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Rating Action:

MOODY'S AFFIRMS USAA'S INSURANCE FINANCIAL STRENGTH RATING AT Aaa; OUTLOOK REMAINS STABLE

05 Nov 2004
MOODY'S AFFIRMS USAA'S INSURANCE FINANCIAL STRENGTH RATING AT Aaa; OUTLOOK REMAINS STABLE

New York, November 05, 2004 -- Moody's Investors Service has affirmed the Aaa insurance financial strength rating of United Services Automobile Association (USAA) and the Aa1 senior debt rating of USAA Capital Corporation. The outlook for the ratings is stable.

Moody's noted that the rating affirmation was based on USAA's continued strong financial results as well as the group's superior franchise in the US personal lines insurance market, which is built around a well defined, loyal customer base of military officers, enlisted personnel and their dependents. This unique customer base also accounts for the excellent asset quality of the consumer loan portfolio and credit card business of the group's banking subsidiary. USAA, which markets directly to insureds, rather than through commissioned agents, has a low-cost operating structure which enables the group to maintain a significant expense advantage relative to agency competitors. USAA has also implemented a highly automated underwriting process with a more complex tiering structure, which enables it to better match rate to risk.

Moody's notes that in recent years, the consolidated group has increased its revenues and diversified its earnings stream, while simultaneously providing a more comprehensive product portfolio to its membership base which includes life insurance, consumer banking, and investment management. This diversification combined with excellent service capabilities has resulted in strong customer persistency and improved earnings stability.

Moody's believes that USAA is well capitalized relative to its underwriting, investment and general business risks. Gross underwriting leverage, which has been between 1.8 times and 2.1 times during the 1999 to 2003 period, is well positioned relative to similarly rated peers.

Partially offsetting these strengths is USAA's large gross catastrophe exposure, recent low investment yields, financial leverage primarily associated with USAA's banking operations, and the inherent risks associated with personal lines insurance, namely the business challenges posed by state-specific regulatory issues and political risk.

Moody's primary concern continues to be USAA's gross exposure to catastrophe losses particularly in Florida, Texas and California where a significant portion of its membership base resides. In recent years, like many of its industry peers, USAA has made significant progress in reducing its net catastrophe exposures through the extensive use of catastrophe simulation modeling, restrictions on certain coverages, increased deductibles, greater reinsurance protection and through participation in the statutorily-created Florida Hurricane Catastrophe Fund, which serves as an important backstop for residential property insurers in Florida. Nevertheless, Moody's notes that 2003 was the second highest catastrophe year in the association's history and 2004 will likely be among the highest in terms of losses given the unusual hurricane season, where four hurricanes struck Florida during 2004. While profitability will be adversely impacted by the recent catastrophe losses in the third quarter, Moody's expects that for the full year, the consolidated group will generate good pre-tax operating income and that the recent hurricanes will not significantly impact the capitalization of the group.

Moody's is also mindful of USAA's organization structure, which enables the group to allocate a portion of USAA's property and casualty surplus to its members each year. As of December 31, 2003, approximately 50% of USAA's statutory surplus had been allocated to Subscriber Savings Accounts (SSAs). While these accounts represent a form of equity and may be reabsorbed by USAA in the event of a major catastrophe, Moody's notes that the company makes ongoing payments from these accounts to both retired members and surviving spouses. While Moody's does not believe that the current distribution rate is a credit concern, we believe that over the next ten to twenty years, as the company's core officer market retires, these distributions will increase. We expect that the company will continue to prudently manage both allocations to and distributions from its SSA accounts such that these accounts will not present a challenge to the company's longer term liquidity and overall financial position.

The stable rating outlook reflects Moody's expectations for continued robust internal capital generation from continued strong underwriting and operating results. Specifically, Moody's expects that over the medium term, the property and casualty group will achieve combined ratios in the mid 90% range, and growth in surplus sufficient to support its overall growth objectives. Moody's expects gross underwriting leverage will remain below three times and financial leverage will remain below 20%. The rating agency also noted the outlook contemplates continued careful management of USAA's expansion into the enlisted market, continued progress in operating efficiencies, as well as prudent management of its SSA accounts.

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, commercial paper at Prime-1.

Based in San Antonio, Texas, USAA and its subsidiaries form a financial services organization that specializes in serving the insurance and financial needs of US military officers, enlisted personnel, and their immediate and extended families. Based on direct premiums written during 2003, the group is the 7th largest domestic underwriter of private passenger automobile and 5th largest domestic underwriter 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 June 30, 2004, USAA reported net premiums written of $4 billion, pre-tax operating income of $1 billion (excluding realized gains of $57.7 million), and policyholders' surplus of $8.8 billion.

New York
Sarah Hibler
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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