NEW YORK--(BUSINESS WIRE)--
Fitch Ratings today downgraded the Issuer Default Rating (IDR) and
senior debt ratings of NLV Financial Corp. (NLVF) one notch to 'BBB+'
and 'BBB' respectively. At the same time, Fitch downgraded to 'A' from
'A+', the 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). A complete list of ratings follows at the end of this
release. The Rating Outlook for all ratings is Stable.
The downgrade reflects Fitch's view that NLGroup's GAAP earnings and
interest coverage are low relative to peers and expectations for the
previous rating level. Fitch anticipates that prospects for material
improvement in earnings and coverage will be limited in the current low
Pre-tax GAAP income, excluding net realized gains and losses and changes
in the fair value accounting of embedded derivatives primarily related
to the indexed products, was $150 million in 2011, an improvement over
the prior year. Through the first six months of 2012, this result was
$65 million compared to $78 million for the prior-year period primarily
due to poor mortality in the first half of 2012. The consolidated GAAP
interest coverage ratio was 4.5x in 2011 and 4.0x through the first half
of 2012, although Fitch expects full-year 2012 GAAP earnings and
coverage to be flat with 2011.
Statutory interest coverage as defined by statutory maximum dividend
capacity divided by holding company interest expense is expected to be
1.7x in 2012. This coverage level is low relative to peers. Favorably,
the holding company maintains cash and liquid assets to cover
approximately three years of holding company interest needs.
Interest margins are a significant driver of the group's earnings given
the focus on indexed life and annuity products with minimum guarantees.
Earnings improved somewhat in 2011 due to growth in in-force reserves,
despite lower investment yields. Higher policy charges and fees, a
policyholder dividend reduction and ongoing expense management are other
levers the company can use to maintain profitability in the current
difficult operating environment.
NLGroup's investment performance has been favorable. Credit-related
investment losses through sales and impairments have been very
manageable throughout the crisis. They declined in 2011, and impairments
are expected to be flat for the full year 2012. Gross unrealized losses
were modest at $113 million at the end of 2011 compared to gross
unrealized gains of $1.4 billion. The consolidated investment portfolio
was in a net unrealized gain position of approximately $347 million
after taxes, after deferred acquisition costs and after policyholder
dividend obligations as of year-end 2011.
The company's statutory capitalization is sound. The NAIC risk-based
capital (RBC) ratio was estimated at 400% at the end of the second
quarter 2012 compared to 393% at the end of 2011. The RBC is expected to
remain near current levels over the medium term.
Fitch views NLGroup's financial leverage ratio of 22% at year-end 2011
and June 30, 2012 as moderate and in line with rating expectations. The
total financing and commitments (TFC) ratio is low at 0.3x. Surplus
notes in relation to total adjusted capital (TAC) are just above 15%,
which is Fitch's maximum guideline for standard notching. The company's
pension plan is underfunded by $144 million at year-end 2011.
Fitch believes that NLGroup has good liquidity and adequate financial
flexibility. The holding company has committed to holding cash well in
excess of about $21 million of pre-tax holding company interest expense.
There was approximately $65 million of cash and liquid assets at the
holding company as of June 30, 2012. No debt is due to mature over the
next 10 years. The company discontinued its securities lending program
WHAT COULD TRIGGER A RATING ACTION
Key rating triggers that could lead to an upgrade are: GAAP interest
coverage of 6x to 8x; financial leverage below 20% and RBC maintained at
or above current levels.
Key rating triggers that could lead to a downgrade are: GAAP interest
coverage below 4x; financial leverage above 30%; and an RBC below 350%
on a sustained basis.
Fitch has downgraded the following ratings and assigned a Stable Outlook
at the new rating levels:
NLV Financial Corp.
--IDR to 'BBB+' from 'A-';
--$199 million 7.5% senior notes due Aug. 15, 2033 to 'BBB' from 'BBB+';
--$68 million 6.5% senior notes due March 15, 2035 to 'BBB' from 'BBB+'.
National Life Insurance Company (Vermont)
--IFS to 'A' from 'A+';
--IDR to 'A-' from 'A';
--$200 million of 10.5% surplus notes due Sept. 15, 2039 to 'BBB+' from
Life Insurance Company of the Southwest
--IFS to 'A' from 'A+'.
Additional information available at 'www.fitchratings.com'.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Insurance Rating Methodology
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Fitch RatingsPrimary AnalystCynthia J. Crosson,
+1-212-908-0863DirectorFitch, Inc.One State Street
PlazaNew York, New York 10004orSecondary AnalystJulie
A. Burke, CPA, CFA, +1-312-368-3158Managing DirectororCommittee
Chair:Brian Schneider, +1-312-368-2321Senior DirectororMedia
RelationsBrian Bertsch, New York, +email@example.com
Source: Fitch Ratings