OLDWICK, N.J.--()--A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of Mutual of Omaha Insurance Company (Mutual) and its subsidiaries, United of Omaha Life Insurance Company (United of Omaha), Companion Life Insurance Company (Companion Life) (Lynbrook, NY), and United World Life Insurance Company (United World Life). Concurrently, A.M. Best has affirmed the debt ratings of “a” on the existing $300 million 6.8% surplus note due 2036 and $300 million 6.95% surplus notes due 2040 of Mutual. The outlook for all ratings remains negative. All companies (collectively referred to as Mutual of Omaha) are located in Omaha, NE, unless otherwise specified.
The rating affirmations reflect Mutual of Omaha’s strong absolute and risk-adjusted capitalization, good revenue and earnings growth within most of its core lines, generally favorable investment performance and moderate use of financial and operating leverage. The company continues to benefit from its well diversified product portfolio, multi-platform distribution system and strong brand recognition. Somewhat offsetting these positives are the company’s growing book of Medicare Supplement business, overall exposure to commercial real estate both in the general account and through affiliated holdings, and its in-force block of interest sensitive liabilities.
Absolute levels of statutory capital have been relatively flat year-over-year, although Mutual of Omaha currently maintains a good level of risk-adjusted capital and liquidity. A.M. Best, however, had previously noted that the Medicare Supplement insurance product line has grown significantly in recent periods and currently represents roughly 35% of statutory insurance revenues. This exposes the group to regulatory and market risks, which include the ability to get necessary future rate increases in certain states. A.M. Best also notes the rising, albeit still manageable, level of commercial real estate exposure throughout the organization—including the company’s East Campus Realty project—and the high level of commercial loans with Mutual of Omaha Bank. To date, Mutual of Omaha has been able to absorb losses in these portfolios without a material reduction in risk-adjusted capital; however, A.M. Best will continue to monitor the company’s ability to manage its overall commercial real estate exposure over the near to intermediate term. Finally, A. M. Best will continue to monitor the performance of the Mutual of Omaha Bank and the company’s East Campus Realty, LLC for potential stresses on Mutual of Omaha’s operating results and capital levels.
On a GAAP basis, Mutual of Omaha’s operating results have been favorable in a majority of the company’s core insurance lines of business with positive earnings at Mutual of Omaha Bank beginning to be more of a contributor as well. A.M. Best anticipates the bank will become an increasing contributor to earnings going forward, subject to potential increased capital requirements required by federal regulation. GAAP equity also has improved due to reported earnings and the favorable impact of low rates on the company’s unrealized capital gain position. Statutory net operating gains and reduced levels of realized losses and impairments also have helped grow absolute levels of statutory capital and surplus. Low interest rates, however, have placed a drag on earnings, and the company has continued to implement price and benefit changes to its products to maintain competitiveness while reducing overall risk.
Overall, A.M. Best believes Mutual of Omaha’s solid liquidity level throughout the group adequately supports its current liabilities under most stress scenarios.
Mutual’s financial and operating leverage, in addition to interest coverage ratio, remain well within A.M. Best’s expectations for its current ratings. A.M. Best notes that the persistent low rate environment continues to negatively impact pretax operating earnings, but this headwind is somewhat mitigated by the current level of excess cash maintained on the consolidated balance sheet of Mutual (approximately $385 million at September 30, 2012).
A.M. Best believes Mutual of Omaha is well positioned at its current rating level. A revision of the outlook back to stable could be realized from a continued improvement in the group’s overall statutory operating performance, coupled with a demonstrated directional shift in its mix of new business toward products viewed by A.M. Best to be more creditworthy. Negative rating actions could result from a material decline in risk-adjusted capital within the group, a material decline in statutory and GAAP earnings from deteriorating loss ratios primarily in the Medical Supplement line, and increased investment losses from its concentration in real estate-related assets.
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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