Ultimate Parent:
Royal Bank of Canada
LIBERTY LIFE INSURANCE COMPANY
Mail: P.O. Box 1389, Greenville, SC 29602-1389 Web: www.rbcinsurance.com
Tel: 800-551-8354 Fax: 864-609-4768
AMB#: 06175 NAIC#: 61492
Ultimate Parent#: 31505 FEIN#: 44-0188050
BEST’S FINANCIAL STRENGTH RATING
Based on our opinion of the company’s Financial Strength, it is assigned a Best’s Financial Strength Rating of A (Excellent). The company’s Financial Size Category is Class IX.
RATING RATIONALE
Rating Rationale: The rating of Liberty Life Insurance Company (Liberty Life) reflects the company’s favorable risk-adjusted capital-ization, profitable aggregate operating results, and the ultimate owner-ship and financial commitment of RBC Insurance. Offsetting these factors are the company’s challenges to increase its market position in the fixed and indexed annuity segments, high exposure to collateral-ized mortgage obligations (CMOs) and mortgage loans, and generally declining operating earnings.
Liberty Life maintains a very good risk-adjusted capital position given its business and investment risks. However, absolute capital and surplus levels have trended downward over the last several years. The company benefits from the strong support of its ultimate parent, Royal Bank of Canada, and the additional distribution provided by other RBC companies in the United States which provide investment, mort-gage and banking services. The company also reduced its leverage
through the partial repayment of its surplus note in 2007. Liberty Life has recorded generally positive net income over the last five years. A net loss was recorded at year-end 2008 due primarily to real-ized capital losses attributable to other-than-temporary impairments in the investment portfolio.
In recent years, Liberty Life’s growth in its fixed and indexed annuity business had been declining due to the low interest rate environment and strong competition in these markets, resulting in a marginal presence in the wealth management market. However, during the first nine months of 2009, the company’s fixed annuity sales have increased significantly due to the high market demand for these products. This growth has also resulted in surplus strain and as a result, additional capital that was available upstream for the company has been drawn down during the quarter. Going for-ward, Liberty Life will need to manage interest rate and disinter-mediation risk prudently given the significant level of interest-sensitive liabilities within its business. The company also maintains an elevated position in mortgage-backed securities, as well as commercial mortgage loans. However, historical perfor-mance of the mortgage loan portfolio has been good, with very few delinquencies or foreclosures. In addition, profitability from the block of in-force life business has declined while new product ini-tiatives have yet to establish positive trends. A.M. Best anticipates that Liberty Life will continue to have parental support as it imple-ments its business strategy.
Best’s Financial Strength Rating: A Outlook: Stable
Best’s
Rating
Report
LIBERTY LIFE INSURANCE COMPANY
Greenville, South Carolina
KEY FINANCIAL INDICATORS ($000) Total Capital
Capital Condit’l Net Net
Surplus Reserve Premiums Invest Net
Year Assets Funds Funds Written Income Income
2004 3,553,437 273,545 33,890 560,339 189,761 30,347 2005 3,745,064 274,937 34,369 564,237 200,941 32,426 2006 3,770,946 268,504 31,298 461,705 201,154 19,988 2007 3,722,392 261,542 29,587 318,906 200,190 39,259 2008 3,597,209 234,251 5,893 294,941 197,748 -19,111
The published year end results are for Business Men’s Assurance Company of America (BMA), however, BMA and Liberty Life were merged on June 30, 2006.
BUSINESS REVIEW
On June 30, 2006 Liberty Life Insurance Company (Liberty Life) was merged into Business Men’s Assurance Company of America (BMA). Simultaneously, BMA was renamed Liberty Life Insurance Company. Liberty Life Insurance Company is a wholly owned sub-sidiary of RBC Insurance Holdings (USA) Inc., the U.S. insurance operation of Royal Bank of Canada (RBC). It operates under the brand name RBC Insurance.
Through the acquisitions of Liberty Life Insurance Company and BMA, RBC entered the life insurance market in the United States, complementing its existing businesses in personal and commercial banking, full-service brokerage and corporate and investment banking services through multiple distribution channels. The life and health operations of Liberty Life were principally conducted through three divisions: Agency, Financial Institution Sales (FIS), and Direct Sales (including the internet), while BMA was engaged primarily in the sale of fixed annuities, variable products and guaranteed investment con-tracts (GICs), with a modest amount of traditional life and health insurance. The traditional life and health insurance segments include term life, universal life and interest-sensitive whole life products.
