The ratings for insurer Unum’s outstanding Northwind life insurance-linked securities (ILS) have been affirmed again, as the ability of available cash flows to service the notes remains adequate, according to A.M. Best.
The Northwind life ILS transaction, which was issued in 2007, was the first life insurance-linked securitization of its kind, designed to transfer the risks of a closed book of business, while freeing capital for the sponsor Unum.
In fact even today, the Northwind deal appears quite innovative, as it offered a capital markets solution to a legacy risk issue which are not particularly common in ILS solutions.
Through the Northwind ILS transaction, Unum securitized an $800m closed block of individual income protection life insurance, tapping capital markets investors reinsurance capacity to offload the risk and free capital.
The deal featured both active and disabled life reserves and securitized the risks through Northwind Holdings LLC, with captive reinsurer Northwind Reinsurance (Northwind Re) used to enter into the necessary reinsurance agreements with Unum.
The deal reinsured Unum subsidiaries Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company and Unum Life Insurance Company of America, and funded a portion of the capital required to support the closed block of individual disability income policies.
For Unum the goal was releasing excess capital from within its life business and subsidiaries, as well as realising some of the value of the book of life policies upfront, so achieved similar goals to an embedded value life insurance securitization.
By entering into the reinsurance agreements with Northwind Re and the issuance of the notes from Northwind Holdings, Unum effectively collateralized and recognised value within its income protection business upfront of the policies maturing, thanks to capital market investor appetite for this risk.
The Northwind life ILS notes were somewhat beleaguered at first, having been downgraded in 2009 due to issues related to the financial guarantor for the transactions, monoline financial guaranty insurer MBIA Inc. which had been downgraded itself during the financial crisis.
Some confidence in the Northwind deal was regained in recent years though, as investment decisions taken with the assets underlying the transaction were seen as positive by the rating agencies, helping the notes maintain their payments and reinsurance cash flows to continue unhindered.
That situation continues today and A.M. Best notes that the transaction has had its ratings affirmed because of the adequacy of cash flows at Northwind Re which is required to service the notes, the ability to meet or exceed benchmarks such as note repayments, and the performance of its investment portfolio which is required to pay ongoing claims.
The fact the transaction now appears to be able to standalone in the eyes of the rating agency is positive, A.M. Best did not consider the financial guarantor MBIA in making its assessment.
As the notes continue to pay down, only $245 million of the $800 million was left in-force and outstanding a year ago, it looks as if the Northwind deal will now continue to perform as expected without impacting investors capital.