Insurer Rating Q1 Updates

Posted on May 11, 2011 by Sergio Ulloa (G+)

Following the first quarterly reporting season of 2011, international credit rating and insurance information agencies have updated their company-specific economic forecasts. A.M. Best, Fitch Ratings and Standard & Poor's (S&P) have all been releasing ratings updates. The following are a summary of some of the most recent credit reports dealing with the foremost multinational insurance funds operating today. AEGON N.V. A.M. Best has declared a financial strength rating of A+ (Superior) for AEGON and issued credit ratings of AA- for its American life and health insurance subsidiaries (collectively referred to as AEGON USA). A.M. Best also affirmed AA- debt ratings on AEGON's outstanding obligations. The outlook for all the Amsterdam-based insurer ratings is stable. AEGON USA's positive credit rating reflects its encouraging 2010 earnings performance. For year-end 2010, AEGON USA recorded net income of US$918 million compared to the $865 million earned in 2009. The IFRS (International Financial Reporting Standards) earnings for AEGON's cumulative operations in the Americas were US$1.5 billion for 2010, compared to 2009's year-end figures of US$697 million. A.M. Best projects IFRS earnings to become more consistent with 2009 results, caused by lower realized gains and a smaller amount of tax-related benefits. AEGON USA's credit report draws upon many factors, including the group's strong market position in several US life and annuity markets, a large distribution platform and a positive cash flow with a diversified sources of earnings. AEGON USA's ratings have been further enhanced through A.M. Best's assessment of the parent company, AEGON's financial strength, and the commitment it has shown towards developing the strategic and financial importance of its US business. Aetna Inc. S&P has revised its outlook on Aetna Inc. and its subsidiaries, upgrading the forecast from negative to stable. S&P also affirmed an A- credit rating for Aetna Inc. coupled with A+ counterparty credit and financial strength ratings for Aetna Life Insurance Co, Aetna's core operating company. Additionally, S&P gave positive ratings for Aetna's important subsidiaries. S&P's ratings upgrades were based upon Aetna's improved earnings and projections that indicate the improvement will continue. Aetna's pre-tax earnings rose considerably in 2010 to US$2.4 billion from the US$1.9 billion earned in 2009, which both fall short of the US$3.0 billion in earnings during 2008. S&P expects Aetna's 2011 operating earnings to further improve to about US$2.7 billion, due to an expected decline in medical claims trends coupled with constructive regulatory adjustments in medical claims expenses. S&P anticipate Aetna's year-end revenue figures to total US$33.5 billion and the customer-base to decrease about 3.5% to 18 million policyholders. If Aetna meets S&P's cash flow targets, S&P would expect the company's debt leverage to be stable at about 35% by year end. Aviva Plc. A.M. Best have confirmed that ratings for Aviva Plc., and its subsidiaries, have remain unchanged following Aviva's decision to sell a portion of its stake in Delta Lloyd NV, from 58.2% of ordinary share capital down to 43.1%. The partial disposal of shares is anticipated to net proceeds of GBP 370 million (US$ 605 million) for Aviva. A.M. Best reported that while Delta Lloyd made a considerable contribution to Aviva's profitability, this performance has historically been more sensitive to overall market movements than the rest of Aviva's holdings. The sale remains consistent with the partial IPO and Aviva's adjusted business strategy of focusing on 12 core insurance markets. Berkshire Hathaway Inc. Fitch Ratings has affirmed the AA- Issuer Default Rating on Berkshire Hathaway and an AA+ rating for the company's major insurance subsidiaries. The ratings outlook is stable. Fitch's positive ratings are due to Berkshire's consistent ability to build book value at a rate exceeding the market indices as well as peer companies. Finch explains that this reliable growth has come from several sources, including investing the insurance float, which currently funds about US$66 billion in investments. Common stock investments, primarily in its insurance subsidiaries, appreciated over 70% through 2010, yielding net unrealized investment gains of US$26 billion. Going forward, Berkshire Hathaway's strategy will increasingly focus on earnings from its 68 non-insurance operations. Legal & General Group Plc. A.M. Best Europe affirmed an issuer credit rating of A for Legal & General Group Plc. (L&G), as well as the financial