Ratings Roundup: Nationwide Financial, AFLAC, Crusader

January 29, 2009

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength ratings (FSR) and the issuer credit ratings (ICR) of the core life/health subsidiaries of Nationwide Financial Services, Inc. (NFS). Best also affirmed NFS ICR of “a-“. The rating agency took the action following Nationwide Mutual Insurance Company’s completion of its acquisition of all of the outstanding publicly held Class A shares of common stock of NFS following shareholder approval on December 31, 2008. NFS is now a wholly owned subsidiary of Nationwide Mutual and therefore is no longer a publicly traded company. Best also said the “ratings reflect NFS’ established position in multiple product lines, the significant brand equity associated with the Nationwide name, its adequate risk-based capital position and its broad distribution platform. The ratings also recognize NFS’ diversified business mix, which has traditionally generated solid GAAP revenues and pre-tax operating earnings. Furthermore, the company has realized positive net flows within its retirement plans segment, primarily driven by its trust and administration-only businesses.”

Fitch Ratings has placed Aflac Inc.’s ‘AA-‘ Issuer Default Rating (IDR) and ‘A+’ senior debt rating, as well as the ‘AA’ Insurer Financial Strength (IFS) ratings of the company’s insurance operating subsidiaries, on Rating Watch Negative. “The rating action reflects Fitch’s belief that in the current environment Aflac’s sizable investment allocation in financial institution perpetual debentures exposes the company to the risk of asset impairments that could substantially weaken Aflac’s future capital position,” said the bulletin. “As of Sept. 30, 2008, Aflac reported approximately $7.9 billion invested in perpetual debenture assets (mostly in financial institutions), which is a significant exposure relative to $6.5 billion in GAAP shareholders’ equity and $4.5 billion in statutory total adjusted capital. The company has already announced the impairment of some of these financial institution perpetual debentures in the third and fourth quarter of 2008. Fitch believes losses in these types of investments and other asset classes will continue in 2009 as global economic challenges persist.”

Standard & Poor’s Ratings Services has lowered its ratings on AFLAC and placed them on CreditWatch with negative implications. “The downgrade resulted from the company’s concentrated exposure to banks and financial institution sector credits in its investment portfolio and the weakened credit quality this sector has experienced over the past three to six months,” explained credit analyst Shellie Stoddard. S&P said the “concentration includes subordinated, hybrid security investments which are highly concentrated in the financial sector.” Stoddard added: “While AFLAC’s issuer-investment concentrations have previously been cited by Standard & Poor’s as an ongoing concern, the potential for the weakness within the broader financial sector to negatively impact the company’s capitalization and financial flexibility prospectively has become significant enough to warrant a one-notch downgrade today.”

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A-‘ (Excellent) from ‘B++’ (Good) and the issuer credit rating (ICR) to “a-” from “bbb+” of Crusader Insurance Company, and has revised its outlook on the ratings to stable from positive. Best has also assigned an ICR of “bbb-” to Crusader’s parent holding company, Unico American Corporation with a stable outlook. Both companies are based in Woodland Hills, Calif. “These rating actions reflect Crusader’s excellent capitalization, solid underwriting and operating performance, strong regional market presence, as well as the financial flexibility afforded through Unico,” Best explained. “These positive rating factors are somewhat offset by Crusader’s geographic concentration of risk and its weak underwriting and operating results in earlier years, driven primarily by adverse loss reserve development.”

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