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TEXT - S&P raises Fidelity & Guaranty Life Insurance Co rating
December 13, 2012 / 7:56 PM / 5 years ago

TEXT - S&P raises Fidelity & Guaranty Life Insurance Co rating

Overview
     -- Fidelity & Guaranty Life Insurance Co. (F&G) returned to a top 10 
position in indexed-annuity sales and continues to reduce investment risk 
since being acquired by Harbinger.
     -- F&G's third-quarter 2012 statutory results continue positive trends 
from 2011.
     -- As a result, we are raising our rating on F&G to 'BB+' from 'BB' and 
revising the outlook to stable from positive. At the same time, we are 
assigning Fidelity & Guaranty Life Insurance Co. of New York our 'BB+' rating 
with a stable outlook.
     -- The stable outlook reflects F&G's improved sales trends, de-risking of 
the investment portfolio, and strengthened capitalization.

Rating Action
On Dec. 13, 2012, Standard & Poor's Ratings Services raised its rating on 
Fidelity & Guaranty Life Insurance Co. to 'BB+' from 'BB'. We also revised the 
outlook to stable from positive. We are now reviewing the company on a 
solicited basis. At the same time, we assigned Fidelity & Guaranty Life 
Insurance Co. of New York our 'BB+' rating with a stable outlook. 

Rationale
The rating upgrade and stable outlook reflect F&G's strengthened competitive 
position, decreased asset risk, and improving operating performance. As of 
Sept. 30, 2012, F&G earned adjusted statutory net income of $211.5 million, a 
$64 million increase from prior-year-end levels (2011 results contain the 
negative impact of about $140 million from the closing of several reinsurance 
transactions). Adjusted statutory net income for the year so far, as of Sept. 
30, 2012, comprised reported net income of $88 million, net realized capital 
losses of $5 million, and $118 million in unrealized gains from derivatives. 
When analyzing statutory net income, we adjust earnings to include the 
unrealized gains or losses on derivatives backing the fixed-indexed 
annuities--reported as a component of capital and surplus--to match it against 
the offsetting change in reserves that are reported in income from operations.

F&G recently returned to a top 10 position in indexed annuity sales as of 
March 31, 2012, a position it last held in 2007. As of June 30, 2012, F&G's 
indexed annuity sales totaled $1 billion--almost triple prior-year sales. For 
the same period, indexed life sales (on a weighted basis) were $9.4 million, a 
modest increase from prior-year levels. However, F&G's narrow business profile 
may affect its competitive positioning in the future.

In its fulfillment of the terms and conditions for the pending sale of F&G in 
2011 from Old Mutual PLC, Harbinger identified certain investments that should 
be eliminated from the investment portfolio. F&G disposed of these investments 
in 2010-2011 to lower the risk in its portfolio without incurring significant 
losses. Although 97% of F&G's bonds were rated investment grade as of Dec. 31, 
2011, above-average credit exposure to 'BBB' rated investments (44% of the 
fixed-income portfolio) offsets its below-average exposure to 
speculative-grade assets. More than 85% of F&G's investments are fixed income, 
mainly investment-grade corporate bonds, municipal bonds, and agency 
collateralized mortgage obligations. The company owns minimal residential 
mortgage-backed securities (4% of total invested assets) or commercial 
mortgage-backed securities (3%) and has a small exposure to real estate. F&G 
also limits its exposure to alternative investments.

F&G improved its year-end 2011 risk-based capital (RBC) ratio to 371% from 
350% in 2010 (despite a $40 million dividend it paid to parent company 
Harbinger Group Inc.) primarily as a result of positive statutory earnings, 
reflecting continued maintenance of capitalization levels.

The ratings on F&G reflect its good competitive position, which it derives 
from its distribution relationships and fixed index annuities 
product-development capabilities in its niche markets.

Outlook
The stable outlook reflects F&G's improved sales trends, de-risking of the 
investment portfolio, and strengthened capitalization. We expect F&G's indexed 
annuity and life sales growth to be consistent with industry trends for 2012 
and 2013. We also expect F&G to generate at least $100 million in adjusted 
statutory net income in 2012 and 2013 and maintain a top 10 position in its 
primary niche business: fixed-indexed annuities.

We could raise the rating if capitalization becomes sustainably redundant at 
the 'BBB' confidence level as measured by our model, and if operating 
performance and risk management continue to improve. We could lower the rating 
if F&G's RBC ratio declines below 300% or capitalization under our model 
declines significantly. We could also lower the ratings if F&G's investment 
risk increases aggressively or if its competitive position weakens.

Related Research And Criteria
     -- Refined Methodology And Assumptions For Analyzing Insurer Capital 
Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
     -- Analysis Of North American Life Insurance Operating Performance, May 
13, 2009

Ratings List
Upgraded; Outlook Action
                                        To                 From
Fidelity & Guaranty Life Insurance Co.
 Counterparty Credit Rating
  Local Currency                        BB+/Stable/--      BB/Positive/--
 Financial Enhancement Rating
  Local Currency                        BB+/Stable/--      BB/Positive/--
 Financial Strength Rating
  Local Currency                        BB+/Stable/--      BB/Positive/--

New Rating; Outlook Assigned

Fidelity & Guaranty Life Insurance Co. of New York
 Counterparty Credit Rating
  Local Currency                        BB+/Stable/--      
 Financial Strength Rating
  Local Currency                        BB+/Stable/--

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