Fitch Affirms Global Atlantic Financial Life Limited’s IDR at ‘BBB’; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' Long-Term Issuer Default Rating (IDR) for Global Atlantic Financial Life Limited (GAFLL), a subsidiary of Global Atlantic Financial Group (GAFG). The Rating Outlook is Stable.

GAFLL's ratings reflect the company's strong risk-adjusted capitalization, strong operating performance, and high credit quality investment portfolio. The rating also reflects the company's rapid acquisition-driven and organic growth in recent years, the relatively short operating history under the larger organization and limited access to external equity capital given its status as a privately held company.

The Stable Outlook reflects Fitch's expectations that the company will maintain strong profitability and capitalization in line with rating expectations.

KEY RATING DRIVERS

Fitch views GAFG's capitalization as strong for the rating. Commonwealth Annuity and Life Insurance Co. (CALIC) group's RBC was 476% at year-end 2014. GAFG remained comfortably above its 400% consolidated RBC target as of Q3 2015, which does not include capital held at its Bermuda reinsurance subsidiary. Commonwealth Annuity and Life Re (Commonwealth Re) had Bermuda statutory capital of $479 million at year-end 2014, which is well in excess of statutory requirements.

GAFG's financial leverage was moderate at 19% and 15% as of year-end 2014 and Q2 2015 respectively. Fitch expects GAFG to maintain financial leverage in the 20% - 25% range, which is in line with rating expectations. Operating leverage is relatively high at 14.8x but is within range for companies with a fixed annuity focus. The company's total financing and commitments (TFC) ratio is considered high at 1.1x as of June 30, 2015. Reserve financing is the primary driver of the high TFC and is considered manageable.

GAFG generated strong profitability as measured by return on equity (ROE) and assets. Operating ROE was 16% and 14% at year-end 2014 and 1H 2015 respectively. Strong YTD 2015 sales in annuities and good results in life insurance and reinsurance along with stable performance of the in-force business and assets, which were acquired at material discounts to par value, have contributed to the strong operating performance of the company.

Fitch expects profitability measures to decline modestly in 2016 driven by growth in lower margin products sold in competitive fixed annuity and life insurance markets and the impact of low reinvestment rates impacting inforce business. Profitability is still expected to be strong for the rating with GAAP ROE expected in the 12% to 15% range for 2016 as GAFG continues to benefit from stable in-force performance, greater economies of scale and focus on growth in certain distribution channels. Fitch will continue to monitor operating results to ensure that new sales profitability is maintained and commensurate with growth.

Fitch views GAFG's debt service capabilities as strong for its rating given the company's GAAP interest coverage of 12x in 2014 and 11x in 1H 2015. The primary source for debt service is cash at the holding company, which was approximately $175 million at Sept. 30, 2015. Additional sources include interest from intercompany surplus notes and dividends from Bermuda-based subsidiary Commonwealth Re and the U.S. life insurance operating entities.

GAFG's investment portfolio is considered to be of high quality as the company invests primarily in investment-grade bonds, with moderate exposure to commercial mortgages and limited exposure to common stock and alternative assets. The company's risky assets ratio is low at 18% at year-end 2014 compared to 82% for the life industry. The company's exposure to structured securities, in particular non-agency residential mortgage-based securities (RMBS) and CLOs, is above average. Credit related investment losses are expected to remain low in 2016.

GAFG has successfully integrated its two major acquisitions, including the purchase of Aviva USA's life insurance business in 2013 and Forethought Financial Group in 2014. Rapid growth in revenues and assets over 2014 as a result of acquisitions and reinsurance transactions have continued into 2015 due to very strong organic growth in annuities and block reinsurance transactions. Fitch expects growth to moderate in 2016 but remain strong relative to industry peers.

RATING SENSITIVITIES

The key rating triggers that could result in a downgrade include:

--A decline in RBC below 350%;

--ROE declining to below 10% for four consecutive quarters;

--Increase in financial leverage above 30%;

--Decline in GAAP interest coverage ratio to below 8x on an operating income basis.

Fitch does not expect an upgrade in the near to intermediate term but key rating triggers that could result in a rating upgrade longer term include:

--Achieving new business growth while maintaining strong sustained profitability;

--RBC above 400% and financial leverage below 25%;

--GAAP based interest coverage above 10x on an operating income basis;

--Continued low credit related investment losses.

FULL LIST OF RATING ACTIONS

Fitch affirms the following rating:

Global Atlantic Financial Life Limited

--IDR at 'BBB'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

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Fitch Ratings

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Source: Fitch Ratings