Back in October we wrote that two life insurance-linked securitization transactions sponsored by Unum Group had been favourably reviewed by Moody’s and their ratings affirmed based on the both deals performance and the quality of the underlying assets. Now another rating agency, A.M. Best, has similarly affirmed both sets of securitized life insurance linked notes debt ratings and kept their ratings on a stable outlook.
The two transactions were both seen as breaking new ground in the securitization of insurance risk at the time of issuance, although as readers will be aware the life securitization sector still has yet to really take off. Northwind was the first securitization of individual disability insurance policies and was issued back in 2007, while Tailwind was the first securtization of a defined block of long-term disability claims even further back in 2006. The transactions were seen as a way to release excess capital within the Unum Group businesses and are considered akin to an embedded value life securitization.
Both transactions suffered downgrades in 2008 because of issues with the financial guarantor for the transactions, 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 both transactions and their downgrade impacted the two life ILS transactions ratings.
The Northwind transaction saw Unum securitize an $800m closed block of individual income protection life insurance through Northwind Holdings LLC. The Tailwind deal involved the securitization and issuance of $130m of disability claim reserve linked notes through Tailwind Holdings LLC.
More recently, reports from rating agencies have been favourable, which will be pleasing for investors who still hold these notes. A.M. Best has affirmed the debt rating of “a-” on $130 million of Series A Floating Rate Insured Notes due 2036 (notes) issued by Tailwind Holdings, LLC and keeps their rating on a stable outlook. Similarly, Best has affirmed the debt rating of “a” on $800 million of Series A Floating Rate Insured Notes due 2037 (notes) issued by Northwind Holdings, LLC and see’s them as stable too.
Best explains that when affirming both ratings it took into consideration the current financial strength rating and issuer credit ratings of Unum’s operating subsidiaries; the adequacy of the excess cash flows at Northwind Re and Tailwind Re available to be transferred as dividends to Northwind Holdings and Tailwind Holdings to service both sets of 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 their plans/forecasts; and the performance of both investment portfolio, which primarily consist of investment-grade securities and are the primary source of funds to pay ongoing claims.
Best also notes that they are not considering MBIA Inc’s ability to service interest and principal payments as part of this affirmation for either deal. They also note that should earnings be unfavorable or either deal fail to achieve performance benchmarks then the ratings could come under negative pressure. Similarly if performance is better than expected then the debt rating and outlook could benefit.
Northwind Holdings is the shareholder of Northwind Reinsurance Company (Northwind Re), a special purpose captive reinsurance company domiciled in Vermont which was set up for the sole purpose of executing reinsurance agreements with Unum subsidiaries to facilitate the funding of capital supporting a closed block of both active and disabled life reserves.
Tailwind Holdings is the shareholder of Tailwind Reinsurance, Inc. (Tailwind Re), a special purpose captive reinsurer domiciled in South Carolina that was established for the sole purpose of executing a reinsurance agreement with Unum Life Insurance Company of America to facilitate the funding of capital supporting certain disability claim reserves.