Institutional Investment Products
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Institutional Investment Products

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Moody's Investors Service research report published in April 2000. ...

Moody's Investors Service research report published in April 2000.

The report discusses U.S. life insurance companies' participation in the institutional investment products market including products such as Funding Agreement Note Issuance Programs (FANIPs) and Guaranteed Investment Contracts (GICs). The report also contains short reviews of the leading life insurers active in this market at the time.

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Institutional Investment Products Institutional Investment Products Document Transcript

  • April 2000 Special Comment Phone New York Patrick Finnegan Laura Bazer Ann Perry Arthur Fliegelman Robert Donohue Rajiv Gupta Christina Slattery Scott Robinson Ellen Fagin Natasha Gouey Robert Riegel 1.212.553.1653 Institutional Investment Products: The Evolution Of A Popular Product: Institutional Investment Products: The Evolution Of A Popular Product: Contact Special Comment
  • Moody's Insurance Research Internet Address: www.moodys.com/insurance Authors Senior Associates Senior Production Associates Arthur Fliegelman, Christina Slattery Ellen Fagin Natasha Gouey Susan Heckman John Lentz © Copyright 2000 by Moody’s Investors Service, Inc., 99 Church Street, New York, New York 10007. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS COPYRIGHTED IN THE NAME OF MOODY’S INVESTORS SERVICE, INC. (“MOODY’S”), 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 WRITTEN CONSENT. 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, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. 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 credit ratings, 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. 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. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. Pursuant to Section 17(b) of the Securities Act of 1933, MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,000 to $1,500,000. PRINTED IN U.S.A. 2 Moody’s Special Comment
  • Table of Contents Summary Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Why Are Insurers Interested In The Institutional Investment Marketplace? Separate Accounts’ Growth Outstripping Growth In The General Account Strong Insurer/Client Relationships Are Important . . . . . . . . . . . . . . . . . .6 . . . . . . . . . . . . . . . . . . . . . . . . . . 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Reliance On Institutional Investment Products Should Be Limited Assured Liquidity Is Crucial . 6 . . . . . . . . . . . . . . . . . . . . . . .6 Insurers See Funding Agreements As A Means To Expand The General Account How We View the Institutional Investment Products Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 “Cash Capital” Analysis – What Every Institutional Investment Product Issuer Needs To Do . . . . . . . . 10 Institutional Investment Products Rating Criteria – Key Factors Moody’s Uses In Evaluating An Institutional Investment Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Operational Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Liquidity Or Maturity Risk Asset Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Liability Optionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Yield Curve Movements Spread Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Funding Agreement Note Issuance Programs (FANIPs) Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 The Number Of Funding Agreement-Backed EMTNs Is Growing . An Expected Surge In Insurer Participation Moody’s Rating Process For FANIPs . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Legal Standing Determines Priority Of Claims Of Funding Agreements Perfected Security Interest An Evolving Market . . . . . . . . . . . . . . . . . . . . . . . 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 The Institutional Investment Product Marketplace Appendix 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit 1- Prominent Issuers’ Institutional Investment Products Outstanding Exhibit 2 - Selected Public Market FANIP Issuance Exhibit 3 – Moody’s Rated FANIP Programs Prominent Issuer Reviews And Statistics 19 . . . . . . . . . . . . . . . . . . . . 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 AEGON USA Life Insurance Companies – Monumental Life Insurance Company . . . . . . . . . . . . . . . 24 Moody’s Special Comment 3
  • Table of Contents (cont’d.) AIG Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Allstate Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Business Men’s Assurance Company of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 CIGNA Corporation - Connecticut General Life Insurance Company Combined Insurance Company of America . . . . . . . . . . . . . . . . . . . . . . . . . . 32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 First Allmerica Financial Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 GE Financial Assurance - GE Life and Annuity Assurance Company . Hartford Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . 38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ING U.S. Life Insurance Companies – Life Insurance Company of Georgia Jackson National Life Insurance Company John Hancock Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Massachusetts Mutual Life Insurance Company Metropolitan Life Insurance Company . . . . . . . . . . . . . . . . . . . . . 42 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Mutual of Omaha Life Insurance Companies – United of Omaha Life Insurance Company . Nationwide Life Insurance Company New York Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Ohio National Life Insurance Company Pacific Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Principal Life Insurance Company Protective Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Prudential Insurance Company of America Security Benefit Life Insurance Company SunAmerica Life Insurance Company Travelers Insurance Company 4 Moody’s Special Comment . . . . . . . . . 52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
  • Summary Opinion Moody’s believes that insurance companies take on additional risks in marketing funding agreement (FA) or GIC contracts, especially compared to those contained in some life insurance products. However, Moody’s continues to hold the view that insurers can issue these contracts if balanced with an appropriate risk management system. An insurer’s overall exposure to institutional investment products needs to be carefully managed and controlled on an aggregate and detailed basis for the insurer to have an appropriate risk/reward tradeoff. Moody’s expects the new funding agreement backed global programs currently being developed by several large insurers will be a primary source of new investable funds for institutional investment product providers during 2000. These programs, an expansion of the existing EMTN programs, will also permit the issuance of these notes to U.S. domestic investors. Moody’s expects that most issuance will be fixedterm, non-callable and will be typically in the three to ten year maturity ranges. Moody’s expects that additional product variations will be developed over time, and that FAs will continue to grow in popularity. However, Moody’s believes that the more established general account GICs sold to 401(k) and other employee retirement savings plans are likely to show only modest growth absent a significant change in market conditions. As insurers continue to grow their institutional investment products books of business, Moody’s will rigorously evaluate the characteristics and the amounts outstanding of this business. As part of this review, we will pay careful attention to the processes and procedures used to manage the business, liquidity needs and resources, asset risks, and the company’s asset/liability management risk tolerance. Moody’s determines what we believe to be the appropriate degree of institutional investment products’ exposure for each company on a case-by-case basis. Moody’s includes in our evaluation criteria the insurer’ asset/liability management capabilities, ratings level, experience, investment track record, and the predictability of their liability structure. Moody’s believes that combined institutional spread-based product liabilities in the range of 20% to 30% of general account liabilities could be reasonable for an experienced company. However, insurance companies issuing institutional investment products need to be cognizant of the fact that these instruments are a form of operating leverage. Moody’s factors the extent to which an insurer continues to operate as an insurance company as an important criterion in our rating process. When institutional investment products reach a point where the company is overly dependent on these products, Moody’s will reduce the extent to which we primarily evaluate the institution as an insurance company. Alternatively, an insurer primarily or even exclusively managed as an institutionally focused banker will be rated on a basis comparable to the other institutional spread-based businesses that Moody’s rates, such as investment banks (with their matched books) and commercial finance companies. Moody’s credit analysis of FA backed securitizations revolves primarily around whether the investor has a perfected interest in the underlying funding agreement (FA) and whether that interest is pari-passu with other policyholder obligations. Moody’s Special Comment 5
  • Why Are Insurers Interested In The Institutional Investment Marketplace? SEPARATE ACCOUNTS’ GROWTH IS OUTSTRIPPING GROWTH IN THE GENERAL ACCOUNT The changing purchasing habits of the individual retail clients from insurance buyer to investor has had significant ramifications on the insurance industry. Clients have heavily migrated from purchasing fixed income products (fixed rate annuities and other guaranteed products) to equity-based products (variable annuities and mutual funds) during the last few years. This, in turn, has caused the general accounts of many insurers to experience slow or no growth. Fixed annuity sales remain depressed as compared to several years ago and surrender activity continues at historically high levels. To make matters worse for insurer’s general accounts, the best selling life insurance product is variable universal life insurance, which is becoming the product of choice in many situations. Therefore, it comes as no surprise that during the five years ended December 31, 1998, general account reserves have grown at a compound annual rate of less than 5% while separate accounts, which are largely equity-based, have grown 27% annually. Insurers typically have earned considerably wider spreads on fixed annuities than on variable annuities. This is due to several factors including that most insurers use external managers to manage the underlying funds in their equity-based separate accounts. INSURERS SEE FUNDING AGREEMENTS AS A MEANS TO EXPAND THE GENERAL ACCOUNT Demand for funding agreements has been growing in recent years. They offer investors a favorable combination of yield, maturity and security. In addition, for many investors, these new insurance company credits permit the portfolio manager to diversify the portfolio’s credit risk. Consequently, insurance companies view this market as a good opportunity to expand their general account business. Structured transaction products, such as EMTNs and global programs, can enable a life insurer to grow its general account balance sheet much more quickly and inexpensively than selling numerous annuity contracts in the retail market. Also, the funding agreements are sold with very minor marketing costs compared to those on almost all insurance products sold in the retail market. This results in a much reduced or eliminated surplus strain to the issuer for the issuance of these products compared to retail products. While funding agreements may not be the only game in town for insurers desirous of growing their general account liabilities, they may well be the most attractive alternative for many insurers. How We View The Institutional Investment Products Market STRONG INSURER/CLIENT RELATIONSHIPS ARE IMPORTANT An important criterion that Moody’s uses in evaluating business lines is the nature and strength of the relationship that exists between the insurer and the client. Moody’s believes that the existence of a strong, long term relationship between the two parties can lessen the risk to the insurer of contractual provisions such as surrender provisions. New Markets More Credit Sensitive Than Traditional Life Insurance Moody’s believes that the institutional investment product market is more credit sensitive than traditional life insurance, or even other insurance products such as retail marketed annuities. This is in part because these products are marketed to sophisticated institutional buyers in millions of dollars amounts at a time. These funds are often managed by a professional investment manager with a fiduciary obligation to the ultimate holder of the instrument. In cases such as these, Moody’s believes that it is unrealistic to believe that the investor will give significant forbearance to an insurer during a period under which it is undergoing financial stress. The investment manager must at all times take actions in the best interest of his clients, regardless of the detrimental effect these actions might have on the insurer. 6 Moody’s Special Comment
  • By definition, little if no business relationship exists between the investor and issuer when FAs are used to back EMTN issuance. In the short-term putable FA market, there may or may not be a broader relationship between the two parties. Evidence of a broader relationship could include direct contact between the insurer and the client, long term vendor relationships, and contractual provisions specifying rolling maturity dates. Even then, Moody’s believes that these products are in large measure institutional investments and are subject to the same credit forces affecting the commercial paper and medium term note market. Short-term Putable Contracts Present The Greatest Credit Risks Moody’s most serious credit concerns are directed to short-term putable contracts that give the insurer 60 days or less to respond to a request for funds. Moody’s believes that the short-term FA market is particularly credit sensitive due to Securities and Exchange Commission’s 2a-7 rule governing the primary buyers of these instruments, money market funds. The credit sensitivities of the remaining buyers of these products, security lenders, separate accounts and other short-term institutional lenders, are similar. Qualifying a product for the “liquid” basket of a money market fund, typically through the use of the put option, is also an important marketing consideration for this product. Moody’s believes that the institutional investment product market is more akin to banking than to insurance. In fact, for years the investment banking community has distributed investment vehicles similar to FAs as a means of financing their purchase of securities. Moody’s believes that there is a higher level of risk to an insurance company in marketing FA or GIC contracts than in marketing life insurance. However, Moody’s continues to believe that insurers can appropriately issue these contracts given appropriate risk management while maintaining a balance within the company’s overall product mix. However, an insurer’s overall exposure needs to be carefully managed and controlled on an aggregate and detailed basis. RELIANCE ON INSTITUTIONAL INVESTMENT PRODUCTS SHOULD BE LIMITED Moody’s believes that a highly rated insurer, having carefully developed experience and expertise in this product area, can support a moderate level of institutional spread-based liabilities. One method of evaluating an insurer’s exposure to this sector is as a percentage of general account liabilities. Moody’s believes that a highly rated insurer could have approximately 20% to 30% of general account liabilities in such products assuming the product line is appropriately managed. Moody’s will also evaluate the exposure to this sector relative to the company’s overall capital. While companies typically earmark a specific amount of capital to support the institutional investment product business, in reality the company’s entire capital base supports all product lines. Highly-rated Insurers Must Maintain Adequate Capital Moody’s believes that for a highly rated insurer, in addition to needing an appropriate degree of operating leverage in the institutional investment products business, overall capital levels must remain adequate to enable the insurer to meet all obligations even in times of unexpected stress. Moody’s will evaluate what we believe to be an appropriate degree of exposure for each company to this sector at its rating level on a case-by-case basis depending upon the individual facts and circumstances of the company under consideration. We include in our evaluation the insurer’s asset/liability management capabilities, investment track record and the predictability of its liability structure. In special circumstances, where relationship oriented clients are the primary product purchasers, we might feel comfortable even with a moderately higher level of exposure to this sector. Parental Support Is An Important Factor In Moody's Analysis While Moody’s begins with an analysis of the financial capability of the legal entity directly responsible for the liability, Moody’s is also mindful of the likelihood and ability of external financial support being supplied when needed by a corporate parent or affiliate. This is especially important in circumstances Moody’s Special Comment 7
  • where a formal support agreement exists, and Moody’s believes that the terms of the support agreement are sufficiently rigorous to be legally enforceable. In such a case, the capacity of the insurer to offer institutional investment products can be considerably increased beyond what Moody’s would consider appropriate on a stand-alone, unsupported basis. However, Moody’s will evaluate the effect of the explicit or implicit support on the financial strength and resulting rating of the combined organization. In some cases, with strong parent/affiliate support arrangements, Moody’s will evaluate the exposure of the overall entity to this business, instead of the specific legal entity issuing these products. An insurance company issuing institutional investment products needs to be cognizant of the fact that these instruments are a form of operating leverage. At times these products can also be a form of financial leverage, but since they are rarely used as funding vehicles for corporate acquisitions and other corporate purposes, Moody’s does not normally include them in computing financial leverage. In addition, market participants must be mindful of the fact that funding opportunities could quickly disappear, especially at inopportune moments, emphasizing the need for product, market and customer diversification. As an insurer becomes increasingly dependent upon these institutional investment products, Moody’s will begin to evaluate the institution less as an insurance company. Moody’s will instead begin to evaluate the institution more like the other institutional spread-based businesses we rate, such as investment banks (with their matched books) and commercial finance operations. ASSURED LIQUIDITY IS CRUCIAL Tolerance For A/L Mismatches Is An Important Measure Of Credit Risk Moody’s believes that the level of mismatching a company is willing to undertake is an important measure of the level of risk that a company assumes in operating an investment products program. Almost all institutional investment product issuers attempt to match their expected asset and liability cashflows for this product line to some degree. Some companies match as closely as possible as a matter of company policy. Other companies are willing to tolerate some level of intentional mismatch in an effort to benefit from expected future market movements. The more tightly run programs have strict limits on the level of mismatch permitted and regularly recalibrate their exposures to the permitted level. Non-securitized Commercial Mortgages Can Carry Significant Cash Flow Uncertainty Moody’s has serious concerns about the inclusion of non-securitized commercial mortgages in institutional investment product asset portfolios. Some companies like to include substantial amounts of these assets in their portfolios to benefit from their favorable yields. However, Moody’s believes that these assets offer a low level of liquidity when it is most needed, and have historically been prone to severe credit deterioration on a cyclical basis. During the early 1990s commercial mortgages that were supposed to mature were instead often extended or refinanced by insurers, even when the insurer had a pressing need for the funds to service maturing liabilities. Moody’s recognizes that the risk assumed by an insurer in making a specific commercial mortgage loan depends upon the loan’s specific characteristics with examples being loan-to value ratio, amortization period, maturity term, and collateral type. However, Moody’s remains of the general opinion that commercial mortgages are a questionable choice to support liabilities with firm, unalterable maturity dates. Moody's Analysis Focuses On The Insurer's Ability To Service Its Obligations As part of our rating process, Moody’s carefully evaluates the insurer’s ability to service its obligations. Moody’s believes that a highly rated insurer with defined liabilities, such as institutional investment products with specific maturity dates, should support them with assets with an equally well defined maturity date. Exceptions to this thinking would be when the insurer can demonstrate unquestioned access to the necessary funds in some other alternative manner. Our evaluation will include not only normal circumstances, but also the likelihood and consequences of reasonably possible stress scenarios. Even in stress scenarios, a highly rated insurer should display an unquestioned ability to service obligations as they mature. While Moody’s would normally expect that 8 Moody’s Special Comment
