OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating (FSR) of B++ (Good) and the issuer credit ratings (ICR) of ‘bbb+’ of EquiTrust Life Insurance Company (EquiTrust) (Chicago, IL). All ratings have a stable outlook.
The affirmation reflects adequate levels of risk-adjusted capitalization, stable investment spreads and good asset-liability matching. A.M. Best expects that EquiTrust’s overall business strategy should benefit from its new owner, Magic Johnson Enterprises (MJE). MJE purchased a majority and controlling interest in EquiTrust in the second quarter of 2015. Despite continued low interest rates, EquiTrust has maintained favorable spreads and has additional flexibility to adjust crediting rates to lower guaranteed minimums. Additionally, EquiTrust has an inforce annuity book that is reasonably well-protected against disintermediation risk from rising interest rates through market value adjustments upon policy surrender. While the proportion of interest-sensitive liabilities remains high, EquiTrust is diversifying its business profile to market more ordinary life products, including private placement universal life, indexed universal life and whole life.
These strengths are partially offset by a somewhat narrow business profile concentrated primarily in fixed-indexed annuities with high interest sensitivity and an investment strategy that is differentiated from the U.S. life industry with overweight allocations to structured securities, short term investments (Schedule DA) and alternative assets (Schedule BA). A.M. Best notes that the overall allocation to structured securities is high, which may pose liquidity risk under stressed capital market conditions. These risks are somewhat offset by reasonable loan to value ratios and adequate debt service coverage ratios within the asset-backed securities portfolio, along with individual issuer diversification. Finally, EquiTrust has a high degree of reinsurance leverage, with substantial reserves reinsured through an unrated reinsurer, although assets backing these reserves are held on EquiTrust’s balance sheet through a modified coinsurance arrangement.
Factors that could result in a positive rating action include strengthening risk-adjusted capitalization ratios, continued diversification of premium growth in ordinary life and continued favorable trends of operating profitability. Factors that could lead to a negative rating action include higher allocations to riskier asset classes, declining levels of risk-adjusted capitalization due to operating losses, credit write-downs or high dividend payout ratios.
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