Fitch Rates SBLI Re’s $160MM Series A and $80MM Series B Surplus Notes ‘A’

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to SBLI Re, LLC's (SBLI Re) surplus notes as follows:

--$160,000,000 Series A due 2039; Stable Outlook;

--$80,000,000 Series B due 2041; Stable Outlook.

The two series of surplus notes rank equally. Approximately $80 million of the Series A and $5 million of the Series B surplus notes are currently issued and outstanding. The remainder is expected to be issued over time. Swiss Re Capital Markets Corporation structured the transaction. Swiss Re Financial Products was the initial purchaser.

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, 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. In total, approximately 57,000 policies have been ceded to SBLI Re to-date. SBLI of MA maintains other reinsurance with various third-party reinsurers. SBLI of MA 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 expectation 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 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.

Cash flow modeling addresses the likelihood that noteholders 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 2016 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 ceding insurer. Proceeds from the sale of the surplus notes will be placed in a reinsurance trust for the benefit of the ceding insurer. Thus, there exists the risk that the ceding insurer (or a regulator in an insolvency proceeding) might withdraw funds from the trust and use them for purposes unrelated to the reinsurance agreement. Although Fitch believes this to be an unlikely event and there are some structural protections that partially mitigate the risk, noteholders nonetheless have some residual exposure to this risk, which is considered in the rating.

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 40 states and the District of Columbia. SBLI of MA offers ordinary life insurance (primarily term and whole life) and fixed annuities. At year-end 2009, SBLI of MA reported statutory surplus of $163 million.

These rating actions reflect the application of Fitch's current rating criteria which is available at 'www.fitchratings.com' and specifically includes the following reports:

--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);

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

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

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

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Fitch Ratings
Donald F. Thorpe, CPA, CFA, +1-312-606-2353
Douglas L. Meyer, CFA, +1-312-368-2061 (Insurance)
Ruchira Dabas, +1-212-908-0244 (ABS)
Media Relations
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Source: Fitch Ratings