Best Affirms United Services Automobile Ass’n. and Subs ‘A++’ Ratings

December 13, 2012

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.

Best also 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 of the ratings is stable, with the exception of the rating on commercial paper, which does not have an outlook. Both companies above are domiciled in San Antonio, Texas.

The rating affirmations reflect USAA’s “superior capitalization and strong operating results through focused business and financial strategies,” Best explained. “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 2011 industry direct premium data.”

As a partial offsetting factor Best cited “USAA’s exposure to frequent and severe weather-related events, with approximately 40 percent of its premium volume derived from catastrophe-prone states. This exposure was much in evidence over the past five years, as catastrophe activity resulted in considerable losses.”

However, Best also indicated that “despite the frequent and severe catastrophe losses of recent years, USAA continues to produce strong earnings and solid surplus growth. This was again evidenced in 2012 based on USAA’s performance through September 30, when it produced nearly $1.8 billion in surplus growth, as well as positive operating earnings, although operating earnings and surplus growth are expected to weaken somewhat in the fourth quarter of
2012 due to the impact from Hurricane Sandy. 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.”

The report also pointed out that “USAA maintains a relatively conservative investment strategy, which has enabled it to enjoy 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 a downward movement in USAA’s ratings include significant deterioration in underwriting and operating performance, a sudden large or catastrophic loss event that materially hinders 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 superior capitalization, strong operating results and business profile, including available resources at the group level, strongly support its core life insurance operations. The ratings of USAA Life Insurance Company and its subsidiary, USAA Life Insurance Company of New York (together referred to as USAA Life), reflect strong 2012 earnings from core annuity and ordinary life business lines driven by favorable mortality, prudent spread management, strong premium growth and persistency attributed to a loyal membership base. USAA Life also maintains a solid business profile that is supported by available resources at the group level, and the ratings reflect a highly focused and well-established presence in the military market. Capitalization and liquidity are maintained at strong levels through a comprehensive ERM program that is evident throughout the organization.”

As a partial offsetting factor Best noted “USAA Life’s challenges associated with increasing the mix of its ordinary life business versus accumulation product sales. In recent years, USAA Life’s annuity growth has significantly exceeded its life insurance products, thus overall reserves are currently weighted toward annuities.”

Best indicated that while it would prefer “a more balanced reserve composition, which would provide for further diversification, the company has recently implemented a strategy to provide a more balanced reserve base through the use of reinsurance. Due to persistent low interest rates, which ultimately impact investment portfolio yields, USAA Life may be challenged to maintain current spreads on its annuity business. In addition, while the company’s commercial mortgage-backed securities are performing to terms, overall exposure remains sizeable relative to capitalization levels.”

The report also described USAA Life as “well positioned at its current rating level. However, key rating drivers that may lead to negative rating actions include a sizeable increase in annuity reserves as a percentage of total reserves, a significant deterioration in operating performance, material impairments or realized losses in the investment portfolio that result in diminished capitalization levels.

Best summarized the companies included in its rating analysis as follows:
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

Source: A.M. Best

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