AM Best Revises Outlooks to Negative for Catholic Order of Foresters

AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “a-” of Catholic Order of Foresters (COF) (Naperville, IL).

The Credit Ratings (ratings) reflect COF’s balance sheet strength, which AM Best categorizes as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

The negative outlooks reflect COF’s declining trend of operating performance, where operating losses have been reported over the past two years and through the second quarter of 2020. Operating losses have been impacted by declining investment income in its small business loan interest-only strip holdings where there have been excess prepayments in recent years due to declining interest rates. AM Best believes that as the number of small businesses close due to the COVID-19 pandemic, it may impact COF's ability to receive interest income from these holdings. Operating performance also is impacted by declining portfolio yields, low lapses and higher morbidity within its discontinued long-term care (LTC) line of business. While COF is monitoring and managing its LTC exposure actively through rate increases where feasible, AM Best notes that COF will be challenged to obtain operating profitability. Additionally, further spread compression is likely due to continued low interest rates along with a significant percentage of contracts with high minimum guaranteed crediting rates.

The affirmation of the Long-Term ICR includes COF’s risk-adjusted capitalization assessment as strong, which is supported by low use of reinsurance and financial leverage. Liquidity capability is good, supported by a line of credit and Federal Home Loan Bank facility. COF is a regional insurer in the Midwest targeting middle-income Catholic families, small business owners, pre-retirees and retirees. Partially mitigating factors include elevated investment allocations in more volatile and/or less-liquid asset types such as SBA interest-only securities, below investment grade bonds, commercial mortgages and collateralized loan obligations.

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