NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) assigns an insurance financial strength rating (IFSR) of A- to Venerable Holdings, Inc.’s (VHI) primary subsidiary, Venerable Insurance and Annuity Company (VIAC), and a debt rating of BBB to four series of VIAC’s surplus notes. At the same time, KBRA assigns an issuer rating of BBB- to VHI and a debt rating of BBB- to VHI’s $150 million subordinated term loan with an optional PIK (payment-in-kind) feature. VIAC and VHI together are referred to as Venerable.
The ratings reflect a highly experienced management team and, at the operating company, the continuity inherent in Voya Financial’s (Voya) closed block variable annuity (CBVA) leadership team moving to Venerable and continuing to perform the same functions as they did at Voya. Also supporting the ratings are the company’s risk management and hedging programs, which have produced a strong track record over its two-year history. Specifically, during the market stresses of 4Q2018 and 1Q2020, VIAC’s programs led to increases in excess capital. Venerable’s business model rests on a foundation of robust capitalization. Conservative capital management is focused on fulfilling obligations to policyholders, and financial performance is measured by growth in excess capital. Despite significant market volatility, excess capital increased 84% from $612 million at Venerable’s inception on June 1, 2018 to over $1.1 billion at March 31, 2020. At inception, VIAC was capitalized at CTE98+ (it is currently above that level). The level will fluctuate as excess capital is carried to support future growth; KBRA expects that it will not fall below CTE95, plus a buffer. VIAC’s company action level risk-based capital ratio as of March 31, 2020 was 736%, which is well above regulatory and creditor requirements. Liquidity is another strength. Venerable maintains a conservative liquidity target that is designed to support liquidity needs even in extremely stressed environments. This target is met both through drawable sources and by maintaining a stock of liquid assets. The liquid asset portfolio as of March 31, 2020 was over $2.8 billion.
Balancing these strengths is the run-off block’s concentration in variable annuities (VA), many of which have living benefit guarantees (LBG). There is tail risk in LBGs related to factors such as severe market corrections, changes in policyholder behavior and hedge breakage. Although the block is well-seasoned, it remains virtually impossible to hedge policyholder behavior. Somewhat mitigating the VA concentration risk is the fact that VIAC’s payout annuity block provides some stability to the combined book. KBRA notes that the payout annuity block’s asset allocation tends to be less liquid and higher yielding. The company also faces potential execution risk related to its growth through acquisition strategy. While the team has to-date successfully executed on the acquisition and subsequent management of Voya’s CBVA, the company is just two years into its life cycle and has yet to execute on additional acquisitions. KBRA views the company as uniquely positioned to serve as a leading industry solution for the consolidation of VA blocks, but acquisition activity inherently gives rise to execution risk. KBRA notes that management maintains conservative capital criteria for M&A/reinsurance transactions. Additionally, the company is exposed to counterparty credit risk through both its derivatives counterparties and its reinsurance partners, although this is well-mitigated with quality counterparties and/or collateral.
The Stable Outlook reflects KBRA’s expectation that Venerable will continue to successfully execute on its risk management and hedging programs, in turn allowing it to maintain strong capitalization and liquidity. The Outlook also reflects the expectation that any future acquisitions would be structured and financed in a way that would not, for a sustained period of time, negatively impact the company’s financial profile or its conservative approach to financial management.
KBRA continues to monitor the direct and indirect impacts of the coronavirus (COVID-19) on the insurance sector. Please click here for more detail on KBRA’s research on the continuing impact of COVID-19.
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Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
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Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
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