KBRA Affirms Rating for Trusted Fraternal Life
27 Nov 2024 | New York
KBRA affirms the A insurance financial strength rating for Trusted Fraternal Life ("TFL" or "the Society"). The Outlook is Stable.
The rating reflects TFL's sustained favorable risk-based capital (RBC) and surplus growth, underpinned by consistent profitability and a generally balanced revenue mix across relatively lower risk life and annuity products. The Society remains committed to its fraternal mission, maintaining strong affinity relationships with members, and continues to prioritize operational efficiency through disciplined cost management and execution of key strategic initiatives, particularly in enhancing its digital infrastructure and leveraging its Family of Brands strategy to expand scale through mergers.
TFL’s RBC ratio continues to trend favorably, while effectively managing elevated disintermediation risk to date. Mitigation strategies, including competitive new money annuity products and internal exchanges, have significantly reduced the proportion of annuities without surrender charges, improving persistency and fund balance stability. Reserves remain well balanced between life and annuities and are supported by a conservative, high-quality fixed-income investment portfolio. TFL’s strong corporate governance and evolving enterprise risk management practices further enhance its operational and strategic execution.
Balancing these credit strengths are challenges from disintermediation risk and an annuity block with a significant, though declining, portion of contracts subject to withdrawal with minimal or no surrender charges. While higher historical persistency mitigates this exposure to an extent, it remains a credit risk. Additionally, the decline in organic membership, consistent with broader fraternal industry trends, remains a credit challenge. However, TFL’s ongoing efforts to grow annual pay life sales, add financial members, and enhance digital capabilities are designed to address these pressures. Net operating margins, currently compressed due to ongoing technology and infrastructure investments, are expected to improve over the medium term.
The recent merger with Woman’s Life Insurance Society has strengthened TFL’s position as a leader in fraternal consolidation, increasing reserve balances and providing operational efficiencies, a trend expected to continue with the recently announced merger with Catholic United Financial. While digital transformation initiatives, such as its policy administration system modernization and straight through processing, and merger-related integration efforts are advancing, near-term execution risks are significantly heightened across the organization.
Factors that could positively impact the rating include sustained significant growth in earnings and surplus, elimination or material reduction of the risk of spread compression on legacy annuity block, favorable change in risk profile, including further shift in reserve mix or material increase in risk-adjusted capital, and successful execution of strategic growth initiatives while maintaining risk profile.
Factors that could negatively impact the rating include material adverse change in risk profile, substantial decline in earnings, significant deterioration in capitalization and/or material decline in asset quality, and execution risks which unfavorably impact capital or earnings.
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