NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Insurer Financial Strength Ratings (IFS) for the life insurance subsidiaries, Fidelity & Guaranty Life Insurance Company and Fidelity & Guaranty Life Insurance Company of New York (collectively F&G Life) at 'BBB'. The IFS ratings were taken off Rating Watch Evolving and a Stable Outlook has been assigned.
Fitch has also revised the Rating Watch to Positive from Evolving on the 'BB' Issuer Default Rating (IDR) assigned to Fidelity & Guaranty Life Holdings, Inc., (FGLH) and the 'BB-' senior unsecured note rating. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
F&G Life's ratings were placed on Rating Watch Evolving in November 2015 following the announcement of an agreement that the company will be acquired by China-based Anbang Insurance Group Co., Ltd. (Anbang) in an all-cash transaction valued at approximately $1.58 billion. The transaction is expected to close once the regulatory approval process concludes and after the satisfaction of other customary closing conditions.
Today's rating actions follow Fitch's review of Anbang's financial profile and strategic fit of F&G Life within the Anbang organization. Fitch expects F&G Life will be considered a strategically 'Important' subsidiary of Anbang post-close, and Anbang's ownership will be considered neutral to F&G Life's ratings. As such, F&G Life's IFS ratings largely reflect the company's standalone credit profile.
Anbang has been active in the acquisition of international assets in insurance, banking, and real estate in the U.S., Europe, and South Korea. Fitch expects F&G Life's existing management team and operating strategies will largely remain in place following the close of the transaction. Anbang's proposed purchase of F&G Life represents the company's initial entry into the U.S. insurance market, and serves to increase the geographic diversification of its investments.
Fitch believes Anbang's ownership will not alter F&G Life's standalone rating profile in part due to the standard restrictions on the minimum capital position and dividend payments typically imposed by U.S. regulators to ring-fence assets and protect the company's capital position and policyholders. Any capital injection from Anbang or capital raise by F&G Life would remain within F&G Life subject to standard restrictions on timing and amounts of dividend outflows.
The revision of the Ratings Watch status for the IDR and senior unsecured note ratings of FGLH to Positive reflects Fitch's expectation that the ratings will likely be upgraded one notch following the completion of the acquisition. Currently, the FGLH ratings reflect non-standard (i.e., wider) notching from the IFS rating as a result of the rating and financial profile of its highly leveraged parent, HRG Group Inc. (HRG; 'B' IDR). Given the absence of high leverage and more normalized financial flexibility of the prospective new parent, the ratings of FGLH will reflect standard notching from the IFS ratings once the transaction is completed.
Fitch's ratings for F&G Life continue to reflect the company's relatively narrow product focus and liability profile, strong balance sheet profile, and improved operating performance. The ratings also consider the competitive and regulatory challenges tied to the company's strategic focus selling fixed indexed annuities (FIAs) through independent marketing organizations (IMOs), and macroeconomic challenges associated with low interest rates.
Fitch expects the implementation of the Department of Labor (DOL) fiduciary rule in 2017 will have a negative impact on the sale of FIAs in qualified markets. While Fitch does not see this as an immediate rating issue, the DOL rules may cause changes in operating strategies that could impact F&G Life's risk profile and ratings longer term.
F&G Life's recent financial performance and balance sheet fundamentals remain in line with rating expectations. Operating performance for first fiscal three quarters 2016 improved over prior year due to the absence of elevated impairments and wider net investment spread from a combination of lowering crediting rates and repositioning to higher yielding assets.
F&G Life's strong balance sheet profile reflects the company's adequate statutory capitalization, moderate leverage, and good asset quality. The company's year-end 2015 RBC of 401% was strong for the rating category. FGL's PRISM capital model score is on the high end of 'Adequate', which is within expectations for its current rating category.
Fitch views F&G Life's overall investment quality to be comparable to peers and notes that the company's investment portfolio tends to overweight public bonds but underweight mortgages loans and alternatives. Investment impairments returned to historical averages in the first three quarters of 2016 following elevated levels in 2015.
Fitch could upgrade the IDR and senior unsecured note ratings of FGLH following the close of the transaction based on the relative improvement of the parent company financial profile.
Fitch could affirm the IDR and senior unsecured note ratings of FGLH at current levels if the transaction doesn't close or if there has been a material unexpected deterioration in Anbang's credit profile.
All of F&G Life's ratings could be downgraded by the following: an unexpected change in the Anbang transaction which negatively impacts F&G Life's credit profile; F&G Life's consolidated RBC ratio falling below 300% with operating leverage above 20x; consolidated financial leverage for FGL exceeding 35%; maximum statutory dividend interest coverage falling below 3.0x; operating ROE below 5% over four consecutive quarters.
Conversely, F&G Life's ratings could be upgraded by the following: consolidated RBC above 400%; financial leverage below 25%; maintain operating ROEs above 10% on a consistent basis.
Fitch affirms the following ratings with a Stable Outlook:
Fidelity & Guaranty Life Insurance Company
Fidelity & Guaranty Life Insurance Company of New York
--IFS rating 'BBB'.
Fitch has revised the Rating Watch status to Positive from Evolving for the following ratings:
Fidelity & Guaranty Life Holdings, Inc.
--Long-term IDR 'BB';
--Senior unsecured note due April 2021 'BB-'.
Additional information is available on www.fitchratings.com.
Insurance Rating Methodology (pub. 15 Sep 2016)
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