Fitch Affirms Minnesota Life's IFS Ratings; Stable Outlook
OREANDA-NEWS. Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Ratings of Minnesota Life Insurance Company (Minnesota Life) and its subsidiary, Securian Life Insurance Company at 'AA'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's affirmation of Minnesota Life's ratings reflects the company's extremely strong balance sheet fundamentals, conservative risk profile and stable earnings. The ratings also reflect its strong position in the highly competitive group life insurance market.
Fitch views Minnesota Life's extremely strong capitalization, which is reflected by its NAIC risk-based capital (RBC) ratio of 513% at year-end 2015, as a fundamental strength to its rating. Operating leverage, as measured by adjusted liabilities to total adjusted capital, is among the lowest in Fitch's universe at 4.6x. Financial leverage, defined as surplus notes to total adjusted capital (TAC), remains extremely low at 3.9%.
Minnesota Life has balanced and diversified sources of revenue that reduce earnings volatility. Pretax operating return on assets remained solid at 0.97% in 2015 compared with 1.03% in 2014. Minnesota Life reported net income of $281 million in 2015 compared with $366 million in 2014. The decline was largely driven by reduced gains on sales of investments and changes in the value of interest rate and equity hedges based on rate and market movements.
On an operating basis, earnings were essentially flat year-over-year. Operating earnings included recurring unusual items, such as the deferred acquisition cost impact of hedging results and pension-related costs. Excluding these items, core earnings declined by 2% in 2015, primarily driven by unfavorable mortality in group insurance compared with favorable mortality in 2014. Results were somewhat offset by prudent expense management and above-average prepayment income. Unfavorable mortality continued into first-quarter 2016, which led to lower earnings during the period.
Fitch anticipates that low interest rates will continue to serve as a headwind to Minnesota Life's profitability. Also, significant capital market declines could lead to lower fee income and increased earnings volatility, given the company's sizeable separate account liabilities.
Fitch notes that Minnesota Life's investment and liquidity profile continues to be favorable. The company has a large, investment-grade, publicly traded bond portfolio, relatively low exposure to risky assets and a stable liability structure.
Minnesota Life has a strong competitive position in the group life insurance market, as the third largest provider in terms of premiums. The company's competitive advantage is supported by its service-driven model and customized systems, which support very strong retention levels. However, the company faces intense competition from larger companies with greater scale and resources. Additionally, the company faces scale pressure in the highly competitive retirement services market, which continues to consolidate.
The key rating triggers that could result in an upgrade include:
--An enhanced market position and size/scale combined with sustained capital strength and low asset risk.
The key rating triggers that could result in a downgrade include:
--A decline in the company's RBC ratio to 450% or lower;
--Significant deterioration in financial performance with GAAP-based return on assets below 0.80%;
--An increase in financial leverage above 15% as measured by debt-to-total capital.
Fitch affirmed the following ratings:
Minnesota Life Insurance Company
--IFS at 'AA';
--Issuer Default Rating at 'AA-';
--$118 million Rule 144a surplus notes 8.25% due 2025 at 'A+'.
Securian Life Insurance Company
--IFS at 'AA'.
The Rating Outlook is Stable.