination of all risk factors would have an adverse effect on the rating.

The third part of the analysis included a review of the plan sponsor. SBLI of MA was initially established in 1907 as Massachusetts Savings Bank Life Insurance. In 1992, SBLI of MA reorganized into a privately-held Massachusetts stock life insurance company. SBLI of MA is licensed in 41 states and the District of Columbia. SBLI of MA offers ordinary life insurance (primarily term and whole life) and fixed annuities. Fitch believes the strength of the cash flows exceeds the financial strength of the sponsor.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Global Structured Finance Rating Criteria' (Aug. 13, 2010);

-- 'Insurance-Linked Securities: Ratings Criteria (Global)' (Feb. 4, 2008); and

-- 'Life Insurance Reserve Financing (Ratings Criteria)' (July 8, 2008).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326

Insurance-Linked Securities 2009: Year in Review
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=495746

Life Insurance Reserve Financing (Ratings Criteria)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=392298

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Fitch, Inc.
Primary Analyst:Jeff Mohrenweiser, FSA (Insurance), +1-312-368-3182
Senior Director
70 West Madison Street
Chicago, IL
or
Secondary Analyst:Du Trieu (ABS), +1-312-368-2091
Senior Director
or
Committee Chairperson:Hylton Heard, +1-212-908-0214
Senior Director
or
Media RelationsBrian Bertsch, +1-212-908-0549 (New York)
[email protected]

Source: Fitch Ratings