TEXT-S&P raises Fidelity & Guaranty Insurance to 'BB'
June 1, 2012 by N/A
Wed May 30, 2012 2:25pm EDT
Overview
— Fidelity & Guaranty Life Insurance Co.’s (FGLIC’s) 2011 statutory
results showed continued positive trends from 2010, with strengthened
capitalization.
— Under its new parent company, Harbinger Group Inc., FGLIC has
continued to derisk its investment portfolio.
— As a result, we are raising our unsolicited issuer credit rating on
FGLIC to ‘BB’ from ‘BB-‘. The outlook is positive.
— The positive outlook reflects our view of FGLIC’s favorable operating
performance and sales trends, which we expect to continue.
Rating Action
On May 30, 2012, Standard & Poor’s Ratings Services raised its unsolicited
issuer credit rating on Fidelity & Guaranty Life Insurance Co. (FGLIC) to ‘BB’
from ‘BB-‘. The outlook is positive.
Rationale
The upgrade and positive outlook reflect FGLIC’s continuing positive operating
performance, its strengthened capitalization, the decreased risk in its
investment portfolio, and its improving sales.
In 2011, FGLIC had an adjusted statutory net income of $148 million. The 2011
adjusted net income included net realized capital losses of $6 million and
unrealized capital losses on derivatives of $99 million, and excluded one-time
charges of $136 million resulting from reinsurance transactions in 2011. In
comparison, FGLIC’s adjusted statutory net income was $168 million in 2010.
The 2010 adjusted net income included net realized capital losses of $49
million and unrealized capital losses on derivatives of $80 million. When
analyzing statutory net income, we adjust earnings to include the unrealized
gains or losses on the derivatives backing the equity-indexed annuities
(reported as a component of capital and surplus) to match it against the
offsetting credit to reserves (reported in income from operations). The
year-over-year decline in FGLIC’s net income was primarily due to declines in
net investment income.
FGLIC improved its year-end 2011 risk-based capital (RBC) ratio to 371% from
350% in 2009, despite a $40 million dividend to Harbinger Group Inc.,
primarily as a result of positive statutory earnings.
Harbinger had identified certain investments that should be excluded from
FGLIC’s portfolio in order to fulfill the terms and conditions for its
acquisition of FGLIC. Accordingly, in 2010 and 2011, FGLIC disposed of those
investments to lower the risk in its portfolio, without incurring significant
losses. Although 97% of FGLIC’s bonds were rated investment grade as of Dec.
31, 2011, the firm’s above-average credit exposure to ‘BBB’ rated investments
offsets its below-average exposure to speculative-grade assets. High risk
assets (speculative-grade bonds and common and preferred stock) as a
percentage of total invested assets declined to 5.0% in 2011 from 6.8% in
2010–below the industry average. FGLIC strategically reduced its weighted
average bond duration to 10.0 years in 2011, which was in line with industry
averages, sacrificing yield for asset-liability matching.
FGLIC recently returned to a top five position in indexed-annuity sales as of
March 31, 2012; a position it last held in 2007. As of Dec. 31, 2011, the
company’s indexed-annuity sales increased 10% from year-end 2010 levels.
However, FGLIC’s narrow business profile may affect its competitive
positioning going forward.
The ratings on FGLIC reflect its marginal competitive position, which it
derives from its product-manufacturing capabilities and distribution
relationships in its niche markets. FGLIC’s concentrated business profile
focuses primarily on the highly competitive annuity market.
Outlook
The positive outlook reflects our view of FGLIC’s positive operating
performance and sales trends, its strengthened capitalization, and its
continued derisking of its investment portfolio. There is a one-in-three
probability that we could raise the rating within the next year if FGLIC’s
operating performance remains positive and it maintains capitalization at
current levels. We could lower the rating if Harbinger allows capital to erode
to an RBC ratio of less than 300%, if FGLIC manages the investment portfolio
more aggressively, or if the company’s competitive position weakens.
We expect that FGLIC’s 2012 equity-indexed annuity sales will increase 5%-10%
from 2011 levels. We also expect that FGLIC will produce at least $100 million
in adjusted statutory net income in 2012 and maintain a top 10 position in its
primary niche businesses: equity indexed annuities and equity indexed life
insurance.
Related Criteria And Research
— Refined Methodology And Assumptions For Analyzing Insurer Capital
Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
— Analysis Of North American Life Insurance Operating Performance, May
13, 2009
Ratings List
Upgraded
To From
Fidelity & Guaranty Life Insurance Co. (Unsolicited Ratings)
Counterparty Credit Rating
Local Currency BB/Positive/– BB-/Positive/–
Financial Enhancement Rating
Local Currency BB/Positive/– BB-/Positive/–
Financial Strength Rating
Local Currency BB/Positive/– BB-/Positive/–
This unsolicited rating(s) was initiated by Standard & Poor’s. It may be based
solely on publicly available information and may or may not involve the
participation of the issuer. Standard & Poor’s has used information from
sources believed to be reliable based on standards established in our Credit
Ratings Information and Data Policy but does not guarantee the accuracy,
adequacy, or completeness of any information used.
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor’s public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
