Best’s News & Research Service - November 20, 2007 03:04 PM (EST)
A.M. Best Affirms Beneficial Life’s Ratings, Removes From Under Review and Assigns Negative Outlook
OLDWICK, N.J. //BestWire// - A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit rating (ICR) of “a” for Beneficial Life Insurance Company (Beneficial) (Salt Lake City, UT). The ratings have been removed from under review with negative implications and assigned a negative outlook.
The outlook reflects continued general market uncertainty in valuing mortgage-related securities. Beneficial maintains above-average exposure to structured investment products—primarily mortgage-backed securities (MBS). Specifically, the company has significant holdings in subprime and Alt-A residential MBS whose values were determined to be impaired by Beneficial in the third quarter of 2007. In addition, A.M. Best believes Beneficial needs to further refine its risk management practices for monitoring investment credit risk.
At September 30, 2007, Beneficial recognized approximately $206 million of asset impairments on both a statutory and GAAP basis. These adjustments resulted from a comprehensive review of the company’s MBS portfolio, where the investments were written down to the lower of market value (where available) or discounted cash flows using a detailed mortgage security model value approach. A.M. Best believes Beneficial’s accounting treatment for these securities is conservative. Subsequent to taking these writedowns, Beneficial received a capital contribution of $206 million from its immediate parent, Deseret Management Corporation (DMC), a holding company for the “for-profit” investments of The Church of Jesus Christ of Latter-day Saints. Accordingly, the capital infusion, coupled with favorable operating results in the third quarter 2007, has resulted in restoration of Beneficial’s capital and surplus to a level slightly above mid-year 2007 levels. A.M. Best expects a significant portion of the capital infusion to be used to mitigate liquidity risk through the early retirement of funding agreements.
A.M. Best notes that the company has reduced its MBS exposure since September by roughly $200 million (6% of bonds) and further reductions are expected in 2008. Nonetheless, A.M. Best expects continued uncertainty within the MBS marketplace-namely, pricing volatility and valuation risk as well as elevated default and liquidity risk-which combined could create the potential for additional asset impairments for companies with investments in these securities. Specifically, should additional impairments be required for Beneficial, A.M. Best expects the capital and surplus to be maintained at mid-2007 levels, including, if necessary, for DMC to support Beneficial via additional capital contributions to preserve its capitalization commensurate with its current ratings. Lastly, A.M. Best notes that Beneficial’s above-average exposure to MBS highlights weaknesses within its enterprise risk management (ERM) practices, which are currently being addressed.
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