US Life Insurance Industry Overview Rating Agency View. Scott Robinson, Senior Vice President

Transcription

1 US Life Insurance Industry Overview Rating Agency View Scott Robinson, Senior Vice President

2 Agenda» Overview» Rating Approach Expected and Stress Scenarios» Macroeconomic Forecast» US Life Insurance Outlook» Regulatory, Accounting, and M&A Developments 2

3 Ratings Trends in North American Life Insurance Sector 40 Rating Distribution (58 Groups) Aa1 Average IFS Rating Aa2 Aa A1 A2 5 0 Aaa Aa A Baa Ba A3 Upgrades and Downgrades Outlook Distribution % 0% 12% 7% as of March 31, 2014 Upgrades Downgrades Stable Negative Positive Rating(s) Under Review 3

4 Incorporating Expected and Stress into Scorecard (Life Insurers) Key Variables Investment losses Equity market decline impact on VA Access to capital markets Disruption of distribution Operating income decline Liquidity stress opco XXX / AXXX solutions Expected and Stress Scorecards - Projected Part 1- Business Profile Factor 1: Market Position and Brand 15 Factor 2: Distribution 10 Factor 3: Product Focus and Diversification 10 Part 2 - Financial Profile Factor 1: Asset Quality 10 Factor 2: Capital Adequacy 15 Factor 3: Profitability 15 Factor 4: Liquidity and ALM 10 Factor 5: Financial Flexibility 15 Factor weight Factor weight 4

5 Incorporating Expected and Stress into Scorecard 5 Financial Strength Rating Scorecard Traditional Raw Score (1&5 yr metrics) Last YE Raw Score (1 yr metrics) Current YE Expected Case Raw Score (1 yr metrics) Stress Case Raw Score (1 yr metrics) Last published adjusted score Expected Case Adjusted Score Stress Case Adjusted Score Proposed Adjusted Score Business Profile Aa1 Aa1 Aa1 Aa2 Aa1 Aa1 A2 Aa2 Market Position and Brand (15%) Aaa Aaa Aaa Aa2 Aaa Aaa A1 Aa1 Relative Market Share Ratio Aaa Aaa Aaa Aa Distribution (10%) Aa2 Aa2 Aa2 A1 Aa2 Aa2 Baa1 A1 Distribution Control Aa Aa Aa Aa Diversity of Distribution Aa Aa Aa A Product Focus and Diversification (10%) Aa1 Aa1 Aa1 Aa2 Aa2 Aa2 A1 Aa2 Product Risk Aa Aa Aa Aa Life Insurance Product Diversification Aaa Aaa Aaa Aa Financial Profile Baa1 Baa2 Baa2 Baa2 A2 A3 Ba1 Baa1 Asset Quality (10%) Baa2 Baa2 Ba1 Ba2 Baa2 Baa1 Baa3 Baa1 High Risk Assets % Shareholders' Equity 118.4%/Baa 118.4% 133.3% 150.0% Goodwill & Intangibles % Shareholders' Equity 72.6%/Ba 72.6% 112.3% 130.3% Capital Adequacy (15%) Baa1 Baa1 Baa1 Baa2 Aa3 Baa1 Ba1 Baa1 Shareholders' Equity % Total Assets 5.5%/Baa 5.5% 5.4% 4.4% Profitability (15%) Baa1 Baa1 Baa2 Ba2 A1 Baa2 Ba3 Baa2 Return on Capital (5 yr. avg) 7.1%/A 7.1% 4.0% 1.0% Sharpe Ratio of ROC (5 yr. avg) 93.6%/Ba 93.6% 96.0% 56.0% Liquidity and Asset/Liability Management (10%) A2 A2 A3 A3 Aa3 A2 Baa1 A2 Liquid Assets % Liquid Liabilities 1.7x/A 1.7x 1.6x 1.6x Financial Flexibility (15%) A3 Baa3 A3 Baa1 A3 A3 Ba1 Baa2 Adjusted Financial Leverage 28%/A 31.2% 29.0% 33.0% Total Leverage 51.5%/Ba 51.5% 52.1% 39.2% Earnings Coverage (5 yr. avg) 5.4x/A -2.3x 3.6x -1.5x Cashflow Coverage (5 yr. avg) 2.9x/Baa 3.3x 3.0x 1.0x Greater than 3 notch differential between expected and stress Operating Environment (0%) Aa Aa Aa Aa Aa Aa Aa Aa Aggregate Profile A2 A2 A2 A3 Aa3 A1 Baa2 A2 5

6 Macroeconomic Forecast: Continuing recovery with greater stability & less uncertainty; diminished downside risks 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% US GDP Growth Actual MIS Projected US Unemployment Rate Actual MIS Projected 12% 10% 8% 6% 4% 2% 0%» Below-trend GDP growth projection GDP Growth: % in both 14/ 15 Unemployment: 6-7% in 14; % in 15» Expectation of slowing rising interest rates Interest rates (10 yr Treasury): rising to 3.2% at year-end 14 and to 4.0% at year-end 15» Downside risks: Disorderly exit from monetary stimulus Fed tapering disrupts emerging markets Flare-up of European debt crisis; deflation 6

