CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA+' Insurer Financial Strength (IFS) ratings of the Guardian Life Insurance Company of America (Guardian) and its wholly owned subsidiaries, Guardian Insurance & Annuity Company, Inc. (GIAC) and Berkshire Life Insurance Company of America (Berkshire). The Rating Outlook is Stable. A full list of ratings follows at the end of this 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. Guardian's very strong balance sheet fundamentals include extremely strong risk-based capitalization, low leverage and high quality investments.
The Stable Outlook is driven by Fitch's expectations of continued sustainable solid operating and investment performance for 2015, supported by conservative product and distribution profiles. Fitch believes that the 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 liability profile.
Fitch views Guardian's capital profile as extremely strong as risk-based capitalization and leverage metrics exceed rating expectations. Guardian's risk-based capital ratio (RBC) is estimated to have increased to 531% at Sept. 30, 2014 from 470% at the end of 2013, both of which are better than Fitch's 'AAA' rating category guidelines. Total adjusted capital (TAC) increased 14% to $7 billion at Sept. 30, 2014 from $6.1 billion at year-end 2013 due to retained earnings and the issuance of $450 million in fifty year surplus notes in June 2014. The company's surplus notes ratio (surplus notes in relation to TAC) increased to approximately 12% at Sept. 30, 2014 from 7% as of Dec. 31, 2013. The total financing and commitments (TFC) ratio remains very low at 0.1x.
Fitch views the Guardian group's operating profile as consistent with 'AA' rating expectations. Guardian maintains a top-tier position within its three core market segments: individual whole life insurance, individual and group disability and group insurance. Fitch believes Guardian is focused on prudent growth and improved expense efficiencies. Guardian is a leading provider of whole life and individual disability income insurance products, operating at the high end of the affluent and small business market primarily through a strong general agency network. Guardian operates one of the largest dental networks in the United States. Fitch considers the company's 401(k) business as currently subscale and its retirement services segment as a minor contributor to Guardian's bottom line.
Guardian's conservative investment portfolio and relatively low exposure to risky assets is supportive of 'AA' category ratings. Guardian has generated solid investment performance and very low credit-related impairments. Credit related impairments were very low through the first nine months of 2014. Fitch expects continued low credit impairments for the full year. Guardian maintains a relatively conservative investment profile as seen in the asset mix that focuses on investing in publicly traded, investment grade, fixed-maturity investments with a below-average exposure to commercial mortgages and structured bonds. Guardian's risky asset ratio of 76% at year-end 2013 was well below the average for its highly rated mutual peer group and below the life industry as a whole. Guardian has below-average exposure to below investment-grade bonds as a percent of TAC.
Longer-term financial performance trends and expected 2015 performance are generally supportive of 'A' category IFS ratings. Guardian's recent operating performance has remained relatively stable and in line with rating expectations. Reported statutory operating return (after taxes and policyholder dividends) on TAC is in the 4% -- 7% range, consistent with peer mutual companies and reasonable given the company's mix of business and levels of operating and financial leverage. GAAP based operating income increased moderately for the first nine months of 2014 led by individual life and disability and group dental results. Sales of individual life insurance have lagged prior year results through the first nine months of 2014 and premium growth has been modest.
Guardian's debt-service capabilities are strongly supportive of 'AA' category ratings reflecting strong debt servicing capabilities. Fitch expects interest coverage to remain strong at above 11x for 2014 and approximately 10x on a run-rate basis for 2015. Fitch views Guardian as having significant financial flexibility through its ability to adjust its policyholder dividend to strengthen earnings and capital when needed. The group's low leverage, strong operating cash flows and stable liability structure further enhances its flexibility. Debt service is supported by the liquidity of the entire general account and is not constrained by statutory dividend restrictions typically associated with debt issued out of a parent holding company.
Guardian's relatively low risk liability profile and strong cash flow generating capacity are supportive of 'AA' category ratings. As of Dec. 31, 2013, par whole life insurance accounts for 75% of the company's $37 billion of consolidated general account reserves (excluding separate accounts) while retail annuities account for just 7%. 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 $12.5 billion in separate account reserves at Sept. 30, 2014, 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.
Fitch's key rating concerns include ongoing low interest rates, geopolitical uncertainty, the potential for significant deterioration in disability loss ratios in a weak economic environment and potential regulatory or tax law changes that could have a negative effect on Guardian's primary markets or distribution channels.
Fitch uses a group rating methodology and refers financial strength from Guardian to wholly owned subsidiaries, GIAC and Berkshire when evaluating the companies' ratings. In its assessment, Fitch considers both subsidiaries a 'core' company within the Group that Guardian is willing and able to support financially and operationally.
Fitch uses standard notching for all Guardian ratings. Guardian's IFS ratings are notched up one from Guardians' Issuer Default Rating (IDR) since policyholder recoveries are assumed to be 'Good'. Ratings on Guardians surplus notes are notched down by one from Guardian's IDR. For Guardian's surplus notes a baseline recovery assumption of below average and a loss absorption assumption of material was used for the surplus notes as per customary Fitch practice.
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; 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.
Fitch affirms the following ratings with a Stable Outlook:
The 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+'.
Berkshire Life Insurance Company of America
--IFS at 'AA+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (September, 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology