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  • 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.

    Originally Posted at Reuters on May 30, 2012 by N/A.

    Categories: Industry Articles
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