7 Stable Outlook on US Life Industry» A gradual increase in interest rates is credit positive for life insurers Portfolio yields will continue to decline, but at a slower pace, diminishing spread compression Profitability and capital generation should be less constrained» Macro-economic recovery will support insurance sales Improvement in both GDP growth and unemployment will reduce pressure on household income and insurance sales (which are discretionary purchase)» Greater stability in economy and therefore in financial markets is positive for insurers Higher equity market levels has reduced risks in variable annuity business Also supported results of fee businesses (as AUM has increased)» Strong balance sheets (opco and holdco) buffer downside risks 7

8 Life Insurers Have Mitigated Impact of Low Interest Rates Net Investment Income (Right axis) Net Income (Right axis) Net Yield on Invested Assets (Left axis) 10 Year US Treasury (Left axis) 7% 6% 5% 4% 3% 2% 1% 0% $Billions » Strong ALM discipline and lowering of crediting rates mitigate impact» Diminished risk of insurers yields declining below level of policyholders guarantees» Diminished risk of balance sheet hits (reserve strengthening, DAC/intangible writedowns)» New business re-priced to reflect low rates; legacy inforce business still vulnerable» Stretching for yield with incremental allocation to higher risk & lower liquidity assets, but rising rates will slow down the hunt for yield Source : Moody s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient s Internal Use Only 8

9 Weak Economy has Constrained Top-line Growth, but Strengthening Recovery Should Bolster Sales Growth in Insurance Premiums and Deposits GDP Growth 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% » Lower unemployment, improving consumer & business confidence, and higher household income will help increase discretionary expenditures» Most life & annuity products are discretionary purchases» Recent slowdown in sales growth partly reflects disciplined pricing and capital management Source : Moody s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient s Internal Use Only 9

10 Policyholder Behavior Remains a Wildcard Group Insurance Financial Strength Rating * Recent Charge Comment AXA Financial Aa3 Negative > $1 bil in 2011 Reserve charge due to lower than expected lapse rates & partial withdrawals ING US A3 Stable > $1 bil in 2011 Reserve charge due to lower lapse rates MetLife Inc. Aa3 Negative 4Q12: $752 mil Prudential Financial Inc. A1 Stable 3Q13: $1.7 bil Lower than expected realized returns over the life of guaranteed VA policies Largely driven by updated lapse assumptions based on actuarial review» Policyholder behavior is unhedgeable» Actual behavior experience is limited for VA living benefits» Accounting charges for policyholder behavior assumption changes are very subjective» Policyholders & distributors likely to become increasingly more efficient 10

11 Profitability & Capital Formation Should Improve Given Impact of Rising Rates & Improving Economy Return on Capital (Left Axis) Growth of Statutory Capital (Left Axis) Earnings Coverage (Right Axis) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% x 10x 8x 6x 4x 2x 0x» Profitability remains below pre-crisis levels, but it should be given de-risking and more appropriate assessment of capital needs for products with guarantees» Greater deployment of capital to shareholders & acquisitions expected to continue» Earnings & cash flow coverage should continue to improve but from weak starting point Source : Moody s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient s Internal Use Only 11

12 Balance Sheets Remain Strong 2013 Investment Portfolio 500% 450% 400% 350% 300% Median Risk Based Capital (CAL) Other Mortgage Loans 2% Commercial Mortgage Loans 9% Equity 2% Real Estate Investments 1% Corporate Bonds 51% Contract Loans 4% Other Invested Assets 6% Cash 3% US Treasury 3% Other Gov't 7% Agency MBS 6% Nonagency MBS 6% % of Invested Assets (bp) Pretax Realized Bond & Commercial Mortgage Loan Losses CML Bond/Pref Stock » Strong RBC ratios, but captives and looser RBC requirements weaken quality of capital» Well-diversified & high-quality Investments - Credit losses back to historical norm (<25 BP) - Re-risking as companies search for yield» Strong liquidity at operating subsidiaries and holding companies» Financial leverage trending down Source : Moody s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient s Internal Use Only 12

13 De-risked Product Management Strategy Helpful with New Business, but Legacy Blocks Remain Strategy\Issue Interest Rate Sensitivity Capital Efficiency Improve ROE Earnings/Capital Volatility De-emphasis of guarantee products x x x x Shift to capital-efficient products x x x Sell more fee business x x x x Sell more protection policies (critical illness, voluntary benefits) Expense management x x x x Expand hedging programs x x x 13

14 2013 Moody s Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ( MIS ) AND ITS AFFILIATES ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTENCONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy. For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY S credit rating. If in doubt you should contact your financial or other professional adviser.. 15