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TMCNet:  A.M. Best Affirms Ratings of United Services Automobile Association, Its Subsidiaries and USAA Capital Corporation

[December 04, 2013]

A.M. Best Affirms Ratings of United Services Automobile Association, Its Subsidiaries and USAA Capital Corporation

OLDWICK, N.J. --(Business Wire)--

A.M. Best Co. has affirmed the financial strength rating (FSR) of A++ (Superior) and issuer credit ratings (ICR) of "aaa" of United Services Automobile Association (USAA) and its property/casualty and life/health subsidiaries. Concurrently, A.M. Best has affirmed the debt rating of "aaa" on the medium-term note program and the debt rating of AMB-1+ on the commercial paper program of USAA Capital Corporation. The outlook for all ratings is stable, with the exception of the commercial paper, which does not have an outlook. Both companies above are domiciled in San Antonio, TX. (See below for a detailed listing of the companies and ratings.)

The rating affirmations reflect USAA's superior capitalization and strong operating results through focused business and financial strategies. USAA maintains diversified sources of earnings, capital accumulation and strong enterprise risk management (ERM) with a full range of financial products and services to its membership of military and ex-military personnel and their dependents. USAA's low cost structure, high customer retention, effective use of technology and exceptional customer service capabilities has enabled it to build a sustainable competitive advantage in the personal lines sector. As a result of these strengths, USAA has built a sizeable market position, especially in the property/casualty segment, as the nation's seventh-largest private passenger auto and sixth-largest homeowners' policy provider, based on 2012 industry direct premium data.

Partially offsetting these positive rating factors is USAA's exposure to frequent and severe weather-related events, with nearly 40% of its premium volume derived from catastrophe-prone states. This exposure was evidenced over the past five years, as catastrophe activity resulted in considerable losses.

However, despite the frequent and severe catastrophe losses of recent years, USAA continues to produce favorable earnings and surplus growth, and in years with somewhat milder weather patterns such as 2013, it has been able to generate exceptionally strong operating earnings and excellent surplus growth. This was evidenced based on USAA's performance through September 30 of the current year, when it produced nearly $2.1 billion in surplus growth, a double-digit increase from year-end 2012 levels, as well as its solid underwriting results and operating earnings, which partlybenefited from the lack of major weather events. However, as part of its ERM, USAA has developed strong catastrophe management and a sound reinsurance program designed to preserve the capital and financial security of its membership. These actions were rewarded in the fourth quarter of 2012, as the impact from Superstorm Sandy, though significant, had a somewhat muted effect on USAA's underwriting results, which nearly broke even for the year (inclusive of dividends), while surplus still grew 9% in 2012 from year-end 2011 levels.


In addition, USAA maintains a relatively conservative investment strategy, which has enabled it to experience favorable investment returns even during times of significant market turmoil and record low interest rates. These positive attributes have allowed USAA to retain its superior ratings. Still, factors that could result in downward rating movement include significant deterioration in USAA's underwriting and operating performance, a sudden large or catastrophic loss event that materially hinders its risk-adjusted capitalization, a material deviation from its submitted financial projections and any event that causes significant damage to its brand identity and reputation in the marketplace.

USAA's capitalization, operating strength, customer base and available resources at the group level strongly support the life insurance operations, referred to as USAA Life. The ratings of USAA Life are based on its superior risk-adjusted capitalization and strong operating results (on both a GAAP and statutory basis) while supporting USAA's strategy of facilitating the financial security of its members through a full range of financial products and services. Rating consideration also includes strong liquidity coverage ratios along with integrated ERM practices to mitigate stress events throughout the organization.

Partially offsetting these positive rating factors are the challenges associated with balancing USAA Life's earnings/reserves mix of mortality versus annuities while achieving spreads on its annuity business in this low interest rate (albeit improving) environment. While USAA Life has reduced its exposure to commercial mortgage-backed securities (including no new investments through 2013), its overall exposure to capital is high relative to the industry.

USAA Life is well positioned at its current rating level. However, negative rating actions could occur if the business profile and/or relative importance of the life operations and its role within the group materially changes. Additional downward rating drivers include a sizable increase in annuity reserves as a percentage of total reserves, a significant deterioration in operating performance and material impairments or realized losses in its investment portfolio, which would result in diminished capitalization levels.

The FSR of A++ (Superior) and ICRs of "aaa" have been affirmed for United Services Automobile Association and its following property/casualty and life/health subsidiaries:

  • USAA Casualty Insurance Company
  • USAA General Indemnity Company
  • USAA Limited
  • USAA Texas Lloyd's Company
  • USAA County Mutual Insurance Company
  • USAA Life Insurance Company
  • USAA Life Insurance Company of New York

The following debt ratings have been affirmed:

USAA Capital Corporation-

--"aaa" on the medium-term note program

--AMB-1+ on the commercial paper program

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.


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