  • these liabilities would be serviced by operating cashflows and maturing assets, other sources of funds might be relied upon in exceptional stress circumstances. Moody’s will pay particularly heavy attention to assuring the adequacy and reliability of projected cash flows to service obligations as they come due. This will include a review of the sensitivity of these projected cash flows to interest rate and other market movements, credit events and other uncontrollable factors. Moody’s believes that an analysis of the line’s asset and liability cash flows, and any gap between them, is critical in evaluating the risk being assumed in writing this business. This analysis should be completed on a current interest rate base case basis, and also under stressed conditions of both rising and falling interest rates. The review of a cash flow variability analysis that has been accomplished in a manner consistent with that developed by the National Association of Insurance Commissioners’ (NAIC) Life Risk-Based Capital Interest Rate Risk Project (C-3) is especially helpful in determining the level of cash flow variability risk being assumed by the insurer in this line of business.1 Short-term Putable Products Are In Special Need Of Cautious Management Moody’s believes that short-term putable products are prone to “runs” compared to other insurance company products. Highly rated companies offering these products should have specific contingency plans in place at all times to deal with such a possibility – even and particularly under stressful circumstances. In the ideal situation, assets with maturity dates equivalent to the liabilities’ put date would support the liabilities, but other alternative liquidity mechanisms may be available to the insurer. If assets with dissimilar maturities are used, adequate provision must be made to account for any realized losses that could be incurred in premature market sales of these instruments. Most Insurers We Rate Have Sound A/L Management In Moody’s opinion, the vast majority of insurers have sound asset/liability management programs. They have also limited their involvement in the riskiest products, especially short-dated paper such as 7-day put contracts. As Moody’s stated in our 1998 report, “Funding Agreements – The New Frontier of Stable Value”, our concern with shorter dated liabilities is based upon the belief that “the shorter the put, the less room there is to maneuver if problems develop.” Assurance Of Adequate Liquidity Is Crucial For Short-term Put Products Moody’s continues to believe that the availability of adequate liquidity is fundamental for the issuance of short-term put products. As Moody’s has stated in the past, “the less liquid and lower quality the asset portfolio, the higher the potential for losses and increased probability of the funding agreement issuer becoming troubled.”2 However, Moody’s believes that the liquidity and asset problems that General American Life Insurance Company (General American) experienced during August 1999 were exceptional. General American’s exposure to 7-day put funding agreement contracts was far beyond life insurance industry norms both in terms of absolute dollar size and relative to the size of the institution’s balance sheet, capital and liquidity. General American’s reliance upon an unusually large reinsurance contract with a lower rated reinsurer only compounded this already outsized exposure. This reinsurance contract effectively ceded control of over $3 billion of General American assets to another party while leaving General American contingently at risk. In the ensuing weeks after the default, several other insurers also encountered relatively high levels of put activity. However, every one of them met their obligations with little strain and without absorbing significant investment losses. Most of these puts were not related to investor concerns regarding the financial strength of the insurer, but were instead due to a reconsideration by the investor of the appropriateness of this relatively new and previously untested asset class. 1 For more information on this project see the NAIC’s web site at http://www.naic.org/finance/interest_rate_risk_project_c3.htm. 2 See Moody’s Special Comment, Funding Agreements –The New Frontier of Stable Value, April, 1998. Moody’s Special Comment 9
  • “CASH CAPITAL” ANALYSIS – WHAT EVERY INSTITUTIONAL INVESTMENT PRODUCT ISSUER NEEDS TO DO Moody’s believes cash capital analysis can be an important method for testing spread-based product lines such as an institutional investment product portfolio. Cash capital analysis values liabilities to their put date. In addition, the method incorporates the existence of any other embedded options in the valuation process. Once the initial valuation process is complete, asset values are measured applying appropriate haircuts to account for the possible loss of value and liquidity discounts. Alternative stress scenarios can then be calculated to estimate the company’s ability to cover, through asset sales or other means, an unusual surge in liability redemptions. This methodology, commonly performed by investment banks for their matched book business, is not fool proof, but provides a significant degree of comfort that the insurer can handle any reasonably foreseeable occurrence. Another useful test is to engage in a “spread at risk” examination where assets are “marked-to-market” as are the liabilities. This test measures any unrealized losses that exist within the book of business. Moody’s believes that this measure can be a more accurate profitability gauge than the more conventional spread analysis method of using the book yield of assets minus any expense charges and liability crediting rates. This approach is of importance primarily if the liabilities can be withdrawn before their expected maturity date. If the liability cash flows are completely predictable, this test is of a reduced degree of importance. Institutional Investment Products Rating Criteria – Key Factors Moody’s Uses In Evaluating An Institutional Investment Program Moody’s assigns financial strength ratings to entire companies, not lines of business and usually not specific products. Nonetheless, as part of the rating process, Moody’s carefully reviews and evaluates the degree of risk in each business line and the relationship between the financial and business performance of these various lines. OPERATIONAL LEVERAGE Operational leverage is expressed as the business lines’ ratio of liabilities to internally assigned statutory capital. The level of this parameter is a crucial determinant of the economic attractiveness of the institutional investment products to an insurer. A high amount of operational leverage permits the program to improve its return on equity (ROE), but at a higher level of risk to the insurer. Conversely, a conservative, lower level of operational leverage reduces program risk, but can quickly make the program uneconomic due to a low resulting ROE. Moody’s is frequently asked to express our views regarding the degree of operational leverage we view appropriate in the operation of these programs. As discussed above, Moody’s rates companies, not lines of business, so we only secondarily look at the amount of leverage attributed to any specific line; our primary attention remains focused on the combined organization. However, during our review process, Moody’s expects that the degree of operational leverage attributed to any specific line should be consistent with the risks assumed in operation of the line. Insurers should be able to explain the operational leverage used in managing this line, just as they would with any other business. Some of the risks that Moody’s compares capital levels to are options embedded in the liability portfolio, asset credit quality, liquidity, volatility and interest rate sensitivity of the underlying asset portfolio. Moody’s believes that an appropriate operating leverage for this business is 11:1 to 15:1, dependent upon factors such as the company’s rating level, experience and management of the business, its other businesses, and its risk tolerance. This leverage range was based on a risk-based capital assessment for this line of business, assuming a typical investment allocation for companies active in this market. Moody’s views this range as appropriate for a well managed business, assuming the risks discussed below are carefully measured and managed in a manner consistent with what is expected from a highly rated entity. 10 Moody’s Special Comment
  • Under certain circumstances, Moody’s would consider operational leverages outside of this range, either up or down, as appropriate. Such circumstances could include especially risky asset or liability portfolios, relative inexperience in operating the business, or explicit parental or third-part support. LIQUIDITY OR MATURITY RISKS As institutional investment products become an increasingly important component of insurers’ balance sheets, liquidity or refinancing risk becomes increasingly important. This risk describes the ability of the insurer to service the liabilities as they come due, either on an expected or, more importantly, on an unexpected basis. Rollover risk is the risk that if new liabilities need to be issued to finance maturing liabilities, the issuer may be unable to do so. It is a given in financial markets that such circumstances occur during the most inopportune moments. General Account Assets Support All Business Lines For some companies, the institutional investment product line is operated on a standalone basis. For other companies, the business is operated as an integral part of a larger business. In either case, from a legal perspective, the resources of the entire organization support all the liabilities, including the institutional investment products. Spreading Liability Maturities Help Disperse Risk One method for managing this risk is to carefully disperse liabilities’ maturities over time – a laddered maturity structure. It is normally less risky to have liability maturities spread out over a wide time spectrum rather than highly concentrated in a short time period. Special care should be taken in environments like now, when issuers are writing large amounts of new liabilities during a fairly tight time frame, to ensure that the resulting liability portfolio is well diversified over time. Without appropriate attention, the liability portfolio could end up being highly concentrated. The spreading of the liability structure is especially crucial if mismatches can occur between asset and liability maturities. It is less important if asset cash flows are sufficient to service the liabilities as they mature. Any mismatch, either expected or unexpected, could require the insurer to dispose of assets at an inopportune time in order to service its liabilities if the insurer is also simultaneously unable to issue new liabilities as the old ones mature. One simple but effective method to reduce the level of maturity risk assumed by the insurer is to create a laddered liability maturity structure where each year’s maturities are limited to a specified percentage of the total institutional investment products outstanding. Under this approach, the adverse financial affect of stressful market conditions or specific company credit problems can be managed over an extensive time period, instead of having to be resolved quickly under stress. Other useful precautions that can be taken include matching near term liability payments due with short-term assets, ownership of adequate amounts of liquid securities, and the development of alternative liquidity facilities such as committed bank lines. Moody's Introduces Short-term Insurance Financial Strength Ratings Constant access to adequate liquidity resources is especially crucial to issuers of short-term funding agreements. Moody’s believes that 90-day putable FAs need to be considered for liquidity testing purposes as 90-day liabilities, even if they are unlikely to be put. To qualify for a Moody’s Prime-1 short-term insurance financial strength rating, significant issuers of short-dated put products need to have available access to alternative liquidity, which can be in the form of back-up lines of credit, liquidity facilities, unused securities reverse purchase facilities, or readily-available marketable securities. ASSET RISK Moody’s believes that asset risk is important. However, asset management principles such as diversification, careful underwriting, and adequate credit quality are not much different than those that apply to other product lines. One important consideration is that given the tight margins involved in institutional investment products, insurers do not have much room for error in their institutional investment management portfolios. Any significant level of investment losses will rapidly push the line into marginal profitability or worse. Moody’s Special Comment 11
  • LIABILITY OPTIONALITY Another potential source of risk are options embedded in the institutional investment product liabilities. Some liabilities have no embedded options, such as funding agreements used to back most FANIP programs. Moody’s views institutional investment product programs that issue liabilities without embedded options as a favorable credit factor. Benefit Responsive GICs Contain Weak Embedded Option Other liabilities have weak options embedded in them. Examples include most benefit responsive GICs marketed to defined contribution plans. While these GICs contain put options, these options are difficult to exercise and expose the insurer to limited losses even when exercised. In addition, most issuers have considerable expertise in evaluating and underwriting this risk. Consequently, Moody’s has typically not been especially concerned regarding the limited optionality embedded in these liabilities. Moody’s most serious concerns arise with liabilities containing short or unusual put provisions. Examples include short-term putable funding agreements and funding agreements containing unusual put or index provisions. Moody’s believes that an issuer of such a product carefully understand and manage the option risk, and carefully controls the amount of the exposure. The issuer should also be able to demonstrate that it can satisfy these option obligations, even under exceptional circumstances, without compromising the institution’s financial strength. Downgrade Provisions In Muni-GICs Compound Other Risks Moody’s views the incorporation of “downgrade” provisions in contracts as substantially increasing the risk level of the contract both to the insurer and to policyholders not benefiting from this provision. These provisions permit the contract holder to put the contract back to the insurer prior to the contract’s normally scheduled maturity date. This special put is triggered when the insurer’s insurance financial strength rating is downgraded by a designated rating agency below a predefined threshold. Contracts with these provisions are typically issued to municipalities and are consequently referred to as “muni-GICs”. Puts exercised under these provisions are by definition exercised at a time when the insurer is already under financial stress. This stress is further exacerbated by the fact that there is no realistic method for the insurer to hedge this risk. YIELD CURVE MOVEMENTS Moody’s expects that highly rated institutional investment product issuers will carefully evaluate and manage risks assumed from yield curve movements. This can be accomplished directly through the liabilities issued and assets purchased, or indirectly through hedging transactions. Hedging transactions used to hedge yield curve movements include interest rate futures and, more notably, interest rate swaps. Cash Matching Is Lowest Risk But Impractical In Practice When the block is managed on a cash matched basis, the issuer’s entire exposure to yield curve movements is automatically eliminated. However, Moody’s believes few if any companies manage their portfolio on this basis since cash matched portfolios leave issuers very limited flexibility in managing their program. It is also difficult to manage a program in this manner profitably. Consequently, issuers manage these blocks on another basis, permitting them more flexibility in the program management, but with the need for more sophisticated analysis to control the program’s risk profile. Moody’s believes that to limit the risk of a duration-managed program to the sponsoring insurer, financial affects of both parallel and non-parallel yield curve shifts have to be evaluated and controlled. Parallel yield curve shifts can be more easily managed and are evaluated on a duration basis. Non-parallel Yield Curve Shifts Are Most Common And Are Harder To Manage However, yield curve shifts are almost never completely parallel. Non-parallel movements are both the rule and considerably more challenging to manage. Therefore management requires partial duration analysis along with the construction of carefully designed hedging programs. 12 Moody’s Special Comment
  • SPREAD RISK Even programs managed on a “perfectly matched” interest rate risk basis remain exposed to potential spread risk, or the risk that asset yield spreads will vary from those expected against their Treasury or LIBOR benchmark rates. These spread deviations occur regularly in financial markets, although typically in more modest fashions than for interest rate movements. Unfortunately, spread movements are especially difficult, although not necessarily impossible to hedge. Moody’s believes that almost all insurers elect to assume spread risks, and consequently need to have sufficient capital to absorb reasonably anticipated spread movements. Spread risk is relatively unimportant if the insurer will not need to sell the asset prior to its maturity to generate liquidity. This would be true in cases when the assets’ maturity is matched to the liability, or when funds are available from other sources to service the liabilities. However, if these assets may have to be sold, spread risk becomes much important. This is especially true if the assets under consideration are relatively illiquid or prone to significant spread moves. An example of the potential importance of spread risk is the General American situation. Moody’s believes that spread risk, and not interest rate movements, caused much of the problem that lead to its insolvency. DIVERSIFICATION Moody’s carefully evaluates both the risks of the program and its effect on the insurer’s overall risk profile during our rating process. Institutional investment products, while not without risk on a stand-alone basis, may permit the insurer to better manage the over all risks assumed by the insurer. For example, the presence of a book of institutional investment products may help lower the overall risk profile of an insurer that had previously just written retail immediately surrenderable deferred annuities. In such a case, longer dated institutional investment products may serve as a base of stable, predictable liabilities while the deferred annuities’ surrender experience varies considerably over time. Funding Agreement Note Issuance Programs (FANIPS) BACKGROUND Moody’s credit analysis of funding agreement backed securitizations, such as the widely marketed EMTN programs, revolves around the primary question of whether the investor has a perfected interest in the underlying FA and whether that interest is pari-passu with other policyholder obligations. Under a funding agreement note issuance program (FANIP), whether it is an EMTN program or a domestic Medium Term Note Program (MTN), a special-purpose, bankruptcy-remote vehicle (SPV) is established. The SPV’s sole purpose is to issue notes to investors and then use the proceeds to purchase funding agreements from the sponsoring insurance company. The funding agreement therefore serves as the sole asset collateralizing the SPV’s debt issuance. (See EMTN Program Structure below.) EMTN Program Structure Funding Agreements Insurer Principal + Interest Proceeds EMTN Notes Special Purpose Vehicle Assign Funding Agreement Principal + Interest Noteholder Proceeds Trustee/Paying Agent Moody’s Special Comment 13
  • The indenture governing the program will ensure that the terms of the funding agreements will mirror the terms of the notes issued by the SPV in order to eliminate any mismatches. As subsequent notes are issued by the SPV, this matching principle is reapplied. If mismatches occur, the SPV would assume risk and would need to be adequately capitalized to absorb any potential losses. Programs are designed to issue a series of notes up to an initially authorized program limit, which can be raised at a later date. FANIP SPVs are created in non-US jurisdictions with favorable tax laws such as the Cayman Islands. The notes issued by these vehicles are rarely marketed in the U.S. for a variety of reasons, including their not being registered with the SEC. Instead of registering the instruments with the SEC, these offerings are instead subject to “Regulation S” of the Securities Act of 1933, as amended, for non-U.S. investors. The notes are marketed to numerous investors around the world outside the U.S., most prominently Europe, Asia and Australia. Many of these transactions are publicly placed and are listed on a European exchange in an effort to improve their liquidity. In many cases insurers have also issued FANIPs in private transactions under these programs in response to investor “reverse inquiry.” Such issues are customer tailored for the need of a specific buyer, often are of smaller size, and usually offer the investor lesser liquidity than public deals. THE NUMBER OF FUNDING AGREEMENT-BACKED EMTNs IS GROWING Moody’s believes that currently the amount outstanding of EMTNs backed by funding agreements approximates $20 billion. The tables at the end of this report supply further detail on the actual issuance that has taken place. To date, most notes have had bullet maturities ranging from three to twenty years in length. Coupons are usually set at a fixed-rate. Notes with floating rates or step-up coupons have been issued when the allin cost for doing so was favorable. Until recently, legal and regulatory issues limited the use of domestic MTNs backed by FAs. One major impediment was that the New York Insurance Department (NYID) believed that transactions such as these constituted the marketing of an insurance policy by an intermediary. In the NYID’s view, such a transaction is not permitted under New York law unless the intermediary and its employees are licensed as insurance agents. This is very rarely the case for investment banks and their employees. However, the NYID has subsequently reconsidered its view on this issue and it is believed that this is no longer an obstacle to launching a domestic program. AN EXPECTED SURGE IN INSURER PARTICIPATION Moody’s believes that several insurers are in the process of developing domestic programs and that approximately 10 to 15 U.S. life insurers will access the market domestically during the next 24 months. To date only Protective Life has issued notes domestically to U.S. investors through a domestic Delaware SPV trust. Moody’s believes that the volume that will be eventually issued in the domestic U.S. market could easily exceed that of the Europe market, and that this may well occur in a fairly short period of time. This will be driven by the fact that the insurers will often be able to place debt domestically at more favorable levels than that required in Europe. These savings will result from a variety of factors including the more liquid U.S. bond market, improved issuer name recognition in the domestic market, and the fact that at least some of these issuers have name scarcity value. MOODY’S RATING PROCESS FOR FANIPs When Moody’s assigns a rating to a FANIP program, it is usually equal to the underlying insurer’s insurance financial strength rating (IFSR). The IFSR rating is the most senior rating that Moody’s assigns to insurance company obligations. This rating applies only to the insurer’s most senior policyholder obligations. A crucial part of the evaluation process in assigning this rating is that Moody’s determines that the funding agreements supporting this obligation are pari-passu with other senior policyholder obligations. When an individual program draw takes place, Moody’s rates the specific drawdown. “Plain vanilla” tranches or notes without unusual features will carry the program rating. However, in some cases the drawdown may contain a credit linked or other embedded derivatives and might be rated lower than the program rating. 14 Moody’s Special Comment
