OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of B++ (Good) and the issuer credit rating of “bbb” of Sentinel Security Life Insurance Company (Sentinel Security Life) (Salt Lake City, UT) [OTCBB: SENI]. The outlook for both ratings remains negative.
The negative outlook reflects weak operating results due to rapid growth in fixed annuity sales, declining spreads and costs related to product development and market expansion. The high level of growth has led to heightened reliance on reinsurance and has strained its risk-adjusted capital position. The company’s unfavorable net operating performance during the past three years has contributed to lower-than-expected capital levels.
Sentinel Security Life has incurred net operating losses over the past three years that were impacted by elevated expenses related to the company’s expansion, expense strains associated with its new business growth and several one-time expenses. The negative outlook reflects A.M. Best’s belief that Sentinel Security Life will be challenged to improve its net operating performance and risk-adjusted capitalization going forward given the expense strains anticipated from projected new business growth, interest expense associated with its surplus note issuance and the continuing challenges of managing its increasing levels of interest-sensitive liabilities through the persistent low interest rate environment. Expenses related to its continuing expansion efforts could also dampen earnings.
The affirmation of the ratings reflects the improvement in total reported statutory capital following the issuance of $15 million of surplus notes in 2014 and the return to positive net operating gains to date in 2015. Strategies for improvement in its risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), are currently being reviewed by management.
The ratings continue to reflect diversity in Sentinel Security Life’s business profile, which focuses on marketing final expense whole life insurance, Medicare supplement and select plans and fixed annuities to the senior market through a well-established, personal producing, non-captive general and associate general agent distribution network. However, recent net premium growth has been driven primarily by fixed annuities. Additionally, the ratings recognize the positive performance of Sentinel Security Life’s well-diversified fixed income investment portfolio that is largely investment grade and currently in a net unrealized gain position. A.M. Best notes that the company benefits from the investment expertise of its key reinsurance partners.
A.M. Best notes that Sentinel Security Life utilizes varying levels of reinsurance to partially mitigate new business expense strains associated with its core product segments. Furthermore, its fixed annuity products maintain adequate surrender charge protection. While A.M. Best acknowledges the positive performance of Sentinel Security Life’s fixed income investment portfolio, it notes the company’s balance sheet includes increasing levels of below investment grade bonds relative to capital and exposure to the real estate market through its investments in residential and commercial mortgage-backed structured securities. The performance of these asset classes can be influenced by the general conditions of the economy and could adversely affect Sentinel Security Life’s net operating performance and financial strength.
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