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A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit rating (ICR) of “a” of Kansas City Life Insurance Company (Kansas City Life) [NASDAQ: KCLI]. Additionally, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of “a-” of Kansas City Life’s wholly-owned subsidiary, Sunset Life Insurance Company of America (Sunset Life). The outlook for the above ratings is stable.
Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the FSR of B++ (Good) and ICR of “bbb+” of Old American Insurance Company (Old American), the group’s final expense life insurance subsidiary. All companies are domiciled in Kansas City, MO.
The ratings of Kansas City Life reflect its solid risk-adjusted capital position and favorable trends in statutory and GAAP operating profitability, which have been primarily driven by its core life insurance and fixed annuity lines of business. More specifically, Kansas City Life has experienced favorable mortality and good persistency along with increasing traditional whole and term life sales over the most recent period. The ratings also consider the company’s diversified product portfolio and multi-channel distribution platform. Kansas City Life also benefits from earnings on its acquired blocks of business, including the recent acquisition of a significant block of variable business (largely variable universal life), which added scale to its fee-based businesses. A.M. Best notes that acquisitions remain a significant part of Kansas City Life’s growth strategy, and it plans to purchase other insurance companies or blocks of ordinary life insurance on an opportunistic basis. Moreover, A.M. Best believes that the organization’s capital is of high quality as full reserves related to Regulation XXX and Guideline AXXX (AG 38) are held by Kansas City Life, and there is limited use of financial or operating leverage.
Partially offsetting these positive rating factors is the general decline in the company’s capital and surplus over the past five years, which was driven by stockholder dividends, and more recently, a material increase in its pension liability due to the low interest rate environment. However, the company remains well capitalized with good liquidity and access to public markets, if necessary. Additionally, Kansas City Life has experienced mixed trends of ordinary life premiums over the past five-year period, which can be partially attributed to the sluggish economy and intense competition in the life insurance arena. Furthermore, A.M. Best believes the group insurance lines of business require more scale to facilitate profitability. Although the portfolio has generally performed well, Kansas City Life maintains an elevated exposure to commercial mortgages (roughly two times capital and surplus) compared to industry norms. While Kansas City Life has reported operating gains on both a statutory and GAAP basis in recent periods, earnings have been negatively impacted by spread compression in its fixed annuity line of business.
The revised outlook for Old American reflects its improved absolute and risk-adjusted capital position and increasing operating results over the most recent period. Additionally, the company has demonstrated favorable premium growth trends over the past five years and actual mortality results have been within A.M. Best’s expectations. A.M. Best expects Old American to remain profitable on both a statutory and GAAP accounting basis in the near to medium term.
Given the stable outlook, A.M. Best believes Kansas City Life and Sunset Life are well positioned for their current ratings. Regarding Old American, positive rating actions may occur due to continued positive trends in its absolute and risk-adjusted capital position as well as continued growth in premiums and favorable earnings.
Key rating drivers that may lead to negative rating actions for the group include a deterioration in risk-adjusted capital, decline in overall earnings or if life insurance sales were to fall short of A.M. Best’s expectations.
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.
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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