  • The actual documentation reviewed by Moody’s in its analysis done to assign a FANIP rating will vary depending on the details of the transaction. Typical documentation in these transactions include the following: • Indenture governing issuance of debt by SPV • Legal opinions - Priority status of FA - Perfection of security interest - Tax opinion - Corporate opinion • Incorporation documents for the SPV • Form of Funding Agreement • Offering document • Dealership agreement LEGAL STANDING DETERMINES PRIORITY OF CLAIMS OF FUNDING AGREEMENTS In the U.S., insurance companies are primarily regulated by the insurance department of their state of domicile. Consequently the laws of that state determine the priority of claims in the case of the insurer’s insolvency, and therefore, have a bearing on the ultimate rating assigned to an issue. Under some state insurance laws or regulations, FAs and/or GICs are specifically mentioned as being considered policyholder liabilities and therefore receive the highest priority of claims. In other states, FAs or GICs may not be explicitly mentioned in the state insurance regulations, making the priority of claims for these instruments in the event of an insolvency unclear, or even worse, subordinate to other policyholder obligations. As a result, some issuers of FAs in states with unclear regulatory environments have sought and received legal opinions from an attorney familiar with that state’s insurance laws and regulations. Moody’s approach is to review the state of domicile’s insurance law as well as relevant legal opinions. If the state insurance law and/or legal opinions suggest that the FA/GIC may be relegated below policyholders in standing under an insolvency or other regulatory action, Moody’s rating assigned will most likely reflect that increased risk profile. In such a case the FANIP rating would usually be one notch lower than the insurer’s financial strength rating. Additionally, Moody’s will monitor the state insurance laws to determine whether the regulations or opinions have changed since the ratings were initially assigned. To date, Moody’s has determined that only one state, Massachusetts, has insurance laws where funding agreements are subordinate to other policyholder obligations. Recently, the Massachusetts State Senate passed a bill which would make funding agreements pari-passu with othr insurance obligations. The legislation additionally needs House and Governor approval to become law. If this change takes place, Moody’s expects to treat funding agreements issued by Massachusetts domiciled life insurance companies consistent with our practice for companies domiciled in other states.3 PERFECTED SECURITY INTEREST Each SPV note issuance is secured by a funding agreement issued by the sponsoring insurer. The notes themselves are non-recourse to the insurer. Moody’s, in our ratings process, will need to establish that holders of the SPV notes have a perfected interest in the supporting funding agreement and that it will continue to serve as their collateral. Under New York law, which is generally regarded as the industry standard for securitizations, funding agreements usually constitute collateral that is excluded from New York Uniform Commercial Code (NYUCC). The economic equivalence of a security interest in the funding agreement can be achieved by assigning the funding agreement to the indenture trustee for the benefit of the note investors. In addition, 3 See Moody’s Special Comment, All Funding Agreements Are Not The Same – Priority of Claims Varies And is Determined By The Issuer’s State of Domicile, June, 1999. Moody’s Special Comment 15
  • the insurer will change its books and records to reflect the assignment and will acknowledge such actions with a notice to the trustee. The trustee, who takes possession of the funding agreements, thereby achieves perfection of the security interest. In the event that funding agreements are interpreted as eligible collateral covered under NYUCC, the trustee will have achieved security interest perfection by filing Uniform Commercial Code (UCC-1) financing statements with relevant New York local offices, naming the SPV as debtor, and the trustee as secured party for the benefit of the note investors. In an effort to ensure perfection under non-New York jurisdiction, the trustee will also file UCC-1 statements in the state where the insurer is domiciled.4 The Institutional Investment Product Marketplace AN EVOLVING MARKET The institutional investment products market has rapidly been transformed during the last decade. It has evolved from simple fixed rate, fixed maturity general account GICs sold primarily to 401(k) plans into a marketplace containing a multitude of products purchased by a wide assortment of institutional Sales Activity Survey* investors. Some of the products now sold include (Billions of dollars) synthetic GICs, short-term funding agreements, 1999 1998 separate account GICs, funding agreement note General Account GIC $16 $17 issuance programs, and other securitized programs. Moody’s expects that new products will continue to be developed, that the relatively new FAs will continue to grow in popularity, while the older traditional general account GICs sold to 401(k) plans will likely enjoy only modest growth, at best. General Account FA Separate Account Products $34 $8 $25 $7 Total $58 $49 *Source: LIMRA-SVIA Stable Value and Funding Agreement Products 1999 Sales and Assets Survey, dated March 9, 2000 Short-term FAs Sales Have Resumed During the first six months of 1999, sales of shortterm funding agreements continued to quickly expand. Several new issuers entered the market and more money market funds began buying shortterm FAs. However, the General American default in early August caused sales of short-term “putable” FAs to stop almost overnight. Even some financially strong issuers were subject to put activity by investors reconsidering their commitment to this asset class. Institutional Investment Products Assets Under Management as of December 31, 1999 (Billions of dollars) Stable Value Funding Agreements $235 $62 Total $298 *Source: SVIA-LIMRA Stable Value and Funding Agreements Products 1999 Sales and Assets Survey. The market for these products has stabilized in late 1999 and early 2000, and some sales have resumed on a deliberate basis. However, it is too early to tell whether both insurers will fully resume their marketing efforts and if investors will purchase these products with their previous enthusiasm. Popularity Of GICs May Have Peaked For Now Traditional GICs, separate account GICs and synthetic GICs all can be expected to experience slow growth in the near term. Traditional GICs may attract additional attention if interest rates rise and spreads widen further, but the dynamics of the 401(k) business (advent of 404c5, the life insurance defaults of the early 1990’s, and the favorable performance of equity markets) have lowered the demand considerably for traditional GICs. 4 See also Moody’s Special Comment, A Brave New World – U.S. Life Insurers Get Innovative with European Medium Term Note Program Backed by Funding Agreements, April, 1999. 5 Under Federal law, ERISA Section 404c, a company can reduce its fiduciary liability by allowing plan participants to take control of their assets in the plan. 16 Moody’s Special Comment
  • Additionally, pressures on synthetic GIC fees have been in place for years. This has substantially lowered the profitability on notional value for all providers of this product. Because of this, only a few insurance providers remain committed to the business. New Domestic And Global MTN Programs Offer Best Chance For Growth If growth in the institutional investment products business is to occur in the near term, it will be through the new domestic MTN programs and related trust structures that can benefit from the large corporate debt market in the United States. The potential issuers of the funding agreements backing domestic MTN instruments have little debt outstanding today so investors may be enticed by the diversification these offerings afford compared to bank debt, industrials or finance companies. Moody’s Special Comment 17
  • 18 Moody’s Special Comment
  • Appendix Following are three exhibits and a discussion by Moody’s analysts of the credit characteristics of the prominent institutional investment product issuers. Exhibit 1 is a table of Prominent Issuers and their institutional investment products exposures. This measures the amount of institutional investment product business written by the insurer and expresses this exposure as a percent of liabilities and capital. Several of the legal entities listed are affiliates of larger insurance groups. In many cases, membership in the group significantly influences the insurance financial strength rating Moody’s has assigned the company. Exhibit 2 includes selected public market FANIP issuances during 1999 and 2000. The listing is useful for those investors that have or are considering investing in this sector. Private issues and certain public issues may not be included in this list. Additionally, Exhibit 3 lists all FANIP programs currently rated by Moody’s. Following the exhibits, Moody’s discusses the credit characteristics of the prominent institutional investment product issuers. This includes a discussion of the company’s insurance financial strength rating, the rating outlook and selected statutory statistics for the company. In cases of more than one company in a group active in the institutional investment products market, statistics are published only for the group’s primary issuer. This section also briefly discusses the management approach of the company in this market. For further information on these companies, please refer to the company’s annual Moody’s report. Moody’s Special Comment 19
  • Exhibit 1 Prominent Issuers’ Institutional Investment Products Outstanding Data as of September 30, 1999 Dollars in Millions Company Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Principal Life Insurance Co * John Hancock Life Insurance Co Prudential Insurance Co of America ** New York Life Insurance Co Sunamerica Life Insurance Co Monumental Life Insurance Co Metropolitan Life Insurance Co Travelers Insurance Company Pacific Life Insurance Co Jackson National Life Insurance Co Transamerica Life Insurance & Annuity Co Allstate Life Insurance Co GE Life and Annuity Assurance Co Protective Life Insurance Co Hartford Life Insurance Co First Allmerica Financial Life Ins Co Peoples Benefit Life Insurance Co United of Omaha Life Insurance Co Ohio National Life Insurance Co Connecticut General Life Insurance Co Business Men’s Assurance Co of America AIG Life Insurance Company Life Insurance Co of Georgia Combined Insurance Co of America Massachusetts Mutual Life Ins Co American Int'l Life Assurance Co New York Security Benefit Life Ins Co Nationwide Life Insurance Co IIPs as % of Policy Moody’s Policy Res IIPs as % of IIPs Reserves IFSR Rating & Liabs Capital Outstanding and Liabs Aa2 Aa2 A1 Aa1 Aaa Aa3 Aa2 Aa3 Aa3 Aa3 Aa3 Aa2 Aa2 A1 Aa3 A1 Aa3 Aa3 A1 Aa3 A1 Aaa Aa2 A1 Aa1 Aaa A2 Aa2 48% 36% 14% 23% 59% 55% 8% 28% 32% 19% 50% 20% 44% 46% 16% 50% 26% 17% 31% 4% 42% 15% 39% 31% 2% 13% 23% 2% 420% 249% 92% 146% 605% 793% 75% 118% 434% 218% 521% 184% 559% 466% 116% 355% 202% 178% 205% 48% 378% 234% 479% 145% 14% 146% 113% 22% $17,346 12,895 12,576 12,541 10,048 9,342 8,557 6,549 6,300 5,906 5,668 5,351 3,952 2,670 2,272 2,210 1,495 1,406 1,181 1,088 1,054 873 858 842 709 685 594 344 $36,499 35,994 90,692 55,442 17,141 16,874 104,292 23,061 19,466 30,547 11,447 26,737 8,935 5,748 13,855 4,436 5,660 8,252 3,824 28,107 2,488 5,729 2,209 2,751 37,922 5,414 2,590 19,690 * Company did not provide data. Estimated from Liabilities line 10.2 + 10.3, Guaranteed Interest Contracts and Other Contract Deposit Funds, of quarterly statement. ** Includes $6.2 billion of institutional spread business issued by Prudential Insurance Company and backed by commercial paper issued by PruFunding Corp. IIP = Institutional Investment Products Policy Reserves & Liabilities is the sum of Liabilities lines 1 thru 11.3 in the quarterly statement. 20 Moody’s Special Comment
  • Exhibit 2 Selected Public Market FANIP Issuance January 1999 to Present Dollars in thousands Ann Date Issuer Maturity Date Final Coupon Currency Amount (‘000) Amount Moody’s (US $’000) Rating 2-Jun-04 2-Jun-04 26-Jan-05 25-Nov-05 6-Oct-03 8-Dec-04 25-Nov-05 8-Dec-04 25-Nov-05 6-Oct-03 26-May-04 25-Nov-05 6.2500 6.2500 1.2000 5.0000 6.3750 4.7500 5.0000 4.7500 5.0000 6.3750 6.5000 5.0000 US$ US$ JPY EUR US$ EUR EUR EUR EUR US$ STG EUR 250,000 500,000 50,000,000 150,000 100,000 200,000 50,000 300,000 100,000 250,000 100,000 250,000 250,000 500,000 476,644 154,500 100,000 203,000 51,560 312,000 106,380 250,000 158,000 269,542 3,086,626 Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa 14-Jan-10 4.2500 25-Jul-04 3mth Libor + .30% SFR US$ 250,000 250,000 157,710 250,000 407,710 NR NR 7-Jun-99 19-May-99 17-Jan-00 4-Jan-00 8-Dec-99 30-Nov-99 18-Nov-99 17-Nov-99 11-Oct-99 27-Sep-99 25-Aug-99 12-Aug-99 AIG SunAmerica Institutional Funding AIG SunAmerica Institutional Funding AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG SunAmerica Institutional Funding II AIG Sun America Subtotal 30-Nov-99 14-Jul-99 Allstate Life Funding Allstate Life Funding Allstate Subtotal 26-Jan-00 25-Jan-00 13-Jan-00 18-Mar-99 Jackson National Life Funding Jackson National Life Funding Jackson National Life Funding Jackson National Life Funding LLC Jackson National Subtotal 28-Aug-03 3.5000 8-Feb-05 US$Libor+20 bps 15-Nov-02 BBSW+25 bps 6-Apr-04 3mth Libor+0.20% SFR US$ AUD US$ 250,000 250,000 250,000 300,000 155,280 250,000 166,980 300,000 872,260 Aa3 Aa3 Aa3 Aa3 11-Jan-00 2-Nov-99 26-Aug-99 9-Jul-99 7-Jun-99 2-Jun-99 6-May-99 22-Mar-99 17-Mar-99 22-Jan-99 7-Jan-99 John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Global Funding Ltd John Hancock Subtotal 31-Jan-05 30-Nov-04 15-Feb-06 13-Aug-09 22-Jun-04 6-Jul-04 30-Mar-09 18-Feb-04 30-Mar-09 8-Feb-06 18-Feb-04 7.5000 5.2500 6.7500 4.0000 6.5000 4.3750 6.1250 2.5000 6.1250 3.8750 2.5000 US$ EUR AUD SFR US$ US$ US$ SFR US$ EUR SFR 300,000 300,000 300,000 300,000 300,000 150,000 350,000 150,000 250,000 300,000 182,017 300,000 315,300 189,000 190,913 300,000 86,972 250,000 102,585 250,000 347,705 182,017 2,514,492 NR NR NR NR NR NR NR NR NR NR NR 23-Jun-99 MassMutual Global Funding LLC 7-Jul-06 7.0000 US$ 300,000 300,000 NR 20-Jan-00 1-Dec-99 19-Nov-99 30-Sep-99 16-Apr-99 Monumental Global Funding Monumental Global Funding Ltd Monumental Global Funding Ltd Monumental Global Funding Ltd Monumental Global Funding Ltd Monumental Global Subtotal 28-Feb-05 3.5000 31-Mar-03 3.2500 31-Mar-03 3.2500 20-Oct-04 3mth Euribor+.15% 15-Jul-09 4.3750 SFR SFR SFR EUR EUR 200,000 50,000 200,000 500,000 250,000 125,172 31,490 129,030 533,650 269,426 1,088,768 NR NR NR NR NR 5-Jan-00 9-Nov-99 14-Jul-99 Nationwide Financial Funding LLC Nationwide Financial Services Nationwide Financial Services Nationwide Subtotal 8-Feb-05 SFR Libor+15 bps 24-Nov-06 5.3750 18-Aug-04 3.0000 SFR EUR SFR 250,000 250,000 500,000 161,436 260,075 316,670 738,181 Aa2 Aa2 Aa2 Pacific Life Funding LLC Pacific Life Funding LLC Pacific Life Funding LLC Pacific Life Funding LLC Pacific Life Subtotal 15-Sep-05 15-Mar-07 23-Dec-03 15-Mar-07 SFR SFR SFR SFR 200,000 50,000 100,000 350,000 131,580 32,560 70,651 246,600 481,391 Aa3 Aa3 Aa3 Aa3 17-Aug-99 2-Jun-99 18-Feb-99 1-Feb-99 3.5000 3.0000 2.5000 3.0000 Moody’s Special Comment 21
  • Exhibit 2 Selected Public Market FANIP Issuance (cont.) January 1999 to Present Dollars in thousands Ann Date Issuer 11-Nov-99 4-Nov-99 3-Mar-99 12-Jan-99 27-Jan-00 Principal Financial Global Funding LLC Principal Financial Global Funding LLC Principal Financial Global Funding LLC Principal Financial Global Funding LLC Principal Global Financial Principal Subtotal 21-Jun-99 5-May-99 22-Apr-99 10-Mar-99 16-Feb-99 2-Feb-99 SunAmerica Institutional Funding SunAmerica Institutional Funding SunAmerica Institutional Funding SunAmerica Institutional Funding SunAmerica Institutional Funding SunAmerica Institutional Funding SunAmerica Subtotal 9-Jun-99 24-Feb-99 Travelers Insur Co Institutional Funding Ltd Travelers Insur Co Institutional Funding Ltd Travelers Subtotal Total Source: Warburg Dillon Read and Capital Data Bondware 22 Moody’s Special Comment Maturity Date Final Coupon Currency Amount (‘000) Amount Moody’s (US$’000) Rating 7-Apr-04 15-Oct-02 7-Apr-04 22-Jan-09 17-Feb-05 2.2500 6.7500 2.2500 4.5000 5.6250 SFR AUD SFR EUR EUR 250,000 150,000 250,000 300,000 300,000 161,290 95,610 172,521 346,580 301,000 1,077,001 Aa2 Aa2 Aa2 Aa2 Aa2 SFR EUR STG SFR US$ US$ 150,000 500,000 250,000 250,000 150,000 850,000 97,428 528,989 403,551 170,381 150,000 850,000 2,200,349 Aaa na na Aaa Aaa Aaa EUR EUR 250,000 300,000 257,626 332,853 590,479 Aa3 Aa3 27-Apr-04 2.0000 21-May-02 3mth Euribor+0.05% 7-Dec-09 5.3750 27-Apr-04 2.0000 15-Feb-09 5.7500 15-Feb-09 5.7500 16-Jun-06 5-Mar-09 4.2500 4.5000 13,357,257
  • Exhibit 3 Moody’s Rated FANIP Programs Dollars in Millions Issuer AIG SunAmerica Institutional Funding Federal Kemper Life Assurance Company* Jackson National Life Funding LLC Nationwide Financial Funding LLC Pacific Life Funding, LLC Principal Financial Global Funding, LLC Protective Life U.S. Funding Trust AIG SunAmerica Institutional Funding II & III Transamerica Global Funding Corporation I Transamerica Global Funding Corporation II Travelers Insurance Co. Institutional Funding Ltd. Program Rating Aaa Aa3 Aa3 Aa2 Aa3 Aa2 A1 Aaa Aa3 Aa3 Aa3 Amount Market Type US$ 5,000 US$ 300 US$ 2,000 US$ 2,000 US$ 5,000 US$ 2,000 US$ 200 US$ 12,500 US$ 2,000 US$ 2,000 US$ 2,000 Global Multiple Euromarket Global Euromarket Euromarket United States Euromarket Euromarket Euromarket Euromarket *Premium Asset Trust Certificates is actual issuer Moody’s Special Comment 23
  • Institutional Investment Products Review AEGON USA Life Insurance CompaniesMonumental Life Insurance Company Company Overview Moody’s Aa3 insurance financial strength rating and P-1 short-term financial strength rating of Monumental Life Insurance Company (MLIC), and the other members of the AEGON USA and Transamerica life companies reflect the group’s good profitability and established market positions in its core business segments, as well as its strong liquidity, its good-quality investment portfolios, and its sound group capitalization. The rating also incorporates the financial strength of the group’s ultimate parent, Netherlands-based AEGON N.V. (AEG). These strengths are tempered by the group’s focus on commodity-like accumulation products, financial leverage at the parent company level and the group’s exposure to interest rate and derivatives basis risk. MLIC and the other members of the AEGON USA Life insurance group have a stable ratings outlook. AEG acquired Transamerica Corporation (TA), a significant U.S.-based insurer on July 21, 1999. TA is functionally a sister company of AEGON USA. The acquisition further strengthens the group’s significant position in several markets including individual annuities, life insurance, and GICs as well as giving AEG entry into the life reinsurance and Canadian insurance markets. The chief risks include increased leverage at AEG, the issue of integration of TA into AEG, and TA’s commercial finance and leasing operation, which has a higher risk profile than the insurance operations. On November 30, 1998, three sister companies (Commonwealth Life Insurance Company, Peoples Security Life Insurance Company and Capital Security Life Insurance Company) were merged into MLIC, creating a legal entity with close to $16 billion in assets. Institutional Investment Products AEGON USA and Transamerica provide investment only products such as fixed and floating rate GICs, synthetic GICs, separate account GICs, and other investment products to various institutional pension plans – public, union, and corporate, both defined contribution and defined benefit. Aggregate spreadbased business (funding agreements and GICs) totaled almost $21 billion, and fee-based operations (synthetic GICs) amounted to over $17 billion as of June 30, 1999. In addition, the company has also developed an EMTN program that has issued over $1.1 billion of funding agreement backed notes. A significant percentage of the company’s spread-based business has embedded put options. Moody’s believes the potential exists for high levels of unexpected withdrawals in this operation. However, the company protects itself by utilizing a fixed-to-floating investment philosophy to match fund its operations and by issuing contracts (most have a 365 day put feature compared to the industry average of 90-days) with less near-term withdrawal risk than most of its competitors. Moody’s views AEGON USA’s market leading fee-based synthetic GIC business as incurring a low level of underwriting risk, but being very sensitive to fee pressures. 24 Moody’s Special Comment
  • Monumental Life Insurance Co. (AEGON) 1998 1997 1996 1995 1994 15,199 17,276 913 159 1 1,072 4,122 1,143 5,358 400 329 18 -11 318 3,990 3,990 267 44 0 311 584 290 931 98 63 11 0 63 4,067 4,067 256 43 0 299 606 291 948 68 35 1 -1 35 3,949 3,949 244 38 0 282 663 283 988 76 40 0 -5 35 3,651 3,651 193 31 0 224 685 256 969 67 41 -13 -5 36 33.1 0.9 19.9 0.5 44.8 0.2 42.3 0.2 54.7 0.6 0.1 0.5 39.3 0.2 57.8 0.6 0.1 0.6 37.0 0.2 60.0 0.6 0.1 0.7 36.8 0.3 59.8 0.7 0.1 0.9 15.3 1.6 11.3 1.6 65.7 0.1 42.3 2.7 17.9 10.0 0.0 -1.3 40.2 2.5 19.8 10.8 0.0 1.1 35.3 2.3 28.8 10.1 0.0 1.2 32.5 2.1 35.5 7.9 0.0 2.5 75.1 0.9 17.1 0.3 2.6 1.4 2.6 85.2 0.0 11.4 0.6 2.0 0.4 0.4 85.7 0.3 10.6 0.6 1.8 0.1 0.8 86.0 0.4 9.2 0.6 1.8 1.4 0.6 86.8 0.4 9.5 0.8 1.8 0.2 0.5 6.5 0.0 3.2 0.6 3.8 0.0 7.8 0.9 4.4 0.0 6.1 0.7 4.9 0.0 10.5 1.0 5.1 0.2 11.4 1.1 2.99 45.98 12.0 13.03 12.68 6.76 7.83 3.04 1.56 20.67 10.9 7.68 7.87 25.53 22.34 3.24 0.86 11.92 11.8 7.72 7.72 26.24 19.51 2.95 0.93 13.93 13.7 7.92 7.99 22.20 16.45 2.87 1.04 16.79 15.1 7.81 7.77 19.22 15.58 3.06 192 9 55 14 51 2 37 -1 24 5 0 0 21 0 9 1 0 1 20 2 10 3 0 0 26 1 10 -1 0 -2 7.1 136.9 294.7 0.0 88.3 — 236.6 7.6 5.4 7.8 149.0 290.9 0.0 46.8 414.6 147.5 11.1 0.0 7.3 136.6 269.3 0.0 57.4 435.9 146.6 8.8 2.5 7.1 129.6 250.7 0.0 66.4 447.4 132.5 13.5 2.3 6.1 109.6 212.9 0.0 80.0 563.2 162.6 19.9 2.2 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 25
