On December 21, 2018, Kroll Bond Rating Agency (KBRA) assigned an insurance financial strength rating (IFSR) of BBB- with a Stable Outlook to ELCO Mutual Life and Annuity (ELCO), a life insurance and annuity company based in Lake Bluff, Illinois.
The rating reflects ELCOs consistent strong top-line growth and stable operating income, which is largely being generated by its flagship product, a Medicaid-compliant annuity (MCA). The MCA is a unique product and carries significant barriers to entry, as it is largely marketed by elder law attorneys. The product design provides significant advantages to ELCO including irrevocability (cannot be surrendered or assigned to a third party); level payouts for a guaranteed period (making it predictable); and considerable spreads. Additionally, KBRA views the market for MCA products as relatively untapped with few competitors, which could support significant growth in the foreseeable future. ELCO employs a niche strategy within the senior market and benefits from a balanced portfolio of annuity and life insurance products, which should help diversify its reserve mix over time.
Tempering these credit strengths is ELCOs substantial growth in annuity deposits, which has led to significant reserve increases and negatively impacted its capital ratios. This growth has historically necessitated extensive use of reinsurance to alleviate the capital strain. Although KBRA views the companys current capitalization as adequate, ELCOs risk-adjusted capital ratios have historically been modest when compared to peers. KBRA recognizes the improvements that management has made in the last few years, as reserve growth appears to be stabilizing and operating earnings have facilitated capital growth since year-end 2015. Moreover, KBRA believes there is room for improvement in ELCOs corporate governance, strategic planning and enterprise risk management (ERM) processes. KBRA views corporate governance, strategic planning, and ERM practices as essential for a life insurer to remain financially sound over the long term.
The rating is based on KBRAs Global Insurer & Insurance Holding Company Rating Methodology published on October 10, 2017.
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Edelsberg, Managing Director
Halverstadt, Managing Director