The merged operations provide life and health insurance, annuities and related personal financial security products to consumers through three product marketing divisions, with distribution through indepen-dent channels such as regional broker dealers and national marketing organizations; the Internet and other direct marketing channels; a pro-prietary sales force, and RBC banking and investment channels.
The Life Protection Products division markets a portfolio of tradi-tional whole life, indexed universal life, critical illness and cancer expense insurance, and term life insurance. RBC LevelTERM, which is traditionally underwritten term life with pricing for tobacco users, has a significant share of this market segment. RBC ExpressTERM is one of the first widely distributed simple issue term life insurance products available for online purchase. Life protection products are marketed primarily through independent marketing organizations, including major term life insurance aggregators and the Internet.
The Specialty Products division markets decreasing term life, acci-dental death and disability insurance products designed to fund the outstanding balance of a residential mortgage upon the death or dis-ability of the insured. These products are distributed primarily through financial institutions using direct response channels, with a focus on top quartile banks with large mortgage servicing operations. A tele-marketed accidental death product formerly sold by the division is in run-off, and A.M. Best notes challenges in the residential mortgage market may impair sales growth in this segment.
The Retirement Income Products division manages a portfolio of traditional fixed and fixed index annuities that provide wealth accu-mulation, transfer, income and liquidity for planned and unplanned life events. The products are distributed primarily through indepen-dent marketing companies, including regional and national market-ing companies servmarket-ing independent agents and registered representatives. The division’s fixed and indexed annuities had post-ed weaker sales in recent years due to unfavorable market conditions and a high level of competition for these products. However, sales activity has increased recently due to the introduction of several new products, the financial stability provided by RBC, and a favorable market for fixed annuity products.
The company’s Agency division is now operated as a company-owned independent marketing organization that recruits independent life insurance and annuity producers and includes approximately 175 captive agents, marketing individual life, including universal life and term life, individual annuities, variable products and health insurance (critical illness and cancer expense insurance). The division main-tains a regional focus in the Southeast and has built a respectable market share in the Carolinas and Louisiana.
The company’s separate accounts include a variable annuity and a variable universal life line of business that support its strategic focus on wealth accumulation, transfer, income and liquidity for planned and unplanned life events. The company previously offered insurance GICs in a separate account and in 2007, this segment completed its runoff. Separate account assets are modest and growth has been lim-ited. Effective December 31, 2008, the company discontinued sales of variable products.
RBC’s activity in the United States financial services sector should afford Liberty Life opportunities to cross sell products and services in both its Agency and Life Protection divisions. Life insurance agents can now partner with RBC Bank and RBC Wealth Management, affording Liberty Life the opportunity to distribute products in the retail banking and brokerage channel. In addition, the company has supplemented organic growth through several acquisi-tions and through partnerships with new distribution partners. Premium levels declined in 2007 and 2008, primarily caused by sig-nificant reductions in individual annuity sales. However, through the first three quarters of 2009, premium levels have increased signifi-cantly, as a result of new fixed and fixed indexed annuity premium growth. Given the current favorable market for fixed products, A.M. Best would expect this trend to continue in the near term.
During 2008, the company released three new term products, two mortgage products and a whole life product. All of these new offer-ings are based on the 2001 CSO mortality tables. A new annuity product was also introduced: Enhanced Choice 10. A new adminis-tration system for its Express TERM product was also completed as well as a new agency compensation system, which should allow for a more competitive compensation structure through split commis-sions and added flexibility. Additionally in 2009 the company has release some multi-year guaranty annuities and added a Guaranteed Living Withdrawal Benefit rider that is available on its fixed indexed annuities.
