OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of B (Fair) and issuer credit ratings of “bb+” of Merit Life Insurance Co (Merit) and Yosemite Insurance Company (Yosemite). The outlook for all ratings is stable. Both companies are headquartered in Evansville, IN.
The ratings for Merit and Yosemite reflect the drag of their parent, Springleaf Finance Corp. (SFC) (Evansville, IN), a below investment-grade consumer finance company, whose operating flexibility and business profile have been challenged by the credit crisis of 2008 and the subsequent difficult macroeconomic environment. However, A.M. Best notes that SFC has made progress in recent periods in repaying near-term debt and extending its liquidity run way along with an improving operating performance and the establishment of secured funding facilities (added $1 billion back-up liquidity lines that are currently undrawn) to support loan origination. The company repaid or refinanced $4.7 billion of debt maturing in 2017, using proceeds from personal loans and residential mortgage securitizations and issuances of senior unsecured notes. However, SFC’s growing reliance upon secured funding and its uncertain access to the debt capital markets is an ongoing concern.
Merit’s business is focused on the credit life and accident businesses within SFC. A.M. Best believes that its core credit lines of business may be challenged by the weakened credit profile of SFC. However, A.M. Best notes that premiums have increased noticeably over the past few years due to a slowly improving economy and increased lending activity at SFC. While the absolute level of capital and surplus has declined over the past five-year period at Merit (due to approximately $325 million of stockholder dividends during this time), the company continues to maintain a strong level of risk-adjusted capital and has reduced exposure to less liquid and higher risk assets in its general account investment portfolio over the past year. The company also maintains adequate liquidity to meet its insurance obligations. Also, operating results have remained positive over the past five-year period despite a general decline due to the impact of lower investment income, which can be attributed to a reduced invested asset base resulting from the aforementioned dividends, statutory strain from an increase in new business sales (in recent periods) and fluctuating mortality in its ordinary life insurance line of business. A.M. Best believes operating results may be pressured somewhat over the near term at Merit due to a continued decline in investment income and additional statutory strain from new business sales.
The stand-alone attributes of Yosemite are extremely favorable in terms of its strong risk-adjusted capitalization, liquidity and continued outstanding underwriting and operating profitability derived from its credit insurance operations. Yosemite maintains a level of risk-adjusted capitalization that is well supportive of its ratings and continues to produce operating results that significantly outperform its peer composite. Yosemite also maintains liquidity measures above composite averages. The advantages and disadvantages of the company’s captive relationship with SFC were additional factors considered in the ratings, which contemplate the potential for any future operational disruption due to Yosemite’s dependence on SFC, as its sole source of business and distribution channel. Future financial constraints also were considered in terms of dividends and/or potential divestitures.
Rating factors that could cause future positive or negative ratings pressure and/or a revised outlook for Merit and Yosemite are primarily influenced by SFC’s financial condition, which is largely tied to its ability to meet upcoming debt maturities and secure long-term funding. However, a continued decline in capital and surplus at Merit due to excessive stockholder dividends also may result in negative ratings pressure.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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