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Fitch Affirms Wilton Re's Ratings; Outlook Stable
May 1, 2017 / 7:57 PM / in 7 months

Fitch Affirms Wilton Re's Ratings; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, May 01 (Fitch) Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Wilton Reassurance Company, Wilton Reinsurance Bermuda Limited, Wilton Reassurance Life Company of New York, Texas Life Insurance Company, and Wilco Life Insurance Company (collectively referred to as Wilton Re), as well as ivari. Fitch has also affirmed the long-term Issuer Default Rating (IDR) of Wilton Re Ltd. at 'A-'. A complete list of rating actions is provided at the end of this release. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings reflect Wilton Re's consistently strong insurance earnings, strong capitalization across its operating subsidiaries, conservative investment portfolio and disciplined growth strategy. Wilton Re's standalone credit profile deteriorated due to some weakening of its balance sheet strength since the last review. However, offsetting this is the company's ownership uplift from the Canadian Pension Plan Investment Board (CPPIB). In the fourth quarter of 2016, Wilton Re completed a dividend recapitalization in which it borrowed $400 million under a five-year revolving credit facility and in turn paid a dividend to its shareholders, primarily CPPIB. During 2016, Wilton Re paid $600 million of dividends to its shareholders, including CPPIB, inclusive of the $400 million dividend recapitalization referred to above. In 2015, given the information available, Fitch calculated Wilton Re's financial leverage by combining the equity of its U.S. GAAP reporting subsidiaries with the cost of its investment in ivari. Based on new information available, beginning with year-end 2016 and going forward, Fitch's calculation of Wilton Re's financial leverage is based upon the combined equity of its U.S. GAAP reporting subsidiaries with its investment in ivari, using the equity method based on ivari's underlying IFRS equity, which is consistent with the debt to capitalization provisions of Wilton Re's bond indenture and revolving credit facility. As a result of the dividends, new borrowings and the calculation changes referred to above, Wilton Re's financial leverage increased substantially to 22% at year-end 2016 from 8%. Leverage ratios are not comparable to prior periods due to the calculation change and the uptick was not entirely aligned with Fitch's prior ratings expectations. Due to changes in the company's capital structure, Fitch revised its standalone assessment of Wilton Re's IFS down by one notch but now assigns it one notch uplift as a result of its ownership by CPPIB. The ownership uplift now more heavily weights the defined linkage to CPPIB as a result of Wilton Re's bank credit facilities including change in control provisions. Additionally, post the acquisition of Wilton Re in 2014, CPPIB has contributed significant equity capital to fund Wilton Re's purchase of ivari and to refinance Wilton Re's funding of XXX/AXXX statutory excess reserve requirements. In Fitch's view, Wilton Re remains a non-core subsidiary of CPPIB. Fitch believes capitalization remains strong across Wilton Re's operating subsidiaries but the quality of capital has weakened. At year-end 2016, the RBC ratio of the U.S. subsidiaries declined to 406% from 569% as of the prior year but remains above the median guideline for the current rating category. The company cedes a portion of its business to Wilton Reinsurance Bermuda Limited. Fitch believes that Bermuda accounting is generally less conservative than U.S. statutory accounting. Bermuda has received Solvency II equivalency. Wilton Re's earnings improved in 2016 following performance that was pressured the prior two years. The company's ROE was 11% for the full year. Results reflected improved mortality experience and higher investment yields. Fitch believes Wilton Re has taken a disciplined approach to growth, with high hurdle rates for its acquisitions, which has resulted in its generally stable operating performance. The company did not complete any transactions in 2016, which was largely a function of market conditions resulting in a lack of attractive opportunities. ivari's minimum continuing capital and surplus requirements (MCCSR) ratio increased materially in 2016 to 256% from 203%. The company targets a ratio of 190%. Equity increased CAD666 million following a retrospective accounting change to unbundle the deposit component of a reinsurance contract whose nature was that of long-term debt. This accounting change increased ivari's reported equity by 49%. Subsequently, ivari paid CAD600 million in dividends to its holding company in 2017. Fitch expects ivari will ultimately dividend its excess capital upstream and its MCCSR ratio to decline towards its target level. Interest coverage was very strong at 15x in 2016. Fitch expects this to decline in 2016 with the increased debt level but