A.M. Best Upgrades Ratings of Allmerica Financial Life Insurance and Annuity Company; Assigns Stable Outlook.

OLDWICK, N.J. -- A.M. Best Co. has upgraded the financial strength rating (FSR) to A- (Excellent) from B+ (Very Good) and the issuer credit rating (ICR) to "a-" from "bbb-" for Allmerica Financial Life Insurance and Annuity Company (AFLIAC) (Worcester, MA). The ratings have been removed from under review and assigned a stable outlook.

These rating actions reflect AFLIAC's strong capitalization; activation of a dynamic business strategy of actively reinsuring variable and fixed annuities; the expectation of positive earnings development; and the hedging techniques implemented to mitigate investment risk. These ratings also reflect the added scale represented by the recent acquisition of a significant block of variable annuity business and the commitment of its new parent, The Goldman Sachs Group, Inc., a leading global securities and investment management firm, as a source of additional future capital to support its business plan.

Offsetting rating factors include the uncertainty regarding the success of the new long-term business strategy and the challenges in attaining the economies of scale required to run a viable variable annuity business model.

A.M. Best believes that AFLIAC and its parent have the expertise and infrastructure resources to expand the business of reinsuring variable and fixed annuities, from both an administrative and an investment management perspective. In addition, the recent acquisition of a significant block of variable business adds scale to AFLIAC's operations. In conjunction with this acquisition, a hedging strategy has been implemented to reduce the level of volatility required to cover potential guaranteed minimum death benefit exposure resulting from possible declines in the equity market. This hedging strategy was developed in partnership with AFLIAC's new parent.

Despite these positive attributes, A.M. Best believes AFLIAC may encounter challenges in building its annuity book of business, namely re-establishing former business relationships and building new ones in an industry where a number of new entrants with low cost structures are also competing for business. Also, if additional blocks cannot be acquired because of price, competition, or other reasons, the required scale for variable annuity business may not be attained.

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