A.M. Best Downgrades Ratings of Unity Mutual Life Insurance Company; Revises Outlook to Negative

A.M. Best Co. has downgraded the financial strength rating to C++ (Marginal) from B- (Fair) and issuer credit rating to “b+“ from “bb-” of Unity Mutual Life Insurance Company (Unity Mutual) (Syracuse, NY). The outlook for both ratings has been revised to negative from stable.

The rating actions reflect Unity Mutual’s weakened capital position on both an absolute and risk-adjusted basis, as measured by Best’s Capital Adequacy Ratio. This significant decline is due to operating results and investments in affiliates, as well as a required increase in the funding for Unity Mutual’s pension plan minimum liability in 2009. A.M. Best notes that the capital structure of the company is supported by a $3 million surplus note.

Unity Mutual has executed several transactions in recent years in an effort to raise capital or enhance operating or investment results. During 2008, the company reinsured a substantial portion of its business in force, resulting in an $8.85 million surplus increased due to ceding commission received. However, in 2009, most of this surplus gain eroded. Unity Mutual also has limited new business production from time to time in an effort to control policy acquisition expenses and monitor the performance of its business. Unity Mutual also successfully recaptured reinsurance from a distressed counterparty; however, this business has experienced adverse mortality. In 2009, the company elected to participate in the government sponsored term asset-backed securities loan facility, and has borrowed $21.2 million for enhancing investment income.

Unity Mutual maintains an investment portfolio with no exposure to mortgage loans or real estate, and has a bond portfolio with only a modest exposure to below investment grade securities. Unity Mutual does have exposure to affiliated investments, which account for nearly two-thirds of its surplus.

The negative outlook on the ratings reflects concerns regarding potential additional declines in surplus as a result of adverse mortality experience, the potential for continued operational and investment losses and Unity Mutual’s limited financial flexibility as a mutual insurance company.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at http://www.ambest.com/ratings/methodology.