Credit Opinion: New York Life Insurance Company

Transcription

1 Credit Opinion: New York Life Insurance Company Global Credit Research - 11 Aug 2015 New York City, New York, United States Ratings Category Rating Outlook Insurance Financial Strength Surplus Notes New York Life Insurance & Annuity Corporation Rating Outlook Insurance Financial Strength Moody's Rating STA Aaa Aa2 (hyb) STA Aaa Contacts Analyst Phone Laura Bazer/New York City Neil Strauss/New York City Robert Riegel/New York City Rokhaya Cisse/New York City Key Indicators New York Life Insurance Company[1][2] As Reported (U.S. Dollar Millions) Total Assets 279, , , , ,576 Total Shareholders' Equity 33,883 30,262 31,604 27,156 25,495 Net income (loss) attributable to common shareholders' 2,226 1,816 1,999 1,163 1,655 Total Revenue 27,287 24,781 24,709 23,653 23,326 Moody's Adjusted Ratios High Risk Assets % Shareholders' Equity 104.1% 107.6% 95.4% 93.4% 100.1% Goodwill & Intangibles % Shareholders' Equity 23.4% 24.2% 16.7% 19.8% 34.2% Shareholders' Equity % Total Assets 10.5% 10.1% 11.0% 10.3% 9.7% Return on avg. Capital (1 yr. avg ROC) 6.8% 6.0% 6.4% 4.0% 6.9% Sharpe Ratio of ROC (5 yr. avg) 516.5% 537.6% 68.6% NA NA Financial Leverage 11.7% 10.7% 13.0% 16.7% 13.4% Total Leverage 16.4% 15.0% 16.0% 19.1% 16.4% Earnings Coverage (1 yr.) 17.6x 16.8x 17.3x 9.3x 13.9x Cash Flow Coverage (1 yr.) NA NA NA NA NA [1] Information based on US GAAP financial statements as of Fiscal YE December 31 [2] Certain items may have been relabeled and/or reclassified for global consistency Opinion SUMMARY RATING RATIONALE

2 Moody's rates New York Life Insurance Company (NYLIC; and collectively with its subsidiaries, New York Life), and its wholly owned subsidiary, New York Life Insurance and Annuity Corporation (NYLIAC), Aaa for insurance financial strength (IFS). The rating is based upon New York Life's intrinsic strengths including a leading position in the U.S. life insurance market, distribution channels, strong underwriting skills, as shown by excellent persistency and mortality experience, as well as a robust and resilient balance sheet highlighted by solid financial flexibility and a generally good-quality investment portfolio. The rating also reflects the group's earnings diversity, strong liquidity, and excellent capitalization. New York Life is the largest mutual life insurer in the U.S. The company has been able to capitalize on this unique position by underscoring the difference in its form of corporate ownership with that of its stock company competitors. The company also has a large block of in-force participating life insurance business (including the closed block of John Hancock, acquired as of 7/1/15) that contains a significant amount of embedded profitability, which should benefit the company over many years. We also expect New York Life's individual life business to continue to experience favorable lapse, mortality and operating costs. In addition, the company has narrowed its international focus in life insurance to Mexico where it can garner significant market presence while exiting locations that have less potential (e.g., operations in Hong Kong, South Korea, China, Thailand, and India) - actions that we view as credit positive. These strengths are tempered by an earnings profile, which although improving, is lower than the rating level, the company's material holdings of below investment-grade and alternative investments, including private equities, in addition to material exposure to commercial mortgage loans and other commercial real estate-related investments. Although actual asset impairments have been de-minimus in the last few years, and could be shared with policyholders of participating and potentially certain other experience-rated products, stress losses could be significant. Moody's expects New York Life to manage these higher risk asset exposures within current tolerances. Other challenges are the slower growth prospects for its more traditional participating life insurance product - which Moody's considers the most creditworthy - relative to higher growth products and businesses, which have higher risk (e.g., variable and fixed annuities and asset management). In February 2014, New York Life acquired Dexia SA's global asset management business for approximately $512 million (including a sizable amount of seed capital). The addition of approximately $100 billion in assets under management (AUM) brought overall AUM to $541 billion at year-end 2014 and provides some diversification benefits to the company. Rapid growth of the asset management business, either organically or through acquisitions, which causes this business to become a significant share of earnings, or of other non-par businesses relative to New York Life's participating life insurance reserves, could put downward pressure on New York Life's ratings, although this is not what we are expecting. NYLIAC's Aaa IFS rating is based upon the implied support from New York Life, as well as commonality of the operations of this company with its parent: shared marketplace identification, products, management and distribution among other key factors. Credit Strengths New York Life's credit strengths are: - Top-tier position in the domestic individual life insurance business. - Large block of individual life insurance containing significant embedded profits. - Productive and well-established career agency distribution force. - Well diversified investment portfolio, strong liquidity, and outstanding capitalization. Credit Challenges New York Life's credit challenges are: - An earnings profile lower than the rating level. - Challenges in growing its participating business lines. - Continued maintenance of its strong growth and retention of its agency field force. - Material holdings of higher risk assets, including below investment-grade bonds, private equities and alternative