strength rating of A+ (Superior) for Legal & General Assurance Society Ltd. The outlook for all ratings is stable. A.M. Best's encouraging ratings and the stable outlook are due to L&G's strong level of risk-adjusted capitalization maintained by stable financials. This has resulted from a solid business profile and an improved diversification within the company, as L&G shifts away from a spread-based and towards a fee-based income strategy. A.M. Best notes that though its risk-adjusted capitalization is strong, it remains below pre-2008 levels. Liberty Life Insurance Co. A.M. Best downgraded the financial strength rating of Liberty Life Insurance Co. to B++ (Good) from A- (Excellent) and issuer credit ratings fell likewise to BBB+ from A-. Both ratings have been assigned a stable outlook. The ratings downgrade follows the announced acquisition of Liberty Life by Athene Holding Ltd. from the Royal Bank of Canada. As a result of this transaction, Liberty Life's life and health insurance businesses will be coinsured to Protective Life Insurance Co, and a share of their annuities will be covered through Athene Life Re. A.M. Best however believes that Athene Holding's access to capital and investment expertise will enable Liberty Life to generate acceptable spreads on both new and in-force annuity business. Munich Reinsurance Co. Fitch Ratings has affirmed both Munich Re's insurer financial strength rating and long-term issuer default rating at AA- with a stable outlook. Fitch's updated ratings reflect Munich Re's continued strong market position and the superior franchise of the group's reinsurance operations, among other factors. Munich Re's ratings were affirmed despite the exceptional first quarter 2011 catastrophe losses. Fitch's report noted that Munich Re was more exposed to the Australian floods and the earthquakes in New Zealand and Japan than some of its rival reinsurers, though losses were not out of line with their market share in the Asia Pacific region. Munich Re's first quarter catastrophe losses amounted to 12% of shareholders' funds, which is a little higher than the main European reinsurers but lower than most of its Bermuda-based peers. Fitch actually expects Munich Re to ultimately benefit from the improved market conditions triggered by these recent events. Munich Re's overall catastrophe risk is reasonable given the highly geographically diversified context of their catastrophe portfolio and the company's strong capital position. Fitch notes that Munich Re continues to generate the bulk of its profits through P&C reinsurance operations, benefiting from the overall solid margins available within its catastrophe portfolio. Fitch's report considers the first quarter catastrophe losses as an earnings event rather than a capital event for Munich Re. However, Fitch explains that further severe catastrophic events or natural disasters might erode Munich Re's capitalization and hurt their capacity to meet annual growth targets. SCOR SE A.M. Best Europe affirmed both the financial strength rating and the issuer credit rating of SCOR SE at A (Excellent). The subordinated debt ratings on SCOR have also been affirmed. The outlook of all ratings is stable. A.M. Best is confident that SCOR's capital position remains sufficient enough to absorb first quarter catastrophe losses arising from Australia, Japan and New Zealand. A.M. Best notes that SCOR's acquisition of Transamerica Re's life reinsurance portfolio will likely strengthen the company's global reinsurance presence and increase their prominence in the lucrative US life reinsurance market. The transaction will add complementary international portfolios to the French insurer's existing profile, which has been focused on traditional life insurance and annuity businesses. A.M. Best adds that the acquisition will assist SCOR's development and conforms to their continued performance targets. Ratings Companies Mentioned A.M Best A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors. Fitch Ratings Fitch Ratings is a global rating agency and provides ratings and analytical services for thousands of banks, financial institutions, insurance companies, corporations, and national governments. Fitch was founded in 1913 and now features dual headquarters in New York and London with over 50 offices worldwide, Standard & Poor's Standard & Poor's (commonly referred to as S&P) is a business branch of publishing house McGraw-Hill. Operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial vehicles such as stocks, municipal bonds, corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard & Poor's is known for its indexes, in particular the S&P 500 index.