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Fitch Affirms United Services Automobile Association's Ratings; Outlook Stable

February 15, 2014

Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of United Services Automobile Association (USAA) and its insurance subsidiaries at 'AAA'.

In a release on February 4, Fitch noted that additionally, it has affirmed the Issuer Default Rating (IDR) of USAA Capital Corp. (USAA CapCo) at 'AAA' and its senior unsecured notes at 'AA+'. The Rating Outlook is Stable.

Key Rating Drivers

USAA's ratings reflect a strong competitive position in a stable niche market--military and ex-military personnel and their families. The ratings also consider USAA's exceptionally strong capitalization, solid liquidity, and continued disciplined underwriting. Offsetting factors include significant catastrophe risk and the lower credit profile of its rapidly growing banking operation.

Fitch views the company's continued capital growth as a fundamental strength of the company. USAA expanded its statutory surplus by 11 percent to $20.4 billion as of September 30, 2013, largely due to earnings and unrealized investment gains during the year.

USAA's capital position remains exceptionally strong based on its 672 percent NAIC risk-based capital (RBC) ratio for P&C insurance subsidiaries (586 percent for life companies) and 'extremely strong' score on Fitch's Prism capital model at year-end 2012. The association also maintains conservative operating and net leverage ratios at 0.7x and 1.4x, respectively. Excluding surplus from USAA Life Insurance Co. and USAA Capital Corp. (CapCo), which owns USAA Federal Savings Bank (FSB), the association's net leverage ratio remains within Fitch's ratings expectations at 2.3x as of September 30, 2013.

USAA reported statutory earnings of $1.1 billion for the nine month period ending September 30, 2013, up 36 percent from the prior year period. The improvement was largely due to fewer catastrophe losses during the period. USAA's strong operating results are also supported by its low-cost structure and sound underwriting practices.

USAA's financial leverage ratio remained extremely low at 3.3 percent as of year-end 2012. Total financing and commitments (TFC) ratio, a comprehensive measure of all financing activities is very high for the rating category at 2.5x. Compared to other insurance organizations, the TFC ratio is skewed upward significantly by USAA's banking liabilities (deposits). Continued growth in banking and other non-insurance operations could ultimately have a negative impact on USAA's ratings, given the lower credit quality of the bank relative to that of the insurance companies.

USAA CapCo represents approximately one-fourth of consolidated GAAP revenue and capital. USAA maintains a support agreement with USAA CapCo, which requires that USAA maintain CapCo's net worth at no less than $1 million and retain ownership of 100 percent of CapCo's common stock. This agreement is a key factor supporting Fitch's rating of USAA CapCo's senior unsecured notes.

The asset quality of USAA FSB remains generally favorable when compared to banking peers, but rapid growth in the banking operations could lead to future deterioration. The bank remains well- capitalized with a Tier 1 risk-based capital ratio of 13.1 percent as of September 30, 2013.

Fitch views the strategic category of USAA Life Insurance Company as 'Core' and, as a result, it continues to receive upward lift to the USAA group rating level. This reflects Fitch's view of the complementary nature of USAA's life products to its distribution channel.

Rating Sensitivities

Key rating triggers that could lead to a downgrade include:

--Further significant growth in banking and other non-insurance operations, such that USAA CapCo becomes a more significant part of USAA as a whole, as measured by one-third of consolidated GAAP revenue and/or capital;

--A material deterioration in balance sheet strength, including net statutory leverage - defined as net written premiums and liabilities divided by surplus -above 2.0x for property/casualty operations and 2.7x excluding surplus for affiliated life insurance subsidiaries and USAA Capital Corp. - or a Prism score below 'extremely strong';

--Sharp and sustained weakening of underwriting results;

--TFC ratio, including banking liabilities, at or above 3.5x.

Fitch has affirmed the following ratings with a Stable Outlook:

USAA Capital Corp.

--IDR at 'AAA';

--Short-term IDR and commercial paper at 'F1+';

--3.5 percent $200 million medium-term notes due July 17, at 'AA+';

--1.05 percent $250 million senior unsecured notes due September 30, at 'AA+';

--2.288 percent $250 million senior unsecured notes due December 13, 2016 at 'AA+'.

Primary insurance companies:

United Services Automobile Association

USAA Casualty Insurance Company

USAA General Indemnity Company

USAA County Mutual Insurance Company

USAA Texas Lloyds Co.

USAA Life Insurance Company

--IFS at 'AAA'.

Additional information is available at 'fitchratings.com'.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (November 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=819491

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