KBRA Affirms Rating for United Heritage Life Insurance Company and Downgrades Rating for Sublimity Insurance Company And Removes Watch Status From Both Companies

KBRA removed the A- insurance financial strength rating (IFSR) of United Heritage Life Insurance Company (UHLIC) from Watch Developing and affirmed the rating at A- with a Stable Outlook. At the same time, KBRA removed the A- IFSR of Sublimity Insurance Company (SIC) from Watch Downgrade and downgraded it to BBB with a Stable Outlook. The downgrade reflects the deterioration in underwriting results and negative impacts to surplus reported in 2023. To offset the adverse impacts to surplus and maintain an appropriate Risk Based Capital Ratio (RBC), parent company United Heritage Financial Group (UHFG) made a $2 million capital contribution to SIC, issued $2.5 million in surplus notes, and increased its whole account quota share for non-auto business from 25% to 50% for capital relief and to benefit from increased ceding commission. SIC ended the year with policyholders’ surplus of $14.6 million, a decline of 5.7% for the year.

UHLIC

UHLIC’s rating reflects KBRA’s expectation that UHLIC will return to its target risk-adjusted capitalization in the medium term and sustain strong earnings. The rating also reflects UHLIC’s balanced reserve mix and low-risk product profile. As of YE2023, capital and surplus reached a historical high of $81.9 million. Prior to the YE2022 drop in its CAL RBC ratio, UHLIC’s ratio exceeded the industry average for much of the past decade. UHLIC’s steady growth in total adjusted capital historically was driven by a balanced mix of consistent earnings until recent years, when annuities became an increasingly large portion of earnings. UHLIC’s investment yields have outperformed relative to industry aggregates and UHLIC has achieved robust (albeit declining) annuity spreads. KBRA believes the company maintains a low-risk product portfolio, selling basic products such as whole life, pre-need, final expense, fixed annuities, and group life.

Relative to the life insurance industry, UHLIC’s investment portfolio has a less conservative asset quality allocation and a higher allocation to corporates. At YE2023, approximately 71% of its investment grade bond portfolio was in the BBB category. In addition, UHLIC is subject to substantial competition from established insurers with strong franchises and broad distribution relationships. KBRA believes that the company’s enterprise risk management capabilities are sufficient for its risk profile and have evolved over time.

SIC

SIC's IFSR reflects the company’s sound risk adjusted capital, consistent net investment gains, long-standing agency relationships, and synergies from the UHFG shared service operating model. SIC’s RBC has declined in each of the last 5 years, mainly because of poor underwriting results. However, the current level is still sound despite being slightly below peers. SIC has generated consistent investment income and maintains a high credit quality investment portfolio. Further, catastrophe risk management has been enhanced in recent years. KBRA believes the current reinsurance protection is prudent, along with appropriate risk mitigation programs and strategies. The company also maintains strong liquidity ratios.

Balancing these strengths are SIC’s unfavorable underwriting performance, exposure concentration in Oregon, Utah, and Idaho, catastrophe exposure to earthquakes, severe storms, and wildfires, and concerns about business retention and growth due to deteriorating operating results. In 2023, the company reported a net underwriting loss of approximately $8 million and a combined ratio of 128.8%. This was the fourth consecutive year that SIC reported an underwriting loss. Catastrophe exposure is a significant risk factor for SIC given its geographic footprint.

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