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Rating Action:

Moody’s affirms USAA’s Aaa financial strength rating and changes outlook to negative

15 March 2019

New York , March 15, 2019 – Moody's Investors Service has affirmed the Aaa insurance financial strength (IFS) rating of United Services Automobile Association (USAA) and the ratings of its subsidiaries (see list below) and has changed the rating outlook to negative from stable. The change in outlook follows the announcement of a consent order between the Office of the Comptroller of the Currency (OCC) and USAA's main banking subsidiary, USAA Federal Savings Bank (USAA FSB), which calls for enhancements to USAA FSB's compliance management system, risk governance framework and information technology program.

RATINGS RATIONALE

The rating affirmation reflects USAA's market leadership in providing insurance and other financial services to the military community and its strong capitalization. The OCC consent order, disclosed by regulators in February 2019, identifies risk management, compliance and information technology weaknesses at USAA FSB relative to regulatory expectations. The order requires the bank to develop and implement a broad remediation plan. Moody's expects that USAA FSB will seek to fully comply with the consent order in a timely manner.

The negative rating outlook reflects the significant management and financial resources USAA will need to devote to this matter over the next couple of years, as well as the possibility that the OCC or the bank will uncover further weaknesses through the remediation process. Also, given that parent company USAA is regulated as a Savings & Loan Holding Company by the Board of Governors of the Federal Reserve System, Moody's notes that the OCC consent order could lead to additional scrutiny from the Federal Reserve. More positively, successful completion of the remediation plan would result in stronger risk management, compliance and information technology systems and processes for USAA.

USAA

The affirmation of USAA's Aaa IFS rating reflects its leading market position in the military community, diversified product set, efficient operations and strong balance sheet, according to Moody's. USAA earns member loyalty by delivering competitive financial products and reliable service through low-cost direct channels such as electronic commerce and mass marketing. USAA's property & casualty (P&C) underwriting expense ratio is more than 10 points below the average for Moody's US personal lines peer group, helping the company price its products competitively. USAA's reciprocal ownership structure further supports its credit profile, aligning the interests of owners and policyholders. USAA has low gross underwriting leverage relative to P&C peers, and conservative, single-digit consolidated financial leverage.

Tempering these strengths are USAA's volatile P&C results in recent years, reflecting industry-wide catastrophe losses and fluctuating personal auto loss cost trends. USAA also has a large banking segment, which Moody's views as well capitalized but of lower credit quality than the flagship P&C operations. Other challenges include the complexity of risk management across USAA's diversified businesses, and the close regulation of personal insurance and banking.

The rating agency cited the following factors that could lead to a downgrade of USAA's ratings: (i) decline in combined statutory surplus in a given year, (ii) material increase in gross underwriting leverage (for example, above 2x) or in gross catastrophe exposure, (iii) consolidated financial leverage exceeding 10%, (iv) sustained shift in the group's business mix from insurance to banking, or (v) material delays or adverse developments in USAA FSB's remediation process.

USAA LIFE

The Aa1 IFS ratings of USAA Life Insurance Company and USAA Life Insurance Company of New York (collectively, USAA Life) reflect the life group's excellent capitalization, high-quality investments, good profitability and ownership by USAA. The NAIC risk-based capital (RBC) ratio of USAA Life was over 550% (company action level) at year-end 2018, providing a significant capital cushion for policyholders even under a stress scenario. The life operations benefit from close integration with the parent company through a common customer base and shared infrastructure and management practices. Offsetting these strengths are USAA Life's limited size relative to peers and disintermediation risk in a rising interest rate environment.

Moody's noted that USAA Life's ratings could be upgraded in the event of an explicit guarantee from the parent company. The rating agency said the following factors could lead to a downgrade of USAA Life's ratings: (i) rating downgrade of parent company USAA or diminished implicit parental support, (ii) RBC ratio falling below 350% (company action level), or (iii) return on capital consistently below 8%.

USAA CAPITAL CORPORATION AND SUBSIDIARIES

The Aa1 senior unsecured debt rating and Prime-1 commercial paper rating of USAA Capital Corporation (CapCo) are based on a net worth maintenance agreement from USAA, which is subordinate to the policy obligations of USAA, as well as CapCo's diversified sources of liquidity. CapCo serves as a downstream holding company for USAA's noninsurance activities, mainly consumer banking and management of a commercial real estate portfolio.

USAA Federal Savings Bank, with assets of $82 billion at year-end 2018, is the largest bank owned by a US insurance company. Moody's considers the bank to be solidly investment-grade, with good asset quality given the military affiliated customer base, strong capitalization and steady profitability. The bank's heavy exposure to unsecured consumer credit constrains the credit profile, although the USAA portfolio performs consistently better than banking industry averages.

Moody's has affirmed the following ratings:

United Services Automobile Association -- insurance financial strength Aaa;

USAA Life Insurance Company -- insurance financial strength Aa1;

USAA Life Insurance Company of New York -- insurance financial strength Aa1;

USAA Capital Corporation -- backed senior unsecured debt Aa1, backed senior unsecured medium-term note program (P)Aa1, backed commercial paper Prime-1.

The rating outlook for these companies is negative.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay senior policyholder claims and obligations.

The principal methodology used in rating United Services Automobile Association and USAA Capital Corporation were Property and Casualty Insurers published in May 2018. The principal methodology used in rating USAA Life Insurance Company and USAA Life Insurance Company of New York was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for copies of these methodologies.

Together with its subsidiaries, USAA is the top provider of insurance and related financial services to the military community. On a consolidated GAAP basis, USAA generated total revenue of $30.0 billion in 2017 and had net worth of $30.6 billion at year-end 2017. On an unconsolidated statutory basis, United Services Automobile Association (the lead company) had policyholders' surplus of $27.6 billion at year-end 2018, up from $26.5 billion at year-end 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Ballentine
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Marc R. Pinto, CFA
MD-Financial Institutions
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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