AM Best Co has upgraded the issuer credit ratings (ICR) to ‘a+’ from ‘a’ and affirmed the financial strength rating (FSR) of A (Excellent) of National Life Insurance Company (NLIC) (Montpelier, VT) and its wholly owned subsidiary, Life Insurance Company of the Southwest (Dallas, TX) (together known as National Life). These companies are the insurance subsidiaries of NLV Financial Corporation (NLVF) (Montpelier, VT), which is the intermediate holding company in the organization’s mutual holding company structure. Concurrently, A.M. Best has upgraded the ICR and senior debt ratings to ‘bbb+ from ‘bbb’ of NLVF. AM Best also has upgraded the debt rating to ‘a-’ from ‘bbb+’ on NLIC’s $200 million 10.50% surplus notes, due 2039. The outlook for the FSR is stable, while the outlook for the ICRs and debt has been revised to stable from positive. (See below for a detailed listing of NLVF’s debt ratings.)
The rating actions reflect National Life’s favorable financial performance over the last several years despite a difficult economic environment. National Life recorded full-year 2010 GAAP and statutory earnings of $122.4 million and $116.8 million, respectively. National Life continues to exhibit a solid performance in 2011, with GAAP and statutory earnings run-rates consistent with 2010. A.M. Best notes that National Life experienced a below average level of investment losses during the 2008-2009 financial crisis relative to its peers, and investment impairments have been minimal for the first half of 2011. In addition, National Life’s risk-adjusted capital was strengthened by its 2009 surplus note issuance, and the group has maintained its strong capitalization through organic earnings in 2010 and 2011.
National Life’s ratings recognize its consistent operating performance, continued conservative risk profile and diverse distribution channels. The company also benefits from its competitive positions in the indexed universal life (UL) insurance and 403(b) indexed annuity markets, as well as its good expense management.
On an annual basis, National Life consistently generates more than $100 million of statutory net operating income (net of policyholder dividends and tax and before realized gains and losses). National Life’s investment portfolio’which is currently in a net unrealized gain position of approximately $1.2 billion’is conservatively managed, with limited exposure to structured securities other than approximately $500 million of commercial mortgage-backed securities. All residential mortgaged-backed securities held by National Life are agency-backed and rated triple-A without exposure to Alt-A or subprime collateral. In addition, National Life continues to exercise discipline in product design, while maintaining competitive positions within its niche markets (indexed life insurance and indexed annuities). National Life ranked fourth in industry sales for indexed UL and also was a top 10 producer of indexed annuities in 2010. Mutual fund sales by National Life’s investment management affiliate, Sentinel Investments, also have been quite strong, as assets under management have doubled since 2007.
Offsetting these positive rating factors is National Life’s exposure to indexed products, which subjects its earnings to modest equity market volatility. Additionally, the 2009 surplus note issuance increased National Life’s GAAP financial leverage (currently 22%, excluding other comprehensive income); however, it remains within AM Best’s guidelines for the company’s current ratings and is expected to decline over time. At the same time, National Life’s GAAP interest coverage (currently five times) has been pressured by the additional interest expense on the surplus notes and is only minimally adequate for the current ratings. However, A.M. Best notes that the group’s coverage ratios also are supported by approximately $95 million of cash and invested assets at NLVF.
AM Best believes that National Life is well positioned at the current rating level for the foreseeable future. However, downward rating pressure may occur should National Life experience weakening earnings, a material decline in risk-adjusted capitalization or significant deterioration in investment performance.
The following debt ratings have been upgraded:
NLV Financial Corporation ‘
-- to ‘bbb+’ from ‘bbb’ on $75 million 6.50% senior unsecured notes, due 2035
-- to ‘bbb+’ from ‘bbb’ on $200 million 7.50% senior unsecured notes, due 2033
National Life has been the state's largest Vermont-based company for most of the last quarter century, at least. See STORY from Vermont Business Magazine's Vermont 100+ ranking from last January. Vermont Business Magazine will issue its 25th annual Vermont 100+ ranking in its January 2012 edition. At that time, it is expected that Green Mountain Coffee Roasters will ascend to the top 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 AM Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: ‘Risk Management and the Rating Process for Insurance Companies’; ‘Understanding BCAR for Life/Health Insurers’; ‘A.M. Best’s Liquidity Model For U.S. Life Insurers’; ‘Rating Members of Insurance Groups’; ‘AM Best’s Perspective on Operating Leverage’; and ‘A.M. Best’s Ratings & the Treatment of Debt.’ Methodologies can be found at www.ambest.com/ratings/methodology.
Founded in 1899, AM Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.