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-NY) (Garden City, NY). Banner Life and William Penn-NY are collectively referred to as Legal & General America Group (LGA) and represent the U.S. insurance 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 actions reflect LGA's continued strong competitive position in the U.S. term life market, where it currently ranks among the top 10 as measured by new recurring premium. The affirmation of the ratings also reflects LGA's solid operating performance as measured on a U.S. GAAP and international accounting basis, which is enhanced by an efficient expense structure and disciplined approach to mortality underwriting. The rating actions also recognize LGA's more than adequate capitalization that has been enhanced by a high quality long-term bond portfolio, which is currently in a large unrealized gain position and has thus far avoided meaningful investment losses. Furthermore, LGA has successfully raised more than $4.6 billion through a variety of securitization transactions to fund Regulation XXX reserves. The rating actions also acknowledge LGA's strategic importance to its ultimate parent, which has provided explicit support when needed to sustain LGA's new business growth.
While the ratings recognize LGA's strong market position and strategic importance to L&G, its business profile is heavily concentrated in the highly competitive and commoditized term life market. To mitigate its business concentration risk and to further broaden its earning sources, LGA has entered the universal life insurance market. Furthermore, with its concentration in mortality risk, LGA's results are subject to volatility from adverse mortality experience. However, A.M. Best notes that LGA's mortality experience has been 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 new business expense strain associated with its term life production and the periodic Regulation XXX reserve financing transactions. LGA historically has relied heavily on capital market securitizations to fund its Regulation XXX reserving needs. However, the current market environment has made it more difficult to obtain capital efficient financing for Regulation XXX reserves. Despite these challenges, LGA has been successful thus far in efficiently funding its new term life business. A.M. Best notes that recent new term life production is being fully funded utilizing the balance sheet of L&G. A.M. Best expects L&G to continue funding LGA's expected new business production at least through the near-term. Should current market conditions persist, A.M. Best believes LGA may be challenged over the long term 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 factors that could result in negative rating actions include a significant and sustained decline in 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 weakened competitive position in its core market niches; and/or a change in LGA's strategic importance to its 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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