A.M. Best Affirms Ratings of RBC Insurance Group’s Life/Health Members

A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit ratings of "a” of the life/health members of RBC Insurance Group (RBC Insurance): RBC Life Insurance Company (RBC Life) (Mississauga, Ontario) and its U.S. life insurance entity, Liberty Life Insurance Company (Liberty Life) (Greenville, SC). The outlook for all ratings is stable.

RBC Life’s ratings reflect its strong risk-adjusted capitalization, generally increasing premium trends, as well as the overall strength and stability of RBC Insurance. RBC Life is the Canadian life insurance operation of RBC Insurance, a division of Royal Bank of Canada (RBC) [TSX and NYSE: RY]. RBC Life maintains a significant market position in the individual living benefits and group long-term disability insurance markets, where it is among the industry leaders in Canada. In addition, RBC Life has focused recently on growing its individual life segments, primarily through the sale of universal and term life insurance. This growth has been accomplished while the company has maintained a favorable risk-adjusted capital position and profitable overall results.

Partially offsetting these positive rating factors are the challenges RBC Life faces while trying to obtain greater market share in the Canadian individual life arena, as well as fluctuating earnings in the group and individual accident and sickness markets. This volatility is due to the strengthening of morbidity assumptions and cyclical claims experience. Furthermore, RBC Life maintains a modest position in the wealth management market through its general account annuities and segregated funds. RBC Life also has generated inconsistent results in its individual life line over the last several years, although 2008 results were positive. Earnings have been impacted by the front-end costs related to new sales growth (strain) and the continued low interest rate environment offset by improvements of business growth attributed to new product enhancements. A.M. Best expects RBC to continue to support RBC Life’s growth initiatives, if needed, as it has demonstrated in the past.

The ratings of Liberty Life recognize its good capitalization, profitable operating results and ultimate ownership by RBC Insurance. Liberty Life continues to benefit from its affiliation with RBC, including distribution opportunities afforded by other RBC companies in the United States that provide investment, mortgage and banking services. Liberty Life’s ratings also reflect the capital support from RBC to fund growth. This support was most recently demonstrated when Liberty Life received two capital contributions in 2009 totaling $50 million.

Partially offsetting these positive rating factors is Liberty Life’s modest business profile, as evidenced by declining net premiums from the in-force block of life business, interest rate risk and high exposure to real estate linked assets. Prior to 2009, limited growth trends had limited the cost benefits of scale. However, the company recorded significant new premium growth through third quarter 2009, driven by strong sales of fixed indexed and fixed annuity products. Liberty Life also maintains a large exposure to mortgage-backed securities, which accounts for approximately half of its fixed income portfolio, as well as a sizeable allocation to commercial mortgage loans. While the commercial mortgage loan portfolio has performed well, A.M. Best remains concerned that this asset class could face pressure given weak conditions in the U.S. commercial real estate market. Liberty Life will need to manage interest rate and disintermediation risk prudently given its significant level of interest-sensitive liabilities. Liberty Life also has recorded a downward trend in capitalization, including the impact from realized investment losses and impairments in recent periods.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.