Fitch Affirms Global Atlantic Financial Life Limited 'BBB' IDR; Outlook Stable

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

GAFLL's ratings reflect the company's strong operating performance, strong risk-adjusted capitalization, more diverse business profile, and high credit quality investment portfolio. The ratings also consider execution risk tied to the company's rapid growth in recent years, due in part to two large acquisitions completed over that timeframe. Fitch's views GAFG's near-term financial flexibility as somewhat constrained by the 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

GAFG generates strong profitability as measured by returns on equity (ROE) and assets. For 2014, operating ROE was 15.9%. Fitch expects profitability measures will decline modestly in 2015 as growth is driven by lower margin products sold in competitive fixed annuity and life insurance markets. Profitability is still expected to be at strong levels for the rating in the 12% to 14% range for 2015 as GAFG should benefit from economies of scale and improved mix, and quality of revenues and earnings streams provide new business capabilities.

Fitch views GAFG's capitalization as strong for the rating. Commonwealth Annuity and Life Insurance Co. (CALIC) group's RBC increased to 486% at year-end 2014. GAFG targets a 400 consolidated NAIC RBC ratio. Commonwealth Annuity and Life Re (Commonwealth Re) had Bermuda statutory capital of $479 million at year-end 2014, well in excess of statutory requirements.

GAFG's integration risk has declined over the past year as the company nears a successful integration of its two major acquisitions. GAFG's revenues increased 77% in 2014 and total assets increased 61% due largely to the series of large acquisitions and reinsurance transactions, but also very strong growth in annuities. Fitch expects these growth rates to moderate to lower double-digit levels in 2015, led by strong annuity sales and block reinsurance transactions.

Fitch expects GAFG to maintain financial leverage in the 20%-25% range, which is in line with rating expectations. GAFG's pro forma 16% financial leverage is considered moderate following the favorable refinancing of bank term loans in 2015. The company's total financing and commitments (TFC) ratio declined in 2014 but is considered somewhat high at 1.0x. Reserve financing is the primary driver of the high TFC and is considered manageable.

Fitch views GAFG's debt service capabilities as strong. Based on the company's strong earnings profile, Fitch expects GAAP interest coverage (operating basis) to be in the 10x-11x range for 2015. Fitch expects the primary source for debt servicing in 2015 will be cash at the holding company, which was approximately $350 million at March 31, 2015. Additional sources in 2015 include intercompany surplus notes interest, fees and dividends from Bermuda-based subsidiary Commonwealth Re, and U.S.-based life insurance companies.

GAFG has low exposure to credit risk as exhibited a low risky assets ratio of 18% at Dec. 31, 2014 versus 82% for the life industry at year-end 2014. The company's exposure to structured securities is above average, in particular non-agency residential mortgage-based securities (RMBS) and CLOs. The company invests primarily in investment-grade securities and has limited exposure to commercial mortgages and limited partnership investments. Credit related investment losses are expected to remain very low in 2015.

RATING SENSITIVITIES

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

--ROE declining to below 10%;

--A decline in RBC below 350%;

--Increase in financial leverage above 30%;

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

-- The announcement of a major operating company acquisition in 2015.

The key rating triggers that could result in an upgrade include maintaining a low M&A profile over the next year and a combination of the following:

--Successful execution of business strategy following recent change in ownership and large acquisitions;

--Achieving new business growth while maintaining strong profitability;

--No deterioration in core financial metrics.

FULL LIST OF RATING ACTIONS

Fitch affirms the following rating:

Global Atlantic Financial Life Limited

--IDR at 'BBB', Stable Outlook.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes) (pub. 12 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576

Insurance Rating Methodology (pub. 04 Sep 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986503

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986503

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Andrew Davidson, CFA, +1-312-368-3144
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street, Chicago, IL 60602
or
Secondary Analyst:
Nelson Ma, CFA, +1-212-908-0273
Director
or
Committee Chairperson:
Mark Rouck, CPA, CFA, +1-312-368-2085
Senior Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Andrew Davidson, CFA, +1-312-368-3144
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street, Chicago, IL 60602
or
Secondary Analyst:
Nelson Ma, CFA, +1-212-908-0273
Director
or
Committee Chairperson:
Mark Rouck, CPA, CFA, +1-312-368-2085
Senior Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
alyssa.castelli@fitchratings.com