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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