Best’s
Rating
Report
EARNINGS
Net operating gains have remained positive but have fluctuated over the last five years. Net income has fluctuated over the last five years due to realized capital gains and losses. In 2008, a net loss was record-ed and was primarily attributable to other-than-temporary impairments in the investment portfolio, primarily in its fixed-income holdings. In addition, individual business segment results during the latest five year period have shown significant fluctuations. The ordinary life line con-tinues to be the primary contributor to net operating gain, although of a sequentially declining level. The group business line primarily con-sists of its accidental death and decreasing term life products market-ed by its Specialty Products division. As the direct marketing costs (statement mailings and direct mail campaigns) often precede the actu-al premium, losses have been recorded in the group life and heactu-alth lines on a regular basis in recent years. Strain related costs have been reported in its direct life line, while the individual annuity line has shown declining strain related costs due to lower sales. The results since the acquisition have shown more balance from the core life and annuity lines, with approximately one-half of insurance reserves rep-resented by life insurance with the remainder primarily in annuities.
One-year ROEs have remained below 10% the last three years. Costs associated with product development and expanding the distrib-ution network, along with declining direct annuity premium and the run-off of in-force life business have contributed to this decline.
Through third quarter 2009, a net loss was recorded. This loss was attributable to increased new premium production as well as realized capital losses as a result of other-than-temporary impairments in the investment portfolio.
CAPITALIZATION
Liberty Life’s risk adjusted capital position, as measured by Best’s Capital Adequacy Ratio, is viewed as adequate for its present rating and sufficient to cover its business and investment risks. This view is maintained despite recent declines in absolute capital levels that have been recorded in each of the last three years. The declines were caused primarily by a stockholder dividend paid in 2006 and a principal repay-ment on its surplus note made in 2007. In 2008, capital and surplus declined primarily due to the unrealized losses in the common stock portfolio, a net loss attributable to other-than-temporary impairments in the investment portfolio and a change in the net deferred tax asset. The company’s capital and surplus to liabilities has declined over the last five years and remains slightly below the life industry average. In second quarter 2009, Liberty Life’s ultimate parent, Royal Bank of Canada, injected $20 million in capital into the company to help offset additional investment portfolio impairments as well as the strain of new business production during the first quarter of 2009, which had further reduced aggregate capital levels. Additionally, subsequent to third quarter 2009 published results, Royal Bank contributed an addi-tional $30 million of capital into the company to help cover addiaddi-tional surplus strain from new business production.
With the merger of BMA and Liberty Life in 2006, the capital structure also includes a surplus note of $57.0 million ($31.0 million at year-end 2008) payable to its parent, RBC Insurance Holdings (USA) Inc. At year end, the note represented approximately 13% of permanent capital. A.M. Best believes the company will continue to
benefit from the strength and support of its owner, the Royal Bank of Canada.
INVESTMENTS AND LIQUIDITY
Investments are primarily in public investment grade bonds and commercial mortgage loans, with the remainder of the portfolio in equities, contract loans, cash and short-term investments and Schedule BA assets. The company seeks investments in undervalued sectors and securities, while continuing the approach of acquiring fixed-income debt obligations of intermediate maturities and medi-um/high grade credits. This has led to the bond portfolio, which is more than 75% of invested assets, to be almost entirely of investment grade quality. The company maintains a high concentration of its fixed income instruments (slightly over half) in mortgage-backed securities, which is above the U.S. life industry average. This includes some investments in Alt-A loans, most of which are older vintage loans. The majority of CMOs are well-structured bonds that mini-mize prepayment and extension risk compared to pass-through secu-rities. All CMOs are backed by fixed rate mortgages with approximately two-thirds comprised of agency securities. In addition, there are no CDOs or structured notes in the portfolio and there are only a nominal amount of securities that are insured by guarantors.
During 2008, realized and unrealized investment losses impacted Liberty Life’s overall investment performance. A.M. Best notes that the company is currently exposed to a significant gross unrealized loss position that is maintained across a range of asset classes including mortgage-backed structured securities, asset-backed securities, and both public and private corporate fixed-income securities. However, A.M. Best recognizes that the company is actively monitoring its unrealized loss position and plans to hold its assets to maturity.
