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Best’s News & Research Service - December 15, 2021 04:39 PM (EST)

AM Best Affirms Credit Ratings of Western & Southern Financial Group, Inc. and Its Subsidiaries

  • December 15, 2021 04:39 PM (EST)
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Oldwick //BestWire// - AM Best has affirmed the Financial Strength Rating (FSR) of A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “aa” (Superior) of the life insurance subsidiaries of Western & Southern Financial Group, Inc. (WSFG). WSFG’s subsidiaries are The Western and Southern Life Insurance Company (WSLIC), Western-Southern Life Assurance Company, Columbus Life Insurance Company, Integrity Life Insurance Company, National Integrity Life Insurance Company (Greenwich, NY) and its affiliate, The Lafayette Life Insurance Company (Lafayette Life) (collectively referred to as W&SF Group). All companies are domiciled in (Cincinnati, OH) unless otherwise specified.

Concurrently, AM Best has affirmed the FSR of A (Excellent) and the Long-Term ICR of “a+” (Excellent) of Gerber Life Insurance Company (Gerber Life) (White Plains, NY). In addition, AM Best has affirmed the Long-Term ICR of “a” (Excellent) and the Long-Term Issue Credit Ratings (Long-Term IR) on the senior unsecured notes of WSFG. The outlook of these Credit Ratings (ratings) is stable. (See below for a detailed list of the Long-Term IRs)

The ratings of W&SF Group reflect its balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, favorable business profile and very strong enterprise risk management (ERM).

W&SF Group’s balance sheet assessment reflects a very favorable risk-adjusted capitalization level, as measured by Best’s Capital Adequacy Ratio (BCAR), which is enhanced by a high quality capital profile with no utilization of captives or permitted accounting practices. The overall statutory capital to asset ratio has been at a higher level, compared with some of the group’s peers, and has provided further stability through difficult market cycles. W&SF Group accumulates additional capital in relation to peers in order to secure future growth options, as well as provide assurance that clients’ needs are met accordingly. The group’s capital position has been remarkably resilient, even during stressed scenarios, as there is a sufficient amount of sources of financial flexibility, including available capital at the holding company for deployment to the life insurance companies if needed. While the overall investment portfolio is of good credit quality, providing independent valuation assurance, exposure to below investment grade bonds, equities and asset-backed securities have been continuously growing and is still higher than industry benchmarks. An increasing percentage of NAIC-2 securities is noticeable; however, this is due primarily to increased allocations to structured product investments, relative to the industry benchmark. The group’s liquidity is strong, as measured by AM Best, with modest financial and operating leverage and strong interest coverage. Finally, the ratings recognize capital maintenance guarantees from WSLIC, excluding Gerber Life, to all insurance subsidiaries and its affiliate, Lafayette Life.

W&SF Group’s statutory operating performance has been volatile, reflecting fluctuating earnings over time within the group’s ordinary life insurance line of business, which has experienced net losses over the past several years. Additionally, the group has posted a return on equity that continues to be lower than industry averages, due in part to strong capitalization levels and to some extent, retention of redundant reserves. Returns also have been affected by premium growth, which has been well-above industry averages. Overall GAAP earnings showed solid growth prior to 2020, and following 2020, have rebounded adequately. The group continues to have higher interest rate exposure given its reserve profile, with a significant portion of earnings still driven by annuities, although investment spreads have been declining slowly. Despite reputable earnings for W&SF Group’s rating levels, the group’s overall operating performance trend metrics have not kept up with some of its higher rated peers during the last couple of years.

Given the concentration in annuities, there is the potential for disintermediation risk in a rapidly rising interest rate environment, although AM Best notes that growth has been strong within immediate annuities, which mitigates this concern. Disintermediation risk also is mitigated partially by adequate surrender charge protection. Post-acquisition, Gerber Life now accounts for approximately 20% of the group’s earnings.

W&SF Group’s business profile benefits from a highly diversified multichannel distribution, with an emphasis on middle market individuals, financial institutions and asset management. The expanded distribution relationship with Fidelity Investments has enhanced growth in annuities and added some additional market share. The acquisition of Gerber Life has added direct-to-consumer distribution capabilities and has created a better balance between life insurance and annuity sales. W&SF Group also sells universal life insurance products with no secondary guarantees through banks, utilizing another distribution vehicle. Finally, while W&SF Group has expanded its product footprint and improved some market positions, its overall market position in life insurance and annuities is still moderate, and it faces ongoing competition from other companies in the highly competitive U.S. life and annuity market.

W&SF Group incorporates a comprehensive risk management strategy and discipline, which has significantly developed over the years in line with the risks inherent in its balance sheet, scope of operations and business profile. ERM has become robust and embedded into the fabric of the organization, including all major strategic, tactical and operational activities, along with decision making, which has led the group through periods of difficulty, including the financial crisis of 2007-2008 and the unexpected COVID-19 global pandemic.

The ratings of Gerber Life reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

The following Long-Term IRs have been affirmed with stable outlooks:

Western & Southern Financial Group, Inc. —

— “a” (Excellent) on $500 million 5.75% senior unsecured notes due 2033

The Western and Southern Life Insurance Company—

— “a+” (Excellent) on $500 million 3.75% surplus notes due 2061

— “a+” (Excellent) on $500 million 5.15% surplus notes due 2049

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.

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