Standard & Poor's lowered its long-term counterparty credit and insurer financial strength ratings on Aviva Insurance Europe SE (Aviva SE) to 'A-' from 'A+'. The ratings remain on CreditWatch with negative implications, where they were placed on Nov. 25, 2010, following the downgrade and CreditWatch placement of the Republic of Ireland.
The rating action follows S&P’s consideration that it is less likely that Aviva plc (Aviva; A/Negative) will consolidate certain of its material European operations into Ireland-based Aviva SE in 2011.
Furthermore, on Feb. 2, 2011, the Republic of Ireland was downgraded to 'A-/A-2' from 'A/A-1' and remains on CreditWatch with negative implications.
"Under our ratings criteria, sovereign risk is a key factor influencing the financial strength of insurers," S&P credit analyst Tatiana Grineva says. "As a result, the vast majority of insurers are rated no higher than the relevant sovereign local currency rating. Consequently, we have lowered the ratings on Aviva SE by two notches to reflect the increasing sovereign-related risk."
Prior to today's rating action S&P assumed that Aviva would increasingly operate its European general insurance business through European branches of Aviva SE, diluting the current level of business and financial exposure to Irish sovereign risk within this rated legal entity. S&P now believes that in the near term Aviva SE's business profile will remain largely focused on Irish risks.
The CreditWatch placement follows the CreditWatch action on Ireland and reflects the possibility that S&P may lower the ratings following its review of Aviva SE's exposure to heightened sovereign-related risks. The ratings on Aviva SE could also be lowered if the agency were to lower the ratings on Ireland further, but are likely to remain in the investment-grade category.
S&P placed its 'BBB+' long-term counterparty credit and insurer financial strength ratings on AXA Insurance Ltd. (AXA) on CreditWatch with negative implications.
On Feb. 2, 2011, S&P lowered its ratings on the Republic of Ireland to A-/Watch Neg/A-2 from A/Watch Neg/A-1. Under the firm’s ratings criteria, it only rates insurance companies higher than the sovereign under specific circumstances. Although S&P factors in support for AXA based on its membership of the AXA group, the limit that the sovereign effectively places on the rating supersedes the implied group support.
S&P understands that AXA has no exposure to Irish government bonds. Hence, it believes movements in the sovereign rating do not directly affect the quality of the company’s investment portfolio.
The CreditWatch placement follows that on Ireland and reflects the possibility of a further downgrade. If S&P lowers the sovereign credit ratings by two notches or more, to below AXA's current 'BBB+' level, the firm would also lower the ratings on AXA so that they were in alignment with the sovereign. In the wake of the Feb. 2, 2011, rating action, S&P considers such a development to be a realistic possibility. Consequently, S&P considers it appropriate to place the AXA rating on CreditWatch with negative implications. That said, S&P would currently expect the ratings on both Ireland and AXA to remain in the investment-grade category over the rating horizon.
A.M. Best assigned a financial strength rating of A+ (Superior) and an issuer credit rating of “aa-” to Everest Insurance Company of Canada (EvCan). The outlook assigned to both ratings is stable.
EvCan will conduct business in Canada, which is licensed to write property, automobile, surety, liability and other classes of insurance on a primary basis. The company will be capitalized with approximately CAD 50 million in common equity and is ultimately owned by the Everest Re Group Ltd (Everest).
The assigned ratings reflect EvCan’s solid capitalization, expected operating results, reasonable business plan and a management team that is familiar with the business lines. The company’s planned business is supported by a quota share agreement with Everest Reinsurance Co., along with financial, enterprise risk management and corporate governance oversight from Everest. EvCan’s ratings also meet A.M. Best’s strict start-up capitalization requirements, which mandate a more conservative level of risk-based capital to support its ratings.
S&P assigned its 'A-' counterparty credit and financial strength ratings on Farm Bureau Life Insurance Co. and EquiTrust Life Insurance Co. (FBL group). At the same time, S&P assigned a 'BBB-' counterparty credit rating on FBL Financial Group Inc. The outlook is stable.
"The ratings reflect FBL group's strong competitive position in its target markets," says credit analyst Patrick Wong. "By leveraging its close relationship with the Farm Bureau and its property/casualty counterpart, FBL has significantly expanded its presence in farm communities."
