CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' Long-term Issuer Default Rating (IDR) to Fidelity & Guaranty Life Holdings, Inc.'s (F&G Life Holdings). At the same time Fitch has assigned a 'BB-' rating to F&G Life Holdings' proposed issuance of $300 million senior unsecured notes. The Rating Outlook is Stable.
Fitch has also affirmed the 'BBB' Insurer Financial Strength (IFS) ratings assigned to F&G Life Holdings' insurance subsidiaries, Fidelity & Guaranty Life Insurance Co. and Fidelity & Guaranty Life Insurance Co. of New York (collectively referred to as Fidelity & Guaranty Life). The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings assigned to F&G Life Holdings are based on the credit quality of its insurance subsidiaries, which will be the primary source of debt service. Non-standard notching of three levels was applied between the 'BBB' IFS ratings of the insurance subsidiaries and the 'BB' IDR of F&G Life Holdings (standard notching is two levels) based on the ratings and financial profile of F&G Life Holdings' highly leveraged parent, Harbinger Group Inc. (HRG, 'B' IDR) and its own limited financial flexibility and liquidity.
The one notch difference between F&G Life Holdings' IDR and the anticipated rating of 'BB-' for the new senior unsecured note reflects standard notching. The proposed debt issuance is anticipated to be a $300 million eight-year note with standard covenants that include debt and upstream payment restrictions.
The newly rated debt issuance is part of the company's plan to provide growth funds for Fidelity & Guaranty Life. Fitch estimates the financial leverage ratio under the new plan will be approximately 26% on a pro forma basis as of Dec. 30, 2012. Fitch expects $195 million of the note proceeds to be moved to the insurance subsidiaries, $75 million to be dividended to HRG and $20 million to be retained for liquidity equal to roughly one year's note interest payments.
Interest payments will be funded by interest on a new $195 million Fidelity & Guaranty Life Insurance Company surplus note held by F&G Life Holdings and statutory dividend payments from Fidelity & Guaranty Life. Terms of the surplus note will be comparable to the new senior unsecured note. Statutory dividend capacity from Fidelity & Guaranty Life Insurance Company is approximately $90 million for 2013, which leads to good statutory cash interest coverage of 5 times(x) for the new senior note.
The affirmation of Fidelity & Guaranty Life's IFS ratings reflects the company's progress in executing against its plan for measured growth, reduced expenses, and improved capitalization. Fitch's IFS ratings also consider Fidelity & Guaranty Life's relatively limited product diversification, competitive challenge in the company's target markets, macroeconomic challenges associated with low interest rates and economic weakness, and a highly leveraged ultimate parent company.
Reported statutory net income was $103 million in 2012 versus $115 million for full year 2011. Net income was affected by the statutory strain from increased sales and lower net investment yields.
Positively, bond quality remained consistent with Dec. 31, 2011, as approximately 3% of bonds were below investment grade. The trend toward lower full year impairment losses continued with a drop to $15 million in 2012 versus $37 million in 2011 and $114 million in 2010, respectively. Fitch expects Fidelity & Guaranty Life's statutory earnings to remain level at approximately $100 million per year for the immediate future.
Statutory capitalization is in line with rating expectations and is considered strong. In 2012, statutory capital has increased $79 million to $949 million and operating leverage declined slightly to 17x, both compared to year-end 2011. Fidelity & Guaranty Life's risk based capital (RBC) was approximately 406% at Dec. 31, 2012. Fitch expects capital to grow modestly over the near term as statutory earnings will largely be used to fund growth and dividend payments to the parent company. Approximately $40 million of dividends were made in 2012 and Fitch expects this to remain steady over the immediate future.
Fidelity & Guaranty Life has narrowed its product focus to the
manufacture of equity-indexed annuity and indexed universal life
products for brokers and independent agents. Fitch expects annuity
premiums, which are up in 2012, to continue to trend upward over the
next year based on the execution of various marketing initiatives.
Fidelity
& Guaranty Life and F&G Life Holdings are wholly owned subsidiaries of
HRG, a publicly traded holding company that seeks to acquire significant
interests in businesses across a diverse range of industries. HRG is
majority owned by investment funds affiliated with Harbinger Capital
Partners.
RATING SENSITIVITIES
Fitch does not anticipate Fidelity & Guaranty Life's financial condition will position it for an upgrade in the immediate future, unless it is owned by a higher rated entity.
The key rating triggers that could result in a downgrade include:
--Deterioration in HRG's credit profile;
--Fidelity & Guaranty
Life's consolidated RBC falls below 300% with operating leverage above
20x;
--Consolidated financial leverage for F&G Life Holdings
exceeds 35%;
--Maximum statutory dividend coverage of F&G Life
Holdings consolidated interest falls below 3x.
--A prolonged spike
in Fidelity & Guaranty Life annuity surrenders;
--Any
significant issues with Fidelity & Guaranty Life's market conduct or
regulatory environment.
Fitch has affirmed the following ratings:
Fidelity & Guaranty Life Insurance Co.
Fidelity & Guaranty Life
Insurance Co. of New York
--IFS rating at 'BBB'.
Fitch also rates the following:
Fidelity & Guaranty Life Holdings, Inc.
--Long term IDR rating
'BB'.
-- Sr. Unsecured Note due March, 2021 'BB-'
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Insurance Rating
Methodology (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating
Methodology -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
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