Fitch Ratings has upgraded the ratings of Delphi Financial Group, Inc. (DFG) and its insurance subsidiaries following completion of the acquisition of DFG by Tokio Marine Holdings, Inc. (TMHD) and its subsidiary Tokio Marine & Nichido Fire (TMNF). The ratings are removed from Rating Watch Positive and assigned a Stable Outlook. A complete listing of rating actions follows at the end of this release.
TMNF is the largest property/casualty insurer in Japan and is the main operating subsidiary of TMHD. TMNF's Insurer Financial Strength (IFS) is rated 'AA-' by Fitch, and the company operates in the U.S. through a branch office and a subsidiary, the Philadelphia Insurance Companies.
The ratings upgrade for DFG is based on expectations that current capital levels at DFG's insurance subsidiaries will be maintained, and financial support to DFG from a strong and large parent will be available. Fitch considers DFG's strategic fit within the TMHD enterprise, to be 'Very Important' under Fitch's 'Insurance Rating Methodology', dated Sept. 22, 2011.
The strategic category Fitch has assigned to DFG may migrate to 'Core' over time as the role of DFG within TMHD and its international growth strategic becomes more defined. This could lead to a rating change that would align DFG with TMNF's group rating.
TMNF paid approximately $2.7 billion in cash for DFG, which is about 11% of its shareholders equity and represents a sizeable premium over DFG's March 31, 2012 book value of $1.9 billion. DFG's common stock had been trading at a discount to book value before the acquisition was announced.
DFG is expected to remain intact and operate autonomously after the acquisition but will be exploring cooperative synergies between itself and the other U.S. operations of TMHD. DFG shares a common target customer as Philadelphia Insurance, but there is minimal to no overlap in products offered by the companies.
First-quarter 2012 net income for DFG fell 34% to $33 million due to acquisition expenses, but operating earnings were within expectations with an 11% increase compared with first-quarter 2011. Fitch expects operating earnings for DFG to continue on this pace in 2012. DFG expects to pay a legal settlement to its former Class A stockholders and option holders of approximately $49 million later in 2012, if the settlement is finalized and approved by the Delaware courts.
DFG's investment profile also improved at March 31, 2012, as gross unrealized losses and other-than-temporary impairments for MBS were $35 million, or 0.5% of total fixed maturity securities, while total bond net unrealized gains improved to $359 million compared with $66 million and $215 million for year-end 2010 and 2011, respectively. Financial leverage (excluding FAS 115) decreased to 24% at March 31, 2012 from approximately 25% at year-end 2011.
Key rating triggers for DFG that could lead to an upgrade include:
--A change in strategic category to 'Core' within the TMHD enterprise.
The remaining upgrade triggers relate to a reassessment of DFG's standalone ratings:
--Excess capital at the operating subsidiary level measured by operating leverage, NAIC risk-based capital, or Fitch's proprietary model;
--Prolonged trend in operating results (measured by pretax return on assets, combined ratio, and operating ratio relative to Fitch's median guidelines) above historical averages and consistent with higher rated companies.
Key rating triggers for DFG that could lead to a downgrade include:
--A multi-notch change in the ratings of TMNF.
The remaining downgrade triggers relate to a reassessment of DFG's standalone ratings:
--Deterioration in capital at the operating subsidiary level measured by operating leverage, NAIC risk-based capital, or Fitch's proprietary model;
--An increase in debt to total capital above 30%;
--Deterioration in operating results (measured by pretax return on assets, combined ratio, and operating ratio relative to Fitch's median guidelines) that is inconsistent with industry averages or driven by ill-advised growth;
--Earnings coverage of interest expense below the 4x level.
Fitch has upgraded the following ratings:
Delphi Financial Group, Inc.
--Issuer Default Rating to 'A-' from 'BBB';
--Senior notes due 2020 to 'BBB+' from 'BBB-';
--7.376% junior subordinated notes due 2067 to 'BBB-' from 'BB'.
Reliance Standard Life Insurance Co.
First Reliance Standard Life Insurance Co.
Safety National Casualty Corp.
--IFS to 'A+' from 'A-'.
The Rating Watch Positive has been removed and a Stable Outlook assigned.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
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Contacts:
Fitch Ratings
Primary Analysts:
Delphi Financial Group and
Life Operations
Bruce Cox, +1-312-606-2316
Director
Fitch,
Inc.
70 West Madison St.
Chicago, IL 60602
or
Safety
National Casualty Corp.
Douglas Pawlowski, +1-312-368-2054
Senior
Director
or
Secondary Analysts:
Julie Burke,
+1-312-368-3158
Managing Director
or
Martha Butler,
+1-312-368-3191
Senior Director
or
Committee Chairperson:
Donald
Thorpe, +1-312-606-2353
Senior Director
or
Media
Relations:
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com