A.M. Best has upgraded the issuer credit rating (ICR) to "bbb+"
from "bbb" and affirmed the financial strength rating of B++ (Good) of GBU
Financial Life (GBU or the Society) (Pittsburgh, PA). The outlook
for both ratings is stable.
The upgrading of the ICR reflects GBU's positive trends in statutory
operating earnings and unassigned funds, improving risk-adjusted
capitalization, favorable performance metrics relative to its fraternal
peers and increasing member base. Partially offsetting these positive
factors are the Society's narrow business profile, high sensitivity to
interest rates fluctuations and geographic concentration risk.
GBU has reported strong statutory earnings growth in recent years due to
effective spread management in its core annuity line of business.
Favorable spread margins have been supported by an investment portfolio
with a higher net yield than the industry average and by managing
crediting rates and controlling expenses. Unassigned funds have
increased substantially in the last three years as operating gains have
been only minimally offset by dividends to its members. Increases in
unassigned funds also have led to improvements in risk-adjusted
capitalization. Furthermore, GBU fully reserves its annuity business,
which is considered more conservative than traditional methodologies,
providing an additional capital cushion not allocated to unassigned
funds. GBU has consistently increased its fraternal membership base
through strong sales performance, further aided by the recent merger
with other Fraternal Benefit Societies.
GBU has a limited business profile as its fixed annuities account for
almost all of direct premiums written and reserve liabilities. Ordinary
life premiums received primarily from single premium whole life policies
have increased in recent years; however, they remain only a modest
proportion of the Society's total business. Fixed annuity reserves are
interest sensitive and remain vulnerable to spread compression in a low
interest rate environment and to disintermediation risk in a period of
rising interest rates, although disintermediation risk is partially
mitigated by the Society's strong surrender charge protection and
historically good retention rates. The Society has managed favorable
spreads on its annuities in the current low interest rate environment by
moving out the yield curve and purchasing lower investment grade,
longer-maturity bonds. While the asset durations are reasonably matched
to the Society's liability structure, the asset duration extending
beyond the liability exposes the Society to increases in the yield
curve, which would negatively impact unassigned funds.
Positive rating actions are unlikely in the near to medium term. Future
positive rating movement could occur with an expanded business profile
that reduces the concentration risk in interest-sensitive fixed
annuities while maintaining favorable trends of operating performance
and risk-adjusted capitalization. Factors that could lead to negative
rating actions include material spread compression negatively impacting
the Society's earnings or losses in the investment portfolio, either of
which could cause a decline in risk-adjusted 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.
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 © 2014 by A.M. Best Company, Inc. ALL RIGHTS
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