Fitch Affirms Combined Insurance Company of America's Ratings.Business Editors CHICAGO--(BUSINESS WIRE)--May 5, 2003 Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has affirmed the insurer financial strength (IFS) rating of Combined Insurance Company of America (CICA CICA Competition In Contracting Act of 1984 (USA) CICA Canadian Institute of Chartered Accountants CICA Competition In Contracting Act CICA Criminal Injuries Compensation Authority (UK) ) at 'A-'. Additionally, Fitch affirmed CICA's short-term financial strength (STIFS STIFS Short-Term Integrated Forecasting System STIFS Software Testing in Financial Services STIFS Short Term Ionospheric Forecast Service ) rating at 'F2'. Both the IFS and STIFS ratings were removed from Rating Watch Negative. The Rating Outlook is Stable. CICA represents the primary accident, health and life insurance underwriter of parent Aon Corporation (Aon). CICA's strong ratings continue to be supported by its profitable operations, niche position in the supplemental accident and health market, and conservative operating leverage Operating Leverage A measurement of the degree to which a firm or project relies on fixed rather than variable costs. Notes: The higher the degree of operating leverage, the greater the potential danger from forecasting risk. profile. Additionally, Fitch expects CICA's capital profile will improve in the near term as CICA should be able to grow policyholders' surplus though internally generated funds as Aon has commented that CICA will not be committed to dividend a large portion of earnings to Aon in 2003. The rating also incorporates recent declining statutory earnings and profitability trends, and a decline in CICA's statutory capital position. Statutory earnings at CICA, as measured by statutory net operating gain after taxes, have declined from over $219 million in 1998 to approximately $64 million in 2002. Statutory profitability, as measured by return on average surplus and pre-tax return on assets Return on assets (ROA) Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). , has fallen from 28% and 8.8% in 1998 to 12% and 1.5% in 2002, respectively. While these trends are negative, CICA's profitability measures still compare very favorably to industry averages. Much of this deterioration can be attributed to an aggressive investment strategy that Aon had employed at CICA in the past. In the later half of the 1990's, this investment strategy produced large returns that have fallen in recent years. Positively, CICA's core accident, health and life underwriting businesses have experienced steady performance over the past several years. Prospectively, Fitch anticipates that Aon management will take a more conservative investment strategy at CICA, which should mitigate investment and operating result volatility in the future. Volatility should be further mitigated by CICA's decision to exit its Group Life and Accidental Death businesses which recently have produced operating losses operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. . Future operating results are expected to grow from 2002 levels. CICA's adjusted policyholders' surplus position has declined from $712 million in 1998 to $564 million in 2002. This deterioration can be attributed to the large dividends upstreamed to parent Aon and large unrealized losses Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. associated with the volatility of limited partnership investments. In December 2001, CICA securitized securitized Of, related to, or being debt securities that are secured with assets. For example, mortgage purchase bonds are secured by mortgages that have been purchased with the bond issue's proceeds. $225 million of limited partnership investments, which has and will continue to reduce volatility in its capital profile going forward. Further, to strengthen CICA's capital position, Aon suspended dividend payments from CICA to Aon in 2002 and has committed to suspend dividend payments in 2003 as well. Fitch expects that the combination of these actions will result in CICA's ability to replenish re·plen·ish v. re·plen·ished, re·plen·ish·ing, re·plen·ish·es v.tr. 1. To fill or make complete again; add a new stock or supply to: replenish the larder. 2. its capital position via internally generated funds over near term. Entity/Issue/Type Action Rating/Outlook Combined Insurance Company of America -- Insurer Financial Strength Affirm 'A-'/Stable. -- Short-term Insurer Financial Strength Affirm 'F-2'. |
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