A.M. Best Affirms Ratings of Delphi Financial Group, Inc. and Its Subsidiaries [Manufacturing Close – Up]

A.M. Best Co. has affirmed the issuer credit ratings (ICR) of "a+" and the financial strength rating (FSR) of A (Excellent) of Reliance Standard Life Insurance Company (Reliance Standard) (Chicago, IL) and First Reliance Standard Life Insurance Company (First Reliance) (New York, NY), the life/health subsidiaries of Delphi Financial Group, Inc. (DFG).

Concurrently, A.M. Best has affirmed the ICRs of "a+" and the FSR of A (Excellent) of Safety National Casualty Corp. (St. Louis, MO) and its reinsured affiliate, Safety First Insurance Company (Chicago, IL) (together referred to as Safety National), the property/casualty subsidiaries of DFG. Additionally, A.M. Best has affirmed the ICR of "bbb+" and the existing debt ratings of DFG. The outlook for all ratings is stable. (Please see below for a detailed list of the debt ratings.) DFG is a direct subsidiary of Tokio Marine & Nichido Fire Insurance Co., Ltd., whose ultimate parent is Tokio Marine Holdings, Inc. (Tokio Marine), Japan's largest non- life insurance organization.

The ratings affirmations of DFG's life/health subsidiaries reflect its consistent operating results and sound capitalization, along with their recognized position as a top-tier group employee benefits carrier. Reliance Standard, together with its New York marketing arm, First Reliance, continue to report favorable operating results driven by profitability of their core employee benefit product lines and supplemented by their annuity operations. The companies offer a diversified portfolio of true group and voluntary products as well as turnkey disability insurance through their Custom Disability Solutions (CDS) division. DFG continues to report net premium growth and stable persistency across most of its product lines and rising assets under management within its annuity operations. Despite prolonged low interest rates, the life/health companies' spreads are holding up due to adjustments in credited rates and opportunistic investing. A.M. Best notes that recent results continue to reflect the company's proactive underwriting discipline, including continued pricing adjustments in its somewhat volatile group disability business line.

Although recognized as a core competency for DFG, A.M. Best continues to closely monitor the investment allocations at the life/ health subsidiaries. While historically well-managed, the group has experienced some volatility related to its alternative investments and holds a sizable amount of lower grade corporate bonds and mortgage-backed structured securities. A.M. Best notes that the group's allocation to alternative assets has declined somewhat over the past few years. However, a recent uptick in subprime residential mortgage-backed securities reflects DFG's above-average tolerance for investment risk and will continue to be closely monitored. Additional concerns related to the employee benefits business reflect the potential effect of a continued sustained level of unemployment and sluggish wage growth as well as the increasingly competitive environment.

Safety National's ratings affirmations reflect the property/ casualty group's strong operating performance, adequate risk- adjusted capitalization achieved in part through explicit support from its intermediate parent company, DFG, and its established market presence within the excess workers' compensation market.

Partially offsetting these positive rating factors are areas of ongoing adverse loss release development occurring on accident years 2004 and prior and the impact of investment market fluctuations, which has hampered the group's ability to internally generate capital. Despite these concerns, the outlook recognizes the group's historically solid profitability levels, which outperform its peer composite, and A.M. Best's expectation that Safety National should generate surplus growth through strong earnings over the near term.

The positive rating attributes reflect the group's disciplined underwriting standards, service-oriented business approach and experienced management team. Furthermore, A.M. Best believes Tokio Marine is fully committed to supporting Safety National's operations. The ratings also acknowledge the inherent synergies between DFG's insurance entities, which include the sharing of management expertise, client bases, products, distribution and expenses.

As a more recent member of the Tokio Marine Group of companies, DFG has potential to benefit from the strength of its parent through the receipt of capital support, if needed. Currently, the group maintains an appropriate debt-to-capital ratio at approximately 22 percent (including some equity credit for hybrid securities) and a good interest coverage ratio at about five times.

A positive rating action could occur once DFG's insurance operations become more fully integrated, and/or the companies receive explicit support from Tokio Marine. Factors that could lead to a negative rating action include a material decline in stand- alone operating profitability, increased investment risk and/or realized losses beyond A.M. Best's expectations (which would reduce risk-adjusted capital levels), or a change in A.M. Best's view of the group's strategic importance of DFG to Tokio Marine.

The following debt ratings have been affirmed:

Delphi Financial Group, Inc.-

-- "bbb+" on $250 million 7.875 percent senior unsecured notes, due 2020

-- "bbb-" on $175 million fixed/floating rate junior subordinated notes, due 2037

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 ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

((Comments on this story may be sent to [email protected]))