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TEXT-S&P raises Fidelity & Guaranty Insurance to 'BB'
May 30, 2012 / 6:28 PM / 5 years ago

TEXT-S&P raises Fidelity & Guaranty Insurance to 'BB'

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.

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