Fitch Affirms Guardian's IFS Ratings at 'AA '; Outlook Stable
KEY RATING DRIVERS
Guardian's ratings reflect the company's favorable operating profile, very strong risk-based capitalization, low operating leverage, high quality investments, and improving operating results. Fitch's key rating concerns include ongoing low interest rates, potential market volatility and the potential for significant deterioration in disability loss ratios in a weak economic environment. Fitch believes that pressure on profitability and capital driven by an extended low interest rate scenario is manageable in the context of the company's capital position and conservative liability profile.
Fitch views Guardian's primary product, participating whole life, as relatively low risk, given the long-duration participating liabilities, limited disintermediation risk, and very limited guarantee provisions. In addition to whole life, Guardian also holds top-tier positions and has had relatively stable performance in its core individual disability and the group insurance markets, which include group life, dental, and disability.
Fitch views Guardian's statutory capital profile as very strong and exceeding rating expectations. At year-end 2015, Guardian's risk-based capital ratio (RBC) was 568% and total adjusted capital (TAC) was \\$7.4 billion, an increase of 7% from year-end 2014 levels. As of Dec. 31, 2015, the company reported low operating leverage of 6.5x. Statutory financial leverage (surplus notes in relation to TAC) is somewhat higher relative to mutual peers at 11.5% but is offset by the relatively conservative liability profile of the company and remains within Fitch's 15% guideline for standard surplus note notching.
Over 2015, Guardian generated solid investment performance and credit-related impairments were within expectations. Guardian maintains a relatively conservative investment profile as seen in an asset mix that focuses on publicly traded, investment grade, fixed-maturity investments and below-average exposure to commercial mortgages and structured bonds. Guardian's risky asset ratio of 56% at year-end 2015 was well below the average for its highly rated mutual peer group and also well below the life industry as a whole. Guardian has maintained below-average exposure to below investment-grade bonds as a percent of TAC.
Guardian's operating performance for 2015 compares favorably to other highly rated mutual peers. Statutory operating results for 2015 are improved over the prior year due to strong results in group insurance and individual life. Reported statutory operating return (after taxes and policyholder dividends) on TAC was 7.6%, which has been supported not only by growth in group and disability insurance but also by strong growth from fee-based service providers, which support and complement group dental and disability insurance.
The ratings on Guardian Insurance and Annuity Company and Berkshire Life Insurance Company of America, which are wholly owned subsidiaries of Guardian, are based on Fitch's view that these entities are core operating companies within the Guardian organization.
RATING SENSITIVITIES
Key rating drivers that could lead to a downgrade include a significant decline in TAC or an RBC ratio below 400%; statutory earnings interest coverage below 6x; a deterioration in disability claims experience causing a significant operating or capital loss; and/or regulatory or tax law changes that hurt the company's position in its primary whole life market.
Fitch could downgrade Guardian's surplus notes if the ratio of surplus notes to TAC exceeds 15%.
Fitch does not anticipate an upgrade at this time given the company's more limited operating profile and scale versus 'AAA' rated peers.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
The Guardian Life Insurance Company of America
--Long-term Issuer Default Rating (IDR) at 'AA';
--IFS at 'AA+';
--Surplus notes at 'AA-'.
Guardian Insurance and Annuity Company
--IFS at 'AA+'.
Berkshire Life Insurance Company of America
--IFS at 'AA+'.
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