3 investments, in addition to significant exposure to commercial mortgage loans and other commercial real estate related investments. Rating Outlook On July 14, 2015, the Aaa rating of New York Life was affirmed with a stable outlook. What to Watch For: - Sustainability of individual life sales. - Pace of growth of the asset management and other non-par businesses relative to participating businesses. What Could Change the Rating - Down New York Life's ratings could go down as a result of - A downgrade of the US government rating; - Risk-sharing products sustained below 50% of total statutory reserves (currently in the 52%-53% range); - Consolidated statutory-based high risk asset ratio greater than 140% (including certain adjustments), or NAIC 2- rated securities above 40% of total bonds (27% at YE 2014); - The company action level NAIC Risk Based Capital (RBC) ratio falling below 400% for more than a short time period or a reduction in capital of more than 10% over a 12 month period; - Adjusted financial leverage of 20% or more; or earnings coverage consistently below 10x. Notching Considerations The spread between NYLIC's Aa2 surplus notes rating and its Aaa IFS rating is two notches, consistent with Moody's typical notching spread for surplus notes issued by life insurance operating companies. DETAILED RATING CONSIDERATIONS Moody's rates New York Life Aaa for insurance financial strength, which is higher than the Aa1 rating indicated by the adjusted insurance financial strength rating scorecard, with the principal differences being: (a) an intense focus and a very strong market position in the participating life insurance business, (b) a governance structure with a strong focus on the best interests of policyholders/creditors, and (c) an emphasis on superior customer value with very substantial experience-rated policyholder dividends, and a strong capital position that depresses reported profitability metrics. Insurance Financial Strength Rating The key factors currently influencing the rating and outlook are: MARKET POSITION AND BRAND: Aaa - LEADING MARKET POSITION IN A NUMBER OF IMPORTANT SEGMENTS New York Life has one of the most well-recognized and respected brands in the U.S. and a leading market position in a number of important segments of the industry. According to LIMRA, New York Life was among the largest sellers of life insurance and fixed annuities in the U.S.(including lifetime income annuities) in trends that continue in New York Life is also the leading direct marketer of life insurance, a top long term care insurance provider, and the largest underwriter of professional association insurance programs in the U.S. Accordingly, we view the company's market position and brand to be in line with expectations for Aaa insurers and have moved this factor up from the Aa indicated by the scorecard metric. DISTRIBUTION: Aa - WIDE DIVERSITY OF DISTRIBUTION CHANNELS The company benefits from a wide diversity of distribution channels including career agents, independent brokers, banks, direct/sponsored distribution (e.g. AARP), and an institutional sales force. Distribution diversity is one of the broadest in the industry and is consistent with a Aaa rating. One of New York Life's greatest strengths is its productive, 12,000 plus member career agency force that is its primary channel for distributing permanent, cash