  • Institutional Investment Products Review AIG Life Insurance Company Company Overview Moody’s Aaa insurance financial strength ratings of AIG Life Insurance Company (AIG Life) and American International Life Assurance Company of New York (AI Life)(The AIG Life Companies (US)) are based on the explicit support provided by American International Group, Inc. (AIG), which is the ultimate parent of the life insurance companies. The companies benefit from their diversified earnings sources and distribution channels and their high quality investment portfolios. These strengths are offset somewhat by the companies’ concentration in interest-sensitive annuity liabilities that present some interest rate risks and by the competitive markets in which they operate. The rating outlooks for AIG Life and AI Life are stable, but are dependent on the financial strength of the parent, AIG. Institutional Investment Products The AIG Life Companies’ stable value business consists of traditional GICs of $1.3 billion as of September 30, 1999 and $300 million in putable funding agreements. Asset/liability management for the company is focused on balancing its short duration and long duration annuities. For its traditional GIC portfolio, the company’s assets and liabilities are tightly matched and the company does not take any call risk because it does not invest in mortgage-backed securities to back this product. AIG Life and AI Life enjoy the explicit support of their ultimate parent, AIG. The support agreements between AIG and the AIG Life Companies (US) contain net worth, liquidity provisions, and policyholder rights language that effectively guarantees that AIG will provide the necessary funds to the companies to ensure the timely payment of those companies’ policyholder claims. AIG may terminate this support agreement upon 30 days of written notice to the AIG Life Companies (US); however, even in the event of a termination of the agreement, the obligations to AIG under the support agreement for all contracts written before the termination would still apply. 26 Moody’s Special Comment
  • AIG Life Insurance Company 1998 1997 1996 1995 1994 5,959 7,930 298 55 0 353 2,397 444 2,890 36 28 5 1 29 5,536 6,740 285 41 0 327 1,526 381 2,087 52 34 3 1 35 4,662 5,307 222 38 0 260 1,575 504 2,074 69 47 0 0 47 5,573 5,763 177 34 0 210 2,325 434 2,768 55 39 1 1 40 3,193 3,277 145 30 0 175 1,664 237 1,910 70 45 3 2 47 43.9 0.1 15.2 1.0 38.7 0.1 46.4 0.0 16.0 1.0 35.1 0.2 56.9 0.0 14.2 0.9 26.6 0.3 67.1 0.0 10.4 0.8 19.7 0.9 54.5 0.0 15.4 1.3 25.7 1.4 36.4 0.2 27.0 1.6 25.9 0.0 15.3 0.0 33.3 13.4 26.5 0.0 46.5 0.0 27.5 1.4 14.5 -0.1 71.1 0.0 8.8 0.7 12.7 0.8 78.2 0.0 5.2 0.8 6.6 1.8 70.4 0.5 8.3 0.0 17.4 2.4 1.0 52.3 0.2 6.7 0.0 27.7 12.1 0.8 48.4 0.4 6.7 0.1 41.4 2.0 1.1 34.4 0.3 4.7 0.1 55.9 3.5 1.2 43.9 0.4 6.0 0.1 45.0 2.7 1.9 5.9 0.0 0.0 0.0 4.5 0.0 0.0 0.0 3.0 0.0 0.0 0.0 1.4 0.0 0.0 0.0 2.2 0.4 0.0 0.0 0.39 8.47 10.1 8.12 8.17 5.24 4.16 1.36 0.59 12.05 17.6 7.83 7.87 7.27 5.05 1.28 0.85 20.01 1.9 10.42 10.47 6.12 4.99 1.42 0.88 20.59 2.5 10.49 10.53 2.89 3.53 1.82 1.85 30.99 3.0 10.22 10.39 2.98 4.27 2.80 -4 -3 5 1 22 1 14 -1 2 2 9 3 24 0 -3 0 14 7 13 -1 4 0 15 -3 36 0 1 -1 10 -10 5.9 129.1 221.2 0.0 97.7 — 136.7 0.0 2.9 5.9 155.8 276.8 0.0 74.2 132.0 111.9 0.0 3.2 5.6 149.5 245.3 0.0 52.5 164.8 118.2 0.0 4.0 3.8 138.2 193.5 0.0 35.4 210.6 118.4 0.9 4.2 5.5 148.6 196.5 0.0 37.4 245.2 106.6 7.1 5.0 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 27
  • Institutional Investment Products Review Allstate Life Insurance Company Company Overview Moody’s Aa2 insurance financial strength rating and P-1 short-term insurance financial strength rating of Allstate Life Insurance Company and of four of its life subsidiaries– Northbrook Life Insurance Company, Lincoln Benefit Life Company, Glenbrook Life and Annuity Company and Allstate Life Insurance Company of New York – is based on their established positions in the markets for life insurance, individual annuities, and group pensions, as well as on their broad product portfolios and extensive multiple channel distribution network, which position the companies well for future growth. Additional rating factors include reinsurance agreements between Allstate Life and three of these four subsidiaries; and the brand name, financial support, distribution, and other benefits of ownership by the multiline Allstate Insurance Company. These strengths are tempered by the companies’ narrow focus on highly competitive interest sensitive life and annuity products, and by the revenue and earnings volatility associated both with these products and the opportunistic sale of structured settlements and GICs. The rating outlooks of Allstate Life and its life insurance subsidiaries, which are closely linked with the ratings of Allstate Insurance, are stable. Institutional Investment Products Group pension products are sold only by Allstate Life and Allstate Life of New York. Products consist primarily of guaranteed investment contracts (GICs) marketed by independent brokers to medium- and large-sized pension funds. Other products include separate account GICs, short-term indexed funding agreements (IFAs) and synthetic GICs. Allstate Life has also established a funding agreement backed EMTN program to access longer dated fixed maturity contracts. Although Allstate Life participates in the market on an opportunistic basis, we anticipate sales of indexed funding agreements may grow thereby exposing the company to some liquidity risk. This risk is somewhat mitigated as Allstate’s strategy is to focus principally on long put IFAs over 365 days. We do not expect the aggregate amount of GICs and funding agreements to exceed 20% of consolidated insurance reserves for the Allstate Life insurance companies. As of September 30, 1999, total general and separate account short-term funding agreement exposure was $1.6 billion, which represented less than 6% of general account liabilities and approximately 4% of total liabilities on a consolidated basis. Allstate Life segments its portfolio by product, and duration matching and/or cash flow matching is established for each product segment. Investment decisions are made on a company wide basis. The organization has a disciplined asset/liability management process and we believe that Allstate Life will manage the institutional investment products portfolio well. Because Allstate Life sells GIC products on an opportunistic basis when appropriate investment yields are available, premiums associated with this business are likely to remain volatile. Allstate Life has good operating cash flow as well as over $16 billion of publicly traded investmentgrade bonds, mitigating liquidity risk. Additionally, Allstate Corporation maintains a US $1 billion commercial paper program initiated in 1996, supported by a $1.5 billion back-up bank credit facility. 28 Moody’s Special Comment
  • Allstate Life Insurance Company 1998 1997 1996 1995 1994 27,429 29,145 2,425 365 0 2,790 5,741 1,886 7,882 279 204 265 149 353 26,393 27,499 2,205 358 0 2,563 4,828 1,903 6,781 384 269 133 68 338 25,420 26,517 1,850 443 0 2,293 5,009 1,825 6,848 283 181 4 5 185 24,061 24,854 1,642 396 0 2,038 4,720 1,756 6,481 283 189 26 9 198 22,404 22,952 1,446 358 0 1,804 4,337 1,634 5,974 171 58 0 -21 37 19.1 0.0 50.4 0.4 29.7 0.1 18.2 0.0 49.5 0.3 31.6 0.1 17.1 0.0 47.6 0.2 34.5 0.3 16.1 0.0 45.3 0.1 37.9 0.3 15.6 0.0 50.4 0.1 33.4 0.3 18.6 0.1 38.4 1.7 38.6 0.7 21.3 0.1 40.1 1.8 34.0 0.3 20.1 0.1 38.3 1.4 36.2 1.3 18.1 0.1 45.4 1.0 31.6 1.1 18.1 0.1 49.8 0.6 27.7 1.2 79.1 4.7 11.8 0.1 2.0 1.6 0.8 79.5 4.7 11.1 0.9 1.9 0.5 1.3 77.6 5.2 12.4 1.2 1.9 1.0 0.7 76.0 5.2 13.6 1.5 1.8 1.1 0.7 74.9 5.2 14.4 1.6 1.7 1.6 0.5 5.9 0.1 3.0 0.4 5.0 0.0 4.2 0.5 4.7 0.0 9.0 1.1 3.7 0.2 10.4 1.4 4.2 0.2 8.3 1.2 1.25 13.20 10.4 7.32 8.16 10.33 6.12 1.24 1.25 13.90 11.1 7.69 8.44 10.26 7.22 1.29 0.72 8.55 10.5 7.72 8.42 9.43 6.86 1.34 0.83 10.29 9.1 7.91 8.34 9.00 6.89 1.36 0.17 2.25 9.0 7.91 7.81 7.92 6.92 1.36 126 0 35 -17 54 0 93 1 104 -10 63 8 52 1 64 -11 64 1 43 1 88 -5 56 1 17 1 30 -2 14 -1 10.2 140.8 311.9 0.0 57.1 — 114.5 4.6 26.5 9.7 133.7 312.2 0.0 50.4 167.0 121.6 4.8 27.7 9.0 120.0 256.9 0.0 50.8 171.3 147.7 12.4 31.1 8.5 112.9 238.3 0.0 42.5 188.2 175.4 19.4 32.3 8.1 106.2 211.9 0.0 51.2 198.4 194.5 16.9 31.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 29
  • Institutional Investment Products Review Business Men’s Assurance Company of America Company Overview Moody’s A1 insurance financial strength rating of Business Men’s Assurance Company of America (BMA) is based on the company’s developed life reinsurance business, its improved earnings and capitalization, and its strategic importance to Assicurazioni Generali S.p.A. (Generali), its ultimate parent. These strengths are offset somewhat by the relatively small scale of operations, rapid growth in interest sensitive liabilities, and high – though declining – expense structure. BMA also has a large investment in commercial mortgage loans as well as a significant exposure to mortgage- backed securities and other structured securities. BMA recently exited the group life and accident market (primarily disability and dental products), a business line which had produced a volatile earnings pattern in recent years, from losses to small gains. BMA provides life insurance, life reinsurance, and asset accumulation products including individual annuities, mutual funds and guaranteed investment contracts (GICs). Growth during the last several years has occurred in the GIC and fixed individual annuity operations – together they account for over 68% of liabilities. The mutual fund operation has also enjoyed success. The life reinsurance operation remains a top 15 reinsurer of U.S. life insurance. BMA’s rating outlook was changed to negative from stable following an outlook change to negative from stable at Generali. The effect of Generali’s outlook change on BMA is pronounced in that BMA’s rating reflects substantial implied support from Generali. The outlook change came about from an apparent shift in Generali’s future tolerance for financial leverage, as evidenced by recent statements made in context of its bid for Istituto Nazionale delle Assicurazioni S.p.A. Institutional Investment Products Since BMA entered the GIC business in 1991, it has grown into over $1 billion in liabilities. Most of the contracts range in size between $500,000 to $5 million, are lump sum deposits and have been sold largely through stable value managers and consultants to mid-sized 401(k) plans. The marketing source is somewhat diversified, but upwards of 25% of contracts have been placed through a single stable value manager, and an additional 20% placed through a second entity. BMA successfully introduced a credit enhanced GIC product in the third quarter of 1997. The product, which is placed in the company’s separate account, functions similarly to the general account GIC product, but has special provisions including an external liability guarantee from MBIA, a “Aaa” rated financial guarantor, on a contract-by-contact basis which would be enforced if BMA was unable to satisfy its contractual obligations. Approximately 90% of all GIC contracts issued are benefit responsive at book value under a variety of terms. Approximately 5% are non-benefit responsive and the remaining 5% are nonqualified, sold to money market funds as 90-day “putable” funding agreements. BMA’s benefit responsive withdrawal experience has been minimal, but some of the “putable” funding agreements have been exercised. We believe this has been the case due to the failure of an unrelated funding agreement provider, not an issue directly related to any change in BMA’s financial strength. We note that BMA’s involvement in the “putable” funding agreement business has been modest ($100 million at its peak); the company’s true exposure is to the longer-term pension GIC market which accounts for a significant percentage of the company’s total liabilities and profits. 30 Moody’s Special Comment
  • Business Men’s Assurance Company of America 1999 1998 1997 1996 1995 2,469 2,890 251 34 0 285 643 168 805 33 29 7 4 33 2,388 2,689 226 32 0 259 657 169 828 46 36 13 8 45 2,392 2,469 188 36 0 224 562 168 756 21 19 -1 -4 15 2,211 2,211 171 27 0 199 526 146 730 14 11 3 -1 10 1,890 1,890 155 23 0 178 442 126 724 10 8 6 1 9 35.0 0.7 27.6 1.5 33.1 0.0 35.2 0.8 27.1 1.2 34.0 0.0 33.4 2.0 27.3 1.1 34.2 0.0 34.4 1.7 27.2 1.0 33.3 0.0 39.0 1.8 25.4 1.1 30.6 0.0 26.5 0.7 11.5 10.6 45.1 0.0 24.2 1.6 5.3 7.6 58.1 0.0 28.4 3.0 8.9 7.1 47.2 0.0 27.8 3.1 14.8 7.8 37.4 0.0 31.7 3.1 35.3 8.7 15.1 0.0 52.2 3.2 36.5 0.4 2.4 4.0 1.3 52.9 3.2 37.7 0.5 2.5 1.3 1.9 55.0 3.9 36.2 0.5 2.6 1.6 0.1 59.2 2.6 32.8 0.8 3.0 1.4 0.2 60.0 2.7 28.6 1.1 3.6 3.8 0.2 0.8 0.0 0.1 0.0 0.0 0.0 0.7 0.3 0.1 0.0 1.2 0.4 0.3 0.1 2.6 0.9 0.3 0.0 3.8 1.1 1.18 12.10 12.3 7.33 7.27 9.98 10.53 2.43 1.73 18.49 12.9 7.50 7.57 8.63 10.61 2.70 0.62 6.87 13.6 7.72 8.13 10.64 13.56 3.26 0.51 5.51 14.5 7.52 7.51 11.00 12.99 3.33 0.55 5.32 14.0 7.76 7.91 14.83 17.39 4.46 26 1 1 -4 9 0 12 8 3 0 10 0 11 -7 5 -1 11 0 9 -3 3 0 6 0 10 -3 -2 -1 7 0 11.5 139.4 293.4 0.0 6.9 — 314.3 0.3 4.8 10.8 136.0 312.4 0.0 0.3 — 345.6 2.5 6.5 9.4 123.5 275.5 0.0 1.1 232.8 384.0 4.6 7.2 9.0 122.8 274.2 0.0 3.5 231.5 366.9 10.8 7.6 9.4 133.9 267.0 0.0 3.1 223.0 305.7 11.4 8.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 31
  • Institutional Investment Products Review CIGNA Corporation Connecticut General Life Insurance Company Company Overview Moody’s A3 senior debt rating of CIGNA Corporation primarily reflects the strong market position of Connecticut General Life Insurance Company (CG Life) in the medium and large case group employee life and health benefits markets. That position is enhanced by CG Life’s integrated indemnity and managed health care products, large, stable blocks of experience-rated pension business, and strong technological capabilities. Additionally, CG Life maintains an overall good quality investment portfolio, with an improving risk-adjusted capital position. The sale of its entire property and casualty insurance operations reaffirms CIGNA’s commitment to focusing on its core businesses. CIGNA is now a broad-based employee benefits company, with a full range of customized health care products complemented by a portfolio of disability, life and accident, investment and retirement savings products. The rating outlook for CIGNA Corporation and its life and health subsidiaries – Connecticut General Life Insurance Company (insurance financial strength at Aa3) and Life Insurance Company of North America (insurance financial strength at A1) – was changed to stable from negative on March 19, 1999. The change was primarily based on CIGNA’s overall improved risk profile resulting from the divestiture of its domestic and international property and casualty insurance operations. Institutional Investment Products Management has taken a conservative position by restraining the amount of competitively priced and nonservice-intensive products it sells, such as guaranteed investment contracts (GICs) and single-premium annuities that are associated with pension plan terminations and terminal-funding contracts. A significant proportion of the company’s assets back experience-rated pension contracts, where investment experience is shared with policyholders. More recently, CG Life is considering plans to enter the long-term funding agreement market, also referred to as European GICs (EuroGIC) or Global GICs. Our concerns with this product are similar to those for traditional GICs. However, in light of the fact that EuroGICs are non-benefit responsive and non-putable, they carry lower liquidity risk, compared with traditional GICs, over the long term. However, the Euro GICs are sold in tranches larger than those sold to a pension plan. Thus we believe Euro GICs have higher refinancing risk. We note that the company does not have any exposure to short-term putable funding agreements that expose companies to short-term liquidity risk. As of September 30, 1999, institutional spread based business was $1.1 billion, less than 4% of general account liabilities. We do not expect the aggregate spread-based institutional business to exceed 20% of consolidated insurance reserves. CG Life manages its asset/liability matching risks well and has minimal liquidity needs. It has established separate investment portfolios for its principal lines of business, which specifically recognize the interest sensitivity and the liquidity needs of the products within each line. Assets supporting the GIC liabilities are located in CG Life’s separate accounts; the GIC portfolio is immunized by duration matching. For those products that are highly sensitive to interest rate changes, the degree of duration match is usually kept within half a year. Also, the type of assets used generally excludes CMOs and other callable securities, which are capable of altering the portfolio duration as rates change. Most of the company’s private securities contain make-whole provisions, which offset their call risk. CIGNA Corporation maintains a commercial paper program of $300 million (Moody’s rating of P-2), with committed back-up lines of credit for 100% of the program’s maximum borrowings. The company also has additional lines on an advised basis for a total of $135 million. Since the sale of the P&C operations, including its premium finance company, commercial paper has fallen to zero, and is likely to fluctuate between $0 and $150 million, with occasional spikes above that level. Proceeds from commercial paper are used predominately for working capital needs such as temporary investment mismatches related to the settlement process. 32 Moody’s Special Comment
  • Connecticut General Life Insurance Company (CIGNA) 1998 1997 1996 1995 1994 32,270 69,213 1,789 448 2 2,239 12,794 2,413 16,520 1,462 839 141 -15 824 38,055 69,705 2,182 538 23 2,743 13,216 2,949 16,382 1,055 548 -117 -131 417 37,511 62,279 2,120 389 52 2,561 12,303 3,018 15,535 1,444 629 32 -18 611 37,918 57,913 2,138 412 17 2,567 12,816 2,992 16,276 1,416 432 9 -43 390 34,843 50,912 2,019 372 20 2,411 7,123 2,690 10,244 954 429 5 -1 428 22.7 0.1 6.4 5.6 61.0 0.1 30.3 0.4 8.8 4.9 52.5 0.0 29.5 0.4 8.4 5.0 53.3 0.0 28.0 0.4 7.7 5.1 55.5 0.0 25.7 0.4 7.2 5.2 61.0 0.0 5.8 0.1 1.6 11.1 60.2 0.1 11.0 0.3 3.3 16.9 52.3 0.1 17.0 0.3 5.1 13.2 47.8 0.1 24.8 0.3 6.6 13.1 39.5 0.0 40.1 0.5 9.2 22.2 2.7 0.0 50.2 0.4 26.3 1.9 16.6 3.8 0.8 52.7 0.5 25.8 1.6 16.6 2.2 0.7 52.6 0.4 27.0 2.2 16.9 0.3 0.6 52.4 0.5 26.8 2.7 16.0 0.7 0.8 53.8 0.6 27.1 3.3 12.9 1.0 1.2 3.7 0.1 4.6 1.3 3.3 0.2 4.5 1.2 3.5 0.2 8.7 2.5 3.7 0.2 11.3 3.2 4.6 0.2 15.7 4.6 1.19 33.09 3.8 7.34 7.54 1.84 3.91 0.72 0.63 15.72 4.2 8.38 8.69 1.60 5.18 1.04 1.02 23.84 6.2 8.63 8.45 1.62 4.58 0.94 0.72 15.65 4.5 8.94 8.91 1.74 4.65 1.10 0.86 18.29 6.0 8.68 8.78 2.74 8.71 1.25 427 5 104 -214 187 -13 151 9 16 15 182 -13 208 0 -11 52 241 -2 144 6 -53 30 212 1 15 1 -11 170 196 0 6.7 97.1 250.6 0.0 50.2 — 387.1 18.8 3.6 7.0 115.7 308.5 0.0 43.8 133.1 364.5 18.3 4.1 6.6 107.9 270.3 0.0 49.3 143.3 407.2 36.5 2.3 6.5 104.9 230.1 0.0 51.8 136.1 417.1 47.7 2.3 6.7 100.1 206.7 0.0 63.0 127.5 412.8 65.0 2.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 33
  • Institutional Investment Products Review Combined Insurance Company of America Company Overview Moody’s A1 insurance financial strength rating and P-1 short-term insurance financial strength rating of Combined Insurance Company of America (CICA) reflects the insurer’s large and stable block of accident and health insurance products, its historically strong underwriting position and its consistent level of operating earnings. Additionally, the company has a good capital position, a good quality investment portfolio and an established, defensible position in its core markets. Somewhat offsetting these strengths is the mature nature of its core business, which is currently experiencing modest growth. Additionally, CICA’s parent, Aon Corporation (Aon), has followed an aggressive acquisition strategy focused on insurance brokerage and consulting, which has produced substantial fixed interest funding requirements. CICA is a leading provider of supplemental disability income insurance, accident insurance and other health insurance to rural America. The company also has significant business in some European countries as well as a smaller operation in the Pacific region. Additionally, CICA entered the guaranteed investment contract marketplace in 1994 and is also a marketer of funding agreements. CICA’s rating outlook is stable. Institutional Investment Products CICA entered the GIC and funding agreement market in 1994, prior to the divestiture of Life Insurance Company of Virginia, which itself was a large GIC writer. As of year-end 1998, approximately $1.2 billion of GICs and funding agreements were outstanding. The portfolio is roughly 50% qualified GICs sold to pension funds and 50% non-qualified funding agreements sold to money market funds and other shortterm money pools. The funding agreements have embedded put options, and therefore can be liquidated at the option of the holder within a relatively short period of time. Moody’s concern in regards to this product is that a market event or a company specific credit event could cause holders to exercise their put options, putting stress on the company to liquidate assets. To mitigate this concern, CICA is currently renewing the shorter-term (7 and 30-day) contracts out with 90-day options. In addition, the company is not looking to grow its funding agreement business significantly in the near term. 34 Moody’s Special Comment
  • Combined Insurance Company of America 1998 1997 1996 1995 1994 3,502 3,502 594 97 0 690 1,247 257 1,612 306 222 23 17 239 3,400 3,400 687 166 0 853 1,117 283 1,552 342 244 74 59 303 3,018 3,018 562 123 0 685 513 316 995 402 298 617 612 910 3,496 3,496 686 97 0 783 1,849 335 2,244 324 241 -14 -3 238 2,654 2,654 652 87 0 739 1,460 161 1,632 203 139 113 101 240 19.4 28.8 0.0 2.6 46.5 2.4 21.7 31.3 0.0 3.1 36.9 6.0 23.9 34.1 0.0 3.6 23.2 14.1 27.2 27.6 16.8 4.0 18.3 0.6 26.2 37.8 0.0 1.1 25.7 1.8 6.2 63.0 0.0 0.0 34.9 -4.1 7.0 68.9 0.0 0.0 33.2 -9.3 -19.3 150.0 -83.6 -3.2 10.4 62.3 5.3 42.8 32.5 1.3 11.5 -0.4 5.3 53.0 0.0 1.5 30.7 -0.2 61.4 23.5 0.1 0.2 1.7 6.9 6.3 64.1 23.7 0.1 0.2 1.7 5.4 4.8 60.8 28.4 0.2 0.3 1.9 3.7 4.6 53.2 38.0 0.2 0.2 2.1 3.1 3.1 38.1 51.3 0.3 0.2 1.5 6.5 2.1 5.2 0.0 0.0 0.0 3.8 0.0 0.0 0.0 2.7 0.0 0.0 0.0 4.5 0.0 0.0 0.0 1.3 0.0 29.5 0.1 6.94 31.02 8.7 8.24 6.05 16.87 20.35 7.35 9.44 39.41 7.6 9.59 12.70 23.57 21.94 7.63 27.93 123.98 8.4 10.48 30.70 57.73 49.34 7.78 7.73 31.24 12.4 11.95 10.48 13.24 15.06 9.06 9.64 29.80 12.9 6.96 6.78 14.51 20.00 11.71 32 150 0 0 7 28 39 141 0 2 2 59 70 160 0 4 2 62 42 156 3 16 4 11 31 93 0 0 0 10 19.7 153.1 288.1 0.0 24.2 — 1.3 0.0 48.0 25.1 194.9 341.1 0.0 14.4 36.3 1.1 0.0 39.7 22.7 134.3 301.7 0.0 11.4 22.8 2.1 0.0 54.5 22.4 89.5 221.1 0.0 19.5 49.6 1.9 0.0 112.6 27.8 86.9 220.9 0.0 4.3 39.5 1.6 0.3 117.4 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 35
