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Rating Action:

Moody's downgrades credit ratings of ING's US insurance subsidiaries (IFS to A3)

Global Credit Research - 07 Dec 2011

New York, December 07, 2011 -- Moody's Investors Service has downgraded to A3 from A2 the insurance financial strength (IFS) ratings of ING USA Annuity and Life Insurance Company and its rated US life insurance affiliates (collectively, ING US -- see complete ratings list, below). The outlook on these ratings is stable. In the same rating action, the Ba1 (hyb) preferred stock rating of Equitable of Iowa Capital Trust II was affirmed with a positive outlook. The rating action follows the pre-announcement by ING NV of an expected 4Q2011 earnings charge of Euro 900 million to Euro 1.1 billion for changes in policyholder behavior assumptions related to the closed block of variable annuity (VA) policies in its US operation.

RATING RATIONALE

Commenting on the downgrade, Moody's said that the reserve charge is sizable relative to ING US's earnings and capital and weakens the US operation's stand-alone credit quality. Moody's notes that some support for the US operations to offset the reserve charge may come from the wider ING Group.

The charge largely relates to assumption revisions for policyholder lapsation (as well as for mortality, annuitization, and utilization rates), and reflects the considerable risks and volatility that are still associated with the company's VA liabilities. "Although ING US has largely exited the business, charges related to legacy VA policies continue to depress the group's overall profitability and weaken capital adequacy, thereby delaying its recovery" said Laura Bazer, Vice President and Senior Credit Officer. "Moreover, greater policyholder efficiency in capturing the value of their guaranteed benefits may be the source of future charges," the analyst added.

Separately, the U.S. group faces the challenge and uncertainties of separating from its parent company, particularly in terms of establishing reliable and cost-effective stand-alone financing arrangements, as it moves toward its planned IPO in 2012, Moody's said.

The rating agency noted that the current A3 IFS ratings on ING US are positioned at their stand-alone credit profile and do not incorporate any uplift from being part of the ING Group given the group's plan to IPO the US operations in 2012.

As a result of the large reserve increase, ING US' consolidated NAIC Risk Based Capital (RBC) is expected to decline from its estimated 490% at 3Q2011, but still remain over 425% at year-end 2011, which is considered good. However, the rating agency added that the RBC ratio benefits from a reinsurance transaction with a captive that is not as well capitalized. In addition, the company's capital position is volatile under stress scenarios, which could challenge capital adequacy once support from ING Group is removed post IPO. ING US' exit from and de-emphasis of higher risk, lower margin businesses should help improve the risk profile of ING US' liabilities over time. The group continues to have a strong position in the US pension and life insurance markets in the US.

Commenting on the Ba1(hyb) preferred stock rating of Equitable of Iowa Capital Trust II, the rating agency said that this trust preferred debt rating is one notch below what is typically seen in Moody's standard notching for insurance groups. This wider notching continues to reflect the risk of a coupon deferral associated with the execution risk posed by the ultimate parent, ING Groep N.V.'s restructuring process. Nonetheless, the affirmation of the rating with a positive outlook also reflects the possibility that this rating may be upgraded, if and when the risk associated with ING Group's restructuring process ends or diminishes significantly.

Moody's said the following factors could lead to a further downgrade of the ratings of ING US: 1) the erosion of ING US' business franchise, distribution, and employee base, given the potentially long lead time until the launch of the ING US IPO; 2) returns on capital consistently below 4%; 3) NAIC RBC ratio falling below 325% (including captive reinsurers); 4) adjusted financial leverage greater than 35%; and 5) earnings coverage below 4x.

The following factors could lead to an upgrade: 1) reduction in earnings volatility, resulting in returns on capital consistently at 6% or better; 2) RBC ratio consistently at 375% or better, while maintaining good capitalization at captive reinsurers; 3) adjusted financial leverage less than 30%; and 4) earnings coverage greater than 5x.

Moody's will comment separately on any rating implications of the downgrade of ING US on ING Verzekeringen NV and ING Groep NV, and on ratings guaranteed by them.

The following ratings were downgraded and now have a stable outlook:

ING Life Insurance & Annuity Company: insurance financial strength rating to A3 from A2;

ING USA Annuity and Life Insurance Company: insurance financial strength to A3 from A2; short-term insurance financial strength to P-2 from P-1;

Security Life of Denver Insurance Company: insurance financial strength to A3 from A2; short-term insurance financial strength to P-2 from P-1;

Reliastar Life Insurance Company: insurance financial strength to A3 from A2;

Reliastar Life Insurance Company of New York: insurance financial strength to A3 from A2;

ING Security Life Institutional Funding: funding agreement-backed senior secured debt to A3 from A2; funding agreement-backed senior secured program rating to (P)A3 from (P)A2;

ING USA Global Funding Trust 3: funding agreement-backed senior secured debt to A3 from A2;

Lion Connecticut Holdings, Inc.: long-term issuer rating to Baa3 from Baa2.

The following ratings were affirmed with a positive outlook:

Equitable of Iowa Capital Trust II: preferred stock at Ba1(hyb).

ING US companies are wholly indirectly owned subsidiaries of the ING Verzekeringen N.V., and members of the ING Groep, N.V. Based in Amsterdam, ING Verzekeringen N.V. had total shareholders' equity of EUR19.6 billion as of 30 June 2011. ING Verzekeringen reported Gross Premiums Written of EUR14.5 billion in the first half of 2011, and a net income of EUR781 million.

The principal methodology used in this rating was Moody's Global Rating Methodology for Life Insurers published in May 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Laura Bazer
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades credit ratings of ING's US insurance subsidiaries (IFS to A3)
No Related Data.

 

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