Fitch Ratings has affirmed Navy Mutual Aid Association's (NMAA) Insurer Financial Strength (IFS) rating at 'A+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
NMAA's IFS rating and Stable Outlook reflect the association's extremely strong capitalization, high-quality and liquid investment portfolio, and modest profitability. The ratings also consider the company's interest-sensitive product profile along with its narrow focus and relatively small scale.
NMAA maintains extremely strong capitalization with an RBC ratio of 470% as of Sept. 30, 2014 compared with 469% at year-end 2013. The company's TAC increased approximately 4% to $239 million for the first nine months of 2014, driven primarily by investment performance and modest earnings.
NMAA has one of the most conservative investment portfolios in Fitch's universe. The company's investments are liquid and heavily concentrated in U.S. government or U.S. government-guaranteed debt. Total risky assets, which include below investment-grade bonds, troubled real estate, unaffiliated common stock and Schedule BA assets, in relation to TAC was low at 43% compared with an industry average of 86%.
The company has increased its exposure to private placements in recent years to augment yields and combat continued low interest rates. Mortgage loans make up approximately 4% of NMAA's total invested assets.
NMAA generates solid investment performance relative to the industry, which allows it to credit high levels of interest on its life insurance policy reserves and maintain favorable persistency. NMAA's investment yield was approximately 6% through the first nine months of 2014 and has consistently been near or greater than that level for the past several years.
NMAA's investment yield is expected to decline in 2015, as maturing higher yielding bonds are replaced by lower yielding bonds. To mitigate the impact, the company reduced its crediting rate in the fourth quarter of 2014. Fitch expects yields to remain in excess of crediting rates.
NMAA's profitability trails peers, given its strategy of distributing excess earnings to its members through relatively high crediting rates. The company targets a level of profitability that maximizes value to its members while supporting new business growth and providing a cushion against unexpected losses. The company reported a $2.8 million net operating gain for the first nine months of 2014, compared with $16.7 million for the prior year period.
Rating concerns include the long-term challenge of membership growth and limited access to capital markets. However, Fitch considers financial flexibility adequate for NMAA's unique business profile and product portfolio.
NMAA has a solid niche position as a low-cost provider of insurance protection products to the United States Sea Services and their families. NMAA serves active, reserve and retired members of the U.S. Navy, U.S. Marine Corps, U.S. Coast Guard, U.S. Public Health Service and National Oceanic and Atmospheric Administration and had total assets of approximately $2.8 billion as of Sept. 30, 2014.
RATING SENSITIVITIES
Fitch views NMAA at the upper end of its IFS range. NMAA's ratings are based in part on its unique profile as a nonprofit institution serving a narrow customer base. Fitch believes NMAA's history and primary strategy of providing high-value products to its customers and maintaining prudent levels of reserves and capital (rather than generating stronger earnings and higher capital levels), limits the upside range of its IFS rating.
Key ratings triggers that could result in a downgrade include:
--A decline in estimated RBC to below 300% company action level;
--A spike in investment-related losses or a trend of sustained net operating losses;
--A significant change in war risk exposure and experience;
--An unfavorable change in tax/regulatory status.
Fitch affirms the following rating with a Stable Outlook:
Navy Mutual Aid Association
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (September 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=935096
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