KEY RATING DRIVERS
Guardian's very strong ratings reflect exceptionally strong balance sheet fundamentals, stable operating results, and a favorable operating profile. The Stable Outlook is driven by Fitch's expectations of continued sustainable solid operating and investment performance for 2014, supported by conservative product and distribution profiles. Fitch believes that the pressure on profitability and capital driven by an extended low interest rate scenario and potential future investment losses is manageable in the context of the company's capital position and liability profile.
Guardian's very strong balance sheet fundamentals include extremely strong risk-based capitalization, low leverage, and a stable liability profile. The extremely strong capitalization and quality of capital are key factors supporting the rating. Guardian's risk-based capital ratio (RBC) is estimated by Fitch to be 499% at
Guardian maintains low leverage. Financial leverage - surplus notes in relation to TAC - was low at 7% as of
Debt servicing capabilities are strong, with interest coverage of 17x for the full-year 2013 based on pre-tax operating earnings. Fitch expects interest coverage to be very strong in the range of 15x to 17x for 2014.
Guardian has a relatively low risk liability profile. As of
Guardian's recent operating performance has remained relatively stable and in line with rating expectations. Reported statutory return on TAC is in the 4%-7% range, consistent with peer mutual companies and reasonable given the company's mix of business. Fitch also notes that Guardian has significant flexibility to adjust policyholder dividends should experience warrant.
Fitch views Guardian's revenue and earnings streams as high quality. Results are driven by individual life, primarily recurring premium participating whole life, individual and group disability, as well as group life and dental. Guardian maintains a strong position at the high end of its core ordinary life market and group dental, disability and life markets. Sales of individual life and group non-medical continue to be solid through the first quarter of 2014, following double-digit growth in 2013. The company's 401(k) business is not up to scale and is not profitable.
Guardian has generated solid investment performance with investment yields above industry average and very low credit-related impairments. The company has maintained portfolio yields above 5% and credit losses were very low in 2013. Fitch expects continued low credit impairments for 2014. Guardian's risky asset ratio of 76% at year-end 2013 was below the average for its highly rated mutual peer group and below the life industry. Guardian has below-average exposure to below investment-grade bonds. However, the investment-grade bond portfolio has a heavier than average allocation to 'BBB' level rated securities at 45% of the bond portfolio making it potentially more vulnerable in a declining economic scenario to downgrade risk.
Uncertain monetary policy and ongoing discord among government officials pose risks to the economy and credit outlook and could have a material negative effect on Guardian's earnings and capital in a severe, albeit unexpected, scenario.
Key rating drivers that could lead to a downgrade include a significant decline in TAC or an RBC ratio below 400%; financial leverage above 15%; GAAP interest coverage below 7x; a deterioration in disability claims experience causing a significant operating or capital loss and/or regulatory or tax law changes that hurt the company's position in its primary whole life market.
Given that Guardian already has the second-highest rating, Fitch does not anticipate an upgrade at this time.
Fitch affirms the following ratings with a Stable Outlook:
--Issuer Default Rating (IDR) at 'AA';
--IFS at 'AA+';
--Surplus notes at 'AA-'.
--IFS at 'AA+'.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology',
Insurance Rating Methodology
Source: Fitch Ratings
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