Fitch Affirms Guardian's IFS Ratings at 'AA+'; Outlook Stable

Tools

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AA+' Insurer Financial Strength (IFS) ratings of Guardian Life Insurance Company of America and its wholly owned subsidiary, Guardian Insurance & Annuity Company, Inc. (collectively referred to as Guardian). The Rating Outlook is Stable.

Today's rating action follows Fitch's updated review of Guardian's capitalization, operating results, liquidity and financial flexibility. Guardian's very strong ratings continue to reflect the company's exceptionally strong balance sheet fundamentals, stable earnings performance, and favorable operating profile.

Guardian's exceptionally strong balance sheet fundamentals reflect the company's strong statutory capitalization, low risk liability profile and limited investment exposure to structured finance and below investment grade securities. Guardian's risk-based capital ratio was 480% as of Sept. 30, 2010, and it is expected to end the year at approximately the same level. The company's quality of capital is strong, with little dependence on reserve financing arrangements or debt. The company has $400 million of surplus notes outstanding, which accounts for 8% of total adjusted capital (TAC) at the end of the third quarter of 2010 and compares to a Fitch maximum guideline of 15%. Operating leverage is low relative to peers and the industry, and the company's pension obligation is fully funded.

Guardian also has a relatively low risk liability profile. Individual participating whole life accounts for close to 80% of consolidated general account reserves, while retail annuities account for just 5%. Fitch views participating whole life as relatively low risk, given the long duration participating liabilities, limited disintermediation risk and very limited guarantee provisions. The ability to adjust policyholder dividends every year also provides the company with significant financial flexibility. Guardian has paid out on average about $650 million in policyholder dividends annually over the past five years.

Guardian's consolidated statutory and GAAP operating income through the first nine months of 2010 was in line with Fitch's full-year run rate expectation of roughly $300 million net of the policyholder dividend. Guardian's three core operating segments--individual life, individual disability and group non-medical insurance, particularly dental--continue to provide diversified earnings streams and consistently contribute to results.

The Stable Rating Outlook reflects, in part, Fitch's view that the company's exposure to future investment losses under Fitch's base case loss scenario is very manageable in the context of the company's statutory capital and projected operating earnings. Guardian's investment results have generally been better than that of peers due to its below average exposure to structured securities, particularly subprime, throughout the crisis. Investment losses have moderated in 2009 and 2010 similar to the industry, and that is expected to continue over the near term. Guardian does have an above-average exposure to unaffiliated common stock in relation to invested assets, but the company hedges this risk to protect a minimum 15% capital ratio. Guardian's consolidated fixed income investment portfolio was in a $2.6 billion net gain position at Sept. 30, 2010.

Fitch's concerns include potential deterioration in the company's disability claims experience in the ongoing weak economic environment and potential regulatory or legislative changes that could affect the tax-advantaged status of life insurance or various distribution channels. Fitch recognizes that Guardian has reduced its disability exposure through reinsurance and views any potential losses as manageable under a base case stress scenario. Fitch also recognizes that the regulatory concerns are industry-wide. Fitch believes, however, that Guardian has above-average exposure to the potential regulatory changes given its strategic focus on individual life sold through career agents.

Guardian is a mutual life insurance company based in New York City. As of Sept. 30, 2010, the group had consolidated statutory total admitted assets and total adjusted capital of $45 billion and $5.2 billion, respectively.

Key rating drivers that could lead to an upgrade:

--Given that Guardian already has the second-highest rating, Fitch does not anticipate an upgrade.

Key rating drivers that could lead to a downgrade or a revision of the Outlook include:

--An unexpected significant decline in TAC or risk-based capital (RBC). Guardian's RBC is expected to remain well above 400% over the medium term.

--Deterioration in disability claims experience causing a significant operating or capital loss at the Berkshire subsidiary.

--Elimination of the tax-advantaged status of life insurance would cause Fitch to reevaluate Guardian's ratings.

--Regulation, such as a new fiduciary standard, that could have a significant negative impact on career distribution, would also cause Fitch to reevaluate the ratings.

Fitch affirms the following ratings with a Stable Outlook:

Guardian Life Insurance Company of America

--Issuer Default Rating (IDR) at 'AA';

--Insurer Financial Strength (IFS) at 'AA+';

--Surplus notes at 'AA-'.

Guardian Insurance and Annuity Company

--IFS at 'AA+'.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' dated Aug. 16, 2010.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

CONTACT:

Fitch, Inc.
One State Street Plaza
New York, NY 10004
Primary Analyst
Cynthia J. Crosson, +1-212-908-0863
Director
or
Secondary Analyst
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chair
Mark Rouck, +1-312-368-2085
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com