Somerset Reinsurance Ltd. 'BBB+' Rating Affirmed On Announced Reinsurance Transaction; Outlook Remains Stable

Aug 2, 2023 //
Press Release

August 2, 2023

 - Somerset has signed a definitive agreement to reinsure approximately $12.5 billion of guaranteed universal life statutory reserves from Prudential Financial.
 - We affirmed our 'BBB+' ratings on Somerset because we view the transaction as consistent with its growth strategy.
 - The stable outlook reflects our expectation that Somerset will continue to make progress on its strategic priorities and will remain competitive among life reinsurance peers while maintaining strong capital adequacy.

NEW YORK (S&P Global Ratings) Aug. 2, 2023--S&P Global Ratings said today it affirmed its 'BBB+' financial strength and issuer credit ratings on Somerset Reinsurance Ltd. The outlook remains stable.

Somerset announced its intent to reinsure $12.5 billion of guaranteed universal life statutory reserves from two of Prudential Financials' operating subsidiaries, Pruco Life Insurance Co. (AA-/Stable/--) and Pruco Life Insurance Co. of New Jersey (AA-/Stable/--). We expect the transaction to close in the fourth quarter of 2023, subject to regulatory approval and customary closing conditions. Somerset raised additional capital commitments from its controlling partner, Aquarian Holdings (not rated), to support planned growth such as this transaction.

We regard this transaction as neutral to our ratings, and it doesn't affect our view of Somerset's overall stand-alone creditworthiness. Our ratings on the company incorporate its strong relationships with primary carriers and established relationships with its sponsors that have helped enable Somerset to gain traction and compete with the larger life reinsurance market participants.

The company has closed several new transactions in the last few years, and with the related capital commitments, its balance sheet will grow to a total adjusted capital (TAC) base in excess of $1 billion from $500 million as of year-end 2022. We expect its TAC to grow even further from internal earnings generation.

We think the transaction will also more than double Somerset's liability base, increase its earnings power, and grow its scale. Because this block will account for approximately 53% of its liability base, we regard pricing, execution, and integration risk as meaningful. The block is transformational in terms of size and product compared to previous blocks acquired, but we consider these risks are manageable given the multiple independent appraisals by third-party actuarial consultants, Somerset's internal stress tests, and the deep expertise of the management team.

Nonetheless, we will continue to monitor this closely since each block is subject to policyholder behavior assumptions and other market-related risks. We believe the company's prospective growth and operating performance require a longer track record and maturity.

We expect Somerset to maintain its capital adequacy at the 'A' confidence level per our capital model in the next 24 months, without aggressive asset-liability management or aggressive investment policy. We also assume no extraordinary dividends to the parent that may strain the capital position.

We also expect Somerset to be able to access additional capital to support its strategic vision. With its current capital raise, combined with our forecast assumptions, we've improved our assessment of its financial risk profile since we believe its TAC base will be sustainably above a billion. We'll continue monitoring its overall risk profile and potential reserve volatility, track record of earnings stability, capital and dividend management, integration of blocks, and acquisitive strategy that makes deal volume and activity difficult to project. As a result, we have selected our lower anchor to mitigate our view of its financial risk profile.

The stable outlook indicates our expectation that over the next 12-24 months, Somerset will continue its growth strategy and remain competitive among larger life reinsurance peers. We expect earnings expansion that supports business growth while the company keeps at least 'A' level capital adequacy.

We could lower our ratings in the next 12-24 months if:

 - Operating performance becomes materially worse than expected, and we think it will remain volatile for a sustained period,
 - Competition challenges Somerset's ability to close on new transactions,
 - Somerset's capitalization declines below 'A' and we expect it to remain so for a prolonged period of time, or
We deem risk management practices at the company insufficient.

While unlikely, we could raise our ratings in the next 12-24 months if Somerset can sustainably improve its competitive position by:

 - Consistent demonstration of stable and strong operating performance relative to higher-rated peers,
 - Material earnings diversity through increased mortality exposure,
 - Execution of its business plans and growth strategy, and
 - Maintenance of capital redundancy at least at 'A'.

ESG credit indicators: E-2, S-2, G-2

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