UPDATE
NEW YORK (S&P Global Ratings) July 29, 2024--S&P Global Ratings said today it revised its outlook on Mutual of America to negative from stable and affirmed its 'A' long-term issuer credit and financial strength ratings on the company.
Impact Of Revised Capital Model Criteria
The implementation of our revised criteria for analyzing insurers' risk-based capital does not lead to any rating changes. The company's capital position, according to our risk-based capital model for year-end 2023, is unchanged and continues to be redundant at the 99.99% (or extreme stress) confidence level. However, this could come under pressure as the company looks to balance sufficient capital adequacy with its underlying insurance operations and expense initiatives.
The negative outlook reflects our view that MoA is exposed to execution risk as its implements its strategic initiatives. As such, it could take time for these initiatives to translate into meaningful and consistent earnings when compared with peers.
We could lower our ratings in the next 12–24 months if we believe that execution of its strategic initiatives, measured by sales, earnings, returns or market share, fall short of our expectations when compared with similarly rated peers, leading to a weakened competitive position. We could also consider a downgrade if capital adequacy deteriorates to a level that we expect will remain deficient at the extreme stress confidence level of our capital model.
We could affirm the ratings in the next 12-24 months if MoA can effectively execute its strategic initiatives and demonstrate stable profitability, thereby fortifying its strong competitive position and maintaining capital adequacy at the 99.99% confidence level.
The outlook revision stems from consistent lower-than-anticipated earnings, leading to execution risk on both MoA's business and financial risk profiles. Margins have deteriorated since 2017, with the most significant losses arising in 2023 with a net loss of about $235 million. $34 million of these losses are accountable to core operational loss, and the remaining is due to an excess reserves requirement by New York state. As part of the New York State Department of Financial Service's (NYSDFS) recent examination, the NYSDFS conducted an examination of the asset adequacy analysis in accordance with 11 NYCRR 95 (Insurance Regulation 126). For the year-ended December 31, 2023, the NYSDFS required the Company to record $201.0 million of Asset Adequacy Reserves under New York Regulation 126.
Our strong view of MoA's competitive position is driven by its market presence in the niche small to midsize nonprofit market, offering group retirement/annuity products (403(b), 401(k), 401(a), and individual retirement accounts. Its core customer base includes employers with fewer than 100 employees and $1 million to $25 million in retirement plan assets. MoA's direct distribution means better service for its small business customers and differentiates the company from larger peers in its target market. Business line diversity remains limited.
Operating performance has been under pressure as evidenced by a five-year (2019-2023) average return on assets (ROA) of -0.34%. However, the company has multiple strategic initiatives to improve margins that involve increasing revenue while reducing expenses. This includes refreshing its real estate and investment strategy, using reinsurance to minimize risk, developing new products for the individual marketplace, and optimizing capital management while maintaining its competitive advantage in the group retirement market. We will continue to monitor the effectiveness of its strategic initiatives in the coming two years.
We expect the company to hold capital at the 99.99% confidence level according to our model. However, there is potential pressure if the company does not execute its profitability plan. Furthermore, its smaller capital base, with total adjusted capital below $1 billion, leaves it more susceptible to capital and earnings volatility. Additionally, MoA's remaining ownership in its home office building, 320 Park Avenue in New York, has significant unrealized value not explicitly credited in our proprietary capital model.
We view MoA's retirement-focused product as lower risk with no exposure to living benefits or performance guarantee riders. MoA manages its investment portfolio primarily through its wholly owned subsidiary, Mutual of America Capital Management LLC, and maintains a high-quality, well-diversified investment portfolio with an average credit quality of 'A'.
We view MoA's funding structure as neutral to the ratings. As a mutual company, access to capital is limited. MoA has no debt outstanding, and if a capital need arises, it can raise capital by issuing surplus notes.
We view liquidity as exceptional, and we believe the company has sufficient resources to fulfil its obligations under stress.