A.M. Best Affirms Ratings of Mutual of Omaha Insurance Company and Its Subsidiaries
December 16, 2014 by Best's News Service
Oldwick – A.M. Best has affirmed the financial strength rating of A+ (Superior) and the issuer credit ratings of “aa-” of Mutual of Omaha Insurance Company and its subsidiaries, United of Omaha Life Insurance Company, Companion Life Insurance Company (New York, NY) and United World Life Insurance Company. Concurrently, A.M. Best has affirmed the debt ratings of “a” on the group’s existing surplus notes. The outlook on all ratings is stable. The companies (collectively referred to as Mutual of Omaha) are located in Omaha, NE, unless otherwise specified.
The rating affirmations reflect Mutual of Omaha’s diversified operating profile, strong balance sheet, well-recognized brand, established positions in several individual and group insurance products, varied distribution channels and good revenue and earnings growth in most of its core lines. Somewhat offsetting these positive rating factors are the company’s sizable books of Medicare supplement policies and, to a lesser extent, long-term-care (LTC) business, which expose the company to regulatory and/or market risks, including the ability to obtain rate increases. A.M. Best also notes Mutual of Omaha’s material exposure to commercial real estate in the general account (via mortgage loans) and through affiliated holdings, as well as its significant interest sensitive liabilities.
In recent periods, Mutual of Omaha has reported solid GAAP and statutory operating earnings. Specifically, for its core Medicare supplement line of business, favorable benefit ratios are a result of disciplined pricing and the fact that medical cost trend is lower than historical levels. Also within the individual segment, the company reported growth in traditional life sales aided by its direct-to-consumer distribution strategy, as well as favorable mortality trends. Moreover, Mutual of Omaha has offered LTC policies for nearly three decades and has been profitable in recent years in part because of product design changes. A. M .Best notes that the company’s legacy business, written prior to 2004, has been subject to various rate increases in recent years, reflecting evolving assumptions related to claims experience.
The company’s group benefits business has been supported by increased diversification of product offerings, including the introduction of several new voluntary products in recent years. Overall, the segment has generated revenue and earnings growth, driven by enhanced sales, disciplined underwriting and expense management. A.M. Best notes that Mutual of Omaha has recently reported some volatility within its group disability business and has taken corrective rate actions in its new and existing blocks to restore profitability in the near term. Additionally, the segment’s retirement plan business has reported good operating results despite the challenging low interest rate environment, which has hindered top-line growth within the annuity and retirement services product lines.
Consistent with industry peers, Mutual of Omaha utilizes operating leverage to supplement earnings and to fund “redundant” reserves. A.M. Best views the company’s operating and financial leverage as manageable, with solid interest coverage supported by its diversified sources of cash flows. Additionally, the company issued $300 million of surplus notes in July and utilized some of the proceeds to retire (via tender offer) a portion of its outstanding notes with maturity dates in 2036 and 2040.
A.M. Best notes that the organization has a somewhat higher all-in exposure to commercial real estate than some of its peers. This includes affiliate, East Campus Realty LLC (ECR), who oversees the Midtown Crossing at Turner Park property, as well as commercial loans with Mutual of Omaha Bank, potentially exposing the company to concentration risk. However, Mutual of Omaha has historically managed these assets prudently, and any volatility related to their performance has not resulted in deterioration of the company’s continued strong risk-adjusted capital position. Mutual of Omaha Bank has been a material contributor to the enterprise’s earnings in recent years. A.M. Best will continue to monitor the performance of the bank, as well as ECR for potential stresses on Mutual of Omaha’s operating results and capital levels.
A.M. Best believes a positive rating action on Mutual of Omaha is unlikely in the near- to-medium term. Rating factors that may result in a negative rating action include deterioration in operating performance, a significant decline in risk-adjusted capital or an increase in the organization’s overall risk appetite through a higher proportion of sales of less creditworthy products or further investments in higher-risk non-insurance businesses.
The following debt ratings have been affirmed with a stable outlook:
Mutual of Omaha Insurance Company—
— “a” on $300 million 4.297% surplus notes, due 2054
— “a” on $300 million 6.95% surplus notes, due 2040 (approximately $167 million outstanding)
— “a” on $300 million 6.80% surplus notes, due 2036 (approximately $263 million outstanding)
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.
Key insurance criteria reports utilized:
- A.M. Best’s Liquidity Model for U.S. Life Insurers
- A.M. Best’s Perspective on Operating Leverage
- Evaluating U.S. Surplus Notes
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for U.S. and Canadian Life/Health Insurers
This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
