[May 16, 2014]

A.M. Best Upgrades Issuer Credit Rating of GBU Financial Life

A.M. Best has upgraded the issuer credit rating (ICR) to "bbb+" from "bbb" and affirmed the financial strength rating of B++ (Good) of GBU Financial Life (GBU or the Society) (Pittsburgh, PA). The outlook for both ratings is stable.

The upgrading of the ICR reflects GBU's positive trends in statutory operating earnings and unassigned funds, improving risk-adjusted capitalization, favorable performance metrics relative to its fraternal peers and increasing member base. Partially offsetting these positive factors are the Society's narrow business profile, high sensitivity to interest rates fluctuations and geographic concentration risk.

GBU has reported strong statutory earnings growth in recent years due to effective spread management in its core annuity line of business. Favorable spread margins have been supported by an investment portfolio with a higher net yield than the industry average and by managing crediting rates and controlling expenses. Unassigned funds have increased substantially in the last three years as operating gains have been only minimally offset by dividends to its members. Increases in unassigned funds also have led to improvements in risk-adjusted capitalization. Furthermore, GBU fully reserves its annuity business, which is considered more conservative than traditional methodologies, providing an additional capital cushion not allocated to unassigned funds. GBU has consistently increased its fraternal membership base through strong sales performance, further aided by the recent merger with other Fraternal Benefit Societies.

GBU has a limited business profile as its fixed annuities account for almost all of direct premiums written and reserve liabilities. Ordinary life premiums received primarily from single premium whole life policies have increased in recent years; however, they remain only a modest proportion of the Society's total business. Fixed annuity reserves are interest sensitive and remain vulnerable to spread compression in a low interest rate environment and to disintermediation risk in a period of rising interest rates, although disintermediation risk is partially mitigated by the Society's strong surrender charge protection and historically good retention rates. The Society has managed favorable spreads on its annuities in the current low interest rate environment by moving out the yield curve and purchasing lower investment grade, longer-maturity bonds. While the asset durations are reasonably matched to the Society's liability structure, the asset duration extending beyond the liability exposes the Society to increases in the yield curve, which would negatively impact unassigned funds.

Positive rating actions are unlikely in the near to medium term. Future positive rating movement could occur with an expanded business profile that reduces the concentration risk in interest-sensitive fixed annuities while maintaining favorable trends of operating performance and risk-adjusted capitalization. Factors that could lead to negative rating actions include material spread compression negatively impacting the Society's earnings or losses in the investment portfolio, either of which could cause a decline in risk-adjusted 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.

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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