Fitch Affirms Western & Southern's IFS Ratings at 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Western & Southern Financial Group (W&SFG) at 'AA-' and the Insurer Financial Strength (IFS) ratings at 'AA' for W&SFG's wholly owned life insurance subsidiaries (see detailed ratings list below). The Rating Outlook is Stable.

Today's rating actions reflect Fitch's view that the W&SFG's consolidated total adjusted capital (TAC) remains strong rising 8% to $3.9 billion at March 31, 2010 after taking a 17% hit in 2008, primarily as a result of realized and unrealized investment losses from the challenging economic environment. Additionally, the rating and Outlook reflect Fitch's view that further investment losses are manageable in the context of W&SFG's capital position and earnings profile. Fitch notes that W&SFG has approximately $375 million in cash and invested assets held at the holding company at March 31, 2010, which could be contributed to the insurance operating companies to bolster capital, if needed.

Solid statutory capitalization is the most significant factor in W&SFG's ratings. Fitch considers W&SFG's consolidated operating leverage of 6.2 times (x) at year-end 2009 to be strong and lower than the industry average of 10x. Additionally, the risk-based capitalization (RBC) at Western & Southern Life Insurance Company (WSLIC), W&SFG's lead operating company, was a strong 470% at year-end 2009 versus 446% at year-end 2008. The main driver of WSLIC's improved RBC is the growth in TAC, which was positively influenced by net operating gains, improved market values, and increase in the deferred tax asset, partially offset by investment losses. The RBC ratio also benefited from a sizeable sale of common stock over the past two years, albeit largely offset by a notable increase in WSLIC's exposure to below investment grade (BIG) fixed income securities, driven by the credit deterioration in the company's bond portfolio, particularly its non-agency RMBS holdings.

The ratings continue to positively reflect Fitch's view that W&SFG's: a) liability composition is more conservative than some of its peers with the avoidance of higher risk products such as variable annuities with living benefit guarantees and universal life no-lapse guarantees; and b) liquidity position is solid with no long-term debt due until 2033, $375 million of cash at the holding company, a $300 million bank line of credit that expires in 2012, a relatively modest financial leverage of 11%, and an expected strong GAAP EBIT coverage ratio of 10x in 2010. Relatively low leverage continues to be Fitch's rationale for the narrow notching behind the holding company IDR rating and the group insurance company IFS rating.

Fitch's ratings concerns include: a) statutory operating earnings trends, which have been deteriorating primarily due to pressure on net investment income, particularly in 2009 and 2008 with lower dividend yields on common stock holdings; b) interest rate and disintermediation risk with $15.6 billion in fixed annuity account values; and c) lack of access to the capital markets, which limits financial flexibility both at the holding company and operating company levels. Further, Fitch expects operating statutory trends could continue to experience pressure given low new money yields. However, Fitch believes the company has sufficient flexibility to alleviate significant spread compression by adjusting its crediting rates on certain products which are above minimum guarantees.

Fitch would reevaluate the ratings of W&SFG if:

--Investment losses were beyond Fitch's expectations, causing increased volatility to W&SFG's earnings and capital. Fitch notes that although W&SFG's fixed income portfolio was in a net unrealized gain position at March 31, 2010 of almost $500 million, the gross unrealized loss position was $757 million, the majority of which Fitch believes is over 12 months old;

--There was either a prolonged period of low interest rates causing significant spreads pressure beyond W&SFG's aforementioned crediting rate flexibility or a rapid rise in interest rates causing significant disintermediation risk beyond what W&SFG has accounted for in its hedge program;

--WSLIC's RBC ratio was below 400% for a prolonged period;

--W&SFG's financial leverage was maintained above 15% with GAAP EBIT coverage maintained below 8x; and

--There was a change in W&SFG's legal or organizational structure (i.e., demutualization), although this is not expected.

Fitch affirms the following ratings with a Stable Outlook:

Western & Southern Financial Group

--IDR at 'AA-';

--5.75% senior notes due 2033 at 'A+';

--5.75% senior notes due 2034 at 'A+'.

Western and Southern Life Insurance Company

Western-Southern Life Assurance Company

Columbus Life Insurance Company

Integrity Life Insurance Company

National Integrity Life Insurance Company

Lafayette Life Insurance Company

--IFS at 'AA'.

These rating actions reflect the application of Fitch's current criteria which is available on Fitch's web site at 'www.fitchratings.com' and specifically includes:

--'Insurance Rating Methodology', dated Dec. 29, 2009;

--'Life Insurance Rating Methodology', dated March 24, 2010;

--'Insurance Industry: Global Notching Methodology and Recovery Analysis', dated Dec. 29, 2009;

--'Fitch's Approach to Rating Insurance Groups', dated March 24, 2010.

Additional information is available at 'www.fitchratings.com'.

Related Research:

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285

Insurance Industry: Global Notching Methodology and Recovery Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493114

Fitch's Approach to Rating Insurance Groups

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506368

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493126

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