OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating of B++ (Good) and issuer credit rating of “bbb+” of Sterling Life Insurance Company (Sterling) (Chicago, IL). The outlook for both ratings is stable. Sterling is owned by Munich Health North America, Inc. (MHNA), the U.S.-based subsidiary of its ultimate parent, Munich Reinsurance Company (Munich Re) (Germany).
The affirmation of the ratings for Sterling reflects its product mix redesign, good level of risk-based capitalization and the support of Munich Re. Following its final exit from the Medicare Advantage Private Fee For Service (PFFS) product in 2012, Sterling shifted its focus to growing its Medicare Supplement business, critical illness care, as well as dental and other insurance products. The Medicare Supplement business membership experienced around 50% growth over the last several years and is expected to increase further in the near term. Although Sterling’s capital and surplus has significantly declined over the last four years (driven by operating losses and dividend payments to MHNA), its level of risk-based capitalization remains adequate for its level of business as its premium base reduced significantly. In addition, A.M. Best expects Munich Re to provide capital support to Sterling if needed.
Somewhat offsetting these positive rating factors are Sterling’s declining premiums, weak financial performance and the challenge to adjust its operations to a lower business volume. Sterling has experienced over a 50% decline in direct premiums written over the last five years, with an additional sizeable decrease expected in 2013. The lower revenue resulted from the gradual phase out of the PFFS product, which was completed by year-end 2012. The PFFS earnings deteriorated substantially over the last two years as the medical loss ratio for that line of business increased by over 1,500 basis points in 2011. Sterling PFFS’ underwriting performance remained negative during 2012; but, significantly improved when compared to 2011. Sterling’s financial results are expected to strengthen in the near term following the exit from PFFS’ line of business. However, A.M. Best is concerned that near-term financial performance may be pressured by high administrative expenses as the company is challenged to adjust the size of its operations.
A.M. Best considers Sterling to be well-positioned for its current rating level. Factors that may lead to negative rating actions include continued operating losses, decline in capitalization or changes in A.M. Best’s view of the company’s strategic importance to the parent.
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.
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