CHICAGO, May 3 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has
lowered the claims paying ability ratings of UICI's primary life insurance
subsidiaries The MEGA Life & Health Insurance Company (MEGA) and Mid-West
National Life Insurance Company of Tennessee (Mid-West) to 'A-' (Single-A-
Minus) from 'A' (Single-A.) At the same time DCR revised the Rating Watch to
Uncertain from Down.
The rating action follows DCR's review of UICI's insurance and credit card
operations and reflects our concerns regarding UICI's ability to fund ongoing
operating losses and capital needs of its subsidiary banking operations and
the potential impact on the company's insurance operations.
For 1999, UICI reported pretax operating losses of approximately $145
million at its United CreditServ subsidiary, chiefly attributable to increases
in the credit card loan loss reserves at United Credit National Bank (UCNB.)
UICI concurrently announced that it will exit the sub-prime credit card
business and expects to complete the sale of UCNB during 2000. UICI recorded
a $130 million charge to 1999 income for the estimated losses on the
discontinued operation, including asset write-downs, estimated loss on the
sale of the business and continuing losses through the sale date.
DCR believes that the operating losses at UCNB will continue to have a
material adverse effect upon the liquidity and cash flows of UICI due to the
current credit support agreement between UICI and UCNB. The U.S. Office of
the Comptroller of the Currency (OCC) has issued a consent order that
significantly limits UCNB's funding activities and credit card programs. UNCB
has a liquidity and capital maintenance agreement in place that requires UICI
to assure sufficient liquidity to meet the bank's funding demands and capital
requirements. UICI has funded more than $105 million in cash through March 27
through its operating subsidiary, United CreditServ, to UCNB through cash on
hand, the sale of investment securities and regular dividends from its
insurance subsidiaries. UICI management currently projects additional cash
needs of $92 million to fund the exit from the credit card business, though
this amount could vary.
DCR's primary concerns are with the ultimate level of funding requirements
and with the uncertainty inherent in the reliance upon non-operating funds as
primary sources of funding. We expect UICI's sources of funding to be from
cash on hand, sale of investment securities, asset sales and external capital
market funding. Additional uncertainty exists from the reduction in UICI's
financial flexibility and the potential impact on employee and agency
performance given the significant devaluation in UICI's stock price over the
last six months.
The ratings on the MEGA and MidWest continue to reflect strong statutory
capitalization; liquid and high-quality investment portfolios; a conservative
reserving methodology; and expertise in their niche health insurance market
for self-employed individuals. The operating performance of the life
insurance companies improved in 1999 continues to perform in line with our
expectations.
DCR will closely monitor the liquidity and operating performance of UICI
and its impact on UICI's life insurance subsidiaries as well as the resolution
of the proposed capital plan with the OCC and its impact upon the timing and
funding requirements at UICI.
For additional information on UICI, visit DCR's Web site at
http://www.dcrco.com (Quick Search: MEGA). DCR's research is also available
on Bloomberg at DCR, FirstCall's BondCall Direct/Research Direct at
http://www.firstcall.com and Multex at http://www.multex.com, as well as
through other third-party providers.
SOURCE Duff & Phelps Credit Rating Co.
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Related links:
http://www.dcrco.com
CONTACT:
R. Andrew Davidson III, CFA, 312-368-3144,
davidson@dcrco.com; or Douglas L. Meyer, CFA, 312-368-2061,
meyer@dcrco.com, both of DCR
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