OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has downgraded the financial strength rating (FSR) to A- (Excellent) from A (Excellent) and issuer credit ratings (ICR) to “a-” from “a” of Household Life Insurance Company (Household Life) (Detroit, MI) and its wholly owned subsidiary, First Central National Life Insurance Company of New York (First Central) (New York, NY). Household Life and First Central, (together referred to as Household Life Group), are the principal insurance operating entities of HSBC Finance Corporation, which is an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC) (United Kingdom) [NYSE: HBC]. The outlook for all ratings is stable.
The rating actions reflect the recent announcement that effective January 8, 2012 in the United States, HSBC will stop selling Household Life Group ordinary term life insurance, and Household Life Group will no longer issue any new business in the United States. This follows the loss of its primary credit insurance distribution channel in the United States in 2009 as HSBC Finance Corporation decided that it would no longer be accepting new business and closed its consumer lending branch offices branded as HFC and Beneficial in the United States. Household Life Group had historically cross-sold credit insurance products to HSBC’s U.S. loan customers. HSBC also will continue to service existing term life customers and will offer third-party life insurance through its U.S. bank branches. Household Life Group will continue to offer credit insurance through HSBC’s operations in Canada.
Household Life Group’s ratings primarily reflect its superior risk-adjusted capitalization, favorable operating performance and the financial strength and flexibility of its ultimate parent, HSBC. While capital and surplus were impacted by extraordinary stockholder dividends in 2007 and 2008, overall capital and surplus has increased in recent years due to strong earnings and the absence of stockholder dividends during this time. In addition, the group maintains a relatively conservative investment portfolio that yielded no asset impairments over the past year.
Recently, Household Life Group's statutory operating results have benefited from the release of reserves from the run-off of its U.S. credit insurance block of business. However, earnings have been impacted by statutory new business expense strains and other costs associated with its recent term life insurance initiative, as well as an increase in disability benefit claims. Going forward, A.M. Best believes that operating results may benefit from reduced costs associated with discontinuation of the group’s term life insurance initiative and the continued profitable Canadian branch operations. A.M. Best notes that HSBC continues to evaluate all of its insurance operations as it seeks to optimize its risk profile, and as such, other insurance lines may be impacted as a result of this strategic review.
A.M. Best believes Household Life Group to be well positioned at its current rating level. However, future rating actions will be driven by, among other factors, execution of HSBC’s strategic review of the Household Life Group currently underway. Key rating drivers that could potentially lead to negative rating actions include a decision by HSBC to pursue a sale of Household Life Group; a continued deterioration in its credit insurance loss ratios, resulting in net operating losses; or significant stockholder dividends taken from the group, resulting in a decline in risk-adjusted capital, which A.M. Best would consider to be inadequate for its current rating level.
The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Life/Health Insurers”; and “Rating Members of Insurance Groups.” Methodologies can be found at www.ambest.com/ratings/methodology.
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