OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has upgraded the financial strength rating (FSR) to A- (Excellent) from B++ (Good) and the issuer credit ratings (ICR) to “a-” from “bbb+” for the life/health insurance subsidiaries of Fortegra Financial Corporation (Fortegra) (headquartered in Jacksonville, FL) [NYSE: FRF]. Fortegra’s life/health insurance subsidiaries are Life of the South Insurance Company (Nashville, GA), Bankers Life of Louisiana (Ruston, LA) and Southern Financial Life Insurance Company (Scottsville, KY) and are collectively referred to as the Life of the South Group. Concurrently, A.M. Best has upgraded the FSR to A- (Excellent) from B++ (Good) and the ICRs to “a-” from “bbb+” of Fortegra’s property/casualty insurance subsidiaries, Lyndon Southern Insurance Company (Lyndon) (Wilmington, DE) and Insurance Company of the South (Insurance South) (Athens, GA). Finally, A.M. Best has upgraded the ICR to “bbb-” from “bb+” of Fortegra. The outlook for all ratings is stable.
These rating upgrades recognize the recent improvement in the balance sheet of Fortegra. A.M. Best notes that historically Fortegra had maintained relatively high levels of intangible assets and financial leverage, primarily due to its acquisition history. In 2013, Fortegra sold two non-core businesses, considerably reducing its intangible assets and financial leverage, as the net proceeds from the sale were used to pay down the outstanding balance on its credit facility. Fortegra’s favorable operating results, derived from its insurance subsidiaries as well as its increasing levels of fee income from its non-insurance operations, are also viewed positively. While recognizing the improvement in Fortegra’s balance sheet, A.M. Best notes that intangible assets still remain in excess of shareholders’ equity.
Fortegra is an insurance holding company that, through its subsidiaries, offers a wide array of revenue enhancing products, including payment protection products, motor club memberships, service contracts, device and warranty service and administrative services to its business partners. These partners include insurance companies, retailers, dealers, insurance brokers, agents and financial service companies, primarily in the United States.
The rating upgrades of the Life of the South Group reflect in part the improved financial position of Fortegra. The rating actions acknowledge the group’s sufficient consolidated risk-adjusted capitalization that has been enhanced by conservative operating company balance sheets, consisting primarily of investment grade long-term bonds. The rating actions also recognize the group’s positive net operating performance, derived primarily from its core credit life and credit accident and health businesses. Additionally, the rating actions recognize its positive trends in total premium growth enhanced by increased production from its existing clients, new clients distributing its credit insurance products, as well as geographic expansion.
While A.M. Best notes that Fortegra has benefited from increased fee income from its service contracts and debt cancellation products through non-insurance affiliates, A.M. Best remains concerned with the Life of the South Group’s limited business profile, although the group continues to expand its product offerings and distribution capabilities. A.M. Best believes the group may be challenged to sustain and improve its net operating performance given the challenges of the persistent low interest rate environment and the expense strains expected from anticipated new business growth.
The rating upgrades for Fortegra’s property/casualty subsidiaries recognize the companies’ sound risk-adjusted capitalization, niche distribution and the historical operating profitability of their core credit-related books of business. Somewhat offsetting these favorable rating factors are the considerable growth in direct writings and heavy reliance on third-party reinsurance, as evidenced by the property/casualty companies’ elevated ceded and gross underwriting leverage measures. However, the associated credit risk related to the companies’ reliance on third-party reinsurance recoverables is mitigated by the credit quality of its rated reinsurers, and collateralization of recoverables due from non-rated entities. Additionally, macroeconomic conditions may put further strain on property/casualty profitability as such products are tied to the availability of credit and the willingness of the U.S. consumer to borrow, despite Lyndon and Insurance South’s stable performance over the recent economic recession.
Additional positive rating actions for Fortegra and its insurance companies are unlikely in the near future. Rating factors that could result in negative rating actions include a significant and sustained decline in the organization’s risk-adjusted capitalization due to large stockholders’ dividends and/or deterioration in the quality of the consolidated balance sheet, including, but not limited to, an increase in financial leverage or an increase in the ratio of intangible assets to stockholders’ equity.
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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