OLDWICK, N.J.--()--A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of “a+” 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 affirmed the ICR and senior debt ratings of “bbb+” of NLVF. A.M. Best also has affirmed the debt rating of “a-” on NLIC’s $200 million 10.50% surplus notes due 2039. The outlook for all ratings is stable. (See below for a detailed listing of NLVF’s debt ratings.)
National Life’s ratings recognize its consistent operating performance, continued conservative risk profile and diverse distribution channels. The company also benefits from its competitive position in the indexed universal life (UL) insurance and 403(b) indexed annuity markets, as well as its good expense management. The rating affirmations also reflect National Life’s strong risk-adjusted capitalization, which was strengthened by its 2009 surplus note issuance and profitable operations. National Life continues to exhibit solid financial performance with full-year 2011 GAAP net income and statutory after-tax earnings of $124.2 million and $115.3 million, respectively. National Life continues to exhibit solid performance in 2012, with year-to-date GAAP earnings at a run rate ahead of 2011 and statutory net income over 50% ahead of last year. National Life’s investment portfolio—which is currently in a net unrealized gain position of approximately $1.5 billion—is conservatively managed, with limited exposure to structured securities, including 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 mainstream products (indexed universal life insurance and indexed annuities). National Life ranked fifth in industry sales for indexed UL and also ranked 12th in industry sales of indexed annuities as of the third quarter of 2012. Mutual fund sales by National Life’s investment management affiliate, Sentinel Investments, also have been quite strong, with an increase of 23.6%, as of September 30, 2012, and assets under management of approximately $9.2 billion in 2011.
Offsetting these positive rating factors is National Life’s growing book of indexed products business, which subjects its earnings to modest equity market volatility. Additionally, the 2009 surplus note issuance increased National Life’s GAAP financial leverage (21.3% at December 31, 2011, excluding other comprehensive income); however, it remains within A.M. 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 at 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 debt service capabilities are supported by approximately $80 million of cash and invested assets at NLVF as of December 31, 2011.
A.M. Best believes that National Life is well positioned at its current rating level for the near term. Key rating drivers that may lead to positive actions on National Life's ratings include a consistent ability to outperform peers, a reduction in the concentration in interest sensitive products, improved coverage ratios and earnings metrics. Key drivers that may lead to negative ratings actions include a sustained material deterioration in the organization’s operating performance, material impairments or realized losses in its investment portfolio, diminished key capital, leverage, coverage and liquidity ratios.
The following debt ratings have been affirmed:
NLV Financial Corporation —
-- “bbb+” on $75 million 6.50% senior unsecured notes, due 2035
-- “bbb+” on $200 million 7.50% senior unsecured notes, due 2033
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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