A.M. Best Revises Outlook to Stable for Ratings of The Savings Bank Life Insurance Company of Massachusetts [Professional Services Close – Up]

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of A+ (Superior) and issuer credit rating of "aa-" of The Savings Bank Life Insurance Company of Massachusetts (SBLI-MA) (Woburn, MA).

The revised outlook reflects SBLI-MA's strengthened capital position both on an absolute and risk-adjusted basis, which reflects its second completed captive reinsurance structure (three total transactions) to fund excess term life reserves associated with Regulation XXX. The transaction generated a net surplus credit and provides financing for three years of new term business. With the benefit of the latest transaction and profitable operations, SBLI- MA's capital and surplus account increased by almost $35 million as of year-end 2011, and its regulatory capital ratio increased over 100 percentage points, its highest level in the previous five years.

The ratings also consider SBLI-MA's leading position as a low- cost term life insurance provider, the benefits it derives from its well-recognized brand name in Massachusetts, its strong level of risk-adjusted capitalization and high quality investment portfolio.

SBLI-MA maintains a competitive advantage in the New England market benefiting from strong brand name recognition and an efficient distribution system mainly focused on selling low-cost guaranteed level premium term life insurance, and to a lesser extent, permanent life insurance products and fixed annuities. Moreover, SBLI-MA expanded its national presence and is now actively selling in 45 of 48 states where licensed, with two-thirds of new business volume originating outside of Massachusetts. With the increase in the company's absolute level of capital and surplus its risk-adjusted capitalization is considered very strong for its current business and investment risks. A.M. Best notes that SBLI- MA's investment portfolio is conservatively managed and was in a net unrealized gain position at year-end 2011.

In addition, legislation was passed in Massachusetts in 2010, which modified SBLI-MA's statutory charter so as to allow it to convert to a regular Massachusetts life insurer. This repealed SBLI- MA's requirement to price products on a unisex basis and should favorably impact the company's future premium growth by allowing for a much more competitive pricing model. Previously, SBLI-MA was the only U.S. life insurer that was required to charge identical life insurance premiums for men and women. In addition, the reorganization allows for more flexible sources of capital and modernizes the company's charter.

Partially offsetting these positive rating factors is SBLI-MA's limited business profile, modest earnings, reliance on Regulation XXX reserve funding transactions and its geographic concentration risk.

SBLI-MA's concentrated product focus on term life insurance and fixed annuities, exposes it to potential sales volatility as firms compete mainly on price and rate guarantees on these commodity-like products. Since SBLI-MA is not able to entirely self-fund its capital needs through organic earnings, A.M. Best notes that the company relies heavily on reinsurance and securitizations to fund excess term life reserves and manage its risk-adjusted capital levels. Although financing is currently available, future adverse market conditions may challenge SBLI-MA to find suitable, cost- effective financing alternatives for funding its excess reserves. The majority of SBLI-MA's in-force life insurance business continues to be in Massachusetts, and while A.M. Best acknowledges that the risk of operating in a single state has been reduced in recent years, it believes the company continues to be subject to operational and regulatory risks in Massachusetts.

While A.M. Best has revised the outlook to stable, the potential for further upgrades of SBLI-MA's ratings is limited. Downward rating actions may occur should the company experience unfavorable earnings trends, a significant decline in its risk-adjusted capitalization or should SBLI-MA be unable to fund excess term life reserves beyond 2014.

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 ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

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