Best Affirms USAA and Subs ‘A++’ Ratings; Outlook Stable

A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aaa” of Texas-based 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 AMB-1+ on the commercial paper program of USAA Capital Corporation.

The outlook for all of the ratings is stable.

The 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 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 eighth-largest private passenger auto and sixth-largest homeowners’ policy provider.”

Best cited the following factors as modestly offsetting: “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 evident over the past five years, as catastrophe activity—including several hurricanes—resulted in considerable losses.”

However, Best also pointed out that despite the frequent and severe catastrophe losses of recent years, “USAA continues to produce strong earnings and record solid surplus growth. Operating results in 2010 have been significantly favorable due in part to somewhat milder weather patterns, which produced lower catastrophe-related claims compared to recent years.

“Furthermore, as part of its enterprise risk management, USAA has strong catastrophe management and a sound reinsurance program designed to preserve the capital and financial security of its membership. In addition, USAA maintains a relatively conservative investment strategy, which has enabled it to enjoy favorable investment returns even during times of significant market turmoil as was witnessed in recent years.

“USAA’s superior capitalization, strong operating results and business profile, including available resources at the group level, strongly support the 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), are based on a highly focused and well established presence in the military market. The affirmations also reflect the improved 2010 earnings results post economic crisis, strong liquidity and capitalization measures and integrated enterprise risk management practices throughout the organization.”

As partial offsetting factors in the life sector Best noted “USAA Life’s challenges associated with increasing the mix of USAA Life’s ordinary life business versus accumulation product sales. In recent years, its annuity growth has significantly exceeded its life insurance products, and reserves were weighted towards annuities.”

Best indicated that it would prefer “a more balanced reserve composition, which would provide for further risk diversification. Moreover, given the uncertainty in the current economic and investment climate, USAA Life may be further challenged to achieve spreads on its annuity business at historical levels. In addition, while the company’s commercial mortgage-backed securities are performing to terms, total exposure exceeds the company’s capitalization levels.”

Best described USAA as a “fully integrated financial services organization with 7.7 million members, $18.0 billion in net worth and nearly $140 billion in owned and managed assets as of June 30, 2010.”

The announcment summarized the ratings and the companies as follows:
The FSRs 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