4 value life insurance products, the company's core product. The controlled nature of the company's career agency channel contributes to New York Life's strong business retention rates. The other distribution channels are primarily used to distribute specialized insurance and investment products, such as COLI/BOLI, sponsored life products (AARP and Professional Affinity Organizations), fixed annuities, and investment products; however, the company has less control over its producers in these channels. We have kept the score on this factor at Aa, consistent with the unadjusted scorecard result. PRODUCT FOCUS AND DIVERSIFICATION: Aa - OVERALL RISK PROFILE SUPPORTED BY LOW-RISK BLOCK OF PARTICIPATING WHOLE LIFE New York Life manufactures and markets a wide range of products for both retail and institutional buyers. The company's principal product lines include individual life insurance, individual annuities (fixed, immediate, and variable annuities-vas), long-term care insurance, pensions & institutional investment products business, and asset management through its New York Life Investment Management subsidiary. The overall risk profile of the company's product portfolio, which is well-positioned among its competitors, is supported by its large block of participating life insurance, one of the lowest risk products sold by U.S. firms; however, participating business has been a slower growing product relative to other higher risk products and lines of business (e.g., variable and fixed annuities). Although New York Life has been growing its asset management business, both organically and through acquisition, we expect that this will continue to be a relatively small business segment in relation to the company's lower-risk life insurance businesses. We maintain the adjusted score at Aa, the same as the unadjusted score, because of the large block of low risk participating life insurance. However, material shifts in the business mix away from participating whole life insurance would put pressure on this factor. ASSET QUALITY: Aa - HIGH RISK ASSET EXPOSURE MOSTLY DRIVEN BY BIG BONDS AND ALTERNATIVE INVESTMENTS The overall quality of New York Life's investment portfolio is very good. On an unadjusted basis, the company's GAAP exposure to high risk assets was about 104% of equity as of December 31, 2014, consistent with Moody's expectations for Baa-rated companies, rising from 95% since 2012, as the company has increased risk while adding incremental yield in the continuing low interest rate environment. The ratio was about 126% on a statutory basis (excluding certain adjustments), given a lower level of statutory vs. GAAP capital (vs. 124% in 2013). Approximately 33% of high risk assets is non-investment grade bonds, although many of these are private placements with covenant and/or collateral protections. Within the bond portfolio, private placements were 39% of corporate securities, incrementally higher than in prior years. New York Life's exposure to non-investment grade corporate bonds as a percent of long-term bonds, at 8% at year-end 2014, is somewhat above the industry average. Most of the remainder of high risk assets are various forms of alternative investments, such as partnership interests in investment funds. Because investment results can generally be shared with participating policyholders, the company substantially reduces its risk of owning these investments. However, under a stress scenario the overall portfolio investment losses would be well in excess of the annual policyholder dividend, and would negatively affect profitability and capital. New York Life also has a exposure to structured securities (RMBS, CMBS, ABS), but about 50% of the RMBS are agency securities. The company's non-agency residential mortgage-backed security (RMBS) exposure as of December 31, 2014 was relatively modest at 2% of invested assets. This segment of the portfolio has been the source of asset losses, but overall portfolio losses have been very modest, and should remain low in Approximately 15% of this portfolio is rated below investment-grade using the NAIC SVO rating scale. The $8.9 billion CMBS portfolio is of high quality with over 70% rated Aaa as of December 31, The company also had a high quality $22 billion direct commercial mortgage loan (CML) portfolio as of December 31, 2014, which has continued to perform well. Total portfolio credit impairments have been de-minimus in 2013 and 2014, ($21-25 million, or 1-2 basis points of invested assets per annum), and are expected to remain low throughout 2015, given the recovering economic and employment situation in the US. Goodwill and other intangibles (primarily reflecting DAC associated with the sale of the company's stable, profitable life and annuity business) are equal to about 23% of capital, consistent with a Aa rating. The adjusted score on this factor is raised to Aa from the unadjusted score of A, given the portfolio's strong diversification, the ability to share investment losses with policyholders, limited exposure to non-agency RMBS, and high likelihood of DAC recoverability. However, continuing material growth of the company's high risk exposures will put pressure on the asset quality score. CAPITAL ADEQUACY: Aa - RBC RATIO IS STRONG While New York Life's capital-to-total asset ratio of about 11% in the scorecard suggests a lower score (Aa), we

