Moody's Investors Service affirmed the debt ratings of Aflac Inc. (senior debt at A2) and the Aa2 insurance financial strength rating of its operating subsidiary,
American Family Life Assurance Company of Columbus. Moody's also maintained the negative outlook on the ratings.
The rating agency said that the affirmation of Aflac's ratings reflects the continued strength in the company's franchise and the solidity of its business profile. The financial profile of the company is further supported by its strong earnings capacity, strengthened capital position, and modest financial leverage.
Commenting on the continuing negative outlook on Aflac, Moody's highlighted that Aflac still faces significant risks within its concentrated investment portfolio, and its capital could suffer material losses under a stress scenario.
"During the past year, Aflac has recorded credit impairments on several large investment positions,” said Moody's Analyst Shachar Gonen, “In a stress scenario, the significant holdings of European financial institutions including perpetual securities, which represents a significantly higher proportion of its investment portfolio and equity relative to peers, could lead to large investment losses, and place pressure on earnings and regulatory capital."
Moody's affirmed the Aa3 insurance financial strength rating of American International Assurance Company (Bermuda) Ltd. (AIAB), and maintained a negative outlook on the rating. This rating action follows Prudential plc (Prudential)'s termination of its agreement to purchase AIA Group Limited from American International Group Inc. (AIG).
AIAB accounts for about 40% of AIA Group's assets, and operates mainly in Hong Kong and Korea. Moody's views the whole of AIA Group (including AIAB) as one analytic unit given its common management, operations and strategic direction.
"The termination of the acquisition by Prudential has removed the integration and execution risks involved in combining two large multi-national corporations," said Sally Yim, Moody's VP/senior analyst. "Nonetheless, Moody's maintains a negative outlook on AIAB's rating, reflecting our concerns over the disruptions in its franchise and operations in the past few months since the announcement of a possible tie-up with Prudential. There has been some senior management turnover at AIA Group."
Moody's added that AIA Group might revive its plan for an IPO as part of AIG's divestment plan. A successful IPO would provide AIA Group with a more stable and clear ownership structure, and would represent a significant step towards independence from AIG, the ratings agency said.
Moody's affirmed the ratings of American International Group Inc. (long-term issuer rating of A3, short-term issuer rating of Prime-1) following the termination of its agreement to sell AIA Group Limited (AIA) to Prudential plc. The rating outlook remains negative to reflect the significant execution risk in AIG's restructuring plan, particularly given the weak global economy and unsettled capital markets.
AIG and Prudential terminated an agreement announced on March 1, 2010, whereby Prudential would have acquired AIA for total consideration of $35.5 billion, including $25.0 billion of cash. The transaction was expected to close by the end of 2010. The termination is credit-negative for AIG, as the company is unlikely to generate cash of that magnitude in the near term from any other disposition of AIA. AIG now expects to receive a termination fee of GBP 152.6 million from Prudential on July 1, 2010.
The rating affirmation is based on Moody's expectation that the US government will continue to support AIG throughout its restructuring, as the company seeks to revitalize its core insurance businesses and exit non-core businesses. The rating agency believes that a full restructuring would allow the US Treasury to maximize the recovery value of its Series E and Series F preferred stock interests.
S&P also commented on the deal, saying that its ratings on AIG and its insurance subsidiaries are not affected by the announcement.
S&P considers this development to be a setback in AIG's overall restructuring plan to reduce outstanding indebtedness to the Federal Reserve Bank of New York and exit from the TARP preferred stock owned by the U.S. Treasury Department. Nonetheless, the sale termination is not affecting the ratings and outlook on AIG, as AIG still maintains a level of flexibility in selling AIA, and its overall credit risk characteristics so far remain unchanged. The agency believes the sale of AIA will now take longer than AIG previously anticipated and poses increased execution risk because of the volatile conditions in the capital and equity markets.
The ratings on AIG reflect S&P’s opinion of the extraordinary support the company has received from the U.S. government in light of AIG's perceived status as a highly systemically important U.S. financial institution. The ratings are also based on our view of the company's 'A+' rated multi-line insurance subsidiaries. We expect that the extraordinary government support will continue during AIG's period of stress. As a result, the long-term counterparty credit rating on AIG includes a five-notch uplift from our assessment of the company's stand-alone 'BB' credit profile. AIG's stand-alone credit profile is 'BB' based on S&P’s view of the high level of leverage that funds its capital structure and dependence on operating-company asset sales to repay its debt.
Moody's affirmed Coventry Health Care Inc.'s senior unsecured debt rating at Ba1 and the insurance financial strength ratings of its key operating subsidiaries at Baa1. The outlook on Coventry was changed to stable from negative.
In affirming the ratings and changing the outlook to stable, Moody's cited several key factors relating to the company's financial profile. First, Coventry has refocused on its core businesses, exited unprofitable businesses (e.g., Medicare Advantage (MA) private fee-for-service (PFFS) business at the end of 2009), and improved/stabilized results. Second, Coventry continues to demonstrate a strong liquidity position and has a significant stream of unregulated cash flows to service its debt. And lastly, despite the potential for excess capital to be upstreamed to the parent, Coventry's NAIC risk-based capital ratio is expected to remain strong at approximately 200% of company action level in 2010.
Jupiter Insurance Limited
A.M. Best Co. revised the outlook to negative from stable and affirmed the financial strength rating of A+ (Superior) and the issuer credit rating of “aa-” of Jupiter Insurance Limited. Jupiter is a captive of BP plc, an integrated oil and gas company.
