OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of B+ (Good) and issuer credit rating of “bbb-” of Illinois Mutual Life Insurance Company (Illinois Mutual) (Peoria, IL).
The revised outlook recognizes an expected decline in Illinois Mutual’s realized investment losses in 2011, when compared to the elevated levels of realized investment losses incurred through the period 2008 through 2010. Furthermore, A.M. Best anticipates an improvement in Illinois Mutual’s risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) model. Primarily, this expected improvement will result from lower asset risk charges, mainly derived from the benefits of the de-risking strategies implemented on the investment portfolio in conjunction with Illinois Mutual’s outside asset manager. These implementations have improved the quality and diversification of Illinois Mutual’s fixed income portfolio, reduced exposure to its more risky asset classes and enhanced the company’s asset liability management processes.
The affirmation of Illinois Mutual’s ratings recognize its diverse business profile focused on marketing its individual accident and health and traditional forms of ordinary life products mainly to the middle income market through multiple independent agent distribution channels. The company has achieved sales growth in both its individual accident and health and ordinary life segments in recent years. In 2010, Illinois Mutual voluntarily ceased writing fixed annuities primarily to preserve capital. However, the company plans to continue to manage its existing annuity businesses. The affirmations also reflect Illinois Mutual’s adequate risk-adjusted capitalization for its current levels of business and investment risk as well as its overall positive net operating performance. The company’s earnings have been primarily derived from its core disability income segment, which has contributed positive net premium growth and favorable morbidity experience. The fixed annuity segment also has generated meaningful earnings enhanced by favorable persistency and active spread management. A.M. Best notes that Illinois Mutual’s earnings have been further enhanced by management’s focus on operational efficiencies and the implementation of cost control initiatives.
Illinois Mutual has experienced a significant decline in its surplus principally due to substantial realized investment losses incurred in both its fixed-income and other invested asset (Schedule BA) portfolios that have more than offset net operating gains. The majority of these investment losses have been due to other-than-temporary impairments taken on its collateralized debt obligation holdings. A.M. Best acknowledges that the majority of the more recent investment losses have been triggered principally by its investment portfolio de-risking strategies; however, the extent of these previous investment losses incurred and the corresponding decline in surplus exceeded A.M. Best’s expectations and limited the company’s financial flexibility. A.M. Best believes the company may be challenged to reverse this declining surplus trend in the near term.
As a mutual life insurance company, Illinois Mutual is limited in its access to capital and relies heavily on retained earnings to increase surplus and fund its growth initiatives. A.M. Best also believes the company may be challenged to sustain and improve its earnings as the combination of expense strains associated with anticipated new business growth and the impact of the continued low interest rate environment on both its interest-sensitive liabilities and new investment opportunities may dampen earnings; thus, slowing total surplus growth. Additionally, while asset impairments have declined and the company’s fixed income portfolio is currently in a large unrealized gain position, there is still some potential for further asset impairments from its remaining collateralized debt obligations and several other fixed-income asset classes that remain in an unrealized loss position.
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.
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