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Rating Action:

Moody’s rates USAA Capital Corp’s senior notes Aa1

15 April 2020

Company issuing $400 million of three-year and $400 million of 10-year notes

New York , April 15, 2020 – Moody's Investors Service has assigned Aa1 ratings to $400 million of three-year and $400 million of 10-year senior unsecured notes being issued by USAA Capital Corporation (CapCo). CapCo is backed by a net worth maintenance agreement provided by its parent, United Services Automobile Association (USAA, insurance financial strength Aaa negative). The support agreement does not constitute a guarantee of the notes by USAA. CapCo is offering the notes through its $6 billion (recently increased from $3 billion) medium-term note program to qualified institutional buyers under Rule 144A of the Securities Act of 1933.

The company will use net proceeds of the offering to finance or refinance eligible investments in the areas of affordable housing, clean transportation, COVID-19 relief and renewable energy. Payment of principal and interest on the notes will be made from USAA's general funds and will not be directly linked to the performance of any eligible investments. The rating outlook for USAA and CapCo is unchanged at negative.

RATINGS RATIONALE

Moody's expects that the coronavirus and related economic shock will lead to weaker premium growth and more volatile investment results in USAA's insurance operations along with higher credit losses in its banking operations. USAA's large capital base and extensive liquidity will help the company absorb such strains. In April 2020, the company announced it is returning $520 million to auto policyholders in recognition of the sharp drop in miles driven as people shelter in place. USAA is returning the premiums via a 20% credit on auto premiums due for the months of April and May.

USAA's Aaa insurance financial strength rating reflects its market leadership in providing insurance and banking services to the military community, its efficient operations and its strong balance sheet. 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. Enterprise risk management across USAA's diversified businesses is another challenge, although the company has streamlined its portfolio over the past year by divesting mutual fund, investment management and real estate management operations.

The negative rating outlook was prompted by a consent order between the Office of the Comptroller of the Currency and USAA Federal Savings Bank, which calls for enhancements to the bank's risk management, compliance and information technology systems and processes. USAA is devoting significant management and financial resources to this remediation process.

CapCo serves as a downstream holding company for USAA's consumer banking operations. CapCo's Aa1 senior unsecured debt rating and Prime-1 commercial paper rating incorporate the company's good capitalization and liquidity and a net worth maintenance agreement from USAA, which is subordinate to the policy obligations of USAA.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's 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 the bank's remediation process.

Factors that could lead to a stable rating outlook include successful completion of the bank's remediation plan along with steady group earnings and continued strong capitalization.

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 these ratings was Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Together with its subsidiaries, USAA is the top provider of insurance and related financial services to the US military community. On a consolidated GAAP basis, USAA generated total revenue of $35.6 billion and net income of $4.0 billion in 2019, and had total assets of $173.7 billion and net worth of $35.3 billion as of December 31, 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

© 2020 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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