MOODY'S AFFIRMS RATINGS OF UNITED SERVICES AUTOMOBILE ASSOCIATION (USAA) AND CERTAIN SUBSIDIARIES; OUTLOOK REMAINS NEGATIVE
New York, September 26, 2000 -- Moody's Investors Service has affirmed its credit ratings of United Services Automobile Association (USAA) and certain of its subsidiaries. The rating affirmation reflects the organization's strong market position in personal lines insurance, sound capital base, above-average liquidity, and diversified sources of earnings. Partially offsetting these strengths are the company's material gross exposure to catastrophe losses, recent pressure on operating earnings -- reflecting intense competition in the personal lines sector as well as significant financial leverage.
Expanding on its rationale, Moody's said that USAA has a solid franchise in the US personal lines market stemming from its disciplined underwriting philosophy and its well defined, loyal customer base of military officers, enlisted personnel and their dependents. USAA also maintains a significant expense advantage relative to agency competitors, given that it markets directly to insureds rather than through commissioned agents. The consolidated group has increased its revenues and diversified its earnings stream, while simultaneously providing a more comprehensive product portfolio to its membership including life insurance, consumer banking, and investment management-through several dedicated subsidiaries. This diversification combined with excellent service capabilities has resulted in strong customer persistency.
However, USAA remains heavily exposed to catastrophes due to significant concentrations of risks in Texas, California and Florida - geographic areas where its membership base resides. While Moody's recognizes that USAA has made significant progress in reducing its net catastrophe exposures over the past several years through a variety of mechanisms, its gross catastrophe exposure remains large.
Over the next several years, management is planning on increasing its market share among the military significantly, and these expansion plans address the organization's need to ensure potential future growth. Moody's believes that management's expansion strategy comes with the risk that the changing customer profile will have less attractive claims and retention experience than USAA's core officer market. Nonetheless, we believe that USAA is closely monitoring its results, and through its highly automated underwriting process will be able to price a wider range of risks and make adjustments to its rates where applicable.
USAA has historically demonstrated above-average profitability, although recent profitability has been pressured as a result of historical rate reductions, increasing loss trends, and by large policyholder dividends and SSA distributions. Moody's believes that profitability will continue to come under pressure in the near term as the cumulative effect of the above factors and subsequent rate increases take time to emerge. Nevertheless, the company is well positioned within the industry as a result of its operational efficiencies, strong customer persistency and disciplined underwriting approach, and profitability should improve over time.
Moody's rating outlook for USAA is negative. Key analytical issues include material exposure to gross catastrophe losses, expansion of its customer base beyond its traditional officer market, and pressure on recent pre-tax operating income. When considered together, these risks create incremental pressure on the group's financial strength.
The following ratings were affirmed:
United Services Automobile Association: insurance financial strength at Aaa;
USAA Life Insurance Company: insurance financial strength at Aa1;
USAA Capital Corporation: senior unsecured debt at Aa1.
United Services Automobile Association (USAA) and its subsidiaries form a San Antonio, Texas-based organization that specializes in serving the insurance needs of U.S. military officers, enlisted personnel, and their immediate and extended families. The group is the seventh largest domestic underwriter of private passenger automobile and sixth largest writer of homeowners insurance. Beyond P&C insurance, USAA sells other financial products and services to its members-including life/health insurance, annuities, banking services, and other investment/retirement savings vehicles-through several wholly-owned subsidiaries. As of December 31, 1999, USAA reported net premiums written of $5.2 billion, a pre-tax operating loss of $279 million (excluding realized gains of $588 million), and policyholders' surplus of $6.2 billion.
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