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KBRA Upgrades GCU to A- With Stable Outlook

February 9, 2022

GCU is pleased to announce our financial strength credit rating has been upgraded from BBB+ to A- by the Kroll Bond Rating Agency, LLC and its affiliates (KBRA). The A- credit rating is a measure of GCU’s sound financial condition and our likely ability to meet policyholder obligations under difficult economic, financial, and business conditions.

KBRA is a global full-service rating agency with a mission to set a standard of excellence and integrity. Established in 2010, KBRA remains dedicated to the restoration of trust in credit ratings by creating new standards for assessing risk and by offering timely and transparent ratings. It strives to provide the investment community with the products and tools needed to make informed investment decisions.

The rating upgrade reflects GCU’s continued favorable growth trends in surplus and overall capital base which remain underpinned by its demonstrated, consistent trends of profitability. Our balance sheet and membership continue to grow against the headwinds of a challenging interest rate and investment environment. Over the past few years GCU has evolved and strengthened its corporate governance, investment management, and enterprise risk management policies and practices.

Key Credit Considerations.
Continued Growth in Capital Base and Profitability Strong capitalization growth and highly favorable trends in total adjusted capital (TAC). Year-end 2020 TAC was $191.1 million, reflecting an increase of over 550% since 2010. TAC is expected to strengthen in 2021 as surplus through 3Q 2021 is up nearly 9% from a year prior. Risk based capital (RBC) company action level (CAL) has settled in the 350-400% range. Net gains from operations have averaged a strong $26.9 million across the 2015-2020 period.

Expanding Membership
During a period when fraternals are experiencing membership declines, GCU has roughly 47,600 members, representing a 16.4% increase from 2011. Management believes distribution strategies, attractive rates and commissions, and excellent customer service continue to drive membership.

Strategic Diversification Efforts
Explicitly targeting a diversification of its business, GCU plans to grow its life insurance portfolio, optimize distribution, and target new geographies and demographics. Life premiums through November 2021 totaled $8.8 million compared to $5.5 million for 2020. Life premiums remain just over 3% of total premium writings.

Potential for Spread Compression
Annuity block is susceptible to spread compression (as of 3Q 2021, 59% of annuity reserves are held in products with a guaranteed rate of 3.0% or higher) and disintermediation (75% of annuity reserves have no or minimal surrender charge). However, GCU’s consistently above-average investment yield (5.0% or higher across the 2015-2020 period) and generally high-credit quality invested asset portfolio are mitigants. Further, the launch of its fixed indexed annuity product may provide some insulation from the current prolonged low interest rate environment.

Exposure to Reinvestment Risk
Notable exposure to reinvestment risk given product portfolio and required yield to meet guaranteed rates in the annuity block. However, target spreads are still being achieved as the society continues to actively manage its credited rates across product offerings and refines asset reallocations to maximize yield.

Lack of Business Diversification
Business mix is highly concentrated as reserves are almost entirely interest-sensitive (between 95% and 96% as measured at YE 2016-2020).

Notable Recent Developments.
GCU remains focused on controlled, strategic growth of its suite of life and annuity products. Earnings and surplus growth remain favorable as its balance sheet continues to strengthen. To date, COVID-19 has not had a material adverse impact on mortality or financial operations.
* GCU launched its fixed indexed annuity (FIA) product in October 2021, which will complement its deferred fixed rate annuity product in the current low interest rate environment. GCU launched its final expense product in the fourth quarter of 2020.
* GCU’s balance sheet remains sound. As of 3Q 2021, total assets were $2.4 billion, and surplus strengthened to $198.7 million.
* Despite the sustained low interest rate environment and the impact of the COVID-19 pandemic, GCU maintained favorable operating margins.
* Through 11 months ended 2021, total premium revenue was $274.7 million, an increase of over 42% from the same period a year prior. Life premiums ($8.8 million) increased 126% while annuity premium and exchanges ($265.4 million) increased over 40%. Life sales remain driven by its whole life single premium and final expense products.

Rating Sensitivities.
For upgrade:
 Sustained earnings and continued favorable capital trends
 Significant controlled growth in life insurance sales which materially improves reserve mix
 Maintenance of above-average investment performance without compromising credit quality
 Favorable, sustained growth of indexed annuity product without undue impact on surplus or risk adjusted capital

For downgrade:
 Material change in risk profile
 Sustained decline in earnings or material investment losses
 Lack of credited rates discipline
 Failure to execute upon business plans or substantial uncontrolled growth which pressures surplus
 Departure of key members of the management team

Tim Demetres | CFO

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