Farm Bureau Life offers traditional life insurance and annuity products in 15 Midwestern and western states. EquiTrust Life offers fixed and indexed annuities to urban areas in 49 states. "In addition, FBL group's operating performance is strong, as it has been steadily improving after significantly weakening in 2008," Wong says. "Farm Bureau Life has steadily contributed stable earnings, while EquiTrust has provided earnings growth opportunities." Investment portfolio quality has remained high despite a modest drop in industry-wide investment portfolio quality. Asset/liability management has improved with the annuity segment and is very well matched.
"However, the business profile has shifted over the past few years toward interest rate-sensitive and spread-based products," Wong adds. "We believe that these products are more risky than traditional mortality products with long maturities."
S&P views this gradual shift in the business profile to also negatively affect FBL group's quality of earnings. In addition, the firm is sensitive to the potential disintermediation risk, given FBL group's book of annuities. However, this is an industry-wide concern and is not unique to FBL group.
Fitch affirmed the Insurer Financial Strength (IFS) ratings of Genworth Financial Inc.'s (Genworth) primary U.S. life insurance companies (Genworth-Life) at 'A-'. The rating outlook is stable.
The affirmation follows Fitch's review of Genworth's financial results for the quarter ending Dec. 31, 2010 and further discussions with management. In the quarter, Genworth reported a GAAP net loss of $161 million. Results in the quarter included $350 million pre-tax reserve strengthening associated the company's troubled U.S. mortgage insurance business (USMI), which was higher than Fitch's expectations. While total mortgage loan delinquencies continue to trend down, the company revised downward their assumptions for the impact of various loss mitigations, in particular loan modifications. Excluding the USMI business, financial performance was in line with Fitch's expectations and reflects generally improving trends relative to prior year and sequentially.
The rating affirmation reflects Fitch's view that the financial performance and balance sheet fundamentals of Genworth-Life remain consistent with expectations for the current rating. Explicit to Fitch's rating of Genworth-Life is an assumption that Genworth will not provide any future capital support to the U.S. mortgage insurance operations.
Key rating drivers that could result in a downgrade include equity-adjusted financial leverage above 30%, NAIC risk-based capital (RBC) ratio less than 300%, and further unexpected deterioration in USMI results that would necessitate a material capital contribution.
Key rating drivers that could result in an upgrade include equity-adjusted financial leverage below 20%, NAIC RBC ratio over 450%, and a material improvement in financial performance of both USMI and U.S. life operations.
Fitch has affirmed the following ratings with a stable rating outlook:
Genworth Life Insurance Co.
Genworth Life Insurance Company of New York
Genworth Life and Annuity Insurance Co.
Continental Life Insurance Company of Brentwood, TN
--IFS at 'A-'.
Genworth Global Funding Trusts
--Notes and Medium Term Notes at 'A-'.
Genworth Financial Mortgage Insurance Pty Ltd.
Moody's placed the A1 insurance financial strength rating of Genworth Financial Mortgage Insurance Pty Ltd. (Genworth Australia) on review for possible downgrade.
The action follows Moody's decision on February 3 to place the ratings of Genworth Australia's parent, Virginia-based Genworth Financial Inc., and certain of its key affiliates on review for possible downgrade, following a $135 million net operating loss in 4Q10, including a loss of $352 million at GMICO, its mortgage insurance business in the United States.
"The review will focus on the degree to which Genworth Australia'sfinancial flexibility and business operations may be affected by weakness at its parent," says Wing Chew, a Moody's VP and senior analyst, based in Sydney.
Genworth Australia has recorded a solid performance during the global financial crisis, with uninterrupted profitability. However, it partly relies on a reinsurance treaty with its U.S. affiliates to meet Australian regulatory capital requirements, Moody’s says. As its parent's and affiliates' credit profiles deteriorate, the capital enhancement afforded by this arrangement could decline.
A.M. Best upgraded the financial strength rating to B+ (Good) from B (Fair) and the issuer credit rating (ICR) to “bbb-” from “bb+” of MGA Insurance Co. Inc. (MGA). The outlook for both ratings has been revised to stable from positive.
