In explaining the downgrade of United's IFS rating, Moody's said that the company's statutory revenue, earnings, and capital have declined in recent years, and that this decline has diminished the company's financial flexibility. The rating agency said that United's primary market—the home service insurance market—has limited growth potential and that it will remain so for the foreseeable future.
Over the past two years, Unitrin has redeployed significant amounts of capital from United to its growing property & casualty operations, including the acquisition of some businesses. The rating agency noted that the group's mix of revenues, capital, and earnings has significantly shifted from its life operations to its property & casualty operations and is expected to continue this trend in the future. Unitrin's debt and issuer ratings were downgraded, because its credit profile depends on the financial strength of its two primary operating subsidiaries—United and Trinity.
Moody's said the holding company's senior debt rating is dependent primarily on the financial strength of United and Trinity, and an assessment of the appropriate notching between the two primary operating subsidiaries' ratings and the holding company's debt rating. The rating agency continued by saying that the Baa1 rating on Unitrin gives full consideration to the group's diversification, as well as the holding company's significant unaffiliated investments which provide cash flow to assist in servicing the interest expense on the debt.
Moody's affirmed the A2 insurance financial strength rating of Trinity -- Unitrin's lead property and casualty subsidiary -- based on the following factors: a) the company's solid risk-adjusted capitalization; b) the high level of parent company support it enjoys, as demonstrated by significant capital infusions from Unitrin to Trinity in recent years; and c) near completion of the transference of business from the financially strained Kemper Insurance Companies to Unitrin. Notably, Trinity's operating profitability, which has been a rating concern in recent years, has improved in recent quarters.
Moody's said its current ratings on Unitrin incorporate the following expectations: Unitrin's financial leverage (debt-to-capital) in the range of 20% to 25%, and cash coverage of interest expense and common stock dividends in the range of 1.0 to 1.5 times; on a consolidated basis, GAAP after-tax operating income of $150 million to $250 million a year; at United, NAIC RBC (Risk-Based Capital) ratio in the range of 400% to 450% of the company action level; at Trinity, combined ratios between 95% and 100%; and no significant acquisitions or disposals of operations.
The following ratings were downgraded:
- Unitrin, Inc.'s senior unsecured debt to Baa1 from A3, and issuer rating to Baa1 from A3
- United Insurance Company of America's insurance financial strength to A1 from Aa3
The following rating was affirmed with a stable outlook:
- Trinity Universal Insurance Company's A2 insurance financial strength
As of June 30, 2004, Unitrin reported total assets of about $8.8 billion and shareholders' equity of approximately $1.9 billion on a GAAP basis.
As of the same date and on a statutory accounting basis, United had total assets of about $2.1 billion and capi