Fitch Affirms Fidelity & Guaranty Life; Outlook Stable
KEY RATING DRIVERS
Fitch's ratings for F&G Life reflect the company's relatively narrow product focus and liability profile, strong balance sheet profile, and improved operating performance. The ratings also considers the high leverage of the company's parent, HRG Group, Inc. (HRG), competitive challenges in the company's target markets, and macroeconomic challenges associated with low interest rates.
F&G Life's strategic focus is centered on the sale of fixed indexed annuities (FIAs) primarily through independent marketing organizations. While Fitch believes that F&G Life maintains a strong competitive position in this market, this concentration exposes the company to potentially unfavorable regulatory or market developments that may negatively impact the demand for FIA products.
F&G Life's strong balance sheet profile reflects the company's strong statutory capitalization and good asset quality. The company's below investment grade bonds (BIGs) to surplus ratio is above industry averages at 79.6% of total adjusted capital (TAC). However, Fitch views the overall investment quality to be comparable to peers and notes that the company's investment portfolio tends to overweight public bonds and underweight mortgages loans and alternatives. Impairment losses continue to remain low at \$3.6 million in 2014 compared to \$6.3 million in 2013.
Year-end 2014 risk based capital (RBC) of 388% and financial leverage of 19% are both in line with rating expectations. The company's RBC was 423% as of year-end 2013 and was negatively impacted at year-end 2014 due to new business strain from increased annuity sales as planned by the company. Fitch notes an increase of 12% in total adjusted capital in 2014.
F&G Life's operating performance has improved following the company's ability to increase sales of FIA and fixed annuities and maintain low expenses. Operating performance has also benefited from management actions to reposition its investment portfolio. The company's profitability measures are currently within range of peers.
Fitch's view of F&G Life's credit profile is negatively impacted by its status as a majority owned subsidiary of HRG (IDR 'B'). Fitch has applied non-standard notching (three notches compared to standard two notches) between the 'BBB' IFS ratings of the insurance subsidiaries and the 'BB' IDR of F&G Life Holdings based on the ratings and financial profile of F&G Life Holdings' highly leveraged parent, HRG, and its own limited financial flexibility and liquidity. In light of HRG's announcement on April 6 that it was exploring strategic alternatives for F&G Life that may include a sale of all or part of its 80.6% ownership interest, Fitch may change its view on whether wider notching continues to apply to the holding company long-term IDR depending on the outcome of HRG's review.
RATING SENSITIVITIES
Key rating triggers that could result in an upgrade of the ratings for F&G Life Holdings include:
--Further divestiture of HRG's ownership in FGL.
Key rating triggers that could result in an upgrade of all F&G Life entities include:
--Successful execution of the company's growth strategy under new management;
--F&G Life's consolidated RBC above 400%;
--Financial leverage below 25%;
--Operating GAAP ROE above 10%.
Key rating triggers that could result in a downgrade include:
--Deterioration in HRG's credit profile;
--F&G Life's consolidated RBC falls below 300% with operating leverage above 20x;
--Consolidated financial leverage for F&G Life exceeds 35%;
--Maximum statutory dividend coverage of F&G Life consolidated interest falls below 3x;
--An unexpected spike in credit related impairments.
Fitch has affirmed the following ratings with a Stable Outlook:
Fidelity & Guaranty Life Insurance Co.
Fidelity & Guaranty Life Insurance Co. of New York
--IFS rating at 'BBB'.
Fidelity & Guaranty Life Holdings, Inc.
--Long-term IDR at 'BB';
--Senior unsecured note due April 2021 at 'BB-'.
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