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Rating Agency Downgrades Unwrapped Notes

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Moody’s Investors Service says a special purpose reinsurer that backs level-premium term life policies may suffer from investment losses.

Moody’s, New York, says it has cut the rating on $42.5 million in 30-year Class A-2 fixed rate notes from Orkey Re II P.L.C. to Caa2, from Baa1.

The rating agency also has cut the rating on $30 million in 30-year Class B-1 subordinated floating rate notes from Orkney Re II to C, from Ba3.

A unit of Scottish Re Group Ltd., Hamilton, Bermuda, sponsored Orkney Re II to finance the reserve requirements associated with blocks of business ceded by Scottish Re (U.S.) Inc., another Scottish Re subsidiary.

The reinsurance agreement between Scottish Re (U.S.) and Orkney Re II covers blocks of level-premium term life policies affected by the Regulation Triple X reserve requirements, Moody’s says.

“Moody’s rating analysis views the actuarial assumptions in Regulation [Triple X] as producing economically redundant statutory reserves for level-premium term products,” Moody’s says.

The Orkney Re II downgrade is based on Moody’s view that the mortgage-backed securities in the reinsurer’s portfolio could suffer losses.

At this point, “none of the securities in the Orkney Re II portfolio have experienced a payment default,” Moody’s says.

“The performance of the underlying level premium term business is consistent with Moody’s original expectations, and is not directly affected by movements in the investment portfolio,” the rating agency says.

The Class B-1 notes are not paying interest, and there seems to be a high probability that the Class A-2 notes “will suffer a payment default at some point in the near- to intermediate-term,” Moody’s says.

Although investment market performance could lead to an interruption in note interest payments, the ultimate performance of the notes will be driven both by the performance of the underlying term life business and by the performance of the invested assets, Moody’s says.

Representatives for Scottish Re were not immediately available to comment on Moody’s ratings action.


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