A.M. Best Affirms Ratings of NLV Financial Corporation and Its Affiliates
December 9, 2014 by A.M Best
OLDWICK, N.J. — A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of “a+” of National Life Insurance Company (NLIC) (Montpelier, VT) and its wholly owned subsidiary, Life Insurance Company of the Southwest (Dallas, TX) (together known as National Life). Both companies are life insurance subsidiaries of NLV Financial Corporation (NLVF) (Montpelier, VT), which is the intermediate holding company in the organization’s mutual holding company structure. NLVF and its subsidiaries are collectively known as the National Life Group.
Concurrently, A.M. Best has affirmed the ICR and senior debt ratings of “bbb+” of NLVF. A.M. Best also has affirmed the debt rating of “a-” on $200 million 10.50% surplus notes due 2039 of NLIC. The outlook for these ratings is stable. (See below for a detailed listing of the debt ratings.)
National Life Group’s ratings recognize its consistent operating performance, conservative risk profile and favorable sales growth complemented by diverse distribution sources. Moreover, the company benefits from its competitive position in the indexed universal life (IUL) insurance and 403(b) indexed annuity markets. The rating affirmations also reflect National Life Group’s strong risk-adjusted capitalization, which was enhanced by an earlier surplus note issuance and continued profitable operations. Additionally, National Life Group continues to grow its capital base with 2013 total adjusted capital at approximately $1.6 billion, which is 11% above 2012 levels. National Life Group’s investment portfolio is conservatively managed with limited exposure to structured securities, including commercial mortgage-backed securities, and is well matched to its liabilities. Nearly all residential mortgaged-backed securities held by National Life Group are highly rated, agency backed, without any exposure to Alt-A or subprime collateral. Additionally, the portfolio is in a net unrealized gain position of approximately $1.1 billion as of Sept. 30, 2014, which enhances the company’s ability to liquidate assets without incurring realized losses. Moreover, National Life Group exercises discipline in product design while maintaining competitive positions within its mainstream products (indexed UL and indexed annuities).
The insurance operations are consistently profitable. In addition, overall GAAP earnings benefit from diversification afforded by its mutual fund operations—Sentinel Investments—which has shown a positive operating earnings for the past three years. Total assets under management remained relatively flat at approximately $30 billion for 2013.
Offsetting these positive rating factors is National Life Group’s concentration in indexed products. Additionally, the 2009 surplus note issuance, which carries a high interest rate, increased National Life Group’s GAAP financial leverage to approximately 21% at Dec. 31, 2012 and pressured interest coverage. However, capital and surplus growth and a 2014 pay-off of $20.6 million in trust preferred securities resulted in an improved GAAP financial leverage of 18.5%. These ratios remain within A.M. Best’s guidelines for the company’s current ratings. At the same time, National Life Group’s GAAP interest coverage at more than five times has improved in the current year. A.M. Best notes that the organization’s debt service capabilities are supported by a strong cash and invested asset position, along with favorable debt service capabilities at its primary insurance subsidiaries.
A.M. Best believes National Life is well-positioned for its current rating and does not see this rating moving upward in the near to medium term. A key driver that could lead to a positive rating action would be growth in credit worthy business. Conversely, key drivers that may lead to negative rating actions include a sustained material deterioration in operating performance, material impairments or realized losses in the investment portfolio and diminished key capital, leverage, coverage and liquidity ratios.
The following debt ratings have been affirmed:
NLV Financial Corporation—
— “bbb+” on $75 million 6.50% senior unsecured notes, due 2035
— “bbb+” on $200 million 7.50% senior unsecured notes, due 2033
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:
• Rating Members of Insurance Groups
• Insurance Holding Company and Debt Ratings
• Evaluating U.S. Surplus Notes
• Understanding BCAR for U.S. and Canadian Life/Health Insurers
• A.M. Best’s Liquidity Model for U.S. Life Insurers
• A.M. Best’s Perspective on Operating Leverage
• Risk Management and the Rating Process for Insurance Companies
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.
A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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