A.M. Best Affirms Ratings of Penn Mutual Life Insurance Company and Its Subsidiary

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Besthas affirmed the financial strength rating of A+ (Superior) and the issuer credit ratings of “aa-” of Penn Mutual Life Insurance Company(Penn Mutual Life)(Horsham, PA) and its wholly owned subsidiary, Penn Insurance and Annuity Company (PIA) (Wilmington, DE) (together referred to as Penn Mutual). A.M. Best has also affirmed the debt ratings of “a” on the $200 million 6.65% surplus notes due June 15, 2034 and the $200 million 7.625% surplus notes due June 15, 2040 issued by Penn Mutual Life. The outlook for all ratings is stable.

The affirmation of the ratings reflects Penn Mutual’s strong risk-adjusted and absolute capitalization, which have been enhanced by the issuance of surplus notes, as well as the performance of its conservative fixed income investment portfolio that is highly liquid and currently in a large overall net unrealized gain position. Penn Mutual’s financial leverage and interest coverage ratios remain within A.M. Best’s guidelines for its current ratings. Penn Mutual’s GAAP earnings and equity have been steadily increasing in recent years.

The rating actions also consider the strength of Penn Mutual’s business profile, which emphasizes an extensive portfolio of individual life insurance products including traditional whole life, universal life with secondary guarantees and indexed universal life. Fixed and variable annuities complement its ordinary life product portfolio. Penn Mutual maintains a well-established and competitive affluent market presence developed through its focus on relationship-oriented producers. Penn Mutual’s life and annuity products are distributed through distinct and harmonized distribution channels comprised of career and independent agents and relationships with independent broker/dealers focused mainly on individual life insurance product sales. These distribution channels have contributed to Penn Mutual’s strong sales growth trends in recent years. Penn Mutual’s full service broker/dealer, Janney Montgomery Scott, LLC, provides diversification of revenue and earnings.

Other positive rating factors supporting the rating affirmations are Penn Mutual’s well-defined hedging programs and strong asset/liability management and cash flow techniques that support its large and growing interest-sensitive businesses. Penn Mutual’s commitment to maintaining mutuality with a focus on longer-term financial performance and policyholder benefits is also viewed positively.

Partially offsetting these positive rating factors are the challenges Penn Mutual faces to improve statutory net operating performance and grow its surplus, which have been impacted by several factors in recent years. These factors include increased sales-related expenses, the effects of the prolonged low interest rate environment and volatile equity markets and its history of self-funding its AXXX reserving requirements. Penn Mutual has since established a special purpose financial captive intended to address reserve strains resulting from the AXXX reserve requirements associated with certain blocks of universal life with secondary guarantee products sold through Penn Mutual Life and PIA. Furthermore, the highly competitive individual life insurance segment makes maintaining consistent and sustainable revenue growth and earnings performance a challenge. Penn Mutual’s decision to voluntarily reduce new annuity production from historical levels adds to this challenge. While A.M. Best considers Penn Mutual’s investment management capabilities to be solid, it notes that Penn Mutual maintains moderate exposure to the real estate markets primarily through its investments in commercial mortgage-backed structured securities, which could expose it to some asset impairments should the global economic recovery stall or deteriorate. A.M. Best acknowledges that this risk is mitigated somewhat as this portfolio is currently in a net unrealized gain position, almost entirely concentrated in the highest-rated tranches, well-diversified by asset type and geographic region and maintains a high degree of subordination. A.M. Best also notes that Penn Mutual has been increasing its exposure to non-affiliated alternative assets that while generally enhancing Penn Mutual’s spread management strategy and asset/liability management objectives, reduces liquidity that could adversely affect operating performance and financial strength. A.M. Best believes Penn Mutual has the ability to hold these asset classes to maturity, while its strong excess surplus position further mitigates concerns.

Positive rating movement is unlikely in the near-term. Negative rating actions could result from overall net operating performance that does not meet A.M. Best’s expectations over the near to medium term, a significant and sustained decline in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) or an increase in financial leverage and/or a decline in interest coverage that falls short of the guidelines for the current ratings.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

• A.M. Best's Liquidity Model for U.S. Life Insurers

• A.M. Best's Perspective on Operating Leverage Evaluating U.S. Surplus Notes

• Insurance Holding Company and Debt Ratings

• Rating Members of Insurance Groups

• Risk Management and the Rating Process for Insurance Companies

• Understanding BCAR for U.S. and Canadian Life/Health Insurers

This press release relates to rating(s) that have been published on A.M. Best's website.For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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A.M. Best Company

Steven Faulks, (908) 439-2200, ext. 5035

Senior Financial Analyst

[email protected]

or

Thomas Rosendale, (908) 439-2200, ext. 5201

Assistant Vice President

[email protected]

or

Christopher Sharkey, (908) 439-2200, ext. 5159

Manager, Public Relations

[email protected]

or

Jim Peavy, (908) 439-2200, ext. 5644

Assistant Vice President, Public Relations

[email protected]

Source: A.M. Best Company