AM Best has revised the outlooks to positive from stable and affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “bb+” of ELCO Mutual Life and Annuity (ELCO) (Lake Bluff, IL).

The ratings reflect ELCO’s balance sheet strength, which AM Best categorizes as weak, as well as its strong operating performance, neutral business profile and marginal enterprise risk management. The revised outlooks to positive reflect a continued strengthening in ELCO’s balance sheet, including improving risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), from profit-based growth in absolute capital, improvements in the risk profile of its investment portfolio and reduced reinsurance leverage. ELCO’s balance sheet had been impacted by unfavorable balance sheet factors, including the asset portfolio composition, which historically has had a higher risk profile, and previously, a very high dependence on reinsurance for ELCO’s deferred annuity business. Continued improvement of balance sheet strength could result in positive rating action.

ELCO’s balance sheet strength assessment mainly reflects the company’s weak level of risk-adjusted capitalization, together with significant reinsurance leverage and limited financial flexibility, partly offset by the absence of financial leverage and a mostly investment grade fixed income portfolio. Furthermore, AM Best notes that ELCO’s financial flexibility is somewhat limited as a small mutual company. The company has a long history of producing operating profits that support capital growth. Returns on equity are strong and driven by the profitability of its core Medicaid-compliant annuity products, which are expected to see continued growth. AM Best expects the company’s operating profitability to remain favorable over the near term.

ELCO’s business is concentrated in annuity offerings, although the company sells pre-need life insurance products, which add diversity. Annuity production is centered on the senior market. Elder care attorneys provide deposit-type single premium annuity sales. This is ELCO’s core business, and the company has been a major participant in these markets for over two decades. Independent general agents distribute most deferred annuities. The group’s enterprise risk management assessment is reflective of a governance structure, culture and risk management controls commensurate with a small mutual insurer.

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