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TMCNet:  A.M. Best Revises Outlook to Negative of Fidelity Security Life Insurance Company and Its Subsidiary

[February 14, 2013]

A.M. Best Revises Outlook to Negative of Fidelity Security Life Insurance Company and Its Subsidiary

OLDWICK, N.J. --(Business Wire)--

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit ratings of "a-" of Fidelity Security Life Insurance Company (FSL) (Kansas City, MO) and its wholly owned subsidiary, Fidelity Security Life Insurance Company of New York (FSLNY) (New York, NY).

The negative outlook primarily reflects the significant policy reserve strengthening of approximately $8 million, which occurred within FSL's annuity product line as a result of recent cash flow testing results. A.M. Best notes that the company has previously reported two more modest actuarial reserve increases since 2008, and believes that additional smaller reserve charges may occur in the future. FSL's 2012 operating results were impacted by surplus strain resulting from a sizable increase in sales during the first half of the year of its MultiVantage5 annuity product, which had attractive crediting rates. The product has since been re-priced and de-emphasized. Additionally, a one-time legal-related charge unfavorably impacted FSL's operations. While FSL has historically maintained a relatively conservative investment philosophy, A.M. Best is concerned regarding its growing exposure to higher-risk assets, specifically below investment grade corporates and collateralized loan obligations, which provide additional yield without a significant increase in duration. A.M. Best will closely monitor the impact of this strategy s the industry navigates through the low interest rate environment.

The rating affirmations of FSL and FSLNY reflect continued strong capitalization, positive operating results (despite the aforementioned charges taken in 2012) and diverse portfolio of niche products. The group maintains strong relationships with insurance carriers, well-established positions in supplemental health markets and good flexibility to adapt to evolving health care reform. FSL's business strategy is centered around five distinct strategic business units (SBU) utilizing various distribution partnerships to be responsive to consumers' needs though innovative and value-added product designs. Historically, FSL has reported good operating results in all five SBUs, contributing to its growing equity position and increasing risk-adjusted capitalization. In addition, management continues to focus on managing operating expenses, allowing for strategic investments in areas such as technology.

FSLNY's current operations acknowledge its run-off life business from its previous owner, which is modestly profitable; however, FSLNY has recently received approval to start marketing its vision, prescription drug and stop-loss products in the state of New York through this entity. A.M. Best notes that the policy obligations and capitalization of FSLNY are explicitly supported by FSL.

The outlook for the ratings of FSL could return to stable if a sustained improvement in operating profitability is reported, including the absence of any material policy reserve adjustments and it continues to maintain a favorable level of capitalization. Key factors that could cause negative rating actions include additional reserve strengthening and/or deteriorating operating or investment results, leading to a material decline in capitalization.

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.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.


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