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Announcement:

Moody's affirms USAA's financial strength at Aaa; outlook stable

17 Sep 2009

New York, September 17, 2009 -- Moody's Investors Service has affirmed the Aaa insurance financial strength rating of United Services Automobile Association (USAA) as well as the Aa1 insurance financial strength ratings of USAA Life Insurance Company (USAA Life) and USAA Life Insurance Company of New York (USAA Life-NY). Moody's has also affirmed the parent-supported Aa1 senior unsecured debt rating and Prime-1 commercial paper rating of USAA Capital Corporation (CapCo). The rating outlook for these entities is stable.

"USAA has remained profitable and has expanded its capital base through the US economic recession and the financial markets crisis," said Bruce Ballentine, lead analyst for USAA. "The rating affirmation reflects USAA's formidable market presence within the military community along with its efficient operations and sound balance sheet." USAA promotes strong member loyalty by delivering an array of competitive financial products through low-cost direct channels, such as member referrals, the Internet, telephone and mail. Such direct distribution is well suited to the highly mobile military community, said Moody's.

USAA's strengths are tempered by its substantial exposure to natural catastrophes. Many of USAA's members live in Texas, California and Florida -- areas prone to windstorms and earthquakes. USAA mitigates this risk through extensive risk modeling, limiting/ceasing writings in certain areas, tightening policy terms, and maintaining a large and diversified reinsurance program. Moody's also noted that management of enterprise risks (financial, operational, legal/regulatory and others) is a growing challenge as USAA offers diversified products and services to an expanding target market. For instance, the company has experienced some deterioration in credit metrics and asset values in its consumer banking and commercial real estate investment units in connection with the weak economy and declining property values. Moreover, any significant expansion of USAA's target market (such as the recent addition of several new membership categories) could erode the overall credit profile of the membership base. Moody's will monitor the diversified operations and the evolving target market for indications of heightened risk and/or declining business performance.

The ratings on USAA Life and USAA Life-NY reflect their strong capitalization, profitability, and investment quality, along with the ownership and implicit support from USAA. "Access to the USAA membership represents a unique competitive advantage for the life companies," said Ann Perry, lead analyst for these entities. "Being part of USAA also enhances the operating efficiencies and financial flexibility of the life operations."

Offsetting these strengths to some extent, the life companies have a considerable proportion of their liabilities subject to disintermediation risk, and they rely heavily on the direct marketing channel. Given the current low interest rate environment, Moody's also remains concerned about the margins on older blocks of fixed annuities and interest sensitive life insurance, which have relatively high (e.g., 4.0%-4.5%) minimum guaranteed interest rates.

The ratings on CapCo reflect a net worth maintenance agreement from USAA along with CapCo's diversified sources of liquidity. CapCo serves as a downstream holding company for USAA's banking, mutual funds and real estate management operations.

Moody's cited the following factors that could lead to a downgrade of USAA's ratings: (i) deterioration in the core property & casualty (P&C) underwriting results (e.g., a combined ratio above 100%), (ii) a material increase in gross underwriting leverage (e.g., above 2x), (iii) adjusted financial leverage exceeding 10%, (iv) a significant shift in the group's business mix away from P&C insurance, or (v) material credit deterioration in the affiliated business units.

Together with its subsidiaries, USAA is the leading provider of insurance and related financial services to US military officers, enlisted personnel and their families. On a consolidated GAAP basis, USAA reported total revenues of $8.6 billion and net income of $1.4 billion for the first half of 2009. Total net worth was $15.8 billion as of June 30, 2009.

The last rating action affecting USAA took place on September 10, 2007, when Moody's affirmed the Aaa insurance financial strength rating with a stable outlook.

The principal methodologies used in rating USAA and its subsidiaries were Moody's Global Rating Methodology for Property and Casualty Insurers, published in July 2008, and Moody's Global Rating Methodology for Life Insurers, published in September 2006, both available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

Moody's has affirmed the following ratings with a stable outlook:

United Services Automobile Association -- insurance financial strength at Aaa;

USAA Life Insurance Company -- insurance financial strength at Aa1;

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

USAA Capital Corporation -- backed senior unsecured debt at Aa1, backed commercial paper at Prime-1, guaranteed senior unsecured notes (guaranteed by the Federal Deposit Insurance Corporation under its Temporary Liquidity Guarantee Program) at Aaa.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to punctually pay senior policyholder claims and obligations. For more information, please visit our website at www.moodys.com/insurance.

New York
Bruce Ballentine
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

Moody's affirms USAA's financial strength at Aaa; outlook stable
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