Fitch Downgrades Liberty Life’s IFS to ‘A-‘; Placed on Rating Watch Evolving

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Insurer Financial Strength (IFS) rating of Liberty Life Insurance Company (Liberty Life) to 'A-' from 'A+'. At the same time, the rating was placed on Rating Watch Evolving.

Today's rating action follows Royal Bank of Canada's (RBC) announcement that it is reviewing "strategic options" for its U.S. insurance business, which includes Liberty Life. Previously Liberty Life's rating was driven primarily by the demonstrated support from its parent, RBC, which has a Fitch Issuer Default Rating (IDR) of 'AA' with a Stable Outlook. Fitch viewed Liberty Life as an important subsidiary of RBC. Although Liberty Life continues to benefit from its ultimate parent's capital resources, administrative support, risk management expertise and distribution opportunities, Fitch views the announcement as an indication of a reduction in Liberty Life's strategic importance to RBC.

Given the recent announcement, Fitch has moved to rating Liberty Life on a stand-alone basis, consistent with Fitch's group rating criteria when the strategic category of an affiliate changes to 'limited importance'. This is the lowest of Fitch's four categories of strategic importance. (See the March 24, 2010 criteria report entitled 'Fitch's Approach to Rating Insurance Groups' available at 'www.fitchratings.com' for further information).

The rating has been placed on Evolving Watch pending the outcome of RBC's strategic review of Liberty Life. At that time, Fitch will evaluate RBC's updated views on the strategic importance of Liberty Life going forward.

The rating rationale includes Liberty Life's solid capital position and conservative investment portfolio which are partially offset by the company's modest size and lack of scale, as well as depressed statutory earnings largely due to new business strain from increased sales.

Fitch considers Liberty Life's statutory capital position as solid for the rating category. Liberty Life's risk-based capital ratio was 323% of the company action level at June 30, 2010, down from 348% at year-end 2009 and 337% at year-end 2008.

Fitch views Liberty Life's investment portfolio, which totaled over $4.6 billion at June 30, 2010, as relatively conservative. While some further losses are expected on the company's commercial and residential real estate investments, Fitch expects the losses to remain manageable in the context of Liberty Life's capital.

In Fitch's opinion, Liberty Life's credit strengths are partially offset by its lack of scale and inherent competitive challenges. In 2009, Liberty Life's statutory premium income grew to $995 million from $295 million in 2008. The significant growth was driven by the company's annuity sales, and in particular fixed indexed annuities (FIAs). Although Liberty Life has benefited from current dislocations in the marketplace, Fitch believes that persistent challenges remain, including an unsettled regulatory environment for FIAs. Additionally, statutory strain from new sales has resulted in operating losses in 2009 and thus far in 2010 and is likely to continue to keep statutory earnings under pressure in the near term. Fitch will continue to monitor Liberty Life's ability to manage the risks associated with the rapid growth in its FIA book of business.

Liberty Life is headquartered in Greenville, South Carolina. At June 30, 2010, the company reported total admitted assets of $4.7 billion and total capital and surplus of $268 million. The company currently operates under the RBC Insurance brand.

Fitch has downgraded the following rating and placed it on Rating Watch Evolving:

Liberty Life Insurance Company

--IFS to 'A-' from 'A+'.

Additional information is available at 'www.fitchratings.com'.

Related Research:

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

--'Life Insurance Rating Methodology', dated March 24, 2010

--'Fitch's Approach to Rating Insurance Groups' (March 24, 2010).

Related Research:

Insurance Rating Methodology

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

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285

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