OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has 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 outlook of these Credit Ratings (ratings) remains positive.
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 (ERM).
The positive outlooks reflect a continued strengthening in ELCO’s balance sheet strength, including improving risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), from profit-based growth in absolute capital and improvements in the risk profile of its investment portfolio. ELCO’s balance sheet had previously been impacted by unfavorable factors, including the asset portfolio composition, which historically has had a higher risk profile, and very high dependence on reinsurance in its core annuity business. Continued strengthening of the balance sheet could result in positive rating action.
ELCO’s balance sheet strength assessment mainly reflects its level of risk-adjusted capitalization, which improved from weak to adequate, together with significant reinsurance leverage and limited financial flexibility, partly offset by the absence of financial leverage and a fixed income portfolio that is nearly all investment grade. Furthermore, AM Best notes that as a small mutual company, ELCO’s financial flexibility is somewhat limited. 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 believes that the company’s operating profitability is likely to remain favorable over the near term.
ELCO’s business is concentrated in annuity offerings, although the company sells pre-need life insurance products that add some diversity. Annuity production is centered on the senior market. Elder care attorneys provide deposit type single premium annuity sales, while most deferred annuities are distributed by independent general agents. The group’s ERM assessment is reflective of a governance structure, culture and risk management controls that are commensurate with a small mutual insurer.
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