A.M. Best Revises Issuer Credit Rating Outlook to Stable for Merit Life Insurance and Yosemite Insurance Company

Oldwick, NJ  (Profitable.comA.M. Best Co. has revised the outlook to stable from negative and affirmed the issuer credit ratings (ICR) of “bb+” of Merit Life Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite). Concurrently, A.M. Best has affirmed the financial strength rating of B (Fair) of both companies, with a stable outlook. Both companies are based in Evansville, IN.

The change in the ICR outlook reflects A.M. Best’s view of the modest improvement in the funding strategy for Merit and Yosemite’s parent, Springleaf Finance Corporation (SFC). SFC is a below investment grade company, whose operating flexibility and business profile remain somewhat challenged due to the uncertain macroeconomic environment. SFC faces a continuing need to improve liquidity and secure long-term funding to address ongoing debt maturities. A.M. Best notes that SFC recently has demonstrated access to long-term funding through its May 2013 issuance of a 7-year $300 million 6.00% privately placed senior note, which was upsized from $250 million due to increased demand. In addition, for the twelve-month period ended April 30, 2013, SFC saw personal loan volume per branch increase approximately 28% compared to the same period the year prior.

On a stand-alone basis, Merit continues to exhibit strong levels of risk-adjusted capital despite the upstreaming of significant dividends to its parent. In addition, the company continues to report positive net income. Although statutory earnings reflect new business strain and reduced net investment income from a declining asset base and lower rates, Merit’s capitalization continues to support growing direct premiums and a well-performing investment grade bond portfolio. A.M. Best notes that Merit continues to maintain an above-average allocation to commercial mortgage loans, although the portfolio has been declining on an absolute basis in each of the past five years. Finally, A.M. Best acknowledges the benefits of Merit’s access to SFC’s national distribution platform while noting the concentration risk of relying on one distribution channel.

The stand-alone attributes of Yosemite are extremely favorable in terms of its strong risk-adjusted capitalization, liquidity and continued outstanding underwriting and operating profitability derived from its credit insurance operations. Yosemite maintains a level of risk-adjusted capitalization that is well supportive of its ratings and continues to produce operating results that significantly outperform its peer composite. Yosemite also maintains liquidity measures above composite averages. The advantages and disadvantages of the company’s captive relationship with SFC were additional factors considered in the ratings, which contemplate the potential for any future operational disruption due to Yosemite’s dependence on SFC as its sole source of business and distribution channel. Future financial constraints also were considered in terms of dividends and/or potential divestitures.

Rating factors that could cause future positive or negative rating/outlook changes for Merit and Yosemite are directly influenced by SFC’s financial condition, which is largely tied to its ability to meet upcoming debt maturities and secure long-term funding. As such, the published ratings of Merit and Yosemite incorporate some drag from its affiliation with a less-creditworthy organization.

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.

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.