5 believe that the NAIC RBC ratio is a better indicator of the company's capital adequacy. NYLIC's year-end 2014 NAIC RBC ratio was 534% (company action level), a level commensurate with Aaa-rated companies, although lower than in 2013 (RBC was 561%), due to a net increase in liabilities for pension and post-retirement plans. Total Adjusted Capital at December 31, 2014, which was $21.6 billion, is of high quality, as New York Life does not use captive reinsurers to boost its capital adequacy. Moody's expects the company's RBC ratio to remain above 400% in 2015 and over time, although, as noted, under a situation of severe stress it would be lower. We have left this factor at Aa, the same as its unadjusted scorecard, because of the quality of New York Life's capital and the company's flexibility in adjusting dividends related to its sizeable participating whole life business, as well as other risk sharing mechanisms in its various other products, which mitigates some of the impact of investment losses in times of severe stress. PROFITABILITY: Aa - POLICYHOLDER DIVIDENDS AND STRONG CAPITAL POSITION DEPRESS NOMINAL PROFITABILITY New York Life's historical profitability performance, as measured by its five-year average return on capital (ROC) sub-factor score of 6%, has been below our expectations for a Aaa-rated company. However, this is due in part to New York Life's outstanding capital position (which depresses reported return on capital measures) and also due to an emphasis on superior policyholder value, which reduces profitability through policyholder dividends that are treated as operating expenses. Although a portion of policyholder dividends is economically equivalent to shareholder dividends for a mutual insurer, under GAAP accounting these dividends are considered expenses, and thus serve to depress the company's reported ROC, whereas shareholder dividends do not impact ROC for a stock company. The Sharpe Ratio of ROC, at approximately almost 517%, remains in the Aaa-range, given the relative stability of earnings. Core earnings (New York Life Management GAAP), which exclude non-recurring items, are mainly driven by the company's large block of in-force participating (par) life insurance, which continues to dominate the company's overall core earnings profile. Growth has come largely from the fixed annuity and third-party investment management businesses (the latter now including the former Dexia acquisition, renamed "Candriam"), although the par life block also continues to experience single-digit growth. Because New York Life's ROC would be more akin to the Aa-range if its policyholder dividends were treated similarly to stockholder dividends of a public company, and if we factor in its high RBC ratio, we believe the company's profitability score is consistent with that of Aa-rated peers, the same as its adjusted score for this factor. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (ALM): Aa - STABLE LIABILITIES AND STRONG LIQUIDITY The results of Moody's 2014 year-end liquidity model for New York Life were consistent with a Aa rating. ALM at New York Life is greatly enhanced by the large amount of very stable participating business on the company's books, which effectively allows the company to share some of its inherent risks with its participating policyholders, and also benefits the company's liquidity profile. The company's liquidity profile is further bolstered by a relatively liquid general account investment portfolio and approximately $34 billion in holdings of cash, short term investments, and U.S. Treasury and agency securities at December 31, New York Life is one of the smaller number of companies that continue to issue funding agreement-backed notes. However, we believe that the program is well managed and that these exposures are well matched, from both a duration and, as issues approach maturity, from a cash perspective. For the twelve months following December 31, 2014, New York Life has just over $5 billion of GICs, non-putable funding agreements, funding agreement-backed notes (FANIPs) and FHLB borrowings maturing. To service these maturing liabilities, the company has cash-on-hand and maturing investment grade bonds. As of December 31, 2014, unencumbered cash and short-term investments amounted to approximately $2 billion, unused credit facilities totaled about $1 billion and investment-grade bonds maturing over the next twelve months amounted to approximately $13 billion. We recognize the stability of the majority of the company's liabilities as well as the substantial liquidity available in the investment portfolio. However, given the asset-liability management needs of its annuity portfolios, we have left the adjusted score on this factor unchanged from the unadjusted scorecard result of Aa. FINANCIAL FLEXIBILITY: Aa - LOW FINANCIAL LEVERAGE, BUT MUTUALS ARE UNABLE TO ISSUE EQUITY On a GAAP basis, the company's adjusted financial leverage was just under 12% as of year-end 2014, and total leverage, which excludes Moody's equity credit treatment for the company's surplus notes and includes operating

