A.M. Best Revises Outlook to Positive for Ameritas Mutual Holding Company Subsidiaries
April 3, 2014 by Best's News Service
Oldwick – A.M. Best has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a+” of Ameritas Life Insurance Corp. (Ameritas Life) (Lincoln, NE), Ameritas Life Insurance Corp. of New York (Ameritas NY) (New York, NY), Acacia Life Insurance Company (Acacia Life) (headquartered in Bethesda, MD) and The Union Central Life Insurance Company (Union Central) (headquartered in Cincinnati, OH). These insurance entities comprise the life/health operations of Ameritas Mutual Holding Company (Ameritas) (Lincoln, NE). Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the debt rating of “a-” of the existing surplus notes of Union Central. (See below for a detailed listing of the debt.)
The revised outlook primarily reflects the group’s solid balance sheet strength, strong GAAP operating performance, favorable business profile and increasing ordinary life insurance sales in recent periods. The ratings also reflect Ameritas Life’s well-established market position in group dental insurance. In addition, the group’s dental insurance business has performed well over the most recent period with improving morbidity, favorable persistency and increasing sales despite the sluggish economic environment and uncertainties related to implementation of The Patient Protection and Affordable Care Act. A.M. Best also notes Ameritas Life’s improving market position in the ordinary life segment. While life insurance sales had fluctuated in the years following the financial crisis, traditional life insurance sales have been the primary driver of growth in recent years. A.M. Best views traditional whole life insurance as one of the most creditworthy product lines. While
statutory pre-tax operating results have been negatively impacted by the strain from new business sales and the impact of the variable annuity hedging program, consolidated GAAP operating results have improved over the most recent period, despite continuing spread compression on interest-sensitive business lines and an increase in mortality within the ordinary life insurance segment. The increase was primarily driven by improvement in the group dental business segment, increased fee income in the variable annuity line of business, along with expense efficiencies realized during this time.
As a mutual holding company, Ameritas has good financial flexibility with the ability to access the capital markets through debt offerings. The organization’s current financial leverage is modest, with a reasonable level of intangibles facilitating a high-quality capital base. Additionally, A.M. Best notes that Ameritas’ below investment grade bonds currently represent less than 3% of the company’s fixed-income portfolio.
A.M. Best believes that Ameritas Life’s favorable business profile should strengthen further under its unified branding strategy and improved economies of scale. Management has indicated that Union Central and Acacia Life will be merged into Ameritas Life on July 1, 2014, as all business is now being written on Ameritas Life and Ameritas NY paper. Its broad portfolio of individual life, individual annuity, disability income, retirement plans and dental and vision products provides a steady source of diversified earnings. Additionally, with the sale of Acacia Federal Savings Bank (AFSB), A.M. Best believes the group will be more focused on core competencies and less burdened by increasing regulatory requirements as a bank holding company.
Partially offsetting these positive rating factors are the decline in earnings within the life insurance product line due to an increase in mortality, spread compression within its interest-sensitive lines of business and lack of scale within the group retirement plans segment. While earnings increased in the company’s annuity segment, A.M. Best notes that a significant amount of Ameritas’ interest-sensitive reserves remain at or near the guaranteed minimum interest rate, which has caused some spread compression. However, this has been offset by an increase in earnings from its variable annuity product line as a result of higher fees associated with an increase in fund balances. Moreover, Ameritas’ exposure to commercial mortgage loans has increased in recent periods to approximately 15% of invested assets as $300 million of primarily interest-only loans that were excluded from the sale of AFSB were transferred to Ameritas’ general account investment portfolio. However, A.M. Best notes the commercial mortgage loan portfolio is well managed with few delinquencies in recent periods.
Although A.M. Best expects favorable operating results to continue in the near to medium term, Ameritas may be challenged to increase sales due to the sluggish U.S. economy, prolonged low interest rates and the highly competitive landscape within many of the group’s core lines of business. A.M. Best would look for continued positive earnings momentum trends before taking further positive rating actions. Factors that may result in negative rating actions include deterioration in the group’s operating results, material investment losses or a lack of sustained revenue growth within its core lines of business.
The following debt rating has been affirmed:
The Union Central Life Insurance Company–
— “a-” on $50 million 8.20% surplus notes, due 2026
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source.