to remain above 10x in 2017. The company's financial flexibility and liquidity profile remain strong. Wilton Re had over $280 million in cash, cash equivalents and short-term investments across its U.S. insurance companies and holding company at year-end 2016. Additionally, U.S. insurance company backup liquidity is strong with over $1 billion of unused FHLB borrowing capacity. ivari's results have been pressured the past several years as a result of updating reserve assumptions, which are consistent with Wilton Re's acquisition pricing. In 2016, assumption updates, largely related to lapses, had a CAD298 million unfavorable impact. This follows CAD55 million of updates in 2015 related to strengthening assumptions and model improvements. ivari's expected pre-tax run-rate earnings are approximately CAD120 million following its reinsurance accounting change, as earnings will reflect CAD68 million of annual interest expense on a funds withheld reinsurance agreement. Fitch views Wilton Re's investment portfolio as conservative and investment losses since inception have been minimal. Fixed-income securities comprised 92% of Wilton Re's invested assets at year-end 2016. The bond portfolio is high quality and liquid with 6% below investment-grade (BIG) securities. ivari's risky asset ratio is above average at 117% as a result of its overweight equity position related to equity-linked universal life contracts, the risk of which is passed through to policyholders. ivari is classified as an important subsidiary of Wilton Re. Its ratings are equivalent to Wilton Re's, as it receives a one-notch uplift from its standalone assessment of 'A'. The purchase of ivari represented Wilton Re's entrance into the Canadian life insurance market. The company's branding and financial reporting basis (IFRS) are distinct from Wilton Re's other subsidiaries. Fitch views the $915 million of secured support notes issued by Redding Funding Ltd. as a secured inter-company debt obligation. As such, the rating for the secured support notes is notched from guarantor Wilton Re's long-term IDR of 'BBB+'. The degree of notching is based primarily on the assumed relative recoveries of the obligations in the event of default/failure. For the secured support notes, a baseline recovery assumption of Superior was used based on an analysis of asset performance under stress. Thus, the secured support notes are notched up one from the IDR. RATING SENSITIVITIES Key rating triggers for Wilton Re's ratings that could result in an upgrade include: --A change in Fitch's view of Wilton Re's strategic importance to CPPIB. Key rating triggers for Wilton Re's ratings that could result in a downgrade include: --A change in ownership; --An increase in financial leverage above 25%; --Large transactions outside the company's historical risk preference or expertise or any other material changes in risk appetite for the company; --A sustained drop in the company's risk-adjusted capital position with no plans or ability to rectify; --GAAP interest coverage below 8x; --A decline in GAAP operating ROE below 8%. Key rating triggers for ivari's ratings that could lead to a downgrade include: --A change in Fitch's view on the strategic importance of ivari to Wilton Re Ltd.; --A weakening in ivari's credit profile that leads to a downgrade in its standalone assessment. The ratings on $915 million secured support notes issued by Redding Funding Ltd. may change if either the quality of the assets in the collateral account changes, implying use of a different recovery assumption, or Wilton Re Ltd's IDR changes. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Wilton Reassurance Company Wilton Reinsurance Bermuda Limited Wilton Reassurance Life Company of New York Texas Life Insurance Company Wilco Life Insurance Company ivari --IFS at 'A+'; Outlook Stable. Wilton Re Ltd. --Long-term IDR at 'A-'; Outlook Stable. Wilton Re Finance LLC --$250 million 5.875% senior notes due March 30, 2033 at 'BBB+'. Redding Funding Ltd. --$915 million secured support notes due Dec. 31, 2058 at 'A'. Contact: Primary Analyst Jamie R. Tucker, CPA Associate Director +1-212-612-7856 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Julie A. Burke, CPA, CFA Managing Director +1-312-368-3158 Committee Chairperson Martha M. Butler, CFA Senior Director +1-312-368-3191 Summary of Financial Statement Adjustment: Fitch has removed $948 million of preferred capital stock from total shareholders' equity of Wilton Re Ltd. as reported at Dec. 31, 2016 (as well as in prior periods). Proceeds from the issuance of the preferred stock were used to fund statutory excess reserve requirements for a block of life insurance policies, and Fitch is treating the preferred stock similar to how it treats operating debt. The noted adjustment did not result in a different rating than had the adjustment not been made, but it is material in how Fitch views the financial leverage and return on equity ratios. 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