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Fitch affirms ratings of Fortitude Re

Fitch Ratings has affirmed Bermuda-based Fortitude Reinsurance Company Ltd.'s insurer financial strength rating at 'BBB+' and its holding company, Fortitude Group Holdings, LLC.'s (Fortitude), Long-Term Issuer Default Rating at 'BBB'. The Rating Outlook is Stable.

Fortitude Re is Bermuda’s largest multi-line reinsurer.

But Fitch noted they would have some reservations about any future growth outside of Bermuda under specific circumstances.

The rating action follows Fortitude's announced acquisition of Prudential Annuities Life Assurance Corporation (PALAC), a transaction valued at $2.2 billion. Total transaction value includes the purchase price for PALAC plus a capital release to Prudential and an expected tax benefit.

But Fitch has followed that up by placing PALAC’s 'AA-' insurer financial strength rating on rating watch negative, reflecting the Fitch expectation the rating will likely be downgraded reflecting the lower credit quality of the buyer.

The acquired business represents variable annuities (VA) written prior to 2011, with an account value totaling $31 billion. The transaction is expected to close in 1H22.

While Fitch views VAs at the volatile end of the liability spectrum, favourably the acquired block is seasoned and largely in-the-money, making it more predictable and facilitating effective hedging.

The acquisition is expected to be funded through a combination of debt and existing capital, with Fortitude's financial leverage expected to remain below 25 per cent.

Further, Fortitude Re's capital adequacy score under Fitch's Prism model is expected to remain at least 'Strong'.

Fitch views the acquisition of PALAC as largely consistent with Fortitude's strategy of acquiring run-off blocks. However, Fitch notes that VAs are new to the company's balance sheet and could introduce risks given the large-scale nature of the transaction.

The holding company's stable outlook reflects Fitch's view that a group solvency regulatory classification post-acquisition is merited, with PALAC's earnings, capital and reserves projected to comprise less than 30 per cent of the enterprise totals over the rating horizon.

Further growth outside of Bermuda by Fortitude Re that results in any of these metrics exceeding 30 per cent, would likely promote a shift to a ring-fencing regulatory classification under Fitch's criteria, leading to a one-notch downgrade of holding company ratings.

Fortitude Re's ratings continue to reflect a moderate business profile and strong capital position.

The ratings also consider the company's slightly above-average investment risk and strong asset/liability management.

Fitch expects Fortitude Re to continue to grow through acquisitions of runoff liabilities, which are episodic transactions by nature.

Factors that could, individually or collectively, lead to a negative rating action/downgrade:

– The holding company could be downgraded by one notch if Fitch utilises a ring-fencing regulatory classification, rather than the current group solvency classification, which would be driven by more than 30 per cent of gross reserves, earnings and/or capital coming from outside of Bermuda;

– Deterioration in capitalisation evidenced by a prism score below 'Strong';

– Deterioration in business profile stemming from increased risk through acquisitions or adverse experience with acquired business and/or existing run-off liabilities;

– Increase in financial leverage to above 25 per cent;

– Material increase in investment risk and/or investment losses that impact Fitch's view of capital;

– Operating ROE below 5 per cent.

Fitch Ratings: affirmed Bermuda-based Fortitude Reinsurance Company Ltd.'s Insurer Financial Strength rating at 'BBB+' (File photograph)

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Published September 15, 2021 at 11:39 am (Updated September 15, 2021 at 9:12 pm)

Fitch affirms ratings of Fortitude Re

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