Concurrently, A.M. Best has withdrawn the ICR of “b” of MGA’s holding company, GAINSCO INC. and assigned an “nr” to the ICR. The ICR withdrawal is due to the delisting of the company’s stock from the AMEX exchange effective Jan. 31, 2011. Both companies are domiciled in Dallas, TX.
These rating actions recognize MGA’s favorable risk-adjusted capitalization and generally profitable operating results during a period of challenging economic conditions, particularly within its niche of personal non-standard automobile. The company has adjusted rates and advanced its pricing sophistication, which A.M. Best says have led to improvement in underwriting performance in recent years. In addition, MGA’s loss reserve strengthening and recent favorable loss trends have led to improved development in recent periods.
These positive rating factors are somewhat offset by MGA’s historically variable underwriting performance. Furthermore, though MGA’s growth has been tempered the past two years, rapid premium growth through 2008 led to elevated underwriting leverage measures. Moreover, the company maintains a somewhat modest business profile with concentration in states with difficult operating environments for the non-standard automobile segment.
A.M. Best revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of B+ (Good) and issuer credit ratings (ICR) of “bbb-” of the core life insurance entities of The Phoenix Cos. Inc. (Phoenix), which includes Phoenix Life Insurance Co. (Phoenix Life) and PHL Variable Insurance Co. In addition, A.M. Best has revised the outlook to stable from negative and affirmed the ICR of “bb-” of Phoenix, as well as all the debt ratings on the outstanding securities issued by the group.
Concurrently, A.M. Best has revised the outlook to stable from negative and affirmed the FSRs of B+ (Good) and the ICRs of “bbb-” of Phoenix Life and Annuity Co. and American Phoenix Life and Reassurance Co. These two Phoenix subsidiaries are immaterial to the group and are not writing new business. All companies are headquartered in Hartford, Conn.
The rating actions reflect the improvement in Phoenix’s investment portfolio, which is in a net unrealized gain position, healthier risk-adjusted capitalization at the operating subsidiaries and reduced levels of surrenders, which have been elevated over the last two years.
Liquidity remains adequate at both the holding company and operating companies with manageable financial leverage and a steady contribution of earnings from Phoenix Life’s sizable closed block. A.M. Best notes that Phoenix currently has sufficient holding company liquidity to meet its fixed charge obligations even though A.M. Best’s calculation of interest coverage is below the guideline for its current rating category.
A.M. Best assigned a financial strength rating of A (Excellent) and issuer credit rating of “a” to Queen City Assurance Inc. (Queen City). The outlook assigned to both ratings is stable.
Queen City is the single parent captive of The Kroger Co. (Kroger) and has exhibited a strong operating performance as evidenced by profitable underwriting, solid and continued investment returns, excellent capital adequacy (both base and stressed) as well as stringent risk management techniques, which address the risks inherent in the company’s business. As Queen City is the single rated entity of Kroger, the analysis involves the business profile of Kroger.
A.M. Best affirmed the financial strength rating (FSR) of B++ (Good) and issuer credit ratings (ICR) of “bbb+” of Summa Insurance Co. (SIC) and its affiliate, SummaCare Inc. (SummaCare). The outlook for all ratings is stable. Both companies are domiciled in Akron, Ohio. Concurrently, A.M. Best has withdrawn the ratings at the company’s request and assigned an NR-4 to the FSR and an “nr” to the ICRs. These rating actions reflect the decision of Summa’s management to withdraw from A.M. Best’s interactive rating process.
The ratings reflect the group’s steady premium growth, adequate risk-adjusted capital position and role as a subsidiary of Summa Health System (SHS), a large integrated health care delivery system.
An offsetting rating factor is that both companies have reported sizeable operating losses in recent years, with medical loss ratios in the mid-90% range. These losses had a substantial negative impact on the group’s capital levels. However, in 2009, SHS contributed approximately $25 million in capital to support SIC and SummaCare. A.M. Best also notes that the group’s net underwriting results improved significantly as of the third quarter of 2010. Prior group losses were attributed mainly to the severity of some large claims and excessive outpatient claims. Management has implemented numerous corrective measures, as well as cost control initiatives, which appear to be positively impacting results in 2010. These final ratings do not reflect any changes in strategy, regulation, operating results or capitalization that may occur or impact SIC and SummaCare going forward.
