KBRA Upgrades Rating for ELCO Mutual Life and Annuity
7 Aug 2023 | New York
KBRA upgrades the insurance financial strength rating (IFSR) to BBB from BBB- for ELCO Mutual Life and Annuity (ELCO or the company). The Outlook is Stable. ELCO is an annuity and life insurance company based in Lake Bluff, Illinois. The company's primary product is Medicaid-compliant annuities (MCA), which serve the senior market.
The upgrade reflects the company’s demonstrated track of record of growth across its surplus and capital bases which remain underpinned by consistent trends of profitability and earnings supported by its low-risk flagship product. ELCO has demonstrated the formalization, continuous refinement, and maturation of its corporate governance, enterprise risk management, and strategic and financial planning processes, which have kept pace with the company’s growth in assets and are viewed as consistent with its rating level. In KBRA’s opinion, when viewed relative to the current credit environment of rising interest rates, the company’s performance and risk management initiatives are favorable.
Key Credit Considerations
The rating continues to reflect the company’s conservative investment portfolio and an improving overall asset/liability management profile. The risk profile of its MCA product remains favorably low. KBRA continues to believe ELCO’s management remains committed to transitioning the company to better identify, quantify and mitigate its risks as well as to consistently employ a risk-based decision-making process, including the execution of its five-year strategic plan.
Balancing these credit strengths is significant concentration risk with a leading distribution partner, a business mix which is improving though lacks diversification, and exposure to regulatory shifts within the MCA space, though no regulatory changes are currently under consideration. KBRA continues to view the company’s current capitalization as adequate, although favorable trends in capital across the near term have been observed. In KBRA’s opinion, while earnings have been consistently favorable, continued growth in surplus and risk adjusted capital would mitigate concentration risk to an extent, all else equal. Though declining significantly since 2019, reinsurance leverage remains significantly elevated relative to peers.
Rating Sensitivities
Continued favorable risk-adjusted capital trends, completed systems upgrade and digital transformation, elimination of asset adequacy reserve, and favorable execution of planned product suite expansion could result in positive rating action over the longer term.
Growth which adversely impacts capital, unplanned or unanticipated loss of key distribution partner, legislative changes which curtail MCA product, and business growth which is not supported by continued enterprise risk management (ERM), strategic planning, and corporate governance development could result in negative rating action.
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Methodologies
Disclosures
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.