KBRA Affirms Ratings for Baltimore Financial Group, Inc. and Baltimore Life Insurance Company
27 Oct 2023 | New York
KBRA affirms the Issuer Rating for Baltimore Financial Group, Inc. at BBB- and the Insurance Financial Strength Rating for Baltimore Life Insurance Company at A-. The Outlook for both ratings is Stable.
Key Credit Considerations
The ratings reflect Baltimore Life Insurance Company’s (BLIC) solid balance sheet, generally high-quality investment portfolio with above benchmark investment returns, diversified distribution, and a reserve mix emphasizing lower risk products. BLIC has no financial leverage, utilizes reinsurance prudently, and holds full no-lapse UL reserves. KBRA notes that the company’s risk-based capital (RBC) ratio has been increasing since 2020 despite net operating losses. Baltimore Life’s fixed income portfolio is externally managed and has generally outperformed its benchmark from a total return perspective. The company has a low-risk group of product offerings including whole life, term life, universal life, final expense, asset transfer products, and annuities. Baltimore Life utilizes career agents and independent marketing organizations to reach its target middle income market.
Factors offsetting these credit strengths include declining operating performance in recent years, strong competition in key product lines, exposure to reinvestment risk and spread compression, and an above-peer average allocation to higher-risk assets. However, the current interest rate environment has provided opportunities to reduce risk in the investment portfolio as investments in alternative assets are no longer needed to meet BLIC’s targeted investment yield, which it can now achieve with corporate bonds. With the moves in interest rates over the last several years, declines in BLIC’s portfolio yields stabilized and then improved slightly over the past twelve months, assisting spread management. There is significant competition in the markets BLIC operates in and the company lacks the brand recognition of more well-established insurers. KBRA believes the company’s ERM program is appropriate for its risk profile although the framework is still evolving. Finally, operating income has been pressured by new business strain and elevated death claims, which has led to net operating losses. The company has obtained reinsurance to manage strain and expects lower death claims going forward. However, investments in technology are expected to weigh on profits in the future.
Rating Sensitivities
Factors that could positively impact the rating include: improved risk-adjusted capitalization, a return to favorable earnings trends from multiple product lines, growing scale or market share, and maintaining solid investment performance through different environments.
Factors that could negatively impact the rating include: a material unfavorable change in the company's risk profile, failure to meet its financial projections, notable investment losses, lack of progress in reaching or maintaining its target RBC ratio or further declines in capitalization, unfavorable trends in operating profitability, a shift in business mix to less creditworthy or riskier products, or loss of key business partners or distribution sources.
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