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Global Credit Research - 01 Mar 2011
Life & health subsidiaries' outlook changed to negative; P&C subsidiaries remain stable
New York, March 01, 2011 -- Moody's Investors Service has affirmed the debt ratings of Assurant Inc.
(NYSE: AIZ, senior debt at Baa2), and the A3 insurance
financial strength ("IFS") ratings of the group's primary life and health
insurance operating subsidiaries ("Assurant L&H"),
but changed the outlook for these entities to negative from stable.
In the same action, Moody's affirmed the IFS ratings of Assurant's
primary P&C subsidiaries ("Assurant P&C") at A2,
with the outlook remaining stable.
The negative outlook at Assurant L&H is primarily driven by the adverse
consequences of recent national health care reform on the group's
key individual and small group medical insurance businesses as well as
weaker expected profitability in its employee benefits segment.
Also, according to Moody's Senior Credit Officer Paul Bauer,
"A continued deterioration in the credit strength of Assurant L&H
could lead to a downgrade of Assurant's debt ratings."
LIFE & HEALTH OPERATIONS
The rating affirmation of Assurant L&H was based on the companies'
established market positions in several specialized life and health markets,
generally good asset quality and solid financial flexibility at the consolidated
parent company level. Assurant L&H benefits from key exclusive
distribution relationships in its core markets, notably, with
the SCI funeral home chain (for pre-funded funeral insurance),
State Farm, and with banks and other financial institutions.
Commenting on the change in outlook to negative, Moody's said
that health care reform was having a more adverse effect on Assurant's
health business at a faster pace than Moody's had anticipated.
"The new 80% minimum medical loss ratio (MLR), required
as of January 1, 2011, may have permanently altered the business
model for individual and small group medical providers like Assurant L&H,"
said Vice President and Senior Credit Officer, Laura Bazer.
In particular, the higher-than-historical required
MLR raises the specter of policyholder rebates, diminishing the
business' profit profile starting in 2011. Assurant projects
its health segment to break even in 2011, due to the likelihood
that it will have to pay policyholder rebates under the higher MLR and
continue to streamline the organization.
In addition, the health segment's distribution model is under
a cloud of uncertainty. "Sharp commission cuts required to
maintain the company's core indemnity health products' viability,
may hurt sales and reduce health membership further in 2011" the
analyst noted. The rating agency said that although the company
has launched a number of new supplementary products in recent quarters,
it is too early to know if these will gain sufficient traction to help
fill the sales and earnings gap for both Assurant L&H and its key
Separately, the company's employee benefits (EB) segment may
also earn less starting in 2011, according to Moody's.
This is due to the likelihood that Assurant will lower its interest rate
assumption for establishing reserves on new long term disability claims,
indicating that recent quarters' reported earnings have been above
the EB segment's underlying sustainable earnings. The company
announced a $306 million goodwill charge for 4Q10 for its health
and employee benefits business, due to health care reform,
low interest rates, and the continuing weak economic environment.
The rating agency said the ratings of Assurant L&H could be downgraded
if there is a significant and permanent deterioration in the volume or
profitability of the company's individual medical business or small group
employee benefits businesses, due to health care reform, resulting
in ROCs consistently below 4%; or if the combined statutory
NAIC RBC ratio at the rated life insurance companies falls below 275%
of the company action level.
Given the negative outlook, an upgrade is unlikely. However,
the following factors could return the outlook on Assurant L&H to
stable from negative: implementation of the new 80% MLR and
other healthcare reform requirements without deterioration of Assurant
L&H's individual medical or employee benefits businesses (i.e.,
less than a 5% decline in revenues; or ROC of 6% or
greater, on a consistent basis.
PROPERTY & CASUALTY OPERATIONS
The affirmation of the A2 IFS ratings of the lead operating subsidiaries
of the Assurant P&C Group are based on a strong market position in
a number of niche, specialty P&C insurance markets, such
as lender-placed dwelling insurance, credit insurance/protection,
and extended service contracts/warranties. Other credit strengths
include good product and geographic diversification as well as relatively
strong profitability. Somewhat offsetting these strengths are the
group's overall modest scale, and a substantial level of catastrophe
exposure in its homeowners' line, particularly as a result of strong
growth in the business over the last several years. In addition,
certain lines of business such as the company's extended service contracts/warranties
and credit protection face headwinds as a result of a weak global economy.
The stable outlook on Assurant P&C reflects the differing business
dynamics of the P&C segment such that difficulties at the affiliated
life operation due to healthcare reform would be unlikely to lead to adverse
affects on the P&C side.
Factors that could lead to an upgrade of the groups P&C subsidiaries
include: significantly reduced catastrophe exposure, combined
with continued strong earnings (return on surplus above 10%).
Conversely, the P&C subsidiary ratings could be lowered if there
is a further increase in both gross and net catastrophe exposure,
a deterioration in profitability (return on surplus in the low single
digits), or increases in underwriting leverage (i.e.
gross underrating leverage above 5x). In addition, the ratings
of both the P&C group and the L&H Group assume debt-to-capital
remains in the 20% to 30% range.
The outlook for Assurant, Inc. was changed to negative due
to concerns at Assurant L&H. Mr. Bauer said, "Given
the operational uncertainty at the life subsidiaries, we consider
the P&C group, which has had strong results in recent years,
to be the primary supporter of Assurant's debt obligations over the medium
term." Assurant's existing ratings assume continued strong
parent company liquidity, including cash held directly at the holding
company, given that additional capital may be required at the company's
operating subsidiaries in a stress scenario, such as a significant
Assurant is a publicly-traded, diversified insurance operation
headquartered in New York, NY. For 2010, Assurant reported
total revenue of $8.5 billion and net income of $279
million. Shareholders' equity was $4.8 billion at
December 31, 2010.
The principal methodologies used in rating Assurant Inc. were Moody's
Global Rating Methodology for Property and Casualty Insurers published
in May 2010, and Moody's Global Rating Methodology for Life Insurers
published in May 2010.
Please see the ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
MD - Insurance
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's changes Assurant Inc.'s outlook to negative
250 Greenwich Street
New York, NY 10007
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