  • Institutional Investment Products Review First Allmerica Financial Life Insurance Company Company Overview Moody’s A1 insurance financial strength rating and P-1 short-term financial strength rating of First Allmerica Financial Life Insurance Company (FAFLIC) is based on the company’s improved earnings trend, its important position within Allmerica Financial Corporation (AFC), increased efficiencies, and diverse distribution. These strengths are tempered by the competitive pressures facing its life insurance and annuity operations. The life insurance segment principally markets fee-based variable products and group pension services. The variable annuity enterprise has been successful in attracting assets, though its recent sales performance has trailed off. The group pension operation – which continues to experience the orderly rolloff of its pension GIC product – has recently experienced substantial growth through the sale of funding agreements. The rating outlook is stable. Institutional Investment Products The traditional GIC portfolio, which is the most interest sensitive of all the segments, continues to dwindle because it is essentially in a run-off mode. As of year-end 1999, it had liabilities of $144 million, a sharp drop from the balance of $2.2 billion at year-end 1994. Moody’s expects the portfolio will continue to dwindle. Reserves in the funding agreement portfolio – primarily floating rated GICs sold mostly to money market funds and securities lending programs – have increased dramatically to $1.2 billion as of year-end 1999. Approximately 84% of the contracts contain 90-day put features. AFC manages the investment portfolio more conservatively than its other general account products; assets consist of approximately 88% investment-grade bonds, predominately corporates. When fixed-rate securities are purchased, the company enters into interest rate swap agreements to match the index and timing of the rate resets on the floating rate GICs. Nevertheless, Moody’s believes that the rapid expansion of the company’s floating-rate portfolio heightens it’s liquidity risk profile, as a market event could cause floating-rate GIC holders to exercise their put options. The company’s recent entrance into the EMTN market should help alleviate some of this risk by providing the company with less option risk on its liabilities. 36 Moody’s Special Comment
  • First Allmerica Financial Life Insurance Company 1998 1997 1996 1995 1994 5,699 8,376 1,164 262 13 1,439 2,316 373 2,751 138 100 -11 -14 86 4,983 7,171 1,221 249 13 1,484 1,173 412 1,647 251 196 0 -5 191 5,165 6,874 1,120 338 14 1,473 909 391 1,355 196 152 -17 -19 133 5,628 6,984 966 323 14 1,304 941 464 1,464 209 145 -11 -11 134 5,535 6,631 465 124 15 604 1,287 404 1,737 119 69 -27 -28 41 22.0 0.0 1.9 1.2 69.2 0.0 27.5 0.0 3.1 1.4 61.6 0.0 26.2 0.0 3.3 1.1 63.8 0.0 22.3 0.0 3.1 0.8 69.5 0.0 19.3 0.0 2.9 0.6 73.9 0.0 4.1 0.0 1.6 3.2 78.8 0.0 5.8 0.0 6.5 4.9 59.5 0.0 7.4 0.0 8.6 5.7 51.1 0.0 7.3 0.0 6.2 4.6 57.5 0.0 5.4 0.0 3.7 3.2 70.2 0.0 55.3 23.2 8.7 1.4 3.9 1.5 5.9 50.7 25.2 9.6 2.2 4.7 1.8 5.8 51.0 25.3 11.2 3.1 4.7 1.4 3.3 55.6 21.9 11.7 3.7 4.5 1.4 1.3 58.1 15.4 15.6 3.5 4.7 1.8 0.9 6.8 0.0 1.4 0.1 8.1 0.0 1.7 0.2 8.2 0.0 5.5 0.6 7.4 0.0 17.6 2.2 8.1 0.1 18.2 3.0 1.11 5.91 5.3 7.55 6.19 3.63 5.49 1.64 2.72 12.93 5.9 8.83 4.84 5.71 10.12 1.69 1.92 9.60 7.2 7.80 8.08 5.74 14.16 1.86 1.97 14.07 15.2 8.98 13.22 4.55 14.29 1.97 0.60 5.78 12.9 7.44 3.32 2.99 10.74 2.03 65 -1 9 17 42 1 115 0 5 14 55 1 81 0 2 21 50 0 90 0 7 9 34 1 20 -1 5 8 30 0 25.3 121.5 291.2 0.0 25.4 — 38.2 0.5 85.1 29.8 133.1 314.7 0.0 25.8 12.6 37.9 0.5 79.1 28.5 126.9 278.0 0.0 27.2 7.7 47.7 2.1 83.8 23.2 117.4 259.6 0.0 30.5 4.0 63.3 9.3 87.3 10.9 69.1 145.2 0.0 70.8 8.9 167.2 27.4 132.0 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 37
  • Institutional Investment Products Review GE Financial Assurance Holdings GE Life and Annuity Assurance Company Company Overview Moody’s Aa3 senior unsecured debt rating of GE Financial Assurance Holdings, Inc. (GE Financial Assurance) and the Aa2 insurance financial strength ratings of the insurance companies are influenced by the implied financial strength and financial flexibility of the parent company, General Electric Capital Corporation (GECC). The rating is also based on GE Financial Assurance’s diversified earnings, broad range of distribution channels and product portfolios, and solid management team with considerable organizational depth. These strengths are somewhat offset by the increasingly competitive nature of GE Financial Assurance’s target markets — wealth accumulation and wealth protection — and the interest rate risk associated with its portfolio of interest-sensitive liabilities. The rating outlook for GE Financial Assurance is stable, but is influenced by the senior unsecured debt rating of GECC. Institutional Investment Products GE Financial Assurance is an opportunistic player in the market for guaranteed investment contracts (GICs) and fixed and floating rate funding agreements through its GE Life and Annuity subsidiary, rated Aa2 for insurance financial strength and P-1 for short-term insurance financial strength. GE Financial Assurance markets its stable value products through investment managers and directly to institutional investors. GE Financial Assurance’s sales of stable value GIC products have increased dramatically in recent years. GIC sales in 1999 totaled $909 million compared to $544 million in 1997. Funding agreements added an additional $1.1 billion to 1999 sales, after being reintroduced in the fall of 1998. As of December 30, 1999, GE Financial Assurance’s stable value business, GICs and funding agreements, amounted to $4.2 billion. Funding agreements, issued only by GE Life and Annuity, were $1.5 billion, which represented 16% of general account liabilities. Although GE Financial Assurance participates in the market on an opportunistic basis, we anticipate that sales of floating rate funding agreements may grow substantially in the near-term thereby exposing the company to some liquidity risk. However, we do not expect the aggregate amount of GICs and funding agreements to exceed 20% of consolidated insurance reserves. The issuance of floating rate funding agreements exposes the organization to some liquidity risk because the agreements are highly credit and market sensitive and contain put options. We believe, however, that GE Financial Assurance manages this risk through its disciplined asset/liability management process. In addition, we believe that GECC would provide additional liquidity to any GE Financial Assurance companies in the event it was needed. 38 Moody’s Special Comment
  • GE Life & Annuity Assurance Company 1998 1997 1996 1995 1994 7,135 12,706 481 83 0 564 2,281 474 2,833 76 51 21 1 52 6,496 10,565 522 78 0 600 1,956 469 2,496 127 72 17 2 74 6,225 9,003 419 86 0 505 2,218 453 2,725 118 65 -23 -3 61 5,406 7,445 364 75 0 439 475 400 915 96 55 -15 -2 54 5,942 7,297 401 67 0 467 1,154 455 1,626 107 60 -24 -7 53 30.9 0.0 29.4 0.5 39.1 0.0 33.1 0.0 36.9 0.6 29.4 0.0 34.4 0.0 38.2 0.6 26.7 0.0 34.4 0.0 36.9 0.6 28.0 0.0 30.2 0.0 43.8 0.5 25.4 0.0 10.4 0.0 40.1 1.5 47.8 0.0 12.8 0.0 55.8 2.0 29.2 0.0 18.4 0.0 60.3 1.5 19.7 0.0 45.4 0.0 -6.4 6.5 53.9 0.0 18.5 0.0 79.8 2.6 -1.1 0.0 85.8 0.8 7.9 0.1 2.8 -0.1 2.6 86.7 1.5 8.2 0.2 3.0 -0.3 0.8 84.2 2.1 10.0 0.3 3.0 0.5 0.0 80.5 2.7 11.6 0.7 2.9 1.6 0.1 82.5 3.4 9.5 0.6 2.4 1.5 0.1 10.8 0.0 3.8 0.3 8.3 0.0 6.4 0.5 4.3 0.0 6.8 0.7 4.6 0.0 9.1 1.1 4.4 0.1 10.9 1.1 0.45 8.97 8.5 7.28 7.07 4.26 4.40 0.86 0.76 13.38 0.0 7.69 7.70 5.92 3.98 0.80 0.75 13.02 8.0 8.17 8.17 5.02 2.90 0.78 0.73 11.89 8.4 7.36 7.37 17.14 12.27 0.79 0.75 11.65 9.1 7.90 8.05 7.87 5.09 0.83 28 0 6 -1 15 0 36 0 19 2 14 0 29 0 20 1 14 0 21 0 12 2 20 0 17 0 23 3 18 0 7.9 155.4 263.6 0.0 133.0 — 99.4 3.8 0.5 9.2 187.8 350.4 0.0 87.4 251.5 88.6 5.7 0.4 8.1 172.7 320.8 0.0 51.8 306.7 123.9 8.3 8.9 8.1 161.2 275.1 0.0 55.4 371.8 147.9 13.3 18.8 7.9 145.6 283.1 0.0 54.9 581.5 125.7 14.2 31.5 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 39
  • Institutional Investment Products Review Hartford Life Insurance Company Company Overview Moody’s Aa3 insurance financial strength rating for Hartford Life Insurance Company, Hartford Life & Accident Insurance Company, and Hartford Life & Annuity Insurance Company (collectively, “Hartford”) is based on the company’s leading market position in the fast growing individual variable annuity business, a business with fee-based income and no investment risk. The rating also reflects Hartford’s excellent asset quality and the fact that it is 81% owned by the Hartford Financial Services Group, Inc. Hartford benefits from diversified distribution channels with a broad degree of variable costs, ownership of a strong annuity wholesaler (Planco), and varied sources of earnings, including top tier positions in the group life and group disability markets. These strengths are tempered by the fact that annuities, which represent a major portion of Hartford’s earning, are subject to narrowing margins as the annuity marketplace becomes increasingly competitive and scale-driven. Hartford’s annuities are sold through non-captive and third party distribution channels, including broker/dealers and banks. Such annuities tend to have lower persistency than those sold through captive channels. Also, there is moderate financial leverage at Hartford’s holding company, Hartford Life, Inc. The servicing of this financial leverage places a modest degree of strain on the company’s operating subsidiaries. Institutional Investment Products Hartford’s stable value business consists predominantly of guaranteed investment contracts (GICs), with a smaller portfolio of funding agreements. Stable value reserves decreased every year from 1995 through 1998, and as of September 30, 1999 were down slightly from the prior year-end. The decrease during this period was driven by a declining amount of general account GICs outstanding. The decline in the GIC portfolio followed the company’s strategic decision several years ago to pull back from this business after experiencing heavy losses in this line in the early and mid-1990s. Specifically, the losses resulted from spread deficiency that occurred because the GIC portfolio was partially backed by CMOs which experienced heavy prepayments in 1993 and early 1994, and the cash proceeds from the CMO prepayments had to reinvested at lower prevailing rates. We expect Hartford to continue to opportunistically write GIC business, although at a significantly lower level than in the early 1990s. GAAP and statutory provisions have been established for losses from the existing GIC portfolio. By year-end 1999, the run-off block was expected to decrease to less than $500 million. In 1997, Hartford entered the funding agreement business. The company’s calculated entry into the funding agreement business has not been excessive given Hartford’s overall size. We note, however, that Hartford’s focus has been on funding agreements with 30-day puts. As of September 30, 1999, the company’s funding agreement portfolio totaled only about $500 million. This equates to less than 2% of its general account assets (including guaranteed separate accounts). Hartford has ample liquidity to support this portfolio. 40 Moody’s Special Comment
  • Hartford Life Insurance Company 1998 1997 1996 1995 1994 16,397 73,783 1,676 142 2 1,820 8,076 1,273 12,293 502 147 -7 -3 143 16,978 62,824 1,441 137 4 1,582 7,549 1,249 11,404 405 120 -42 14 134 17,198 52,274 1,207 186 4 1,397 5,269 1,302 9,538 564 60 -57 9 70 17,637 46,641 1,125 142 3 1,270 7,356 1,243 11,468 584 133 -24 -65 68 17,355 36,836 941 95 3 1,039 9,917 1,212 12,203 440 24 33 32 57 17.9 0.1 54.3 2.5 25.1 0.0 21.7 0.1 47.3 2.3 28.6 0.0 19.4 0.1 47.5 2.3 30.8 0.0 15.9 0.0 46.6 2.2 35.3 0.0 14.7 0.0 38.5 2.2 44.5 0.0 48.5 0.0 15.5 15.9 19.8 0.0 42.5 0.1 18.8 17.7 20.7 0.0 31.9 0.2 24.7 12.0 31.2 0.0 18.6 0.0 26.4 15.3 39.6 0.0 17.3 -0.2 29.8 4.4 48.8 0.0 69.1 3.6 0.9 0.0 18.8 6.7 0.9 67.5 2.7 0.0 0.0 22.7 6.3 0.8 70.8 2.4 0.0 0.0 23.0 3.0 0.8 72.2 1.9 1.5 0.0 19.6 3.9 0.8 76.3 1.0 1.9 0.0 15.4 4.2 1.1 1.5 0.0 0.0 0.0 0.8 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.2 0.1 5.3 0.1 0.2 0.0 6.0 0.1 0.21 8.42 1.6 8.06 8.22 4.23 4.44 0.52 0.23 8.97 2.2 7.70 8.08 1.63 3.93 0.52 0.14 5.21 3.9 7.85 8.42 3.45 4.86 0.52 0.16 5.89 2.5 7.43 8.12 2.66 3.11 0.55 0.17 5.88 2.0 7.91 8.14 1.73 2.00 0.60 81 -4 102 3 17 -52 49 0 87 -1 -1 -15 -26 -3 86 8 -62 57 26 2 119 1 -32 16 17 1 -114 6 85 29 7.0 106.6 318.3 0.0 12.8 — 8.1 0.0 29.9 5.8 99.9 298.2 0.0 8.5 181.1 0.0 0.0 27.2 5.1 95.0 288.8 0.0 5.5 168.7 0.1 0.0 25.0 4.5 87.8 258.1 0.0 2.4 387.3 21.1 2.4 22.1 4.2 89.8 261.3 0.0 3.4 481.0 31.1 2.5 10.7 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 41
  • Institutional Investment Products Review ING U.S. Life Insurance CompaniesLife Insurance Company of Georgia Company Overview Moody’s Aa2 insurance financial strength rating of the ING U.S. life insurance group (the group) applies to the following companies: Security Life of Denver Insurance Company, Life Insurance Company of Georgia, Southland Life Insurance Company, Equitable Life Insurance Company of Iowa, and USG Annuity & Life Company. The rating is based primarily on the support and financial strength of the companies’ ultimate parent, Netherlands-based ING Group, N.V. ING Group is one of the largest diversified financial services companies in the world. The Aa2 insurance financial strength rating also incorporates the group’s diversified sources of earnings and distribution channels, above average returns on its investment portfolio, and good positioning in the life reinsurance and GIC/funding agreement markets. These strengths are tempered by the group’s shift in business mix from individual life insurance toward more commodity-like deferred annuities, GICs/funding agreements, and reinsurance, and the inherent challenges of building an integrated financial services organization. Also, high financial leverage at the U.S. holding company may constrain capital formation at the operating insurance companies and the group has above average exposure to below-investment grade bonds, commercial mortgages, and interest sensitive assets. In addition, the group has taken an opportunistic stance in the market for funding agreements with short-dated puts. Institutional Investment Products ING is an active participant in the GIC and funding agreement markets. Historically, ING’s Institutional Markets Group (IMG) focused on the defined contribution area of the pension market offering GICs as assets in support of the stable value options of 401(k) plans. Subsequently, IMG began selling non-qualified funding agreements to various short-term debt investors, such as money market funds, and also entered the structured settlement market. This movement into putable funding agreements was based on the belief that this market provided the business unit with an attractive risk/return tradeoff at that time given the aggressive funding levels in other markets, and considering the significant amount of liquidity available within the IMG portfolio. Despite the potential attractiveness of this market, IMG has put in place prudent internal limits regarding the amount of business that would be placed in the funding agreement sector. The GIC/funding agreement business has shown steady growth, and has become increasingly profitable for the group. Historically, GICs outsold funding agreements by a ratio of 85%-to-15%. However, with the rise of the funding agreement market and the continued slowdown and aggressive pricing in the GIC market, this sales ratio reversed itself in 1998 with funding agreement sales far outpacing GIC sales. Throughout 1999, traditional GIC sales increased as a percentage of total sales when compared to the previous year as sales in the funding agreement market slowed significantly. As an opportunistic participant in the funding agreement market, IMG actively maintains exposure to funding agreements with 30- and 90-day puts. With the funding agreement market disruption of August 1999, IMG experienced $277 million of puts of various durations; $217 million was actually taken ($60 million of put requests were later cancelled by customers). IMG had ample time and liquidity to handle these withdrawals. As of August 31, 1999, IMG still had some $1.3 billion of putable funding agreements on its books and $227 million of putable pension GIC business within a total GIC/funding agreement portfolio of $4.1 billion. The putable funding agreement portfolio, after the August puts, included no 7day, $682 million of 30-day, $496 million of 90-day, and the remainder in 180-day putable contracts. The total of these categories represents the total risk exposure that must be prudently managed from an asset/liability standpoint. Given the liquidity within IMG’s portfolio and its internal management of this exposure, as well as the business unit’s affiliation with the ING Group and therefore its indirect access to liquidity sources, this exposure seems manageable. 42 Moody’s Special Comment
  • Life Insurance Company of Georgia (ING) 1999 1998 1997 1996 1995 2,477 2,477 92 28 0 121 882 180 1,064 57 19 -11 -9 10 2,563 2,563 130 30 0 160 460 191 656 34 23 1 -2 21 2,796 2,843 190 29 0 219 400 209 619 45 29 13 1 30 2,905 2,941 171 31 0 203 735 214 964 37 15 10 3 18 2,775 2,810 156 27 0 184 682 211 980 40 17 11 2 19 47.9 2.1 3.9 0.0 46.0 0.0 44.8 2.0 4.3 0.9 48.0 0.0 41.5 1.7 4.3 0.8 51.4 0.0 37.6 1.7 4.2 0.8 55.4 0.0 38.9 2.0 4.6 0.9 53.2 0.0 18.8 4.4 0.2 0.0 77.6 0.0 33.1 9.0 1.4 1.9 53.3 0.0 37.4 11.8 1.4 3.0 42.5 0.0 21.7 7.2 0.9 1.7 66.9 0.0 38.2 9.1 1.3 2.0 45.7 0.0 67.7 1.0 25.3 0.3 3.3 0.0 2.3 65.3 0.9 19.2 0.5 3.2 4.7 6.3 67.1 0.8 18.2 0.7 2.8 2.6 7.7 72.2 0.6 19.1 0.8 2.8 1.3 3.2 74.6 0.5 19.7 1.1 2.9 -0.1 1.4 4.6 0.3 0.4 0.1 4.2 0.1 1.5 0.3 2.8 0.1 2.1 0.4 1.8 0.0 2.8 0.5 1.3 0.0 5.1 1.0 0.39 6.94 10.1 7.63 7.52 3.87 8.37 2.93 0.78 11.13 22.5 7.59 7.49 7.52 17.30 2.94 1.03 14.11 12.9 7.79 8.03 10.49 19.26 2.66 0.63 9.32 15.2 7.96 8.40 7.25 10.45 2.67 0.67 8.66 11.5 8.28 8.61 11.86 11.66 2.86 12 -2 2 4 5 0 23 -6 1 -1 13 0 14 -2 3 0 15 0 0 0 1 0 12 0 8 -3 2 0 9 0 4.9 99.0 202.1 0.0 91.2 — 503.3 6.9 0.4 6.3 119.2 275.1 0.0 65.3 — 305.6 5.6 0.3 7.8 147.7 400.8 0.0 35.4 205.7 236.1 5.8 0.2 7.0 140.9 280.4 0.0 24.7 264.7 277.0 7.6 0.3 6.6 133.6 302.4 0.0 19.3 287.8 304.6 14.9 0.3 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 43
  • Institutional Investment Products Review Jackson National Life Insurance Company Company Overview Moody’s Aa3 insurance financial strength rating and P-1 short-term insurance financial strength rating for Jackson National Life Insurance Company (JNL) is based on the company’s profitable growth in the individual fixed annuity market, its low-cost operating structure, and the support provided by its ultimate parent, Prudential Plc. These strengths are offset somewhat by the risks associated with the company’s emphasis on competitive and commodity-like interest-sensitive products, the firm’s aggressive growth, the decline in individual life insurance sales activity in recent years, and its relatively large mortgage-backedsecurities and non-investment grade bond portfolios. JNL’s efficient operations have enabled the company to profitably expand its book of business. In recent years, the company has successfully diversified its distribution systems to include banks and broker/dealers, in addition to its traditional focus on independent agents. Also, product diversification has occurred with the introduction of group pension products (including GICs and funding agreements), variable annuities, universal life insurance, and equity-linked annuities. Institutional Investment Products JNL entered the GIC market in 1995. During its first three full years, the operation underwrote over $5 billion of business, over 80% of which were funding agreements. All of the funding agreements are floating-rate, mainly LIBOR or Fed Funds-based instruments, primarily sold to securities lending operations and money market funds. The average size of the contracts is about $50 million, and JNL has been a participant in the market for shorter dated puts. Moody’s believes the put option, especially 7 and 30 day puts, makes these liabilities potentially very fluid. We feel that this potential volatility, and its possible impact on the company’s liquidity, could complicate JNL’s asset-liability management process. However, JNL has thus far successfully managed this risk. In doing this, management has limited the sale of shorter put products, and is most interested in underwriting traditional GIC business sold to pension plans, and other longer duration products which do not have put options. In early 1999, JNL established a $2 billion European medium-term note (EMTN) program to access longer-term institutional funding. The company’s EMTN program uses a special purpose vehicle to issue notes, which are backed by JNL funding agreements, to European institutional investors. These instruments allow the company some diversification benefits from the short-term put risk in its funding agreement portfolio, as they do not grant options to investors. JNL is focusing on issuing EMTN notes with maturities ranging from 5 to 10 years, although the program allows for the issuance of notes with any maturity. The 5 to 10 year maturity range brings an added dimension to the company’s institutional spread business, in that its traditional GICs typically have 2 to 5 year maturities, while its U.S. funding agreements are usually issued with maturities under two years. Moody’s believes that the EMTN program can have a positive effect on JNL’s institutional spread business due to its longer maturities and absence of put options. 44 Moody’s Special Comment