The company maintains a mortgage loan portfolio that consists entirely of commercial loan holdings. These loans are diversified by property type and are represented by a large number of relatively small individual loans. Outstanding loan values range up to approx-imately six million dollars in size. Loan fundings are limited to no more than 75% of the market value of the real estate at the origina-tion date, with a current aggregate loan-to-value ratio of around 57%. The mortgage portfolio is monitored on an individual loan basis annually by the use of operating statement reviews. The geo-graphic exposure of the portfolio is spread out over forty states, with the largest concentration in the South Atlantic area of the United States (Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia). There are no single large exposures, and the portfolio has performed well in recent years, providing returns in excess of the risk of the reduced liquidity inherent in mortgages. At year-end 2008, the company had one foreclosed mortgage loan with another loan in restructured status. However, no new mortgage loans have been written since June 2008 (with the exception of a restructuring during 2009) as the corporately mandated limit on total mortgage loan holdings was reached. A.M. Best notes that the company’s exposure to real estate linked assets is high, with investments both directly and indirectly in mortgage loans through its CMO portfo-lio and mortgage loan portfoportfo-lio.
Best’s
Rating
Report
Common stock holdings are comprised primarily of exchange-trad-ed funds investexchange-trad-ed in well diversifiexchange-trad-ed indices and represent approxi-mately 20% of total capital. Preferred equities are nearly all rated as investment grade quality and are in primarily financials and corpo-rates, with the balance in utilities. Total preferred stock represents around 10% of total capital.
The company performs annual cash flow testing. In addition, the company has a rigorous ALM process. The portfolios are segmented by line of business and rebalanced to improve cash flow matching. This process is coordinated by the investment and actuarial areas.
OFFICERS
President and Chief Executive Officer, R. David Black; Senior Vice Presidents, Francis E. Bugge, Michael K. Deardorff; Vice President, Treasurer and Chief Financial Officer, Guy H. Smith III; Vice President, Secretary and General Counsel, Robert T. Coleman III; Vice President and Chief Actuary, John R. Obermeier III; Vice Presidents, Ronald A. DeCicco, Douglas W. Kroske (Investments), Nancy A. Olson, Jerome P. Shaleuly.
DIRECTORS
R. David Black, Michael K. Deardorff, Neil D. Skelding. TERRITORY
The company is licensed in the District of Columbia, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY.
Best’s
Rating
Report
Balance Sheet Assets ($000)12/31/2008
*Total bonds . . . $2,617,920
*Total preferred stocks . . . .
22,017
*Total common stocks . . . .
51,037
Mortgage loans . . . .
562,026
Real estate . . . .
99
Contract loans . . . .
102,929
Cash & short-term inv . . . .
113,988
Prems and consids due . . . .
7,858
Accrued invest income . . . .
26,284
Other assets . . . .
72,890
Separate account bus . . . .
20,162
Assets . . . $3,597,209
Liabilities ($000)
Net policy reserves . . . $3,185,729
Policy claims . . . .
29,896
Deposit type contracts . . . .
25,793
Comm taxes expenses . . . .
23,018
Asset val reserve . . . .
5,893
Other liabilities . . . .
72,467
Separate account bus . . . .
20,162
Total Liabilities . . . $3,362,958
Common stock . . . .
9,920
Surplus notes . . . .
31,000
Paid in & contrib surpl . . . .
151,770
Unassigned surplus . . . .
41,561
Total . . . $3,597,209
Best’s
Rating
Report
A Rating Report from the A.M. Best Company represents an independent opinion from the leading provider of insurer ratings of a company’s financial strength and ability to meet its obligations to policyholders.
The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of insurance companies since 1899. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer's claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser.
The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company.
A Best’s Rating is assigned after an extensive quantitative and qualitative evaluation of a company’s financial strength, operating performance and market profile.
Best’s Ratings are assigned according to the following scale: Secure Best’s Ratings
A++ and A+ . . . .Superior A and A- . . . .Excellent B++ and B+ . . . .Good
Vulnerable Best’s Ratings
B and B- . . . .Fair C++ and C+ . . . .Marginal C and C- . . . .Weak D . . . .Poor E . . . .Under Regulatory Supervision F . . . .In Liquidation S . . . .Rating Suspended For the latest Best’s Financial Strength Ratings and AMB Credit Reports visit the A.M. Best web site at www.ambest.com. You may also obtain AMB
Credit Reports by calling our Customer Service department at
+1-908-439-2200, ext. 5742. To expedite your request, please provide the company’s identification number (AMB #).
