NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' Insurer Financial Strength (IFS) rating of Mutual of America Life Insurance Company (MOA). The Rating Outlook is Stable.
KEY RATING DRIVERS
MOA's rating is based on the company's established strong niche position in the small to midsized not-for-profit pension market, extremely strong balance sheet fundamentals and conservative investment portfolio. Rating concerns include MOA's modest, albeit improving, operating profitability, narrow operating profile, and the impact of ongoing low interest rates given the company's focus on spread-based annuities.
MOA has a long established niche in the small to midsize not-for-profit qualified pension market. The company has demonstrated its ability to grow over the last few years due in part to pension plan takeovers and rollovers, which helped offset declines in defined benefit and other areas the company has deemphasized over time. Net flows, driven to a large extent by the company's 403(b) and 401(k) thrift growth products, were positive through full-year 2014 and for the first nine months of 2015.
MOA maintains extremely strong and stable risk-based statutory capitalization, relatively low operating leverage, and no financial leverage. Fitch views the quality of MOA's capital as exceptional. The company has been able to exhibit steady growth in surplus through retained earnings over the last five years and has not engaged in capital enhancing transactions. The total financing and commitments ratio is zero. MOA's estimated risk-based capital (RBC) ratio was 471% as of Sept. 30, 2015 and the agency expects it to remain well above 400% over the medium term.
Fitch continues to view MOA as having one of the more conservative investment portfolios in the Fitch universe. The company's investments are liquid and primarily concentrated in investment-grade corporates and Agency MBS. The company's investment-grade public bond holdings account for approximately 88% of invested assets as of year-end 2014. The company's percentage of below-investment-grade bonds (BIGS) out of total bonds increased by 1.3% from prior year levels to 5.6% as of year-end 2014 due to increased corporate downgrades. However, the BIGS percentage still remains slightly below that of the life industry average of 5.9%.
Total risky assets, which include below investment-grade bonds, troubled real estate, unaffiliated common stock and Schedule BA assets, in relation to total adjusted capital was well below the industry average at 43% compared with 82% for the industry as a whole. Fitch notes that MOA, unlike the rest of the life insurance industry, does not invest in riskier asset classes such as mortgage loans and alternative investments and has nominal exposure to common equity.
Fitch views MOA's statutory operating profitability as below average for the rating category but notes significant improvement beginning in 2010 due in part to higher asset-based fee income and reduced credited rates. MOA has continued the reduction in credited rates into 2015 in some of its product offerings. Net income for the first nine months of 2015 is $43 million, an increase of 22% over the same period in 2014.
Fitch's rating considers MOA's operating profile as a moderate-sized insurer competing in the group pension market against competitors that have much greater scale and financial resources. MOA's more narrow business focus also exposes it to unanticipated adverse regulatory changes that could have a negative impact on revenue and earnings.
Fitch's rating also considers the impact of ongoing low interest rates given the company's focus on spread-based annuity products. MOA has used its flexibility to reduce crediting rates in recent years to offset the impact of low interest rates. Given this, MOA has an ability to lower crediting rates on about 30% of its general account liabilities going forward to increase earnings. Fitch considers current crediting rates on these products to be modestly above the guaranteed minimum rates but notes the company can also increase separate account fees, which have historically been lower than competitors, as a means to generate additional earnings.
Key rating triggers that could lead to a downgrade include an RBC below 400%, a risky asset ratio above 75%, adverse regulatory developments that would negatively impact demand for the company's pension products, and sustained negative net flows.
Key rating triggers that could result in an upgrade include an enhanced market position and size/scale, sustained capital strength including low operating leverage and high capital quality, and continued low asset risk.
Fitch affirms the following rating with a Stable Outlook:
Mutual of America Life Insurance Company
--IFS at 'AA-'.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 16 Sep 2015)
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