A.M. Best Affirms Ratings of Penn Mutual Life Insurance Company and Its Subsidiary
March 11, 2014 by Adam Cufr
A.M. Best has affirmed the financial strength rating of A+ (Superior) and the issuer credit ratings of “aa-” of Penn Mutual Life Insurance Company (Penn Mutual Life) (Horsham, PA) and its wholly owned subsidiary, Penn Insurance and Annuity Company (PIA) (Wilmington, DE) (together referred to as Penn Mutual). A.M. Best also has affirmed the debt ratings of “a” on the $200 million 6.65% surplus notes due June 15, 2034 and the $200 million 7.625% surplus notes due June 15, 2040 of Penn Mutual Life. The outlook for all ratings is stable.
The rating actions reflect Penn Mutual’s large excess surplus position and strong risk-adjusted capitalization that has been enhanced by the issuance of surplus notes, as well as a conservative fixed income investment portfolio that is highly liquid, has performed reasonably well and currently is in a net unrealized gain position. A.M. Best notes that Penn Mutual’s financial leverage and interest coverage ratios remain within A.M. Best’s guidelines for its current ratings.
The rating actions also consider the strength of Penn Mutual’s business profile, which emphasizes a broad portfolio of individual life insurance products led by universal life with secondary guarantees and indexed universal life products, as well as a growing block of highly creditworthy whole life business. Fixed and variable annuities complement its core individual life products. Penn Mutual maintains a well-established and competitive affluent market presence developed through its focus on relationship-oriented producers. Penn Mutual’s life and annuity products are distributed through distinct and harmonized distribution channels consisting of career and independent agents and relationships with independent broker/dealers focused primarily on life insurance product sales. These distribution channels all have contributed to Penn Mutual’s recent strong sales growth trends. Janney Montgomery Scott LLC—Penn Mutual’s full service broker-dealer—provides diversification of both revenue and earnings.
Other positive rating factors are Penn Mutual’s well-defined hedging programs and its strong asset/liability management and cash flow techniques that support its significant and growing interest-sensitive businesses. Penn Mutual’s commitment to maintaining mutuality with a focus on longer-term financial performance and policyholder benefits also is viewed positively.
Partially offsetting these positive rating factors are the challenges the group faces to improve its statutory operating performance and grow its surplus, which have been impacted by several factors in recent years. These factors include increased sales-related expenses, the continuing challenges of the low interest rate environment and volatile equity markets and the decision to self-fund AXXX reserve requirements. The group has recently established a special purpose financial captive intended to address reserve strain experienced at PIA resulting from the reserve requirements associated with its sales of universal life with secondary guarantees. AXXX reserves at Penn Mutual Life continue to be self-funded. Furthermore, the highly competitive individual life insurance segment makes maintaining consistent and sustainable revenue growth and earnings performance a challenge. The group’s recent decision to voluntarily reduce new annuity production from historical levels adds to the challenge. Penn Mutual also maintains an elevated exposure to the real estate market relative to total surplus. The majority of this exposure relates to its elevated—albeit declining—investments in commercial mortgage-backed securities (CMBS), which could expose the group to investment losses should the U.S. economic recovery stall or deteriorate. A.M. Best acknowledges that the exposure to these risks is mitigated somewhat as the CMBS portfolio is currently in a net unrealized gain position, almost entirely concentrated in the highest-rated tranches, well-diversified by both asset type and geographic region and maintains a high degree of subordination. A.M. Best believes Penn Mutual has the ability to hold these securities to maturity, while its strong excess surplus position further mitigates A.M. Best’s concerns.
A.M. Best believes Penn Mutual to be well positioned at its current rating level. Positive rating movement is unlikely in the near term. Negative rating actions could result from net operating performance that does not meet A.M. Best’s expectations over the near to medium term; a significant and sustained decline in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR); or an increase in financial leverage and/or a decline in interest coverage that falls materially short of the guidelines for its current ratings.
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.
A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