  • Jackson National Life Insurance Company 1999 1998 1997 1996 1995 34,908 39,356 2,261 472 0 2,733 8,078 2,402 10,667 472 335 56 21 355 33,043 34,995 2,127 391 0 2,519 6,066 2,366 8,532 495 342 36 -20 322 31,361 32,483 1,942 349 0 2,291 5,871 2,219 8,214 394 244 47 -7 237 26,987 27,357 1,501 313 0 1,814 4,458 2,007 6,524 317 276 8 -4 272 24,099 24,100 1,196 291 0 1,487 2,632 1,661 4,303 247 158 43 -2 157 16.2 0.0 62.4 0.0 21.5 0.0 16.6 0.0 64.5 0.0 18.9 0.0 17.5 0.0 68.5 0.0 14.0 0.0 18.7 0.0 70.9 0.0 10.4 0.0 20.2 0.0 74.1 0.0 5.8 0.0 6.4 0.0 47.0 0.0 46.5 0.0 9.3 0.0 40.5 0.0 50.2 0.0 10.4 0.0 55.5 0.0 34.1 0.0 14.4 0.0 53.7 0.0 31.9 0.0 23.6 0.0 72.3 0.0 4.2 0.0 79.6 1.5 10.0 0.1 2.0 5.1 1.6 82.1 1.1 7.7 0.1 2.0 6.1 1.0 83.4 0.8 5.2 0.0 2.0 7.9 0.6 90.7 0.8 3.2 0.1 2.3 2.6 0.4 95.3 1.1 0.7 0.1 2.2 0.4 0.2 8.9 0.0 0.2 0.0 8.0 0.0 0.6 0.0 8.5 0.1 0.9 0.0 8.2 0.1 1.8 0.1 9.8 0.0 0.9 0.0 0.96 13.53 11.7 7.38 7.42 3.76 2.90 0.63 0.95 13.38 9.7 7.68 7.66 3.43 3.43 0.62 0.79 11.56 9.3 7.98 8.17 4.68 3.34 0.66 1.06 16.49 9.9 8.27 8.25 5.22 3.47 0.60 0.72 11.24 9.1 8.06 8.22 7.46 4.76 0.58 55 0 210 0 69 0 122 0 193 0 27 0 54 0 173 0 17 0 45 0 218 0 13 0 37 0 117 0 4 0 7.8 139.9 245.3 9.1 111.0 — 127.3 0.2 2.9 7.6 137.5 267.8 9.9 103.3 — 99.3 0.9 8.6 7.3 140.3 274.7 10.9 113.9 482.9 70.3 2.0 7.0 6.7 125.5 251.5 0.0 118.9 636.7 47.2 2.1 44.7 6.2 107.7 219.3 0.0 155.3 724.9 12.7 0.1 14.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 45
  • Institutional Investment Products Review John Hancock Life Insurance Company Company Overview The Aa2 insurance financial strength rating of the John Hancock Life Insurance Company (John Hancock) reflects the company’s diversification of revenue sources, good capitalization, and its large and stable base of traditional life insurance policies, as well as its strong positions in the individual life, longterm care, and investment management markets. These strengths are offset somewhat by the company’s below-average bond quality, increasingly independent distribution channels, and significant exposure to commercial and agricultural mortgage loans. John Hancock’s rating outlook is negative due to the company’s exposure to potential losses from the workers’ compensation reinsurance risks assumed, the company’s sizable guaranteed and structured products business, and the effects of business changes that could result from the completion of the company’s recent demutualization. John Hancock has allocated $134 million after tax for the reinsurance exposures, and based on the best information available, the company believes that this reserve is sufficient. However, there is no guarantee that this reserve will be sufficient until all parties involved have settled their claims. John Hancock is a major provider of life insurance protection products to the middle-income market, and the company has also begun serving more affluent markets through the use of alternative distribution channels. John Hancock’s strength in the asset accumulation market creates a good, albeit less stable, source of earnings. John Hancock is also one of the leading providers of investment and related services to pension and retirement savings plans and other institutional investors. The company is lowering its risk profile by increasingly emphasizing less risky fee-for-service investment management products such as variable products and mutual funds. Institutional Investment Products John Hancock has long been one of the largest providers in the stable value market through the company’s Guaranteed and Structured Financial Product’s business unit. Some, but not all, of the business is direct marketed to plan sponsors, giving the company an unusually strong relationship with its customers. John Hancock offers a very wide assortment of institutional investment products, making the company well diversified in this line. In the last few years, John Hancock has diversified its stable value business by developing and selling products for the non-qualified funding agreement market (including European Medium Term Notes); 46% of the unit’s 1999 sales were from products in this area that had not existed two years previously. John Hancock had a total of $13.1 billion of GICs (69%) and funding agreements (31%) outstanding as of December 31, 1999, one of the higher percentages of these types of liabilities of any company in the industry. John Hancock had no short-term put funding agreements outstanding at year-end. Moody’s believes that John Hancock carefully manages its stable value business with close attention paid to both the credit and asset/liability management risk assumed. The company’s investment portfolio is heavily tilted towards private placement and commercial mortgages, but is well diversified and carefully managed, including little or no surrender rights for over ninety-five percent of in-force liabilities. John Hancock prefers the assumption of moderate amounts of credit risk to the assumption of interest risk, so the company’s interest rate risk is tightly controlled. As of December 31, 1999 considerable liquidity exists within John Hancock with $10 billion of investment-grade public bonds, $1.2 billion in cash and short-term assets and a $1.0 billion committed bank line. 46 Moody’s Special Comment
  • John Hancock Life Insurance Company 1999 1998 1997 1996 1995 43,986 60,732 3,457 1,243 214 4,914 9,763 3,033 13,038 710 466 81 29 495 40,915 58,363 3,389 1,290 206 4,884 8,973 2,956 12,163 1,050 607 132 1 608 39,424 55,446 3,158 1,166 185 4,509 7,456 2,856 10,412 884 467 -21 -90 377 39,622 53,591 2,856 1,065 176 4,097 8,156 2,803 11,028 821 314 28 -44 270 37,848 50,777 2,533 1,014 167 3,715 8,281 2,678 11,050 874 279 54 21 300 30.7 1.3 12.2 0.6 54.5 0.0 31.9 1.0 12.3 0.6 53.4 0.0 31.7 0.8 12.3 0.6 53.9 0.0 30.5 0.5 10.9 1.4 55.4 0.0 30.3 0.5 10.0 1.3 56.9 0.1 14.2 1.9 7.9 2.9 72.6 0.0 15.8 1.7 6.5 3.4 71.7 0.0 18.4 1.9 12.0 5.5 60.9 0.0 16.7 1.2 11.4 7.2 59.0 0.0 15.6 1.1 9.2 6.5 63.3 0.0 61.2 6.7 21.4 2.0 3.7 2.7 2.4 58.6 6.6 20.7 4.6 4.0 3.4 2.1 59.8 6.1 20.4 5.9 4.1 1.9 1.8 58.4 5.0 20.7 6.3 4.1 3.7 1.9 57.4 4.7 24.0 6.3 4.4 1.5 1.7 8.6 0.4 3.8 0.8 7.5 0.4 7.2 1.5 7.3 0.4 8.5 1.8 6.1 0.3 10.6 2.3 7.4 0.2 12.7 3.2 0.83 10.11 0.0 7.52 7.24 2.55 10.00 1.64 1.07 12.94 7.6 7.77 7.63 2.68 9.97 1.57 0.69 8.77 7.5 7.68 7.94 3.21 11.47 1.57 0.52 6.92 7.5 7.69 8.29 3.07 10.68 1.67 0.62 8.53 7.5 7.64 8.01 2.51 10.36 1.76 160 -44 10 21 283 58 276 -19 52 18 270 10 247 -26 32 28 206 7 132 -18 3 8 191 5 122 -19 3 27 170 1 11.2 137.4 240.3 9.2 75.3 — 204.2 10.4 29.8 11.9 143.2 256.3 9.2 60.8 — 206.1 16.1 30.3 11.4 134.2 242.8 10.0 62.5 39.5 224.4 18.6 32.0 10.3 125.3 214.9 11.0 57.0 53.0 253.3 24.3 31.5 9.8 114.4 197.6 12.1 73.5 33.2 299.6 33.5 34.6 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 47
  • Institutional Investment Products Review Massachusetts Mutual Life Insurance Company Company Overview Moody’s Aa1 insurance financial strength rating of Massachusetts Mutual Life Insurance Company (MassMutual) is based on the company’s strong market position in individual life insurance, its large block of participating liabilities, growing asset management business, and sound capitalization. The rating outlook is stable. MassMutual is a leading provider of individual life insurance and related products to the affluent business and professional markets. Moody’s considers the company’s productive career agency system a major competitive strength, but the company will be challenged to maintain long-term revenue growth through its controlled sales force. MassMutual also owns a controlling interest in OppenheimerFunds, one of the largest retail mutual fund complexes in the U.S. The company’s investment portfolio is capably managed and well diversified, although it has a significant investment concentration in private placements and commercial mortgages that tend to be of lower quality and are less liquid than other asset classes. MassMutual’s capital level is strong and is expected to grow further as the separate account business becomes increasingly important. Institutional Investment Products MassMutual reentered the GIC business in 1999, marketing the product on an opportunistic basis to the retirement plan market as well as the EMTN market. MassMutual had actively marketed stable value products during the late 1980s and early 1990s, but the company withdrew from further marketing these products. MassMutual also inherited a GIC block when it merged with Connecticut Mutual Life Insurance Company in 1996. While MassMutual did not actively market these products for some time, the company has continued to manage an existing albeit shrinking book and has remained active in the stable value market through sales of guaranteed separate account GIC products. As of December 31, 1999, MassMutual had $815 million in stable value liabilities outstanding distributed approximately 57% GICs and 43% funding agreements. In line with its opportunistic business strategy, MassMutual will limit its GIC and funding agreement issuance to modest amounts when the market offers particularly attractive opportunities for doing so. Moody’s believes that MassMutual offerings will attract considerable market interest given the company’s excellent credit quality and small level of outstandings. The company’s financial management is strong. The company is very well capitalized, has good profitability and carefully matches the duration, convexity, and cash flows of its assets and liabilities. MassMutual is highly liquid with $1.6 billion of cash, short-term instruments, and U. S. Treasuries as of December 31, 1998, which is further supplemented by $14 billion of investment-grade public bond holdings. 48 Moody’s Special Comment
  • Massachusetts Mutual Life Insurance Company 1998 1997 1996 1995 1994 43,086 62,675 3,189 1,029 505 4,723 7,482 2,915 10,605 1,522 340 224 25 366 40,831 57,635 2,873 945 472 4,291 6,765 2,836 9,679 1,504 300 59 -43 257 39,783 53,347 2,639 865 438 3,942 6,329 2,781 9,190 1,361 224 122 40 265 29,203 38,033 2,073 487 264 2,823 4,266 2,157 6,444 893 215 75 -54 160 28,666 35,174 1,929 443 266 2,638 4,590 2,040 6,701 892 224 -287 -135 89 60.6 4.6 6.2 8.7 19.9 0.0 60.1 4.4 6.7 6.7 22.0 0.0 57.9 4.1 7.1 5.9 25.0 0.0 48.0 2.7 8.4 4.0 36.9 0.0 45.3 2.3 8.3 3.4 40.6 0.0 37.1 3.9 11.0 9.7 38.3 0.0 41.1 4.2 14.5 4.3 36.5 0.0 43.4 4.5 16.0 4.5 32.3 0.0 43.2 3.4 13.3 3.2 37.5 0.0 38.4 3.1 9.8 6.8 28.5 0.0 60.4 3.9 14.2 4.2 12.5 2.7 2.2 60.2 3.7 12.3 4.3 12.5 4.9 2.2 65.5 3.5 10.1 4.8 12.3 2.8 1.0 63.1 3.3 10.5 4.6 10.1 7.6 0.8 63.5 2.6 10.7 4.8 9.7 7.9 0.8 5.6 0.1 3.1 0.4 5.8 0.1 7.7 1.0 5.9 0.1 15.5 1.6 5.7 0.1 16.0 1.8 5.5 0.1 21.2 2.5 0.61 8.12 5.8 7.32 7.53 4.17 9.27 1.15 0.46 6.25 6.2 7.42 7.70 4.80 9.40 1.15 0.58 7.82 6.1 8.55 8.75 5.30 9.74 1.35 0.44 5.87 5.5 7.87 7.90 5.68 10.24 1.19 0.26 3.46 5.8 7.55 7.30 5.70 10.82 1.43 213 -7 29 0 107 0 195 10 16 7 73 0 154 4 0 6 59 0 126 2 15 8 65 0 103 -2 6 10 74 0 11.0 177.5 290.4 6.9 49.1 — 162.1 4.7 50.1 10.5 179.5 286.1 7.5 53.8 150.1 152.9 9.7 41.1 9.9 169.9 269.3 8.1 57.9 187.5 145.6 16.9 30.7 9.7 171.9 272.2 11.2 56.9 238.5 151.7 18.7 23.7 9.2 166.7 269.6 11.9 58.1 232.5 163.9 26.9 19.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 49
  • Institutional Investment Products Review Metropolitan Life Insurance Company Company Overview Metropolitan Life’s (MetLife) Aa2 rating is based on its leading market positions in both individual and group businesses, its large captive agent sales force, and its high-quality bond portfolio. MetLife also has a strong position in the large-case group life and non-medical health market, particularly in the profitable group life insurance line. MetLife has shown stronger sales in its individual life products, improved agent retention rates, greater productivity among the career agents, and has made recent changes that more fully integrate the management of MetLife’s and New England’s individual business operations. However, these strengths are somewhat offset by the slow industry growth outlook for individual life products, MetLife’s shift of business toward lower-margined products, sizeable exposure to commercial real estate, and relatively weak profitability in recent years. Although MetLife has implemented an indepth plan of action to reduce its high cost structure and improve its earnings, its expense structure is still relatively high. In addition, MetLife’s planned demutualization may shift management attention to issues of shareholder returns and may cause management to increase operational and financial risk. In January 2000, MetLife acquired GenAmerica Corporation and its operating subsidiaries. MetLife plans to demutualize and expects to conduct an IPO early in the second quarter of 2000. Institutional Investment Products MetLife is one of the largest insurance company pension-fund managers. General account GIC reserves of approximately $6.4 billion at September 30, 1999 have been declining, and the pension closeout liabilities have stabilized as the closeout market has become inactive. Although MetLife has a block of guaranteed investment contracts, it has also focused on its separate account pension offerings, which include a MetLife-managed separate account GIC contract. The split between investment management and guaranteed products has shifted over the last few years, with investment management products now accounting for a growing share of overall sales. GIC deposits for both traditional and “Met-Managed” products have decreased significantly from the levels reached in the early 1990s. We view the general account GIC product as a commodity type of business – extremely competitive and highly rate sensitive – and essentially a spread based borrowing operation. The decrease in GIC sales from the early 1990s level represents a combination of changing market preferences and company pricing discipline. MetLife also has about $2.4 billion in funding agreements including the $600 million of short term funding agreements it assumed as part of its acquisition of General American Life. The company has adequate liquidity in its investment portfolio to meet surrenders and maturities in its pension and funding agreement business. 50 Moody’s Special Comment
  • Metropolitan Life Insurance Company 1999 1998 1997 1996 1995 126,201 183,917 7,630 3,109 816 11,555 28,834 8,595 38,354 3,309 1,005 -487 -216 789 124,726 178,136 7,388 3,323 780 11,490 27,169 8,959 36,551 1,560 184 1,441 691 875 127,097 172,444 7,378 3,814 826 12,017 24,357 8,264 32,823 2,217 394 336 195 589 123,356 162,475 7,151 2,635 782 10,568 24,162 8,018 32,389 2,247 743 -149 -283 459 110,425 142,132 6,564 1,860 686 9,110 23,024 7,753 30,932 2,119 201 -534 -873 -672 41.5 0.9 14.2 9.3 31.5 0.0 45.4 0.4 15.9 9.6 25.9 0.0 40.7 0.3 15.4 7.6 33.2 0.0 39.1 0.1 15.7 7.4 35.4 0.0 34.4 0.1 16.7 7.6 38.7 0.0 16.6 0.3 10.7 28.2 36.1 0.0 18.2 0.2 9.1 30.4 34.2 0.0 21.7 0.1 9.5 30.3 29.0 0.0 21.4 0.1 10.1 28.7 30.9 0.0 19.7 0.2 8.3 28.5 33.3 0.0 66.6 4.6 15.9 4.8 4.1 2.3 1.8 69.1 4.2 13.8 5.1 4.2 1.8 1.8 65.7 5.9 14.6 5.8 4.3 1.7 2.1 65.8 4.7 14.3 7.1 4.5 1.4 2.2 66.5 3.4 13.3 8.9 3.7 1.8 2.3 7.2 0.1 5.4 0.9 6.2 0.0 6.3 0.9 3.7 0.0 8.3 1.2 2.2 0.0 14.8 2.2 1.0 0.0 15.2 2.1 0.44 6.85 5.6 7.46 6.99 1.59 9.65 1.54 0.50 7.45 5.9 7.67 7.48 1.54 12.13 1.88 0.35 5.22 6.1 6.99 8.22 1.67 13.92 2.02 0.30 4.67 6.1 7.25 7.55 1.89 12.79 2.03 -0.49 -7.43 5.7 7.58 7.23 2.28 12.43 2.09 66 -55 187 295 410 4 -322 8 190 74 278 0 36 -17 102 250 97 4 308 11 172 200 88 4 -166 6 16 -74 40 1 9.2 124.6 210.1 13.4 75.2 — 217.7 9.6 53.0 9.2 128.7 215.7 13.5 65.3 — 198.8 9.3 36.3 9.5 120.6 209.0 12.9 38.1 115.7 209.1 12.5 62.8 8.6 114.1 193.5 14.6 24.4 135.8 242.3 24.6 63.8 8.2 117.4 204.5 15.4 11.2 231.4 260.0 24.5 54.0 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 51
  • Institutional Investment Products Review Mutual of Omaha Insurance Company/ United of Omaha Life Insurance Company Company Overview Moody’s Aa3 insurance financial strength ratings of Mutual of Omaha Insurance Company (Mutual of Omaha) and United of Omaha Life Insurance Company (United of Omaha) reflect the companies’ established positions in the individual and group health markets, their growing presence in life insurance and annuities, and their good asset quality and capitalization. These strengths are tempered, however, by the companies’ concentration in indemnity health insurance— a market threatened by the continuing growth of managed health care services and health care reform, and by growing emphasis on narrow-margin, interest-sensitive asset accumulation products. In addition, Mutual of Omaha’s own expansion into managed care has produced poor operating results, and the company has disposed of certain HMO subsidiaries. Management is striving to reduce its dependence on indemnity health, but it will be challenged to replace its earnings, especially in the annuity market, which is fiercely competitive. A recent cost-cutting program should help overall profitability. The ratings outlook for Mutual of Omaha and United of Omaha are negative, given the decline of the indemnity health sector, their historical core strength. Institutional Investment Products In group retirement plans, United of Omaha has about $2.5 billion of reserves, about 50% GICs, 35% payout annuities, and the rest non-guaranteed and deposit administration. Annual deposits run at about $400 to $600 million, the majority of which are GICs sold through GIC brokers or through direct contact with pension plan sponsors. Group pension products are sold by United of Omaha and amounted to 33% of the company’s $8 billion in policyholder reserves and liabilities. GICs and other deposit funds were about 22% of policyholder reserves and liabilities. Putable funding agreements amounted to $238 million as of September 30, 1999. Most of these contracts have short term put options of 30 days, which exposes the company to some liquidity risk. We expect the aggregate amount of GICs, funding agreements, and other deposit funds to approximate 20% of insurance reserves for United of Omaha. 52 Moody’s Special Comment
  • United of Omaha Life Insurance Company (Mutual of Omaha) 1999 1998 1997 1996 1995 9,284 10,748 687 123 0 809 1,416 608 2,089 88 43 15 12 55 8,894 10,023 620 99 0 719 1,322 576 1,946 88 41 21 9 50 8,359 9,287 588 94 0 682 1,480 584 2,093 80 42 47 52 93 8,038 8,537 535 114 0 649 1,546 542 2,113 72 31 29 23 55 7,387 7,543 513 106 0 619 1,360 522 1,912 77 47 18 14 61 22.0 0.0 42.7 2.0 33.1 0.0 21.2 0.0 43.9 2.1 32.7 0.0 21.1 0.0 45.8 2.2 30.9 0.0 20.2 0.0 43.8 2.4 33.6 0.0 20.3 0.0 40.3 2.5 36.8 0.0 34.5 0.0 32.5 12.2 20.8 0.0 35.0 0.0 37.4 13.2 14.4 0.0 28.8 0.0 50.6 10.6 10.1 0.0 24.7 0.0 58.4 9.1 7.8 0.0 24.6 0.0 48.6 9.6 17.2 0.0 86.5 1.2 7.4 0.9 1.6 0.9 1.5 85.5 1.3 7.1 1.1 1.6 2.5 1.1 86.1 1.3 7.3 1.4 1.6 1.4 0.9 79.7 2.7 11.8 1.8 1.5 1.5 0.9 75.4 3.1 14.6 2.2 1.6 2.5 0.7 4.9 0.0 0.9 0.1 3.1 0.0 1.3 0.1 3.1 0.0 5.1 0.4 3.0 0.1 7.2 0.9 2.6 0.1 7.3 1.1 0.53 7.19 11.1 7.18 7.68 8.40 13.90 1.90 0.51 7.07 11.8 7.15 7.28 8.97 15.50 2.12 1.05 14.03 13.4 7.59 7.72 8.80 12.93 2.15 0.68 8.61 13.3 7.49 7.56 8.19 11.44 2.20 0.87 10.47 13.4 8.08 8.46 7.21 13.56 2.61 36 0 18 23 8 -17 47 0 13 13 12 -26 26 0 15 15 16 -19 8 0 -1 9 18 0 0 0 11 7 24 0 8.7 141.9 307.1 0.0 53.8 — 91.3 0.8 11.8 8.1 135.0 312.4 0.0 37.0 — 95.8 1.5 12.6 8.2 136.8 313.2 0.0 36.9 238.0 102.1 4.9 11.8 8.1 128.4 257.9 0.0 36.2 250.0 162.9 11.4 11.5 8.4 130.6 260.2 0.0 30.2 272.7 193.2 13.8 11.3 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality [1]Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets [2] Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE [2] Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital [1]Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital [3]Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 53
  • Institutional Investment Products Review Nationwide Life Insurance Company Company Overview Moody’s Aa2 insurance financial strength ratings of Nationwide Life Insurance Company (Nationwide Life) and Nationwide Life and Annuity Insurance Company are based on their strong position and diversified distribution channels in the annuity and pension markets, high quality investment portfolio, and national presence in the market for public-employee deferred compensation. Offsetting these strengths is the companies’ increasing focus on lower-margin, asset accumulation products. The rating reflects the substantial linkage remaining between Nationwide Life and its property/casualty parent, Nationwide Mutual Insurance Company (Nationwide). The rating also incorporates the financial leverage of Nationwide Financial Services (A1 senior unsecured debt rating), which places dividend demands on Nationwide Life. Nationwide Life has a strong distribution network and administrative capabilities in the qualified and non-qualified annuity markets. It also benefits from a stable block of traditional insurance and a large volume of separate account products that provide fee-based revenue to offset some of the investment risks of guaranteed products. The rating was placed on review for possible downgrade in March 2000 primarily because of continued weak performance by the parent company. Moody’s expects that profitability in Nationwide’s core business of auto and homeowners insurance is likely to lag its high performance peers over the near to medium term. Institutional Investment Products Nationwide’s funding agreements, including contracts backing European Medium Term Notes (EMTN), and GIC business amounted to approximately $580 million as of December 31, 1999. Nationwide launched funding agreement-backed EMTN issues in October of 1999 for $260 million and January of 2000 for $160 million. Nationwide has not issued any putable funding agreements. In July 1999, Nationwide Financial Services established a $2 billion EMTN program. Notes under the program can be in any currency and maturity, and with fixed or floating interest rates. Issuance under the program is supported by funding agreements issued by Nationwide Life. The program size currently amounts to less than 10% of the general account. ALM for Nationwide’s EMTN program is managed on a program level basis. We note that Nationwide acquires a substantial portion of the assets prior to funding. Liquidity risk is somewhat mitigated as the issues do not contain any put provisions, this is offset to some extent as the asset portfolio has a significant share invested in commercial mortgages. Additionally, since the supporting assets range in maturities from 3 to ten years, Nationwide must actively manage its EMTN portfolio to meet maturity payments. Currency risk associated with foreign-denominated issues is managed by fully swapping into US dollars and interest rate risk is managed by matching asset and liability durations and swapping fixed rate liabilities and assets to floating. Nationwide Life manages its asset/liability risk through a process by which premiums and deposits are used to “purchase” units of internally constructed investment pools, each with specific duration ranges and cash flow characteristics. In addition, interest rate risk is minimized through contractual features, such as market value adjustment clauses and frequent resets on credited rates. The annuity payout obligations are managed with assets in an immunized pool, while the company attempts to duration match the remaining liabilities with a target mismatch of not more than three months. Nationwide’s significant investment in mortgage-backed securities presents challenges to the duration-matching approach because of the modeling difficulties associated with these assets. However, the company does limit its exposure to prepayments by purchasing less volatile types of mortgage backed securities. We believe that the company’s investment portfolio generally has adequate liquidity to protect itself from disintermediation risk. We also note that the company has alternative sources of liquidity through its operating cash flows and access to a $600 million revolving credit facility. 54 Moody’s Special Comment
