OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has downgraded the financial strength rating to B++ (Good) from A- (Excellent) and the issuer credit ratings to “bbb+” from “a-” of Columbian Mutual Life Insurance Company (CML) (Binghamton, NY) and its Illinois-domiciled subsidiary, Columbian Life Insurance Company (CLIC). CML and CLIC are the members of the Columbian Financial Group (CFG). The outlook for both ratings has been revised to stable from negative.
The rating downgrades reflect CFG’s declining level of capital and fluctuating operating performance that is inconsistent with “a-” rated peers. The decline in capital is primarily the result of a substantial increase in CFG’s pension liability due to the low interest rate environment and changes in mortality assumptions. Additionally, the company’s earnings have been dampened by the costs associated with acquiring new business, the impact of interest rates on product profitability and investment yields, as well as certain one-time charges over the past several years.
A.M. Best notes that the group has taken a number of measures to mitigate the impact of these events including freezing the pension plan, significant expense reductions and modestly increasing its exposure to NAIC Class 2 bonds to enhance investment yields. More recently, CFG has managed surplus strain from new business production through reinsurance and a strategic decision to moderate sales. However, A.M. Best believes that CFG’s capital position remains susceptible to an increasing pension liability should interest rates continue to decline. Additionally, A.M. Best believes the group’s financial flexibility is somewhat limited, and CFG will be challenged to generate the operating earnings necessary to support new business growth and materially improve its current risk-adjusted capital position, which remains below many similarly rated insurers.
While CFG’s capital position has declined by over 30% from year-end 2013 to March 31, 2015, the group still remains adequately capitalized for its current business and investment risks. The organization maintains a relatively creditworthy liability profile of primarily low face amount ordinary life insurance policies, as well as a generally conservative investment portfolio. Although CFG has noteworthy holdings of commercial mortgages, the portfolio is well-diversified and has performed well with no delinquencies in recent years. Moreover, CFG has achieved a successful unified marketing approach in its niche target markets and maintains established market positions in its core home service, final expense and pre-need businesses. While A.M. Best believes that the organization will be challenged to meaningfully improve its operating results over the near term, its earnings and capital position could be favorably impacted if interest rates begin to rise at a moderate pace.
Following the downgrade, A.M. Best believes a positive rating action for CFG is unlikely in the near to medium term. Key factors that could result in a future negative rating action include further deterioration in risk-adjusted capitalization or operating performance that does not meet A.M. Best’s expectations.
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.
Additional key criteria utilized include:
- A.M. Best’s Liquidity Model for U.S. Life Insurers
- A.M. Best’s Perspective on Operating Leverage
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for U.S. and Canadian Life/Health Insurers
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
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