A.M. Best Co. has downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) and issuer credit ratings (ICR) to “bbb+” 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 Insurance 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]. Concurrently, A.M. Best has downgraded the FSR to B++ (Good) from A- (Excellent) and the ICR to “bbb+” from “a-” for Household Life’s property/casualty affiliate, HSBC Insurance Company of Delaware (HSBC DE) (New Castle, DE). The outlook for all ratings is stable. The rating actions for the Household Life Insurance Group primarily reflect the recent announcement that it will cease manufacturing insurance products in the United States and Canada. Specifically, the company has decided to exit the manufacturing of all insurance products through the sale of HSBC Finance Corporation’s interest in substantially all of its insurance subsidiaries. Insurance products will continue to be offered to HSBC customers through non-affiliate providers. The decision to sell these entities was made at the conclusion of a strategic review that had been ongoing since the second half of 2011, at which time HSBC had decided that this business was no longer consistent with its core strategy in the United States and Canada. The company had previously decided to cease issuing new term life insurance products in 2011 as part of this review. The ratings also reflect an anticipated substantial decline in capital and surplus due to an extraordinary stockholder dividend and A.M. Best’s expectation that Household Life Insurance Group will be managing to much lower risk-adjusted capital ratios going forward relative to historical levels.
Household Life Insurance Group’s ratings primarily recognize its adequate risk-adjusted capitalization and generally positive operating performance over the past five years. While operating results had benefitted from the release of reserves from its credit insurance block of business, earnings declined significantly in 2011. A.M. Best expects the organization’s earnings to remain positive, although substantially lower than its pre-2011 run-rate, due primarily to lower anticipated investment income.A.M. Best views the Household Life Insurance Group to be well positioned at its current rating level. Potential negative rating actions could occur if benefit cost increases result in operating losses, or if significant additional stockholder dividends are taken from the group resulting in a further decline in risk-adjusted capital below A.M. Best’s expectations. The rating actions for HSBC DE acknowledge the same issues as previously discussed for its life affiliates in addition to the decision to cancel an assumed reinsurance contract from Assurant Inc. (headquartered in New York, NY) on a cut off basis effective June 1, 2012. This contract had been a major source of business for the company in recent years. As HSBC DE is now effectively in run off, its previously very high level of risk-adjusted capital is expected to decrease substantially by year end due to shareholder dividends. The stable outlook reflects A.M. Best’s view that, notwithstanding the lower capital base, the company will maintain sufficient capital to support its run-off operations at the current rating level. Potential negative rating actions could occur on HSBC DE should its sizable shareholder dividends continue to such an extent as to materially impact its risk-based capital, as measured by Best’s Capital Adequacy Ratio (BCAR). 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. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.