The negative outlook reflects concerns over the potential impact on BP of the ongoing Deepwater Horizon oil spill in the Gulf of Mexico. Given the magnitude of this event, it is currently impossible to assess the impact on BP, both in terms of financial liabilities and reputational damage. Significant uncertainties are likely to remain for some time to come, and A.M. Best will continue to monitor the situation.
A.M. Best considers that the financial position of Jupiter itself is likely to remain strong following this incident. Although Jupiter has established loss reserves at its policy limit of USD $700 million, risk-adjusted capital still soundly supports the rating level.
S&P said its 'A+' long-term counterparty credit rating on U.K.-based Prudential PLC, its 'AA' insurer financial strength rating on The Prudential Assurance Co. Ltd. (PAC), and related ratings remain on CreditWatch with negative implications. The ratings were originally placed on CreditWatch on March 1, 2010, following the announcement that Prudential had reached agreement with AIG to acquire its subsidiary, AIA Group Ltd.
S&P’s decision to maintain the CreditWatch placement follows the announcement by Prudential that its agreement to acquire AIA Group, including its subsidiary American International Assurance Co. Ltd. has been terminated because the parties were unable to renegotiate the terms of the transaction in response to adverse market developments since the acquisition was agreed on March 1, 2010.
S&P says Prudential has incurred material costs in pursuit of the AIA transaction, totaling an estimated £450 million. These costs exacerbate pre-existing pressures on cash flow and funding metrics for its rating level. S&P believes there also are uncertainties over the strategic and financial implications of the termination of the AIA acquisition agreement, including confirmation of the final cost of settlement of its foreign exchange hedges put in place for the transaction. Because of this, the ratings agency finds that these factors increase the risk of Prudential’s ratings, hence the continuing CreditWatch placement.
Before it announced the proposed AIA Group acquisition, the ratings on Prudential carried a negative outlook. This recognized the incremental pressure on the group's balance sheet and cash flows from adverse market conditions and a weakening in the financial strength of PAC, one of the key credit strengths of the group. The deterioration in the funding profile of the group following the payment of substantial transaction-related costs, combined with its exposure to asset-related risks—particularly in the United States—may cause a change in our view of the group's ability to meet its organic capital needs from existing resources. That said, Prudential's underlying performance continues to compare favorably with S&P’s expectations, as demonstrated by its results in 2009 and new business sales in the Q1 2010.
S&P lowered its counterparty credit and financial strength ratings on the operating insurance companies of State Auto Group to 'A-' from 'A'. At the same time, the agency lowered its counterparty credit rating on State Auto Financial Corp. to 'BBB-' from 'BBB'. The outlook on all of the ratings is stable.
"The rating actions reflect the recent substantial decline in earnings from historical levels, the deterioration of non-catastrophe underwriting performance, and the negative impact on the overall group's performance of some strategic decisions, including the acquisition of Rockhill Holding Co. in early 2009," said Standard & Poor's credit analyst John Iten. "Offsetting these factors are the group's strong competitive position in its core Midwest region and strong capitalization."
The group's operating performance has been deteriorating in relation to the property/casualty industry (excluding mortgage and financial guaranty insurers). S&P doesn’t believe that the company will be able to achieve the above-average underwriting performance that it did from 2004 to 2007 in the next two to three years. S&P expects State Auto Group's operating performance to continue deteriorating as a result of above-average catastrophe exposure, deteriorating non-catastrophe underwriting performance, a higher-than-average expense ratio and lower investment income. Because of this, the ratings agency believes that the deterioration in operating performance is, in part, a reflection of delayed pricing and underwriting actions and the implementation of a catastrophe mitigation program, coupled with the acquisition of Rockhill, which has not contributed to the group's overall profitability.
A.M. Best upgraded the issuer credit ratings to “aa” from “aa-” of Travelers Group, its property/casualty members and affiliate, Travelers Casualty and Surety Company of America (TCSA) and TCSA’s affiliate, Travelers Casualty and Surety Company of Europe Limited (TCSCE). At the same time, A.M. Best has affirmed the financial strength ratings of A+ (Superior) of Travelers, TCSA and TCSCE. The outlook for the ICRs has been revised to stable from positive, and the outlook on the FSRs is stable.
Concurrently, A.M. Best has upgraded the ICR and senior debt ratings to “a” from “a-” of The Travelers Cos. Inc. (TRV). The outlook for the ICR has been revised to stable from positive.
Additionally, A.M. Best has affirmed the FSR of A+ (Superior) and ICR of “aa-” of Travelers Guarantee Company of Canada. The outlook for both ratings is stable.
A.M. Best also affirmed the FSR of A (Excellent) and ICR of “a+” of The Premier Insurance Company of Massachusetts and the FSR of A (Excellent) and ICRs of “a” of Travelers of New Jersey Group and its property/casualty members. In addition, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of “a-”of First Floridian Auto and Home Insurance Co. The outlook for these ratings is stable.
A.M. Best says Travelers’ ratings reflect its strong risk-adjusted capitalization, favorable operating and underwriting results, proactive and comprehensive risk management, dominant market profile in commercial and personal (largely distributed through independent agents) lines, and quality management team. The ratings also acknowledge Travelers’ underwriting and financial discipline, relatively conservative investment portfolio, geographic and product diversification, and enhanced technology and internal information systems, which have improved its underwriting effectiveness and ability to service agents and customers in both commercial and personal lines.
