Fitch Affirms SBLI Re’s $240MM Surplus Notes; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings and Stable Outlooks for SBLI Re, LLC's (SBLI Re) surplus notes, as shown below:

--$160,000,000 series A surplus notes due 2039 at 'A';

--$80,000,000 series B surplus notes due 2041 at 'Asf'.

The two series of surplus notes rank equally. Approximately $135 million of the series A surplus notes and $40.3 million of the series B surplus notes are currently issued and outstanding. The remainder is expected to be issued over time.

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

The affirmation of these notes reflects the performance characteristics over the past 12 months (with data ending March 31, 2012). Fitch recognizes the structure has generated good economic profits. Retention of these profits along with the paid-in capital contribution from SBLI of MA represents over a 40% cushion for the notes at this time. Risk based capital ratios for SBLI Re is very strong and exceeds 650%.

Since inception, the defined block of business has shown slightly favorable mortality experience though it is prone to periodic volatility due to its smaller in-force size. In addition, the tightly managed asset portfolio has performed well and generated sufficient investment income to meet its spread costs. The market value of the asset portfolio exceeds the amount of notes outstanding. Finally, Fitch has affirmed its rating opinion of the ceding insurer, SBLI of MA.

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 Massachusetts (SBLI of MA or the ceding insurer). 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 (associated with the series A notes) represents level premium term life insurance policies issued from Sept. 1, 2007 through Dec. 31, 2009. Block B (associated with the series B notes) represents similar policies issued starting Jan. 1, 2010 and ending March 31, 2011 . 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.

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 expectations or Fitch's opinion of the ceding insurer's financial strength changes, the ratings on the notes may change.

The rating of the surplus notes considers the strength of the structure's equity. This 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 then 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 2017 for Series A and 2019 for Series B. Following the reserve peak, the notes begin amortizing, which increases the recovery rate to noteholders 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. Fitch believes the strength of the cash flows exceeds the financial strength of the 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 48 states and the District of Columbia. SBLI of MA offers ordinary life insurance (primarily term and whole life) and fixed annuities. At year-end 2011, SBLI of MA reported statutory surplus of $194 million. Fitch affirmed its rating opinion of SBLI of MA in June, 2012.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

-- 'Insurance-Linked Securitizations: Ratings Criteria' (Aug. 11, 2011).

Applicable Criteria and Related Research:

Insurance-Linked Securitizations

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Fitch Ratings
(Insurance)Jeff Mohrenweiser, FSA
Senior Director
+1-312-368-3182
Fitch, Inc., 70 W. Madison Street, Chicago, IL 60602
or
(ABS)Du TrieuSenior Director
+1-312-368-2091
orJuveria MozaffarAssociate Director
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or

Brian Bertsch+1-212-908-0549
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or
Media Relations:Sandro Scenga+1-212-908-0278
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Source: Fitch Ratings