A.M. Best Revises Outlook to Negative for Sentinel Security Life Insurance Company
June 17, 2013 by Best's News Service
OLDWICK, N.J. – A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of B++ (Good) and issuer credit rating of “bbb” of Sentinel Security Life Insurance Company (Sentinel Security Life ) (Salt Lake City, UT) [OTCBB: SENI].
The negative outlook reflects a continuing decline in Sentinel Security Life’s risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) model, which has significantly reduced the company’s excess capital for its current rating level and further limited its financial flexibility. These declining trends primarily have been a result of a rapid increase in Sentinel Security Life’s direct top-line growth—primarily capital-intensive fixed annuity business—that has more than outpaced growth in total capital. A.M. Best believes that if Sentinel Security Life continues its rapid top-line growth strategy, a meaningful capital infusion will be necessary.
The affirmation of the ratings reflects Sentinel Security Life’s adequate risk-adjusted capitalization for its current business and investment risks. The rating actions also recognize the company’s diverse business profile in marketing final expense whole life insurance, Medicare Supplement and Select plans and fixed annuities primarily to the senior market through a well-established, personal producing, non-captive general and associate general agent distribution network channel. The rating actions acknowledge the company’s generally profitable—albeit modest—overall net operating performance and its reduced exposure to common equities.
Historically, Sentinel Security Life’s business profile had been concentrated in the final expense market. To further broaden its business profile, diversify earning sources and mitigate geographic concentration risk, the company embarked on two key marketing initiatives. In 2010, Sentinel Security Life began distributing Medicare supplement and Medicare select plans primarily through a brokerage distribution channel under a single supervising general agent (SGA) agreement with one of the nation’s largest marketing organizations specializing in the senior market. A year later, the company entered the senior fixed annuity market through the same SGA. While A.M. Best continues to view these marketing initiatives positively, it is concerned that continued rapid growth in new direct business production will continue to place significant downward pressure on risk-adjusted capitalization.
Furthermore, A.M. Best believes Sentinel Security Life will be challenged to improve its net operating performance given the expense strains anticipated from projected new business growth and the challenges of managing its increasing levels of interest-sensitive liabilities through the current low interest rate environment. Expenses related to its continuing expansion efforts also could dampen earnings. A.M. Best notes that Sentinel Security Life does use reinsurance to partially mitigate the new business expense strains associated with its fixed annuity and Medicare business, and its fixed annuity business maintains adequate surrender charge protection. Additionally, the company has begun exploring strategies to further strengthen its capital position. A.M. Best notes that the company’s balance sheet includes moderate exposure to below investment grade bonds relative to total capital. Additionally, the company has increased its exposure to the real estate markets through investments in residential and commercial mortgage-backed structured securities. The performance of these securities can be influenced by the general conditions of the economy and could adversely affect the company’s operating performance and financial strength.
A revision to the negative outlook could occur if Sentinel Security Life meaningfully improves and sustains its risk-adjusted capital levels as measured by BCAR. Key factors that could result in additional negative rating actions include a further decline in risk-adjusted capitalization that no longer supports the current ratings, net operating performance that does not meet A.M. Best’s expectations and higher than expected growth in annuity production.
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 http://www.ambest.com/ratings/methodology. BN-NJ-06-13-2013 1256 ET #
