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FOR IMMEDIATE RELEASE
OLDWICK, N.J. - JUNE 08, 2011 12:00 AM (EDT)
A.M. Best Co. has revised the outlook to stable from negative and affirmed the issuer credit rating (ICR) of "bbb+" of The American Home Life Insurance Company (American Home Life) (Topeka, KS). A.M. Best also has affirmed the company's financial strength rating (FSR) of B++ (Good). The outlook for the FSR is stable.
The revision to the ICR outlook recognizes American Home Life's increased capital and surplus, modest improvement in risk-adjusted capitalization and an upturn in the performance of the fixed-income portfolio that has experienced declining levels of realized investment losses and currently is in a net unrealized gain position.
The ratings reflect American Home Life's diverse business profile whereby it markets and underwrites term life, whole life and final expense insurance products through an independent personal producing general agent distribution network. The company also offers preneed life insurance distributed through funeral homes and traditional fixed-annuities that have been the primary source of top-line growth over the past several years. The rating actions also reflect American Home Life's adequate risk-adjusted capitalization that has been augmented by the company's positive net operating performance. The favorable operating performance is derived primarily from its core ordinary life insurance segment that has benefitted from a controlled growth strategy, as well as its individual fixed-annuity segment that has been enhanced by active spread management.
While A.M. Best acknowledges that American Home Life's risk-adjusted capitalization is currently adequate for its business and investment risks, excess capital levels remain modest. A.M. Best believes the company could be challenged to sustain and improve its risk-adjusted capitalization going forward as it balances anticipated new business growth and profitability. As a mutual life insurance company, American Home Life is limited in its access to capital and relies heavily on retained earnings to increase capital and surplus and fund its growth initiatives. As a result, the company continues to emphasize efficient marketing and expense controls and has implemented a controlled growth strategy to maintain its profitable operating performance.
A.M. Best also notes that American Home Life's exposure to interest-sensitive liabilities has been rising due to increased annuity production. While its annuity segment has provided some diversification of earnings, these products generally require more capital to support contract holder obligations. The company plans to voluntarily reduce its future levels of new annuity production.
Finally, the company's balance sheet contains a high exposure to the real estate markets through its investments in mortgage-backed structured securities and direct commercial mortgage loans. A.M. Best believes that the company may be vulnerable to some investment losses should the fragile U.S. economic recovery stall or deteriorate. A.M. Best notes that the direct commercial mortgage loan portfolio is well diversified geographically and by property type and thus far has performed reasonably well. The majority of the commercial mortgage-backed structured securities are agency backed with the remainder entirely in the highest-rated tranches, primarily in earlier vintages, well diversified by asset class and geographic location and have a high degree of subordination. The company's exposure to the residential Alt-A market is minimal and it has no direct exposure to the residential subprime market.
The principal methodology used in determining these ratings is Best's Credit Rating Methodology - Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: "Understanding BCAR for Life and Health Insurers" and "Risk Management and the Rating Process of Insurance Companies." Methodologies can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.