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). At the same time, Fitch assigned an 'A-' rating to NLIC's $200 million surplus notes issued in 2009. A complete list of ratings follows at the end of this release. The Rating Outlook for all ratings has been revised to Stable from Negative.
The rating action reflects Fitch's updated review of NLGroup's investment results, leverage, operating results, capitalization, liquidity and financial flexibility. The Stable Rating Outlook reflects improved investment results and Fitch's updated view that the company's exposure to future investment losses under a base case scenario is manageable in the context of the company's statutory capital and operating earnings.
Gross unrealized investment losses in relation to total adjusted statutory capital (TAC)was 25% at year-end 2009 compared to 120% in 2008. The ratio had declined to 9% as of Sept. 30, 2010. NLGroup's investment losses during the crisis were driven primarily by corporate bonds, particularly financials and industrials. The company has limited exposure to non-agency structured securities. NLGroup's total risky assets, which include below investment grade bonds (BIGs), unaffiliated common stock, troubled real estate and Schedule BA alternative assets in relation to TAC has consistently been below the industry average. At year-end 2009, the ratio was 89% compared to the industry average of 135%. NLGroup's ratio had declined to 86% as of Sept. 30, 2010.
NLV Corp.'s financial leverage, excluding unrealized gains from GAAP equity, was 23% at Sept. 30, 2010. The group's total financing and commitments (TFC) ratio is below average at 0.3 times (x). NLGroup has reduced its securities lending program significantly and had no exposure as of Sept. 30, 2010.
NLGroup's statutory capitalization is sound. Fitch estimates that the combined NAIC risk-based capital (RBC) ratio was 408% as of Sept. 30, 2010 compared to 403% at the end of 2009. The combined RBC is expected to remain in the 400% range for the full year 2010. The operating entities received no capital contributions in 2009 and 2010.
Fitch views NLGroup as having a relatively good liquidity profile and reasonable financial flexibility. There is no debt maturing over the next decade. The group services debt out of cash at the holding company and also has access to $2 billion of liquidity through its membership in the Federal Home Loan Bank of Boston and $50 million in bank credit lines. There were no outstanding amounts as of Dec. 31, 2010. GAAP EBIT coverage is in the 4x to 5x range, which is low for the rating category. Fitch notes that NLGroup has additional financial flexibility in its ability to adjust policyholder dividends.
NLGroup's GAAP operating earnings have been relatively stable. There is some volatility in net investment income related to changes in the value of the options the company uses to hedge its equity-indexed annuities. There is an offset in the interest credited expense line. Combined statutory pre-tax operating income was $117 million through the first nine months of 2010, which is down from the prior year but in line with expectations. Annuity growth slowed substantially in 2010 from very strong growth in 2009, and that is expected to reduce surplus strain.
Fitch continues to be concerned about the group's underfunded pension plan and its potential impact on financial results over the longer term. Fitch believes, however, that the group's funding obligations related to the pension plans are manageable over the next few years.
NLGroup had approximately $19 billion in consolidated GAAP assets and $1.9 billion in shareholders equity at Sept. 30, 2010.
Key rating drivers that could lead to an upgrade:
--Significant improvement in operating profitability on a sustained basis.
--Combined RBC above 450%.
--Financial leverage below 20% on a sustained basis.
--GAAP EBIT coverage of 10x or more.
Key rating drivers that could lead to a downgrade:
--Financial leverage above 30%.
--A significant unexpected drop in statutory capital due to investment losses or the pension liability.
--Combined RBC below 350% on a sustained basis.
The following ratings are affirmed with a Stable Rating 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'
Life Insurance Company of the Southwest
--IFS at 'A+'.
In addition, Fitch assigns the following rating:
National Life Insurance Company (Vermont)
--$200 million of 10.5% surplus notes due Sept. 15, 2039 at 'A-'
Additional information available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Insurance Rating Methodology', dated 16 August 2010,
'Life Insurance Rating Methodology', dated 24 March 2010,
'Fitch's Approach to Rating Insurance Groups', dated 14 December 2010..
Applicable Criteria and Related Research:
Life Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766
Fitch's Approach to Rating Insurance Groups
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765
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Fitch Ratings
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Fitch Ratings
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Andrew Davidson, CFA, +1-312-368-3144
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Managing Director
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