S&P: National Life Group Ratings Raised On Improved Capital Strength; The Outlook Is Stable
"The upgrade reflects our view that NL Group has improved its capital strength, resulting in stronger credit quality. With capital redundant at the 'AAA' confidence level at year-end 2015 per our model, we now view the insurer's financial risk profile as extremely strong, compared with our prior opinion of very strong," said S&P Global Ratings credit analyst Heena Abhyankar. "Over the past few years, NL Group has organically grown its capital, more effectively managed its investments in structured securities, and successfully completed a closed block reinsurance transaction. We believe its improved capital position is sustainable."
NL Group's business risk profile remains strong, with premiums and deposits almost evenly split between protection and retirement savings. In 2015, life insurance weighted net annualized premiums (NL Group's metric for new sales) grew 7% year-over-year, whereas annuity sales decreased by 5%. The company's 2011-2015 average generally accepted accounting principles (GAAP) return on assets is around 100 basis points stemming from strong growth in the life segment and disciplined expense management. As of Dec. 31, 2015, its financial leverage was around 23% and GAAP EBITDA fixed-charge coverage was about 4.9x--in-line with our expectations.
"The stable outlook reflects our expectation that NL Group will maintain its strong business risk profile encompassing engaged and productive distribution and favorable operating performance," Ms. Abhyankar. "We expect the company to maintain capital redundancy at the 'AAA' level, financial leverage of less than 25%, and fixed-charge coverage of about 5x."
We could lower the ratings by one notch over the next two years if NL Group's competitive position deteriorates, operating performance declines relative to peers, or capital redundancy drops materially below the 'AAA' level for a sustain period. We may also lower the rating if the group adopts a more-aggressive investment policy or if the overall quality of its investment portfolio deteriorates, leading us to revise our view of the company's overall investment risk profile.
"We are unlikely to raise our ratings on NL Group over the next 24 months without seeing a significant differentiated improvement in its already strong competitive position," Ms. Abhyankar added.