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 Life Insurance Company 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 Guardian insurance 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 Life Insurance Company 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.


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