  • Nationwide Life Insurance Company 1999 1998 1997 1996 1995 21,528 86,556 1,350 193 20 1,563 14,338 1,434 16,610 379 295 -17 -18 276 19,527 68,953 1,315 189 19 1,523 12,565 1,423 14,632 339 169 20 2 171 18,762 55,616 1,135 181 21 1,336 10,180 1,364 12,119 274 132 -1 -20 112 18,723 45,168 1,001 192 21 1,213 8,666 1,343 11,130 227 92 -15 -18 73 17,318 35,657 1,363 164 21 1,548 7,038 1,295 8,452 207 88 8 -2 87 16.2 0.6 18.9 0.8 63.2 0.0 16.5 0.7 19.0 0.8 62.7 0.0 14.8 0.7 20.6 0.5 63.0 0.0 13.6 0.8 22.9 0.2 62.1 0.0 14.1 0.8 19.9 0.2 64.5 0.0 7.3 0.0 27.1 0.1 65.5 0.0 8.6 0.0 26.8 0.6 64.2 0.0 6.1 0.0 47.3 0.6 46.0 0.0 5.2 0.0 45.8 0.1 48.9 0.0 5.2 1.1 45.1 0.4 45.0 0.0 67.7 0.6 25.8 0.7 2.5 1.8 0.8 67.3 1.1 26.4 0.8 2.4 1.3 0.8 65.2 0.9 27.0 1.2 2.3 2.8 0.6 64.2 2.9 28.9 1.2 2.1 0.2 0.5 66.6 2.9 26.5 1.3 2.0 0.2 0.4 2.4 0.0 0.9 0.2 1.9 0.0 1.5 0.4 1.5 0.0 2.4 0.7 1.2 0.0 2.8 0.8 1.6 0.0 3.5 0.9 0.36 17.90 7.2 7.32 7.14 4.04 3.19 0.59 0.27 11.96 7.4 7.83 7.94 4.14 3.71 0.75 0.22 8.76 8.2 7.81 7.88 4.59 4.32 0.87 0.18 5.30 8.6 7.98 7.94 4.82 4.68 1.00 0.27 5.84 8.7 8.27 8.37 4.46 5.09 1.14 -27 0 172 -19 23 145 -58 0 17 -4 90 124 -18 0 0 -3 54 99 -7 0 -35 1 35 99 -5 0 -9 -1 19 86 7.3 122.7 326.3 0.0 32.3 — 358.7 3.3 4.6 7.8 130.3 332.8 0.0 23.2 — 340.4 5.1 8.2 7.1 121.2 328.7 0.0 20.4 253.7 386.5 9.2 9.5 6.5 90.7 306.1 0.0 18.1 280.5 437.7 12.1 39.1 8.9 120.3 374.8 0.0 17.4 221.0 305.5 10.5 31.2 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 55
  • Institutional Investment Products Review New York Life Insurance Company Company Overview Moody’s rates the New York Life Insurance Company and its wholly-owned subsidiary, New York Life Insurance and Annuity Corporation (collectively, New York Life), Aa1 for insurance financial strength. This strong rating is based upon the companies’ established position in the individual life insurance, annuities, and group pensions markets, as well as its large block of stable individual life insurance policies that have significant embedded profits. The rating also reflects New York Life’s good quality investment portfolios, sound capitalization and liquidity, strong asset liability management expertise and established career agency distribution force. These strengths are tempered by the company’s growing reliance on interest-sensitive products and low margin variable annuities, slow growth in its core individual life insurance operation, and an overall modest and slow growing level of earnings. New York Life remains a substantial force within the life insurance industry and ended 1998 with a market share of approximately 5% (excluding large case BOLI/COLI sales). Also in 1998, the company led the U.S. market in individual life insurance sales. The productivity of New York Life’s large career agency sales force (about 6,500 full time agents at year-end 1998) has recently improved, and the company enjoys strong name recognition. In addition, the company has growing variable annuity and mutual fund businesses. Institutional Investment Products The earnings driver in New York Life’s asset management operation is the general account guaranteed investment contract (GIC) product, a business in which NYL is a leading provider. Approximately 90% of the business is medium term, benefit-responsive products sold to 401(k) pension plans; the other 10% is short-term floating rate contracts (funding agreements) distributed primarily to money market funds. NYL has built its position in the marketplace by leveraging off of its high credit rating and providing a good level of service. Due to the maturity of the market, Moody’s believes that the GIC business is unlikely to grow significantly from its present level in the near term, but should continue to remain a strong source of earnings for the company. In recent years, in an attempt to maintain its asset base and grow the profitability of this line of business, New York Life undertook a number of initiatives. They included development of a synthetic GIC product, and the receipt of approval for entry into the muni-GIC market. In addition, the company has grown its funding agreement business, and as of September 30, 1999 had $1.8 billion of funding agreements outstanding. Of the $1.8 billion in total funding agreements, $1.1 billion had embedded put options, including $300 million of paper with a 7-day put and $200 million with a 30-day put. To manage this risk, NYL has an active asset-liability (ALM) management program. NYL’s ALM program restricts the type of assets that can be used to back GICs and funding agreements to only highly liquid assets. This ALM program is integrated into a comprehensive liquidity-monitoring program undertaken by NYL on a company-wide basis. Moody’s believes that NYL’s appropriately manages the risk associated with its institutional investment products and that the company maintains appropriate liquidity. 56 Moody’s Special Comment
  • New York Life Insurance Company 1999 1998 1997 1996 1995 67,505 68,812 6,398 2,102 695 9,195 10,314 4,151 14,867 2,214 487 65 12 499 67,387 68,852 5,576 1,965 655 8,195 9,390 4,337 13,535 2,375 812 121 -59 752 63,621 65,275 4,622 1,588 619 6,829 9,174 4,010 13,591 1,828 320 577 212 532 60,943 62,727 4,008 1,399 579 5,985 10,756 3,855 15,408 1,697 212 339 228 439 56,979 59,415 3,756 1,268 593 5,618 10,181 3,811 14,277 1,748 279 420 252 530 57.9 1.5 7.8 0.9 31.4 0.0 55.9 1.3 7.4 0.8 34.2 0.0 53.8 1.2 6.7 0.9 36.4 0.0 52.0 1.0 5.9 0.7 39.6 0.0 52.4 1.0 5.5 0.7 39.8 0.0 40.7 1.5 10.0 4.9 40.7 0.0 43.3 1.6 10.9 4.4 35.9 0.0 44.0 1.7 12.1 4.6 34.8 0.0 37.7 1.3 9.2 3.3 46.4 0.0 39.4 1.3 9.9 3.5 39.7 0.0 62.8 9.1 10.9 0.9 8.0 6.3 2.0 64.9 9.2 9.9 1.0 7.9 5.9 1.2 65.8 8.0 9.4 1.3 8.3 6.2 1.2 68.1 6.4 9.2 1.2 8.5 4.9 1.6 68.7 6.0 9.6 1.9 9.1 2.9 1.8 4.8 0.0 1.6 0.2 4.3 0.0 2.0 0.2 4.7 0.0 4.7 0.4 4.5 0.0 8.4 0.8 4.2 0.0 11.4 1.2 0.73 5.74 6.9 6.75 8.01 2.13 9.78 1.47 1.12 10.01 7.0 7.29 8.74 2.50 10.66 1.49 0.83 8.30 6.6 6.97 8.32 2.91 12.72 1.82 0.72 7.57 6.6 7.02 7.50 2.40 11.42 2.01 0.92 9.80 7.9 7.45 8.41 2.74 11.01 1.95 383 -15 17 6 83 1 650 -10 31 18 97 1 177 -11 23 11 121 2 118 -1 21 -4 71 0 171 -4 20 -5 82 0 13.6 196.1 318.3 4.9 33.8 — 82.9 1.4 22.9 12.2 178.3 294.4 5.5 33.7 — 85.9 1.7 26.2 10.7 159.2 276.8 6.6 41.8 165.6 95.2 3.9 30.4 9.8 151.1 278.4 7.5 44.4 214.0 102.5 7.8 33.8 9.9 144.7 269.2 8.0 40.8 233.2 112.2 11.2 36.4 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 57
  • Institutional Investment Products Review Ohio National Life Insurance Company Company Overview Moody’s A1 insurance financial strength rating of Ohio National Life Insurance Company (ONLIC) is based on the company’s regional strength in the individual life markets, tight expense controls, stable block of individual life insurance, and good asset/liability management. The company has been able to grow its earnings and capital base while maintaining its low expense structure. These factors are offset by the high degree of competition in the individual life insurance marketplace and by the significant portion of the company’s liabilities concentrated in interest-sensitive products. While individual life sales have grown since 1989, they remain modest relative to total revenues. ONLIC continues to have a large proportion of reserves represented by guaranteed investment contracts (GICs), lottery annuities, and fixed annuities, markets in which ONLIC will face increasing competition with larger life insurers and other financial services companies. Ohio National is well positioned in its current rating category. The ratings outlook is stable. Institutional Investment Products As of year-end 1998, Ohio National maintained GIC reserves of roughly $1 billion. The company has not issued short-term putable funding agreements, but does maintain some one-year put business. In addition to the GIC reserves, ONLIC has also distributed lottery annuities, which are non-surrenderable. In Moody’s opinion, while collectively the GIC and lottery annuity businesses are profitable and account for a significant portion of the company’s total earnings, they are largely commodity-like in nature and, in the aggregate, ONLIC does not have a strong competitive position. We do not expect ONLIC to grow the GIC/FA business much beyond its current size. ONLIC’s asset/liability management appears to be well conceived. However, the company has considerable asset/liability risk because of its concentration in interest-sensitive products such as GICs, other fixed rate group pension products, and individual annuities. ON Financial manages this risk by employing simulation testing and “stress” tests, along with the required asset adequacy analysis. Asset/liability risk is also managed by product design. For example, GICs, although they may be discontinued, provide disintermediation protection through an onerous market value adjustment. 58 Moody’s Special Comment
  • Ohio National Life Insurance Company 1999 1998 1997 1996 1995 4,441 6,018 431 78 15 524 985 339 1,342 108 53 26 23 76 4,325 5,376 409 96 14 519 795 331 1,145 106 56 3 -5 51 4,216 5,057 363 86 13 462 765 336 1,112 108 56 2 -2 54 4,124 4,733 314 70 13 396 806 318 1,130 91 42 6 2 45 3,824 4,244 243 61 12 317 751 301 1,057 72 28 -1 -3 24 18.5 1.2 27.9 1.0 51.3 0.0 18.1 1.2 28.9 1.0 50.8 0.0 17.6 1.2 29.4 0.9 50.9 0.0 17.1 1.2 29.7 0.9 51.0 0.0 17.5 1.3 30.1 0.8 50.2 0.0 10.2 1.0 39.1 3.1 45.8 0.0 12.2 1.2 27.8 3.8 54.0 0.0 11.7 1.2 26.7 3.4 56.0 0.0 10.5 1.1 22.8 3.1 61.4 0.0 10.8 1.2 23.9 3.0 60.1 0.0 66.1 4.6 23.5 0.2 2.7 1.6 1.3 64.5 5.1 24.2 0.2 2.8 2.3 1.0 65.7 4.6 24.8 0.4 2.8 0.6 1.1 67.5 3.9 22.8 1.0 2.9 0.8 1.1 69.4 4.0 19.9 1.1 3.1 1.4 1.1 5.3 0.1 1.0 0.2 4.5 0.0 1.4 0.3 4.5 0.0 1.9 0.5 3.8 0.0 3.0 0.7 4.1 0.0 4.3 0.9 1.33 14.54 2.7 8.13 8.37 2.21 7.52 1.30 0.97 10.37 4.7 8.16 8.35 2.83 8.13 1.24 1.10 12.52 6.8 8.48 8.89 3.08 7.06 1.10 0.99 12.49 7.7 8.42 8.68 2.84 6.19 1.11 0.61 8.17 6.9 8.70 9.08 3.27 5.96 1.12 9 1 26 0 17 0 11 3 30 -1 15 -4 12 4 23 0 16 0 10 1 16 1 14 0 8 0 11 0 9 0 11.8 156.3 355.1 16.2 44.1 — 196.3 3.2 23.8 12.0 159.5 350.3 16.4 36.4 — 198.7 3.1 23.4 11.0 149.6 343.8 18.4 39.8 61.6 225.4 4.3 22.6 9.6 138.1 318.4 21.5 38.8 90.7 241.8 7.2 22.8 8.3 121.6 283.9 15.8 48.6 112.5 247.8 10.4 24.9 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 59
  • Institutional Investment Products Review Pacific Life Insurance Company Company Overview Moody’s Aa3 insurance financial strength rating and P-1 short-term insurance financial strength rating of Pacific Life Insurance Company (Pacific Life) is based on Pacific Life’s established market position in variable and universal life, annuities, and group pensions and institutional products, as well as its strong asset management capabilities, prudent asset/liability management and good capitalization. The rating of Pacific Life has a positive outlook. These strengths are somewhat offset by potential liquidity and other business risks to Pacific Life arising from its issuance of guaranteed interest contracts (GICs) and funding agreements, a separate account business that earns a lower return on assets, and the susceptibility of its rapidly expanding variable annuity business to equity market fluctuations. Pacific has $350 million in committed bank facilities and a $450 million commercial paper program available should the company require liquidity in addition to that provided from its operations. Institutional Investment Products Pacific Life’s Institutional Products Group (IPG) offers traditional, separate account and synthetic GICs; funding agreements; and guaranteed separate account products. These products are marketed to corporations and organizations in the U.S. and abroad. In recent years, Pacific Life has been diverting its attention from the slow growth traditional GIC market to focus on the new and faster growing alternative markets such as funding agreements and FANIP programs. More than three-quarters of Pacific Life’s 1999 IPG sales were made to non- pension fund markets. FANIP programs are issued for fixed rates and for longer time periods than are available in the domestic GIC market. Pacific Life is also exposed to a limited amount of liquidity risk by issuing a small number of short-term funding agreements containing short-term put options, but Moody’s believes that Pacific Life appropriately manages this risk through its careful asset/liability management. As of December 31, 1998 year-end assets under management for IPG were $16.8 billion. IPG had 1998 premiums and deposits of $2.7 billion, up 50% from 1997. Pacific Life’s business strategy is to compete on the basis of investment performance and innovative product design targeted at meeting the needs of large institutional investors such as public and private pension funds, short-term and other institutional investors. The products are managed in an individually managed, dedicated investment segment that also includes payout annuities. This helps limit the company’s liquidity risk exposure and permits Pacific Life to better balance the overall asset/liability risk assumed. 60 Moody’s Special Comment
  • Pacific Life Insurance Company 1999 1998 1997 1996 1995 24,621 48,234 1,219 232 13 1,464 8,641 1,737 10,627 277 174 -27 -6 168 21,741 37,585 1,157 299 12 1,468 6,133 1,565 7,841 339 241 -6 -53 188 20,231 31,836 945 252 11 1,209 4,579 1,272 6,053 193 112 27 10 122 13,238 21,205 815 209 12 1,037 3,810 997 4,961 208 98 32 15 113 12,068 17,589 723 191 11 926 2,710 935 3,871 155 79 29 6 85 48.3 0.0 14.0 0.4 37.1 0.0 53.5 0.0 7.3 0.6 38.6 0.0 55.9 0.0 10.3 0.4 33.4 0.0 53.2 0.0 3.0 0.8 43.0 0.0 53.3 0.0 3.1 0.8 42.7 0.0 16.2 0.0 53.2 0.0 29.4 0.0 20.3 0.0 36.1 0.0 43.6 0.0 21.3 0.0 41.7 0.0 37.1 0.0 22.7 0.0 32.8 0.1 44.4 0.0 24.8 0.0 22.3 0.1 52.9 0.0 62.0 2.6 12.3 1.0 17.7 1.3 3.3 60.1 2.8 13.2 1.0 18.8 0.9 3.1 65.2 2.1 9.7 1.2 19.5 0.5 1.8 58.5 3.1 11.4 2.1 23.3 0.3 1.2 56.6 3.3 11.7 1.6 22.8 2.2 1.8 4.9 0.0 0.4 0.1 5.1 0.1 1.7 0.2 4.7 0.0 3.7 0.4 4.6 0.0 6.9 0.8 3.6 0.0 6.5 0.8 0.39 11.49 6.0 7.92 7.44 5.40 4.87 0.98 0.54 14.02 3.9 7.86 8.12 5.06 5.29 0.93 0.46 10.83 3.6 7.94 8.45 3.74 5.93 1.02 0.58 11.53 3.3 8.25 8.46 3.88 5.38 1.06 0.53 9.76 3.3 8.37 8.72 4.82 6.66 1.12 62 0 -48 1 48 119 54 0 6 0 92 89 27 0 -25 0 61 49 21 0 -24 0 50 52 25 0 -15 0 48 21 5.9 109.9 238.1 10.2 80.2 — 217.6 1.6 38.0 6.8 139.1 237.0 10.2 73.4 — 206.3 4.6 12.2 6.0 133.7 237.6 12.4 77.6 151.1 178.9 6.0 14.3 7.8 161.5 283.1 14.4 57.7 80.2 169.7 10.4 18.3 7.7 160.5 290.9 16.2 45.9 83.4 170.9 10.2 19.7 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 61
  • Institutional Investment Products Review Principal Life Insurance Company Company Overview Moody’s Aa2 insurance financial strength rating of Principal Life Insurance Company (Principal Life) is primarily based on its strong, broad-based position in the markets for group pensions, group life and health insurance, and individual life insurance. It also reflects the company’s extensive, largely captive distribution channels, its efficient, technology-based operations, and its disciplined financial and investment management. Principal Life’s potential access to the equity market through its mutual holding company structure is an additional corporate strength. These strengths are tempered by the mounting competitive pressures and narrowing margins facing Principal Life’s key group pension segment; by its increasing emphasis on, and already sizable exposure to commercial mortgages, real estate, and mortgage banking activities, which have higher risk and volatility than the company’s core life insurance business; and by its exposure to the troubled health care industry. In addition, the Principal Group’s acquisition of the asset management operations of Bankers Trust Australia Group and its continuing international expansion present it with significant execution, integration and financial risks, while significantly increasing its consolidated financial leverage. Institutional Investment Products Principal Life is a major U.S. pension provider, and its pension segment is its single largest business, accounting for over 70% of its 1998 statutory premiums and 35% of its statutory earnings. Within this segment, the company offers full-service qualified pension plans primarily to small and medium-sized employers for their 401(a-k), 403(b), and similar full-service plans, as well as single-premium investmentonly GICs, funding agreements, and other related products. Pension assets are primarily managed by Principal Life itself, which offers plan participants a wide selection of proprietary equity and fixed-income investment options. In line with market trends, a growing proportion of its pension business has moved to the separate account. In terms of general account business, at September 30, 1999, Principal Life had $17.6 of GICs, of which $5.7 billion were full-service plans, and $11.9 billion were investment-only GIC liabilities. We are somewhat concerned about the preponderance of investment-only GICs, because they tend to be less persistent than full-service plans. Of the investment-only portfolio, approximately $2 billion were short-term GICs and funding agreements, most of which have 30-, 90-, and 360-day put options. These contracts, which are primarily sold to large institutional investors and money market funds, are highly credit- and market-sensitive, and could constrain company liquidity if the puts are exercised en masse. However, some contracts include supplemental surrender restrictions and market-value adjustments. We note Principal Life’s entry into the Euro-GIC market in 1999. At December 31, 1999, the company had sold over $1.2 billion of medium-term notes to European institutional investors, supported by its general account funding agreements. These funding agreements are not surrenderable, and have long maturities that match those of the debt instruments they support. Similar to funding agreements, however, EuroGICs are a credit-sensitive spread business, and they expose the company to rollover risk at the time the notes mature. We believe that Principal Life’s strong investment discipline and asset-liability management mitigate these risks to a large extent. 62 Moody’s Special Comment
  • Principal Life Insurance Company 1999 1998 1997 1996 1995 42,415 76,018 3,152 980 150 4,281 15,781 2,981 19,247 937 539 160 174 714 41,039 70,096 3,032 991 159 4,182 14,276 2,749 17,443 697 350 220 161 511 40,330 63,957 2,811 1,125 161 4,097 12,851 2,799 15,827 854 349 119 83 432 39,619 56,837 2,504 1,048 158 3,709 12,311 2,696 15,052 778 259 194 156 415 38,311 51,268 2,208 1,077 160 3,445 11,940 2,651 14,616 710 261 79 2 263 17.0 0.6 7.3 0.9 72.0 0.0 16.9 0.5 8.0 2.2 70.4 0.0 16.2 0.5 8.5 2.4 70.4 0.0 15.5 0.5 8.5 2.5 70.8 0.0 15.1 0.4 8.7 2.6 70.7 0.0 6.0 0.4 3.8 1.8 75.0 0.0 6.8 0.4 4.8 2.5 72.0 0.0 6.9 0.4 5.4 3.0 66.9 0.0 7.0 0.4 7.7 3.1 59.4 0.0 7.3 0.4 7.5 3.2 55.5 0.0 57.9 3.7 27.3 1.9 1.9 4.3 3.1 56.6 4.3 28.7 3.4 1.9 3.6 1.4 54.9 4.7 30.3 4.0 1.9 3.0 1.2 58.1 4.0 28.7 4.1 1.9 2.1 1.1 58.4 5.3 26.9 4.1 1.9 2.4 1.0 5.6 0.2 4.0 1.1 5.1 0.2 7.2 2.2 4.8 0.2 8.7 2.8 4.7 0.1 10.1 3.2 5.7 0.1 11.7 3.5 0.98 16.87 6.5 7.51 7.63 1.65 6.69 1.45 0.76 12.35 6.4 7.12 6.84 1.67 7.57 1.61 0.72 11.07 6.2 7.38 7.80 1.91 7.46 1.59 0.77 11.60 5.3 7.27 7.43 2.16 7.48 1.70 0.55 8.25 4.9 7.61 8.61 2.33 7.54 1.89 78 -1 38 42 231 211 49 -4 36 26 122 228 34 -10 32 32 146 90 42 -6 29 25 116 11 36 -12 26 21 101 82 10.1 132.2 256.1 7.0 54.0 — 283.2 12.8 84.4 10.2 134.1 245.4 7.1 48.8 — 308.3 23.2 76.0 10.2 131.5 245.5 7.3 46.5 100.3 329.5 28.9 73.5 9.4 122.9 237.0 8.0 49.5 116.3 342.4 34.2 72.6 9.0 114.1 222.1 8.6 61.2 104.4 335.1 38.8 78.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 63
  • Institutional Investment Products Review Protective Life Insurance Company Company Overview Protective Life Insurance Company’s A1 insurance financial strength rating is based on its strong profitability, diverse sources of revenues and earnings, and low-cost operations, as well as its good quality investment portfolio. These strengths are somewhat offset by its balance sheet concentration in commodity-like, interest-sensitive investment and annuity products, asset/liability management risks, below average statutory capitalization, and moderate financial leverage at its holding company, Protective Life Corporation. Protective’s rapid growth in premiums and earnings has been driven by the company’s presence in the GIC market, and by its opportunistic and successful acquisition strategy. Protective also has profitable operations in individual life, individual annuities, credit insurance, and group dental insurance, although some of these segments generate rather modest earnings. Protective has a good quality investment portfolio, consisting predominantly of bonds and mortgage loans. The company’s mortgages are predominantly high quality, credit-tenant loans with low levels of problems and net historical loss experience. The high proportion of mortgages and mortgage-backed securities supporting guaranteed interest products present some risk to the company’s asset/liability management process. In addition, Protective Life Corporation’s financial leverage has increased in recent years as the company has actively grown its GIC, individual life, and acquisition businesses. Protective Life Corporation’s financial leverage remains moderately high. Institutional Investment Products The company’s Stable Value Products division has grown modestly in recent years, and had reserves of $2.85 billion as of December 31, 1999, consisting of $2.7 billion in GICs and about $150 million of lottery annuities. GIC sales totaled $970 million in 1999, its highest level ever. The company continues to emphasize guaranteed investment-only GICs, marketed to 401(k) defined contribution plans (typically two to five year contracts) and non-surrenderable funding agreements. Protective diversified its customer base by offering guaranteed funding agreements (GFAs) to mutual funds, banks, asset management companies, and state and local governments. About 40% of the GIC division’s 1999 sales were of GFAs. Most of these GFAs had a long-term duration, although short duration contracts are sold on an opportunistic basis. In addition, in 1997 Protective sold $300 million of medium-term note funding agreements through an off-shore trust to European debt investors. With less than 8% of GIC and GFA liabilities with termination provisions of less than one year, Protective’s funding agreements are manageable from a liquidity perspective; roughly 4% have termination provisions of 30 days or less. The Stable Value Products division has grown faster than any of the company’s other divisions, except for the Acquisitions division. The company limits its GIC and annuity liabilities to not exceed 70% of its consolidated statutory balance sheet (including separate account liabilities). However, as the balance sheet has grown through acquisitions, these liabilities have dropped to less than 60%. The percentage is likely to stay in this range in the near term, partly because of the high capital requirements of the GIC business, and partly because buyer preferences in the qualified GIC market have been changing from traditional contracts to synthetic GICs. In the future, we expect GIC and GFA account balances to increase only modestly as maturing liabilities offset new GIC deposits. 64 Moody’s Special Comment
