Fitch Ratings has affirmed the 'AA+' Insurer Financial Strength (IFS) ratings of Guardian Life Insurance Company of America and its wholly owned subsidiary, Guardian Insurance & Annuity Company, Inc. (collectively referred to as Guardian). The Rating Outlook is Stable. See the full list of ratings at the bottom of this press release.
KEY RATING DRIVERS
Guardian's very strong ratings continue to reflect exceptionally strong balance sheet fundamentals, relatively stable operating results, and a favorable operating profile. The Stable Outlook is driven by Fitch's expectations of continued sustainable solid operating and investment performance for 2013, supported by conservative product and distribution profiles. Fitch believes that the pressure on profitability and capital driven by an extended low interest rate scenario and future investment losses is manageable in the context of the company's capital position and liability profile.
Guardian's very strong balance sheet fundamentals include extremely strong risk-based capitalization, low leverage, and a stable liability profile. The extremely strong capitalization and high quality of capital are key factors supporting the rating. Guardian's risk-based capital ratio (RBC) is estimated to have increased to 490% at June 30, 2013 from 470% at the end of 2012. Total adjusted capital (TAC) increased to $5.9 billion at June 30, 2013, following a 5.5% increase to $5.8 billion at year-end 2012.
Guardian maintains low leverage. Financial leverage - surplus notes in relation to TAC - was low at 7% as of June 30, 2013 and Dec. 31, 2012. The total financing and commitments (TFC) ratio is less than 0.1x, and consolidated operating leverage is very low at 6.9x at mid-year 2013.
Debt servicing capabilities are strong, with interest coverage of 16x for the full-year 2012 based on pre-tax operating earnings. Fitch expects interest coverage to be very strong in the range of 14x to 16x for 2013.
Guardian has a relatively low risk liability profile. As of December 31, 2012, par whole life insurance accounts for 74% of the companies $34 billion of consolidated general account reserves (excluding separate accounts) while retail annuities account for just 6%. Fitch views the primary product, participating whole life, as relatively low risk, given the long-duration participating liabilities, limited disintermediation risk, and very limited guarantee provisions. Guardian has about $9.8 billion in separate account reserves at Dec. 31, 2012, consisting of individual variable annuities, 401(k) and variable life insurance. Fitch views the company's exposure to the more complex living and death benefit guarantees as very low.
Guardian has generated solid investment performance with investment yields above industry average and very low credit-related impairments. While not immune from the low interest rate environment, the company has maintained portfolio yields above 5% and credit losses were very low in 2012 and through the first half of 2013. Fitch expects continued low credit impairments for the full year. Guardian's risky asset ratio of 79% at year-end 2012 was well below the average for its highly rated mutual peer group and below the life industry as a whole despite its above-average exposure to unaffiliated common stock. Guardian has below-average exposure to below investment-grade bonds and has recently made a conscious effort to reduce exposure to below investment-grade private placement bonds.
The insurer's recent operating performance has remained relatively stable. Statutory net operating gain increased to $205 million in the first six months of 2013 from $145 million the prior year. Guardian's reported statutory return on TAC is consistently in the 4%-5% range, which is below industry returns but reasonable given the company's mix of business. Guardian's pre-tax, post-dividend return on assets is above the mutual peer group average.
Guardian generates consistent operating results driven by its large, seasoned book of life insurance products. The relative stability of earnings comes in part from the participating nature of the company's whole life book which has limited guarantees and a flexible dividend scale. Key factors enabling the individual life segment to market its products on a cost-effective basis are its low lapse rates associated with protection-based insurance products and overall low expense base, aided by Guardian's good scale and productive agency force.
In addition, Fitch views Guardian's revenue and earnings streams as high quality and benefiting from solid results from its individual and group disability, as well as group life and dental. All core segments contribute consistently to results.
Fitch's key rating concerns include the macroeconomic headwinds associated with low interest rates and equity market volatility, the potential for significant deterioration in disability loss ratios in the current weak economic environment, and potential regulatory or tax law changes that could have a negative effect on Guardian's primary markets or distribution channels.
Key rating drivers that could lead to a downgrade include a significant decline in TAC or an RBC ratio below 400%; financial leverage above 15%; GAAP interest coverage below 7x; a deterioration in disability claims experience causing a significant operating or capital loss at the Berkshire subsidiary; and/or regulatory or tax law changes that hurt the company's position in its primary whole life market.
Given that Guardian already has the second-highest rating, Fitch does not anticipate an upgrade at this time.
Fitch affirms the following ratings with a Stable Outlook:
Guardian Life Insurance Company of America
--Issuer Default Rating (IDR) at 'AA';
--IFS at 'AA+';
--Surplus notes at 'AA-'.
Guardian Insurance and Annuity Company
--IFS at 'AA+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', Aug. 11, 2013.
Applicable Criteria and Related Research:
Insurance Rating Methodology
- Security Upgrades & Downgrades
- Fitch Ratings
R. Andrew Davidson, CFA, +1-312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Cynthia J. Crosson, +1-212-908-0863
Brian C. Schneider, +1-312-606-2321
Brian Bertsch, +1-212-908-0549 (New York)