OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and issuer credit ratings of “aa-” of Banner Life Insurance Company (Banner Life) (Frederick, MD) and William Penn Life Insurance Company of New York (William Penn) (Garden City, NY). Banner Life and William Penn are collectively referred to as the Legal & General America Group (LGA) and represent the U.S. operations of the ultimate parent, Legal & General Group Plc (L&G), a worldwide insurance organization headquartered in the United Kingdom. The outlook for all ratings is stable.
The rating affirmations reflect LGA’s strong competitive position in the U.S. term life market, where it currently ranks fourth as measured by new business annualized premiums. The ratings also reflect LGA’s positive operating performance as measured on both a U.S. GAAP and International Financial Reporting Standard (IFRS) basis, which has been enhanced by LGA’s efficient expense structure, variable cost distribution network and disciplined approach to mortality underwriting.
The rating actions also acknowledge LGA’s adequate stand-alone capitalization that has been augmented by a high quality long-term bond portfolio, which has avoided material investment losses since the financial crisis and is currently in a large net unrealized gain position. Furthermore, LGA has successfully raised in excess of $5.5 billion through a variety of securitization transactions to fund statutory Regulation XXX reserve requirements.
The rating actions also recognize LGA’s strategic importance to L&G, which has provided explicit support when needed to sustain LGA’s new business growth. A.M. Best also notes that L&G derives significant diversification benefits from LGA’s mortality business, which acts as a natural hedge to L&G’s asset accumulation business.
While the ratings acknowledge LGA’s strong market position and strategic importance to L&G, its business profile remains heavily skewed to the highly competitive and commoditized term life market. To lessen its business concentration risk and further diversify its earning sources, LGA has entered into the universal life insurance market. LGA’s concentration in mortality risk exposes the group to volatility from adverse mortality experience. A.M. Best notes that LGA’s actual mortality experience has been generally in line with expectations, and its disciplined underwriting processes serve to partially mitigate the risk of adverse experience.
A.M. Best also expects LGA to continue to experience volatility in its statutory accounting results due to high levels of statutory expense strain anticipated from new business production and the effects of periodic Regulation XXX reserve financing transactions. A.M. Best notes that LGA has historically relied on capital market securitizations to fund Regulation XXX reserving needs. However, market conditions made it more difficult to obtain capital efficient financing for its Regulation XXX reserves. Despite these challenges, LGA continues to be successful in efficiently funding its new term life business. Starting in 2010, LGA’s new term life production has been fully funded utilizing the balance sheet of its parent. A.M. Best expects L&G to continue to fund LGA’s expected new business production at least through the near term. However, should the parent’s strategy to self-fund Regulation XXX reserve requirements change, A.M. Best believes LGA may be challenged to find suitable, cost-efficient financing and re-financing alternatives for funding its Regulation XXX reserves.
A.M. Best believes LGA is well positioned at its current rating level. Key rating factors that could result in negative rating actions include a significant and sustained decline in its consolidated stand-alone risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) model, operating performance that does not meet A.M. Best’s expectations over a sustained period, a deterioration in A.M. Best’s view of LGA’s strategic importance to L&G or a downgrading of L&G’s ratings by A.M. Best.
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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