The rating actions reflect FFG’s significant level of unrealized losses in its investment portfolio, high level of real-estate linked assets, limited financial flexibility and high intangibles to equity, the rapid growth in annuity reserves within the organization and the losses reported in its 2008 GAAP results, due primarily to one-time deferred acquisition cost and sales inducement adjustments related to anticipated surrenders at EquiTrust Life.
FFG reported a 53% decline in its GAAP equity between the third and fourth quarters of 2008 due to a significant increase in its accumulated other comprehensive loss. As these unrealized losses do not flow through statutory statements, the reported capital for the life insurance entities remained stable and increased modestly due to capital contributions and permitted practices in the state of Iowa. Nevertheless, A.M. Best is concerned with the magnitude of the unrealized losses relative to capital as the company continues to maintain a high exposure to real-estate linked assets, with high growth in its commercial mortgage portfolio over the last several years. While performing to date, a downturn in commercial real estate performance is anticipated given weak macroeconomic conditions. Rapid growth has led to heightened interest rate risk and a high level of intangibles to equity. In addition, A.M. Best believes that spread management will continue to be a challenge for FFG.
The significant annuity growth experienced at EquiTrust has been supported through capital contributions from FFG, primarily from the issuance of debt and originally from ongoing dividend payments from FB Life to its parent. A.M. Best notes that additional leverage was added in 2008 through the fourth quarter issuance of a three-year $100 million note to affiliated companies.
EquiTrust’s interest-sensitive liabilities have shown significant growth, through sales of both indexed annuity products, and more recently, through sales of multi year guaranteed fixed annuities. While the company’s risk-adjusted capitalization is presently viewed as adequate, continued rapid growth and further investment impairments would weaken its capital position.
The ratings continue to recognize FB Life’s more balanced business profile between life and annuity reserves, strong affinity within the Farm Bureau market and stable profitability trends. The ratings also recognize EquiTrust’s rational product design, competent hedging programs and proactive market conduct and compliance programs.
The negative outlook on the ratings reflects A.M. Best’s concern with the reduced level of financial flexibility within the organization in the current unfavorable credit environment, the continued concern with potential future losses in its portfolio and an elevated level of surrenders.
The following debt ratings have been downgraded:
— to “bb” from “bbb-” on $75 million 5.85% senior unsecured notes, due 2014
— to “bb” from “bbb-” on $100 million 5.875% senior unsecured notes, due 2017