A.M. Best Revises Outlook to Negative for 5 Star Life Insurance Company

A.M. Best has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of 5 Star Life Insurance Company (5 Star) (Baton Rouge, LA). 5 Star is a wholly-owned subsidiary of Armed Forces Benefit Association (AFBA).

The revision of the outlook reflects 5 Star’s ongoing operating losses, which resulted from planned new business growth and has been partially funded by increased utilization of debt and external reinsurance to support capital strain. A.M. Best notes that management has partially addressed operating losses through tempered sales growth within its final expense product, a redesign of its term product for capital efficiency, along with the aforementioned reinsurance agreements. Despite these actions, A.M. Best notes that 5 Star is expected to have continued operating losses in the near-term with lower overall financial flexibility. A.M. Best acknowledges that a portion of the anticipated proceeds from the sale of AFBA’s bank subsidiary will be contributed to 5 Star to support near-term operating losses.

The rating affirmation reflects 5 Star’s strong position within its niche military and federal employee marketplace, expansion into worksite marketing and moderate levels of investment risk. The company’s risk-adjusted capitalization remains adequate and is supported by an underwriting arrangement with AFBA for its group affinity term product, with all risk retained at AFBA. Additionally, 5 Star’s balance sheet is qualitatively enhanced by retention of XXX reserve redundancies, which over time will reverse and become accretive to earnings. The rating affirmation also reflects financial leverage at 5 Star and AFBA that are within A.M. Best’s guidelines, although interest coverage is weak due to operating losses at both entities. However, there is additional liquidity at AFBA to meet current debt service requirements and provide capital to support 5 Star’s growth.

Factors that could lead to a revision of the outlook to stable include organic growth in capital, a trend of profitability on a statutory and GAAP basis, reduced utilization of financial leverage to fund growth and improved financial flexibility. A downgrade in the ratings could occur following continued operating losses, increased utilization of financial leverage or reinsurance to support capital or a material decline in capitalization.

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.

Key insurance criteria reports utilized:

• A.M. Best’s Liquidity Model for U.S. Life Insurers

• Evaluating Non-Insurance Ultimate Parents

• Risk Management and the Rating Process for Insurance Companies

• Understanding BCAR for U.S. and Canadian Life/Health Insurers

• Understanding Universal BCAR

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

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