Fitch Affirms Wilton Re's Ratings; Outlook Stable
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings are based on Wilton Re's consistently strong insurance earnings, balance sheet strength that includes solid capitalization across the operating subsidiaries, a conservative investment portfolio, ample liquidity and a reasonable amount of financial leverage.
Fitch views Canada Pension Plan Investment Board (CPPIB)'s ownership of Wilton Re as a credit positive for the company since it removed uncertainty regarding the long-term ownership structure of the company and improved the company's financial flexibility. Based on the application of Fitch's group rating methodology, Fitch classifies Wilton Re as a non-core subsidiary of CPPIB, but CPPIB views the North American life insurance market as a long-term investment opportunity. Since its purchase, CPPIB has demonstrated its ongoing commitment to Wilton Re by providing equity capital to fund the purchase of Aegon Canada ULC (Aegon Canada) and to refinance Wilton Re's funding arrangement associated with its XXX/AXXX statutory reserve requirements.
Fitch believes Wilton Re has taken a disciplined approach to growth which has resulted in its strong operating performance. It has prudently deployed capital only on transactions that have consistently met or exceeded its profitability hurdles. As a result, the company's operating performance to date has compared favorably to peers. Wilton Re announced several large closed block transactions in 2014 that increased net reserves from \$6.5 billion to \$12.7 billion. Fitch views rapid growth cautiously and will continue to monitor the profitability of these transactions.
Fitch believes capitalization is strong across Wilton Re's operating subsidiaries. The company maintains risk-based capital levels in excess of Fitch's guidelines for the current rating category for U.S. operations. At year-end 2014 the RBC ratio of the U.S. subsidiaries was 478%. The company cedes a portion of its business to Wilton Reinsurance Bermuda Limited. Accounting rules in Bermuda are less conservative than U.S. statutory accounting. Given these differences, Fitch looks at consolidated GAAP operating leverage to judge capital adequacy across the organization. Wilton Re's ratio was 8.5x at year-end 2014, a strong result.
Fitch views Wilton Re's investment portfolio as conservative and investment losses since inception have been minimal. Fixed-income securities comprised 94% of Wilton Re's invested assets at year-end 2014. The bond portfolio is high quality and liquid with 7% below investment-grade (BIG) securities.
Fitch also believes that Wilton Re's liquidity position is sound. The company currently has cash and liquid assets to meet obligations at the holding company and operating company levels. Additional sources of liquidity include a senior revolving credit facility and as a member of the FHLB of Des Moines Wilton Re has access to additional borrowing capacity.
Fitch views the \$1.2 billion 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 'A-'. 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 lead to an upward rating action include:
--A change in Fitch's view on the strategic importance of Wilton Re to CPPIB.
Key rating triggers for Wilton Re's ratings that could lead to a negative rating action include:
--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;
--A decline in GAAP operating ROE below 10%.
The ratings on \$1.2 billion 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.
Fitch has affirmed the following ratings:
Wilton Reassurance Company
Wilton Reinsurance Bermuda Limited
Wilton Reassurance Life Company of New York
Texas Life Insurance Company
Conseco Life Insurance Company
--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.
--\$1.2 billion secured support notes due Dec. 31, 2058 at 'A'.
The Outlook is Stable.
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