Rating agency A.M. Best has affirmed the debt rating on the $800m tranche of life insurance-linked securities which were issued by through Northwind Holdings LLC., on behalf of sponsoring life insurer UNUM Group.
The Northwind deal was seen as breaking new ground in the securitization of insurance risk at the time of issuance. It was the first securitization of individual disability insurance policies and was issued back in 2007. The transaction was seen as a way to release excess capital within the Unum Group business and subsidiaries and was considered akin to an embedded value life securitization.
Northwind suffered a downgrade in 2008 because of issues with the financial guarantor for the transaction, monoline insurer MBIA Inc. which had itself suffered a downgrade. MBIA is guarantor for the timely payment of scheduled interest and also repayment of principal at maturity for the Northwind notes and its downgrade impacted the life ILS transactions ratings.
The Northwind transaction saw Unum securitize an $800m closed block of individual income protection life insurance through Northwind Holdings LLC.
Northwind Holdings was formed to hold stock of Northwind Re, Inc. as well as to issue the resulting notes for the deal. Northwind Re provides reinsurance coverage to three Unum subsidiaries, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company and Unum Life Insurance Company of America, and facilitates the funding of a portion of the capital required to support a closed block of individual disability income policies.
A.M. Best has affirmed the debt rating of “a” on the $800m of Series A Floating Rate Insured Notes due 2037 issued by Northwind Holdings, LLC.
A.M. Best explained that in affirming the rating it takes into consideration Unum’s operating subsidiaries’ current financial strength rating of A (Excellent) and issuer credit ratings of “a”; the adequacy of the excess cash flows at Northwind Re available to be transferred as dividends to Northwind Holdings to service the notes; the remaining portion of the monetized excess cash flows; the ability to meet or exceed certain benchmarks (e.g., principal note payment, dividend distribution, reserve balances, etc.) relative to its plan/forecast; and the performance of its investment portfolio, which primarily consists of investment-grade securities and is the primary source of funds to pay ongoing claims.
Clearly A.M. Best remains happy with the stability of the notes and transaction as a whole which will please investors holding Northwind at this time. This life ILS transaction is clearly performing as expected, which will please investors, although A.M. Best is careful to note that it does not take into account the ability of MBIA to honour its obligations under the deal in its rating decision.