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 for W&SFG's wholly owned life insurance subsidiaries at 'AA' (see detailed ratings list below). The Rating Outlook is Stable.
Key Rating Drivers:
Today's rating actions reflect Fitch's view that W&SFG's full-year 2012 results are in line with expectations for the current ratings. Risk-adjusted capitalization remains extremely strong, leverage is low and interest coverage is strong.
Fitch views the statutory capitalization of W&SFG's insurance subsidiaries as extremely strong. Fitch estimates that the combined risk-based capital (RBC) of Western & Southern Life Ins. Co. (WSLIC) and Lafayette Life Ins. Co. (Lafayette) was 493% as of Dec. 31, 2012, up from 473% in 2011. Fitch expects RBC to remain above 450% over the medium term. Consolidated operating leverage is below 6x, among the lowest in the Fitch universe.
W&SFG's financial leverage of 8% at the end of 2012 is very low and in line with rating expectations. Relatively low leverage continues to be Fitch's primary rationale for the narrow notching between the holding company IDR and the insurance company IFS rating. Outstanding debt is concentrated at the holding company and consists of two issues with maturities in excess of 20 years. The group's total financing and commitments ratio (TFC) remains in the 0.4x range.
Fitch views W&SFG's debt service capabilities and overall liquidity as very strong. GAAP coverage of interest expense is strong at 12x as of Dec. 31, 2012. Based on statutory dividend capacity in the $389 million range, statutory interest coverage is estimated to be 13x, which is very strong.
Fitch's primary concern continues to be the group's exposure to interest rate risk given the predominance of fixed annuities in its liability structure. Interest margins on fixed annuities, which are the primary driver of the group's earnings, were flat in 2012 compared to 2011. About 40% of the inforce block is currently crediting at the minimum guaranteed rate, giving the company flexibility to reduce rates in aggregate.
Approximately 30%of the company's fixed deferred annuity portfolio is out of the surrender charge period and subject to disintermediation risk if interest rates spike up. Fitch believes the group is monitoring and managing this risk closely, and has more than enough liquidity available to meet potential outflows.
Fitch views W&SFG's overall exposure to equity market volatility as manageable in the context of its very strong balance sheet fundamentals. The group has above-average exposure to unaffiliated common stock in its investment portfolio but only modest exposure to equity market volatility through variable annuity living and death benefit guarantees.
Rating Sensitivities:
Absent the expansion of W&SFG's market position and size/scale, key rating triggers that could result in an upgrade include:
--A reduction in the company's concentration in spread-based fixed annuity products, which currently account for about 70% of policyholder liabilities;
--Risky asset ratio below 100%;
--Operating leverage ratio maintained below 8x.
Key rating triggers that could result in a downgrade include:
--RBC falls significantly below 400% on a sustained basis;
--Financial leverage is maintained above 15%;
--GAAP EBIT coverage falls below 7x;
--TFC ratio increases to above 0.8x.
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'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', Jan. 11, 2013.
Applicable Criteria and Related Research
Insurance Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
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