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Press release from Business Wire

A.M. Best Affirms Ratings of HSBC's U.S. Life Insurance Subsidiaries

Wednesday, June 15, 2011

A.M. Best Affirms Ratings of HSBC's U.S. Life Insurance Subsidiaries16:21 EDT Wednesday, June 15, 2011 OLDWICK, N.J. (Business Wire) -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “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 (Household Life 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]. In addition, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of “a-” of HSBC Insurance Company of Delaware (HSBC Insurance Company) (New Castle, DE), a property/casualty subsidiary of HSBC. The outlook for all ratings is stable. The ratings of Household Life Group primarily reflect its superior risk-adjusted capitalization, favorable operating performance, and the financial strength and flexibility of its ultimate parent, HSBC. While capital and surplus was impacted by extraordinary stockholder dividends a few years ago, overall capital and surplus has increased considerably over the past two years due to strong earnings and a lack of stockholder dividends during this time. In addition, the group maintains a relatively conservative investment portfolio that yielded no asset impairments over the past year. The group's statutory operating results have benefited from the release of reserves from the run-off of its U.S. credit insurance block of business. However, earnings have been impacted by statutory strain and the costs associated with its recent term life insurance initiative. While A.M. Best notes that the U.S. retail banking operations and credit card arm of HSBC are currently under strategic review, Household Life Group continues with its current strategy of offering term life insurance through HSBC's U.S. banking distribution channel and third party vendors. Household Life Group also continues to market credit life and accident and health insurance products through HSBC's consumer lending operations in Canada. The group's U.S. credit insurance operations were discontinued in 2009. Overall premium levels continue to be impacted by the run-off of the U.S. credit insurance block of business, partially offset by an increase in term life insurance premiums. While overall term life insurance premiums increased modestly during the most recent period, A.M. Best notes that sales declined considerably as a new term life product was introduced with a redesigned underwriting process that impacted distribution. In addition, the group withdrew from its online distribution channel. Going forward, A.M. Best will be monitoring the group's ability to expand its relatively modest U.S. business profile by successfully executing its current strategy of penetrating HSBC's U.S. customer base and developing new distribution outlets for its life products. Future rating actions on Household Life Group also will be dependent upon its ability to begin generating statutory operating gains in its ordinary life product line over the medium term. The affirmation of the ratings of HSBC Insurance Company acknowledges its strong risk-adjusted capitalization and solid underwriting and operating results. These rating factors are offset by HSBC's 2010 decision to eliminate HSBC Insurance Company's 50% coinsurance agreement with its affiliate, Household Life, which generated the majority of the company's premium production. This decision expedites the run-off status of the company that was initiated by HSBC's 2009 announcement that it would cease issuing credit insurance in the United States, which included the subsequent closure of HSBC Insurance Company's primary distribution source. A.M. Best anticipates that HSBC Insurance Company will continue to produce positive operating results as it runs off its traditionally profitable core credit businesses while maintaining a level of risk-adjusted capital that supports its current ratings. The principal methodology used in determining these ratings is Best's Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Life and Health Insurers”; “Understanding BCAR for Property/Casualty Insurers”; “Natural Catastrophe Stress Test Methodology”; and “Rating Members of Insurance Groups.” Methodologies can be found at Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit Copyright © 2011 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.A.M. Best Co.Michael Adams, 908-439-2200, ext. 5133Senior Financial Analystmichael.adams@ambest.comorThomas Rosendale, 908-439-2200, ext. 5201Assistant Vice Presidentthomas.rosendale@ambest.comorRachelle Morrow, 908-439-2200, ext. 5378Senior Manager, Public Relationsrachelle.morrow@ambest.comorJim Peavy, 908-439-2200, ext. 5644Assistant Vice President, Public