On May 14, 2020, Kroll Bond Rating Agency (KBRA) assigned the following insurance financial strength ratings (IFSR) to the three insurance subsidiaries of United Heritage Financial Group, Inc. (UHFG): A- to United Heritage Life Insurance Company (UHLIC); A- to Sublimity Insurance Company (SIC); and BBB+ to United Heritage Property & Casualty Company (UHPC). The Outlook for all ratings is Stable.
UHLIC’s rating reflects its strong capitalization, favorable operating performance, balanced reserve mix, and low-risk product profile. The company’s risk-adjusted capital and surplus-to-liabilities ratios exceed life industry averages. UHLIC has demonstrated steady growth in total adjusted capital supported by consistent operating profitability and a balanced mix of earnings across the company’s individual annuity and life insurance product lines. UHLIC has outperformed relative to industry aggregates and outside asset managers with respect to its investment yields and has achieved robust annuity spreads in a low interest rate environment. Additionally, KBRA believes the company maintains a low-risk product portfolio, selling basic products such as whole life, pre-need, final expense, fixed annuities, and group life. Finally, UHLIC has a seasoned, in-force block of life insurance policies—some of which are participating—that will continue to underpin the company’s long-term financial strength.
KBRA believes that UHLIC’s high portfolio yields are likely to decline due to lower new money rates and the maturing of premium bonds. The company will be challenged to maintain its historically robust annuity spreads without compromising credit quality, mismatching the durations of its assets and liabilities or lowering crediting rates closer to the guaranteed minimums. KBRA views UHLIC’s investment approach as somewhat aggressive relative to other life insurers. At March 31, 2020, nearly 70% of its investment grade bond portfolio was in the BBB category and below investment grade bonds represented approximately 11% of the bond portfolio (over 75% of total adjusted capital). Further credit migration is expected as well as increased high-yield bond defaults. Additionally, UHLIC is subject to substantial competition from established insurers with strong franchises and broad distribution relationships. KBRA notes that UHFG’s enterprise risk management capabilities are sufficient for its risk profile and continue to evolve to the point where risk is fully integrated into all of the company’s decision-making processes.
The ratings for SIC and UHPC reflect the companies’ low underwriting leverage, consistent investment income, strong risk-adjusted capitalization, and sound catastrophe reinsurance program. In addition, the insurers benefit from long-standing agency relationships and management teams with deep local market knowledge. Further, KBRA believes UHFG’s shared services model provides a distinct expense advantage for SIC and UHPC. UHPC and SIC primarily write personal lines coverage focusing on private passenger auto and homeowners products. SIC has a larger block of auto business, with generally favorable underwriting performance over the past five years. As a result, surplus growth has outpaced net premium growth since 2015.
Balancing these strengths are the companies’ geographic risk concentrations and catastrophe exposure. In addition, UHPC’s predominant property focus has resulted in more volatile and unfavorable underwriting performance, although net investment income has generally offset underwriting losses. The companies have geographic concentrations in Idaho, Oregon, and Utah, with exposure to severe convective storms, earthquakes, and wildfires. Following the 2018 wildfire season, the companies’ shared catastrophe reinsurance program was significantly strengthened to mitigate model error regarding wildfire risk. KBRA believes the current reinsurance protection is prudent, along with several recently employed risk mitigation programs and strategies. Finally, although UHPC may continue to exhibit earnings volatility given its property focus, KBRA expects profit restoration plans to facilitate improved results.
KBRA has analyzed the impact of recent market volatility on the United Heritage companies and has stress tested the investment portfolios. KBRA believes the impact is manageable due to UHLIC’s strong capitalization and the high credit quality of the property/casualty investment portfolios. KBRA continues to monitor the direct and indirect impacts of the coronavirus (COVID-19) on the insurance sector. Please click here for more detail on KBRA’s research on the continuing impact of COVID-19.
To access ratings and relevant documents, click here.
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- Quarterly (Re)Insurance Highlights: COVID-19 Challenges and Rating Implications
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Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Andrew Edelsberg, Managing Director (Lead Analyst)
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Fred DeLeon, Senior Director
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Peter Giacone, Managing Director (Rating Committee Chair)
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Tina Bukow, Managing Director
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