Fitch Affirms NLV Financial Corp. IDR at 'A-'; Outlook Revised to Negative

NEW YORK--()--Fitch Ratings today affirmed the 'A-' Issuer Default Rating (IDR) and 'BBB+' senior debt ratings of NLV Financial Corp. (NLVF), and the 'A+' Insurer Financial Strength (IFS) ratings of National Life Insurance Company (Vermont)(NLIC) and Life Insurance Company of the Southwest (LSW) - collectively known as the National Life Group (NLGroup). A complete list of ratings follows at the end of this release. The Rating Outlook for all ratings is revised to Negative from Stable.

The rating affirmation reflects an updated review of NLGroup's credit related investment losses, which continued to decline in 2010 and through the first nine months of 2011. The investment portfolio as a whole was in a net unrealized gain position of approximately $300 million at Sep. 30, 2011.

Fitch views NLV Corp.'s leverage as moderate, and notes that it has been very stable over the past few years. The financial leverage ratio was 22% at Sep. 30, 2011 compared with 23% at year-end 2010. The group's total financing and commitments (TFC) ratio is lower than average at 0.3 times (x).

The Outlook revision is based on Fitch's view that earnings and interest coverage will be pressured by the continued low interest rate environment. NLGroup's reported GAAP pretax operating earnings decreased to $103 million in the first nine months of 2011 versus $109 million for the previous year's period as a decline in investment income from derivative mark to market changes was not fully offset by reduced credited interest. The company continues to meet target interest margins on its overall book of business, although margins on smaller older blocks of business are under pressure. GAAP interest coverage remains relatively low for the rating category, 4.3x through the first nine months of 2011, and prospects for material improvement are somewhat limited in the current low rate environment.

Fitch believes that NLGroup has good liquidity and reasonable financial flexibility. The company holds cash of approximately four times annual pre-tax interest expense at the holding company. No debt is due to mature over the next 10 years. NLG has additional flexibility in its ability to adjust policyholder dividends. The company discontinued its securities lending program in 2010.

NLGroup's statutory capitalization is sound. The combined NAIC risk-based capital (RBC) ratio was approximately 400% as of Sept. 30, 2011 compared to 393% at the end of 2010. The combined RBC is expected to remain near current levels for the full year 2011 and beyond.

Fitch continues to be concerned about the group's underfunded pension plan and its potential impact on financial results over the longer term. In the near term, Fitch expects the lower interest environment to lead to a decline in the funding status. Fitch believes, however, that the group's funding obligations related to the pension plans are manageable over the next few years.

NLGroup had approximately $20 billion in consolidated GAAP assets and $2 billion in shareholders equity at Sept. 30, 2011.

Key rating triggers that could lead to a downgrade are:

--GAAP and statutory earnings levels remaining near current levels or declining.

--Lack of improvement in GAAP EBIT coverage from the current level of 4.3X. (Based on operating earnings)

--Financial leverage above 30%.

--Combined RBC below 350% on a sustained basis.

Key rating triggers that could lead to a return to a Stable Outlook:

--Improved GAAP and statutory earnings from current levels.

--GAAP EBIT coverage improving to 5x or higher. (Based on operating earnings)

--Combined RBC maintained at current levels.

--Financial leverage maintained at current levels.

--TFC maintained at current levels.

The following ratings are affirmed with a Negative Outlook by Fitch:

NLV Financial Corp.

--IDR at 'A-';

--$199 million 7.5% senior notes due Aug. 15, 2033 at 'BBB+';

--$68 million 6.5% senior notes due March 15, 2035 at 'BBB+'.

National Life Insurance Company (Vermont)

--IFS at 'A+'.

--IDR at 'A'

--$200 million of 10.5% surplus notes due Sept. 15, 2039 at 'A-'

Life Insurance Company of the Southwest

--IFS at 'A+'.

Additional information available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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Contacts

Fitch Ratings
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com
or
Primary Analyst:
Cynthia J. Crosson, +1-212-908-0863
Director
Fitch Ratings
One State Street Plaza
New York, New York 10004
or
Secondary Analyst:
Julie A. Burke, CPA, CFA, +1-312-368-3158
Managing Director
or
Committee Chair:
Peter F. Patrino, +1-312-368-3266
Managing Director

Sharing

Contacts

Fitch Ratings
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com
or
Primary Analyst:
Cynthia J. Crosson, +1-212-908-0863
Director
Fitch Ratings
One State Street Plaza
New York, New York 10004
or
Secondary Analyst:
Julie A. Burke, CPA, CFA, +1-312-368-3158
Managing Director
or
Committee Chair:
Peter F. Patrino, +1-312-368-3266
Managing Director