6 debt, was 16.4%. The company's nearly $2 billion of surplus notes receive 25% equity credit in accordance with Moody's hybrid methodology, which is factored into the adjusted financial leverage calculation. We expect adjusted leverage and total leverage for year-end 2015 to be in the same range as year-end The adjusted financial leverage and total leverage metrics are consistent with Aaa and Aa ratings, respectively. Average earnings coverage of 15x over the past five years is consistent with the metrics expected for Aaa-rated companies. Given stronger earnings coverage since 2012 (i.e., one-year coverage ratios in the 16x-18x range), we expect earnings coverage to remain in line with the Aaa companies, i.e., over 12x on a consistent basis. We also expect New York Life's adjusted financial leverage will remain below 20%. However, as a mutual company, New York Life's lack of ready access to the public equity markets somewhat limits its financial flexibility. As a result, we have lowered this factor score to Aa from the unadjusted score of Aaa. Other Considerations New York Life has a very strong commitment to serving its policyholders, and writes primarily business that provides risk sharing with its customers through dividend-paying products. Its branding and consumer marketing is tightly linked with its participating product focus and commitment to policyholder value and financial strength. Considering its generally conservative investment philosophy, together with its emphasis on the sale of dividendpaying products, New York Life presents very conservative business and financial profiles, and the company's management does not stray from its core policyholder oriented principles, which align well with creditor interests. Although some aspects of the company's credit profile are directly captured by the key rating factors, the additional benefit from the company's deeply ingrained focus on financial strength, policyholder value, and overall conservative management philosophy results in a one-notch uplift, raising the company's IFS rating to Aaa from the adjusted scorecard rating of Aa1. Liquidity Profile New York Life's debt consists of two issues of surplus notes, $992 million and $998 million, maturing in 2033 and 2039, respectively. In addition to its own direct debt, New York Life's subsidiary, New York Life Capital Corporation (NYL Capital) issues commercial paper. NYL Capital benefits from explicit support from its parent. Its $2 billion commercial paper (CP) program is rated Prime-1 (P-1) and the program is available for spread arbitrage opportunities and occasionally used for liquidity management. The average amount of CP outstanding in Q was approximately $503 million, with a maximum of $503 million outstanding during the quarter, and approximately $503 million outstanding as of March 31, NYL Capital Corp's CP program is backed by a $1.0 billion bank credit facility. This facility is comprised of a $500 million 3-year component which matures in June 2016 and a 5-year $500 million component which matures in June The bank facility does not contain a material adverse change (MAC) clause, and the financial covenants in the bank facility are not restrictive and are quite manageable for the company Rating Factors New York Life Insurance Company[1][2] Financial Strength Rating Scorecard Aaa Aa A Baa Ba B Caa Score Adjusted Score Business Profile Aa Aa Market Position and Brand (15%) Aa Aaa - Relative Market Share Ratio X Distribution (10%) Aa Aa - Distribution Control X - Diversity of Distribution X Product Focus and Diversification (10%) Aa Aa - Product Risk X

7 - Life Insurance Product Diversification X Financial Profile Aa Aa Asset Quality (10%) A Aa - High Risk Assets % Shareholders' Equity 104.1% - Goodwill & Intangibles % Shareholders' 23.4% Equity Capital Adequacy (15%) Aa Aa - Shareholders' Equity % Total Assets 10.5% Profitability (15%) Aa Aa - Return on Capital (5 yr. avg) 6.0% - Sharpe Ratio of ROC (5 yr. avg) 516.5% Liquidity and Asset/Liability Management (10%) - Liquid Assets % Liquid Liabilities X Financial Flexibility (15%) Aaa Aa - Financial Leverage 11.7% - Total Leverage 16.4% - Earnings Coverage (5 yr. avg) 15.0x - Cash Flow Coverage (5 yr. avg) Operating Environment Aaa - A Aggregate Profile Aa2 Aa1 Aa Aa Aaa - A [1] Information based on US GAAP financial statements as of Fiscal YE December 31 [2] The Scorecard rating is an important component of the company's published rating, reflecting the stand-alone financial strength before other considerations (discussed above) are incorporated into the analysis This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) 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. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. 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

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