A.M. Best Co. has revised the outlook to negative from stable and
affirmed the financial strength rating of A- (Excellent) and issuer
credit ratings of "a-" of Fidelity Security Life Insurance Company
(FSL) (Kansas City, MO) and its wholly owned subsidiary, Fidelity
Security Life Insurance Company of New York (FSLNY) (New York, NY).
The negative outlook primarily reflects the significant policy reserve
strengthening of approximately $8 million, which occurred within FSL's
annuity product line as a result of recent cash flow testing results.
A.M. Best notes that the company has previously reported two more modest
actuarial reserve increases since 2008, and believes that additional
smaller reserve charges may occur in the future. FSL's 2012 operating
results were impacted by surplus strain resulting from a sizable
increase in sales during the first half of the year of its MultiVantage5
annuity product, which had attractive crediting rates. The product has
since been re-priced and de-emphasized. Additionally, a one-time
legal-related charge unfavorably impacted FSL's operations. While FSL
has historically maintained a relatively conservative investment
philosophy, A.M. Best is concerned regarding its growing exposure to
higher-risk assets, specifically below investment grade corporates and
collateralized loan obligations, which provide additional yield without
a significant increase in duration. A.M. Best will closely monitor the
impact of this strategy s the industry navigates through the low
interest rate environment.
The rating affirmations of FSL and FSLNY reflect continued strong
capitalization, positive operating results (despite the aforementioned
charges taken in 2012) and diverse portfolio of niche products. The
group maintains strong relationships with insurance carriers,
well-established positions in supplemental health markets and good
flexibility to adapt to evolving health care reform. FSL's business
strategy is centered around five distinct strategic business units (SBU)
utilizing various distribution partnerships to be responsive to
consumers' needs though innovative and value-added product designs.
Historically, FSL has reported good operating results in all five SBUs,
contributing to its growing equity position and increasing risk-adjusted
capitalization. In addition, management continues to focus on managing
operating expenses, allowing for strategic investments in areas such as
FSLNY's current operations acknowledge its run-off life business from
its previous owner, which is modestly profitable; however, FSLNY has
recently received approval to start marketing its vision, prescription
drug and stop-loss products in the state of New York through this
entity. A.M. Best notes that the policy obligations and capitalization
of FSLNY are explicitly supported by FSL.
The outlook for the ratings of FSL could return to stable if a sustained
improvement in operating profitability is reported, including the
absence of any material policy reserve adjustments and it continues to
maintain a favorable level of capitalization. Key factors that could
cause negative rating actions include additional reserve strengthening
and/or deteriorating operating or investment results, leading to a
material decline in capitalization.
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 © 2013 by A.M. Best Company, Inc. ALL RIGHTS
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