A.M. Best Co. has affirmed the financial strength rating (FSR) of
A+ (Superior) and issuer credit ratings (ICR) of "aa-" of Mutual of
Omaha Insurance Company (Mutual) and its subsidiaries, United of
Omaha Life Insurance Company (United of Omaha), Companion Life
Insurance Company (Companion Life) (Lynbrook, NY), and United
World Life Insurance Company (United World Life). Concurrently, A.M.
Best has affirmed the debt ratings of "a" on the existing $300 million
6.8% surplus note due 2036 and $300 million 6.95% surplus notes due 2040
of Mutual. The outlook for all ratings remains negative. All companies
(collectively referred to as Mutual of Omaha) are located in Omaha, NE,
unless otherwise specified.
The rating affirmations reflect Mutual of Omaha's strong absolute and
risk-adjusted capitalization, good revenue and earnings growth within
most of its core lines, generally favorable investment performance and
moderate use of financial and operating leverage. The company continues
to benefit from its well diversified product portfolio, multi-platform
distribution system and strong brand recognition. Somewhat offsetting
these positives are the company's growing book of Medicare Supplement
business, overall exposure to commercial real estate both in the general
account and through affiliated holdings, and its in-force block of
interest sensitive liabilities.
Absolute levels of statutory capital have been relatively flat
year-over-year, although Mutual of Omaha currently maintains a good
level of risk-adjusted capital and liquidity. A.M. Best, however, had
previously noted that the Medicare Supplement insurance product line has
grown significantly in recent periods and currently represents roughly
35% of statutory insurance revenues. This exposes the group to
regulatory and market risks, which include the ability to get necessary
future rate increases in certain states. A.M. Best also notes the
rising, albeit still manageable, level of commercial real estae
exposure throughout the organization-including the company's East Campus
Realty project-and the high level of commercial loans with Mutual of
Omaha Bank. To date, Mutual of Omaha has been able to absorb losses in
these portfolios without a material reduction in risk-adjusted capital;
however, A.M. Best will continue to monitor the company's ability to
manage its overall commercial real estate exposure over the near to
intermediate term. Finally, A. M. Best will continue to monitor the
performance of the Mutual of Omaha Bank and the company's East Campus
Realty, LLC for potential stresses on Mutual of Omaha's operating
results and capital levels.
On a GAAP basis, Mutual of Omaha's operating results have been favorable
in a majority of the company's core insurance lines of business with
positive earnings at Mutual of Omaha Bank beginning to be more of a
contributor as well. A.M. Best anticipates the bank will become an
increasing contributor to earnings going forward, subject to potential
increased capital requirements required by federal regulation. GAAP
equity also has improved due to reported earnings and the favorable
impact of low rates on the company's unrealized capital gain position.
Statutory net operating gains and reduced levels of realized losses and
impairments also have helped grow absolute levels of statutory capital
and surplus. Low interest rates, however, have placed a drag on
earnings, and the company has continued to implement price and benefit
changes to its products to maintain competitiveness while reducing
Overall, A.M. Best believes Mutual of Omaha's solid liquidity level
throughout the group adequately supports its current liabilities under
most stress scenarios.
Mutual's financial and operating leverage, in addition to interest
coverage ratio, remain well within A.M. Best's expectations for its
current ratings. A.M. Best notes that the persistent low rate
environment continues to negatively impact pretax operating earnings,
but this headwind is somewhat mitigated by the current level of excess
cash maintained on the consolidated balance sheet of Mutual
(approximately $385 million at September 30, 2012).
A.M. Best believes Mutual of Omaha is well positioned at its current
rating level. A revision of the outlook back to stable could be realized
from a continued improvement in the group's overall statutory operating
performance, coupled with a demonstrated directional shift in its mix of
new business toward products viewed by A.M. Best to be more
creditworthy. Negative rating actions could result from a material
decline in risk-adjusted capital within the group, a material decline in
statutory and GAAP earnings from deteriorating loss ratios primarily in
the Medical Supplement line, and increased investment losses from its
concentration in real estate-related assets.
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.
Founded in 1899, A.M. Best Company is the world's oldest and most
authoritative insurance rating and information source. For more
information, visit www.ambest.com.
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
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