Standard & Poor’s Ratings Services has announced two major rating actions.
S&P, New York, reduced the counterparty credit and financial strength ratings of Penn Treaty Network America Insurance Company to B minus, from B.
The rating agency also increased the credit and financial strength ratings it has assigned New York Life Insurance Company, New York, and New York Life’s New York Life Insurance & Annuity Corp. subsidiary to AAA, from AA plus.
S&P lowered the ratings on Penn Treaty, a company that helped create the modern long term care insurance market, because Penn Treaty’s parent, Penn Treaty American Corp., Allentown, Pa., failed to “file its year-end 2006 10-K in a timely fashion,” Neal Freedman, an S&P analyst, says in a discussion of the downgrade.
“This continues a pattern of failure to file its [Generally Accepted Accounting Principles] financial statements within the required time frames,” Freedman says. “Standard & Poor’s believes that this indicates a continuing serious lack of control over the company’s financial reporting function.”
Although Penn Treaty’s insurance subsidiary has filed its statutory financial statements on time, the lack of audited GAAP financial statements limits the parent company’s financial flexibility, S&P says.
Once the parent company returns to a standard financial reporting schedule, S&P likely would change its outlook on the company to positive, S&P says.
Penn Treaty says in respond that it has been late with its GAAP filings mainly because it was asking the U.S. Securities and Exchange Commission for advice about how to apply new accounting rules.
Getting the answers took more than 5 months, and “the company is in process of becoming current with all filings following that initial delay,” Penn Treaty says.
Penn Treaty now has a risk-based capital ratio of 869%, substantially greater than the minimum regulatory requirement of 200%, and sales have been about as strong this year as they were in 2006, the company says.
Claims on policies issued since 2001 have been below pricing expectations, and the company’s “quick hit ratio” – the percentage of policies entering claim in the first policy year – fell to 0.2% in 2006, from 0.4% in 2005 and 0.6% in 2004, Penn Treaty says.
In addition, “the company has no exposure, either directly or indirectly, to subprime mortgages,” Penn Treaty says.
Meanwhile, in related news, New York Life is celebrating its upgrade and the upgrade of NYLIAC.
“The upgrade reflects the companies’ extremely strong competitive position and capitalization, very strong and stable earnings, and appropriate enterprise risk management,” says Jon Reichert, an S&P credit analyst.
“The company’s clear competitive advantage is the effectiveness of its career agency force strategy,” S&P says.
The company has increased life sales despite facing tough competition, and it also has been successful in the LTC insurance market, in the investment management market, and in international markets in countries such as India and Mexico, S&P says.
Operating profits have been strong, and, “as a mutual company, NYL manages for long-term earnings growth and stability of policyholder dividends but can absorb some short-term earnings volatility,” S&P says.
Because of New York Life’s emphasis on participating whole life insurance, “the company has avoided the most aggressive products and features seen in the marketplace,” S&P says. “This conservatism has augmented an already extremely strong capital base.”