Fitch Affirms SBLI Re's Series A & B Surplus Notes at 'Asf'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the following notes for SBLI Re, LLC (SBLI Re)

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

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

The Rating Outlook is Stable for both series.

The two series of surplus notes rank equally. Total issuance of the series A and B surplus notes equals $145.5 million and $52.1 million, respectively. The remainder is expected to be issued over the next several years.

KEY RATING DRIVERS:

The affirmation of these notes reflects the performance characteristics over with data provided to Fitch. The ratings consider the transaction structure, the financial strength of the counterparties and the strength of the expected cash flows from the ceded blocks of business. Currently, Fitch believes the strength of the cash flows exceeds the financial strength of the sponsor.

The strength of the transactions structure 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. Fitch recognizes the structure has generated economic profits since inception. Retention of these profits along with the paid-in capital contribution from SBLI of Massachusetts (SBLI of MA) represents a $165 million cushion for the notes.

The rating also incorporates the recent rating affirmation of assorted counterparties. On May 20, 2014, Fitch affirmed its rating opinion of the ceding insurer, 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 Re is a wholly owned subsidiary of SBLI of MA and 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. Risk based capital ratios for SBLI Re is very strong and exceeds 600%.

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.

Since the last review, the defined block of business has shown a slight improvement in mortality experience such that the inception-to-date actual to expected mortality ratio is 102%. Due to its smaller in-force size, it is prone to periodic volatility which is muted by external reinsurance. 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.

Insurance cash flow projections were developed by an internationally-recognized actuarial firm that also reviewed the ceded blocks and produced an analysis of the reserves. These projections were an input into a cash flow model that applied the priority of payments to noteholders. Fitch stochastically varied the mortality and rate of return assumptions in the cash flow model to develop alternative scenarios. This process produced a cumulative modeled loss curve that was compared to Fitch's published ILS calibration matrix.

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 projected reserve peaks in 2017 for series A and 2019 for series B. Following the reserve peak, the notes will begin amortizing.

RATING SENSITIVITIES

The ratings on the notes may change if either the actual cash flows vary materially from expectations or Fitch's opinion of the ceding insurer's financial strength changes.

Fitch tested alternative assumptions for sensitivity. A contributor to the repayment of the notes is the ability of the asset portfolio to generate sufficient income to support the note coupon. 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.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (November 2013);

--'Insurance-Linked Securities' (August 2012);

--'Global Structured Finance Rating Criteria' (May 2014);

--'Counterparty Criteria for Structured Finance Transactions and Covered Bonds' (May 2014).

Applicable Criteria and Related Research:

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Insurance-Linked Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684430

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748821

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832406

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst (Insurance)
Jeff Mohrenweiser, FSA
Senior Director
+1-312-368-3182
Fitch Ratings, Inc., 70 W Madison Street, Chicago, IL 60602
or
Secondary Analyst (ABS)
Du Trieu
Senior Director
+1-312-368-2091
or
Chairperson
John Bella
Managing Director
+1-212 908-0243
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst (Insurance)
Jeff Mohrenweiser, FSA
Senior Director
+1-312-368-3182
Fitch Ratings, Inc., 70 W Madison Street, Chicago, IL 60602
or
Secondary Analyst (ABS)
Du Trieu
Senior Director
+1-312-368-2091
or
Chairperson
John Bella
Managing Director
+1-212 908-0243
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com