by John D. Darer CLU ChFC CSSC RSP
A.M. Best Co. has affirmed the financial strength rating of B++ (Good) and issuer credit ratings of “bbb+” of Fidelity & Guaranty Life Insurance Co. (FGL) and its wholly owned subsidiary, Fidelity & Guaranty Life Insurance Co. of New York of Purchase, N.Y. The outlook for all ratings for the Baltimore, Md.-based parent company is “stable.”
A Bit of History
Both companies are former structured settlement annuity issuers, the New York company previously known as Thomas Jefferson Life Insurance Company. At its peak in 2001, the company has 150 appointed structured settlement agents through 5 Managing General agents according to a company Powerpoint presentation found on the Internet. At that point structured settlement annuities represented 25% of its book.
Prior to 2001, both life insurers were used by the St. Paul Companies (now Travelers) to fund structured settlements when settling cases with St. Paul insureds. St. Paul acquired F&G when it merged with USF&G in 1998. On September 28, 2001, St. Paul completed the sale of F&G Life and its New York subsidiary to Old Mutual, Africa's largest insurer. At the time the company was rated "A" (Excellent) by A.M.Best.
On April 6, 2011, FGL was acquired for $350 million by Harbinger Group Inc (HGI) [NYSE: HRG], a diversified holding company that is majority owned by hedge funds associated with Harbinger Capital Partners, led by Phil Falcone.
A.M. Best recognized favorable risk-adjusted capitalization and earnings performance during 2010 and into the first half of 2011 in affirming the ratings at B++, but also notes that "partially offsetting these positive rating factors, according to the ratings service, is the deterioration of FGL’s market positions, its decline in assets under management (AUM) and the weaker credit profile of its new ownership. In 2009, FGL’s sales volumes were substantially lowered by design to reduce new business expense strain and improve statutory profitability. Although overall sales were up nearly 50% in 2010, FGL’s market positions have declined from the top five and top 10 positions in indexed annuities and indexed universal life insurance, respectively, to the top 15 positions. In addition, the company’s decision to curtail sales volumes in 2009 and the subsequent attrition of business that matured and surrendered over the past two years has reduced the company’s AUM and the related net investment income. A.M. Best notes that HGI’s business model employs significant financial leverage to meet its business objectives and relies on dividend payments from FGL to help cover its debt service. Given its level of indebtedness, A.M. Best believes that HGI’s ability to provide capital to FGL during periods of financial stress is considerably less than that of its former parent. A.M. Best also expects FGL’s organic capital growth to be flat to slightly negative for the foreseeable future as the company’s statutory earnings will likely be offset by dividend payments to HGI in support of its debt service obligations".
Let's keep an eye on F&G shall we?
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