  • Protective Life Insurance Company 1998 1997 1996 1995 1994 5,671 7,753 538 50 2 590 758 392 1,298 164 139 -3 -9 130 5,697 7,542 577 53 2 632 918 431 1,458 194 154 -14 -7 147 5,167 6,581 454 66 2 522 886 385 1,353 123 98 4 0 98 4,671 5,724 322 101 1 424 800 363 1,249 158 113 3 -8 106 4,615 5,409 305 21 1 327 936 323 1,284 69 47 2 8 55 27.4 1.0 21.4 0.8 48.4 0.8 26.7 1.0 22.7 0.8 47.1 1.6 27.5 1.0 21.3 0.9 47.5 1.4 25.0 1.0 19.2 1.0 52.5 0.9 23.6 0.9 23.5 1.0 48.5 2.1 17.2 2.4 16.0 1.3 54.4 0.2 17.7 2.4 21.9 1.6 47.9 2.8 17.6 2.4 22.7 1.7 49.2 -0.1 16.2 2.9 22.4 1.7 51.9 -0.3 12.5 2.5 21.2 1.6 53.7 4.6 65.3 8.1 21.5 0.6 2.4 1.1 0.9 72.0 7.0 16.5 0.6 2.5 0.9 0.6 64.6 6.0 22.2 0.7 2.8 3.0 0.7 57.2 2.9 29.7 0.9 2.5 5.7 1.1 59.1 3.1 26.5 0.9 2.6 6.5 1.2 2.7 0.1 0.8 0.2 1.8 0.4 1.8 0.3 2.5 0.3 2.1 0.5 6.1 0.0 2.0 0.6 5.8 0.4 2.1 0.6 1.70 21.27 8.3 7.40 5.42 27.14 24.49 2.43 2.09 25.52 9.3 8.50 6.48 19.18 17.57 2.28 1.59 20.67 9.0 8.33 7.87 17.58 16.41 2.36 1.90 28.14 9.8 8.28 8.21 20.74 15.79 2.27 1.10 17.36 9.2 7.88 8.06 15.08 11.77 2.22 88 1 -8 3 29 27 86 3 2 3 42 14 50 -4 -5 0 30 24 39 3 16 -1 35 20 21 2 2 1 19 -1 9.1 104.5 314.4 3.1 25.1 — 202.2 2.5 74.1 9.6 116.4 374.6 3.2 15.5 289.7 147.3 5.7 59.6 8.7 120.6 306.8 4.7 23.6 279.2 219.4 6.9 52.8 7.9 105.2 260.2 8.2 65.6 341.6 326.7 6.6 25.9 6.2 85.0 222.1 12.1 79.1 495.9 377.2 13.0 32.4 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 65
  • Institutional Investment Products Review Prudential Insurance Company of America Company Overview Moody’s A1 insurance financial strength ratings of The Prudential Insurance Company of America (Prudential) and Pruco Life Insurance Company (Pruco Life) are based primarily on Prudential’s improving strategic profile, its good earnings capacity, its opportunities for growth in the international arena, its improved capitalization relative to balance sheet and operational risks, and its well-known brand name. These strengths are offset primarily by the challenges of restoring market share in the company’s individual life insurance unit and building scale in its property/casualty, asset management and retail securities operations, as well as its relative high expense structure, its greater use of asset-based financing at Prudential Securities, and the increasingly heightened competition among financial services companies. The rating outlook of Prudential is stable. In August 1999, Prudential closed the sale of its health care business to Aetna Inc. Exiting the health care market allows Prudential to concentrate additional capital and resources on growing its core operations. In January 1999, the Supreme Court left intact the multi-billion dollar class action settlement between Prudential and policyholders that had sued the company for allegedly fraudulent sales practices. This decision clears the way for Prudential to complete its remediation plan to compensate policyholders. In February 1998, Prudential’s board of directors authorized management to take preliminary steps necessary to become a publicly traded company. Full demutualization could provide the company with a number of tangible and intangible benefits, including greater access to capital markets, an acquisition currency in the form of common stock and more focused operations. Institutional Investment Products We understand that Prudential intends to maintain a presence in the institutional marketplace. However, we believe that assets under management in this arena will more likely shrink over the near to medium term. This will result from the reduction of the company’s GIC business and the limited new creation of defined benefit pension plans, though existing plans continue to grow because of the strength of the strong equity investment markets. Prudential’s sales of guaranteed products have leveled off and, as a result, the associated assets under management for these products have declined steadily over the last several years. We anticipate that the assets backing these products will continue to decrease over time as the company shifts its emphasis to asset management for retail customers and de-emphasizes spread-based products for institutional investors. The company has moderate exposure to funding agreements with about $885 million at September 30, 1999. However, only $305 million have short-term (7-day) put provisions. In 1997, Prudential began augmenting its GIC operations by borrowing funds and using its GIC asset/liability management skills to earn additional spread income on the borrowed funds as if they were customer deposits. Asset/liability analysis is done on a segment basis, with mismatch risks managed to tolerant levels and hedged with derivative instruments. The company’s GIC and pension close-out blocks are duration matched, but on a cash flow basis inflows fell short of liability maturities in 1998. Over the medium term, however, we expect cash inflows to exceed projected liability flows. Prudential also uses its commercial paper program for cash shortfalls to supplement asset sales to fund liability outflows where it may choose to for asset management reasons. At year end 1998, Prudential borrowed $5 billion for these purposes. We believe Prudential has adequate sources of liquidity to meet the maturities of its shrinking group pension business in an orderly liquidation. It continues to benefit from a large pool of liquid assets invested in high-quality public bonds, additional borrowing capacity in the form of unsecured lines of credit and from the capacity at Prudential Securities Lending Group, Prudential Funding Corporation and other affiliates. 66 Moody’s Special Comment
  • Prudential Insurance Company of America 1999 1998 1997 1996 1995 124,443 191,536 9,249 3,334 1,239 13,822 14,600 8,246 24,672 3,715 379 180 -46 333 125,620 195,863 8,536 3,387 1,219 13,142 16,747 8,290 26,393 3,348 586 1,299 661 1,247 128,035 193,987 9,242 3,046 1,190 13,478 19,567 8,468 28,846 3,264 829 1,063 642 1,471 120,823 178,620 9,375 2,682 887 12,944 20,674 8,551 29,922 3,565 549 784 457 1,006 125,831 179,734 8,668 2,705 885 12,257 21,088 8,554 30,088 3,578 661 583 -183 478 58.3 0.1 7.9 4.6 27.3 0.1 56.8 0.2 8.2 4.4 28.4 0.1 53.7 0.1 8.7 3.3 30.9 0.2 50.3 0.1 9.5 3.0 33.8 0.2 47.6 0.2 11.0 2.8 35.1 0.2 41.0 -0.2 3.5 19.7 29.5 0.0 32.8 0.3 3.3 14.4 33.9 -0.1 29.4 0.3 3.7 9.1 25.4 0.5 30.9 0.4 6.9 9.0 21.0 0.3 30.9 0.5 8.7 9.2 21.5 0.3 62.3 7.3 13.0 0.6 5.5 8.3 2.9 67.1 6.7 13.1 0.7 5.5 3.3 3.6 65.0 6.4 13.2 1.1 4.9 7.0 2.3 64.6 6.3 14.7 1.8 5.2 5.2 2.2 64.0 5.4 16.7 2.1 5.1 4.0 2.7 8.0 0.1 3.1 0.4 8.9 0.0 3.7 0.5 7.2 0.0 4.9 0.7 5.9 0.1 8.5 1.3 4.6 0.1 8.5 1.5 0.17 2.47 7.4 7.09 7.60 2.42 23.68 1.78 0.64 9.37 8.0 7.02 7.39 2.38 20.34 1.75 0.79 11.13 9.0 7.30 7.86 2.18 21.33 2.24 0.56 7.99 7.5 7.42 8.09 2.31 18.25 2.11 0.28 4.24 8.2 7.37 7.85 2.54 18.66 2.27 657 -21 39 170 261 13 795 -32 54 0 240 52 752 -6 197 110 338 45 213 -18 106 149 585 -26 368 -2 159 148 217 -18 11.1 133.9 269.0 7.1 69.9 — 118.7 4.1 53.8 10.5 128.4 253.2 7.5 82.0 — 127.2 4.7 51.9 10.5 133.2 272.0 7.3 65.7 61.6 130.5 6.2 42.9 10.7 131.0 256.6 7.6 53.2 50.7 147.8 12.0 41.4 9.7 125.0 235.2 8.0 45.2 37.4 185.7 15.2 42.8 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 67
  • Institutional Investment Products Review Security Benefit Life Insurance Company Company Overview Moody’s A2 insurance financial strength rating on Security Benefit Life Insurance Company (Security Benefit) is based on its established position in the 403(b) Tax Sheltered Annuity retirement marketplace, solid capitalization, favorable cost structure and good administrative capabilities. The company also enjoys a good quality investment portfolio, anchored by a high quality bond portfolio, and has a growing money management operation. These strengths are tempered by the company’s historical decline in annuity sales momentum and a high percentage of general account liabilities outside of surrender period. In addition, Security Benefit faces heightened market competition for investment management assets, and has minimal overall product diversity, with 99% of general account reserves attributable to fixed annuities, fixed options within variable annuities, and funding agreements. Security Benefit’s increases in assets under management and earnings have been driven by good growth in the non-qualified market, and its success in the 403(b) marketplace, primarily with K-12 grade educators. The company also has a growing mutual fund operation, and benefits from managing over 80% of the assets it accumulates in its annuity and mutual fund businesses. Approximately two-thirds of Security Benefits’ annuity revenue is fee-based, with the balance coming from interest rate spreads. Other businesses include providing an insurance wrapper for a large mutual fund company’s variable annuity product. Institutional Investment Products In mid-year 1998, Security Benefit announced that it would opportunistically enter the funding agreement market, writing up to $500 million over the next 12 months. The company followed through, and as of June 30,1999 had issued $475 million of putable funding agreements of varying terms. By July 31, 1999, this number had increased to $525 million, or 102% of the company’s 1999 mid-year capital and surplus, of which $275 million was putable upon 7- and 30-day notice periods. During June, the company communicated with its Board of Directors its strategy to evolve away from short putable clients, while working to complete a $294 million 10-year, non-putable funding agreement that closed on July 29, 1999. Proceeds were to be used for orderly liquidation of short putable contracts, depending on renegotiated terms with clients. With the funding agreement market disruption of August 1999, Security Benefit experienced $200 million of puts of various durations, but had ample liquidity on hand to handle the withdrawals. Security Benefit employs a comprehensive liquidity management process with a set policy and guidelines. Additionally, they have incorporated backstop liquidity resources with terms advantageous to negotiated commercial alternatives. In view of present market conditions, the company has scaled back any efforts for funding agreements with puts of under 90-days. Moody’s views this most recent action positively, as we continue to see significant shock liquidity risk inherent in short-dated puts, especially those with 7- and 30-day put features. 68 Moody’s Special Comment
  • Security Benefit Life Insurance Company 1999 1998 1997 1996 1995 3,110 8,142 470 82 0 553 1,404 221 1,699 71 53 4 2 55 2,779 7,177 427 54 0 482 995 194 1,254 66 51 3 -1 50 2,458 6,161 382 44 0 426 728 200 980 58 42 -1 1 43 2,726 5,522 287 42 1 330 734 202 978 51 38 3 0 38 2,631 4,697 208 33 1 242 494 186 709 40 30 7 -1 29 0.1 0.0 89.6 0.8 9.5 0.0 0.1 0.0 87.6 0.9 11.3 0.0 0.2 0.0 85.0 1.0 13.7 0.0 12.8 0.0 73.2 1.1 12.8 0.0 12.7 0.0 72.8 1.1 13.4 0.0 0.1 0.0 87.4 1.2 11.2 0.0 0.2 0.0 93.9 1.6 4.1 0.0 3.0 0.0 89.3 2.1 5.3 0.0 4.4 0.0 88.2 2.3 4.8 0.0 -2.8 0.0 90.9 3.4 8.0 0.0 83.0 10.7 0.6 0.0 3.0 1.0 1.8 85.8 6.1 1.9 0.6 3.2 0.8 1.6 85.5 5.4 2.5 0.8 3.6 0.7 1.5 87.7 3.9 2.4 0.7 4.0 0.0 1.4 88.8 1.6 2.7 0.8 3.9 0.5 1.6 7.6 0.1 0.0 0.0 8.3 0.0 6.1 0.1 7.8 0.0 6.5 0.2 7.4 0.0 7.1 0.2 6.7 0.0 7.6 0.2 0.72 10.66 6.5 7.86 8.65 3.54 3.77 0.69 0.76 11.11 8.2 7.79 7.97 4.46 4.49 0.67 0.74 11.36 7.1 8.14 8.33 5.88 5.89 0.73 0.74 13.25 5.7 7.93 8.08 5.51 5.09 0.73 0.66 13.62 7.0 7.51 7.63 7.13 6.97 0.79 0 0 50 1 3 0 -1 0 48 1 3 0 -1 0 39 1 4 0 2 0 31 1 5 0 5 0 20 1 4 0 17.8 162.2 365.0 9.0 41.7 — 3.4 0.6 37.7 17.3 193.1 414.1 10.4 47.2 — 14.4 0.8 26.7 17.3 200.6 422.8 11.8 44.0 131.4 18.4 0.9 25.6 12.1 162.9 313.3 15.1 60.1 223.2 25.1 1.4 28.9 9.2 152.6 302.6 0.0 71.7 421.9 38.1 2.3 19.2 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 69
  • Institutional Investment Products Review SunAmerica Life Insurance Company Company Overview Moody’s Aaa insurance financial strength ratings and P-1 short-term insurance financial strength ratings of SunAmerica Life Insurance Company (SunAmerica Life) and its wholly owned subsidiaries, Anchor National Life Insurance Company (Anchor National) and First SunAmerica Life Insurance Company (First SunAmerica), have a stable outlook and are based on the explicit support provided by American International Group, Inc. (AIG), the ultimate parent company. The ratings also incorporate the companies’ strong positions in the markets for individual annuities and guaranteed investment contracts (GICs), their expanding, partly-captive distribution network, advanced processing technology, solid profitability, and increasing brand awareness. These strengths are tempered by the companies’ narrow focus on low margin, interest-sensitive accumulation products; by their dependence on GICs for a significant percentage of their profits; by their high tolerance for risk assets (including below-investment-grade and unrated securities, and partnership assets). Institutional Investment Products SunAmerica’s stable value business, including European medium term notes, amounted to $12.4 billion as of September 30, 1999. GICs continue to play a key role in SunAmerica’s product mix. These generally longer-duration products are used by SunAmerica to enhance the relatively narrow returns on fixed and variable annuities because they can be invested in longer-term, higher-yielding assets. GICs are sold primarily by SunAmerica Life, which is one of the largest GIC providers in the U.S. GICs have also been sold by SunAmerica National, a special-purpose GIC subsidiary, which was assumed by SunAmerica Life in an assumptive reinsurance transaction effective October 31, 1999, and also by Anchor National. To further broaden product distribution, a credit-enhanced separate account facility was introduced in 1995. The majority of the company’s GICs are fixed rate and non-putable with five to twelve year maturities, almost half of which were sold to off-shore investment vehicles to support debt securities issued to European investors. We expect significant growth of this business as evidenced by SunAmerica’s $7.5 billion European medium-term note (EMTN) program. The company is also diversifying its funding sources to include non-European markets. About 30% of the company’s GICs are floating rate instruments that are sold to money market managers and banks. The level of GICs with put options amounted to $1 billion as of September 30, 1999. Company policy dictates that putable GICs be limited to less than 10% of total GICs. Although SunAmerica’s GIC reserves have grown significantly in the past few years, the group’s GIC exposure continues to be well managed. The SunAmerica companies use dynamic cash-flow sensitivity testing in their asset/liability management. Swaps are primarily used to hedge foreign exchange risk associated with non-dollar denominated GIC liabilities. The company’s policy requires perfect hedging of any foreign currency risk. In addition, swaps may be used to hedge interest rate risk associated with floating-rate assets and liabilities, as well as other derivative-based immunization procedures, and their usage seems appropriate. With an ALM approach somewhat unique for the industry, particularly for GIC providers, the company does not segment assets and liabilities but instead uses a total portfolio approach. Approximately 86% of SunAmerica’s $21 billion fixed annuity and GIC reserves are protected by surrender charges or other withdrawal restrictions. However, liquidity risk is heightened by early surrender clauses in a segment of the GIC portfolio (including 90-, and 180-day put options and ratings-linked withdrawal options). SunAmerica’s capable asset/liability management — complemented by a sizable portfolio of publicly traded investment-grade bonds and operating cashflow — offset some of these risks. SunAmerica also has access to the commercial paper market through AIG’s program. We expect that additional liquidity would be available from AIG if necessary through the terms of its explicit support agreement with SunAmerica Life, Anchor National, and First SunAmerica. 70 Moody’s Special Comment
  • SunAmerica Life Insurance Company 1999 1998 1997 1996 1995 20,765 22,801 1,803 199 0 2,003 5,990 1,477 7,470 479 426 -24 -8 417 15,502 16,923 1,265 165 0 1,430 3,282 1,091 4,381 182 148 -109 -122 25 15,633 16,211 1,431 149 0 1,580 2,131 1,404 3,545 389 376 57 23 399 11,755 12,037 1,187 158 0 1,345 1,429 964 2,385 263 212 -30 -14 198 7,473 7,524 944 164 0 1,108 1,826 607 2,437 154 124 -35 -37 87 1.3 0.0 34.2 0.0 64.5 0.0 1.8 0.0 50.2 0.0 47.9 0.0 1.8 0.0 58.1 0.0 40.1 0.0 2.6 0.0 53.5 0.0 43.9 0.0 4.3 0.0 30.7 0.0 65.0 0.0 0.0 0.0 4.2 0.0 95.8 0.0 -0.1 0.0 5.3 0.0 94.8 0.0 -0.1 0.0 10.8 0.0 89.3 0.0 -0.2 0.0 15.5 0.0 84.7 0.0 -0.1 0.0 36.4 0.0 63.7 0.0 72.4 4.3 15.8 0.2 0.3 5.4 1.6 73.2 4.4 17.3 0.1 0.3 1.7 2.9 72.4 6.0 16.6 0.1 0.3 3.5 1.1 74.2 5.0 13.4 0.3 0.3 3.4 3.4 63.9 5.5 19.7 0.6 0.5 3.6 6.4 6.6 0.0 2.1 0.3 7.8 0.1 2.2 0.4 6.8 0.0 2.1 0.4 7.2 0.2 3.9 0.5 6.9 0.3 4.7 0.9 2.10 24.31 8.9 8.55 8.51 0.14 1.02 0.31 0.15 1.68 8.2 7.32 6.73 0.24 1.88 0.37 2.82 27.27 22.6 10.83 9.74 6.16 4.02 0.61 2.03 16.18 7.9 10.58 11.91 2.14 4.69 0.69 1.24 9.07 12.8 9.13 9.53 1.44 2.88 0.75 5 0 165 0 256 0 3 0 57 0 87 0 9 0 143 0 224 0 4 0 46 0 110 52 5 0 9 0 110 0 9.6 120.3 273.9 0.0 67.6 — 163.7 4.0 49.5 9.2 109.4 210.0 11.9 82.8 — 185.2 4.8 42.6 10.1 106.8 290.4 0.0 66.4 221.0 163.2 3.7 73.7 11.4 133.0 266.4 0.0 62.5 267.7 118.6 6.0 38.0 14.8 163.7 265.3 0.0 45.7 313.6 135.0 8.4 42.9 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 71
  • Institutional Investment Products Review Travelers Insurance Company Company Overview Moody’s Aa3 insurance financial strength rating and P-1 short-term insurance financial strength rating of The Travelers Insurance Company (TIC), and the Aa3 insurance financial strength ratings of its wholly owned subsidiaries — The Travelers Life & Annuity Company (TLAC) and Primerica Life Insurance Company (Primerica Life) — are based on the companies’ ownership by Citigroup (senior debt at Aa2), with the attendant brand, distribution, and numerous other benefits of this ownership. The ratings are also based on the established position of TIC and TLAC in the markets for individual annuities and qualified group pension products, and on the leading position of Primerica Life in the market for term life insurance. The companies’ broad captive and quasi-captive distribution channels, their superior capitalization, and minimal direct exposure to the commercial mortgage and real estate markets are also positive rating factors. These strengths are mitigated by the increasing focus of TIC and TLAC on highly competitive, interest-sensitive annuity products, and short-term putable GICs, and on the limited premium growth and lack of earnings diversification at Primerica Life. Oversight risks related to Primerica Life’s large, part-time agency force, and its aggressive agent-led recruitment program also mitigate corporate strengths. In addition, TIC and Primerica Life are exposed to the cross-ownership risks associated with its substantial holding of Citigroup preferred stock. Institutional Investment Products Group pension products, sold by TIC, consist of group pension annuities, GICs, fixed- and floating-rate funding agreements, and payout annuities, and they are marketed directly by TIC employees, or are placed through independent consultants and advisors to plan sponsors. Although this product line had been de-emphasized in recent years because of poor margins on an old block of GICs, new sales efforts have resumed, with TIC’s expansion of its funding agreement (FA) business in 1997, and its entry into the GIC-supported Euro MTN market in 1998. Euro MTNs stood at approximately $1 billion at yearend 1999. We are somewhat concerned about the renewed emphasis on FAs and GIC-related products, which, in 1998, accounted for 51% of TIC’s statutory premiums, and, in total stood at close to $6 billion at September 30, 1999 (including GICs in the separate account). Short-term FA sales alone rose by over 50% to $2.1 billion in 1998, and amounted to $2.5 billion at September 1999. Most of the company’s FAs are sold to money market mutual funds and banks, and contain highly credit- and market-sensitive shortterm put options (i.e., 7-, 30-, 90-day puts). Traditional, structured GICs and Euro MTNs are longerterm liabilities with a fixed maturity, but they, too, can expose the company to liquidity risk and asset-liability difficulties, if not appropriately laddered and cash-matched. Internally, TIC appears to have adequate liquidity and asset-management discipline to support an unexpected exercise of its puttable FAs. In addition, as a member of Citigroup, it has potential access to substantial intercompany sources of alternative liquidity. However, uncapped growth of FAs and other non-traditional GICs relative to other insurance products will ultimately increase TIC’s risk profile. 72 Moody’s Special Comment
  • Travelers Insurance Company 1999 1998 1997 1996 1995 29,077 46,403 5,027 657 0 5,684 4,500 2,228 6,979 860 679 73 96 775 28,097 41,244 4,954 384 0 5,338 3,350 1,810 5,388 686 505 76 -21 483 25,350 35,976 4,117 416 0 4,534 3,110 1,878 5,019 751 551 88 40 591 23,824 31,774 3,442 397 0 3,839 2,639 1,778 4,442 628 507 24 29 536 24,965 31,196 3,198 445 0 3,642 2,854 1,939 5,072 863 806 -573 -552 254 12.3 3.7 34.4 1.4 48.2 0.0 14.5 2.9 35.1 2.8 44.7 0.0 13.1 2.4 38.4 5.6 40.4 0.0 13.7 1.8 39.8 5.6 39.0 0.0 13.0 1.2 38.1 5.1 42.2 0.0 6.1 5.6 62.4 0.0 26.0 0.0 6.8 6.8 68.0 0.2 18.3 0.0 7.6 6.4 63.2 0.2 25.3 0.0 10.5 5.8 65.3 0.3 19.2 0.0 10.1 4.1 57.8 -11.5 18.7 0.0 67.0 11.0 7.8 1.1 4.1 3.4 5.5 64.9 10.4 9.4 0.9 6.4 4.1 4.0 64.6 9.4 11.5 1.0 7.2 2.8 3.5 65.8 6.6 12.6 1.9 7.8 3.1 2.3 63.4 5.0 15.5 1.6 7.4 6.0 1.2 7.2 0.1 11.7 1.0 7.2 0.0 16.8 1.6 5.4 0.0 11.1 1.3 4.4 0.0 21.0 2.9 3.7 0.0 24.2 4.0 1.77 14.06 8.3 8.17 8.96 4.64 6.72 0.69 1.25 9.79 9.0 7.07 4.71 5.51 8.65 0.75 1.74 14.11 9.3 8.05 10.94 5.54 8.74 0.80 1.70 14.33 9.7 7.74 8.71 6.39 9.72 0.81 0.81 7.76 10.0 7.94 7.15 9.04 14.44 1.31 70 -30 78 12 101 448 62 -34 85 16 180 183 83 -28 115 9 123 229 59 -15 97 15 97 207 64 -8 45 149 188 209 19.5 196.6 305.2 0.0 36.1 — 45.0 5.6 53.0 19.0 198.1 350.0 0.0 37.0 — 52.8 8.6 66.7 17.9 172.2 365.3 0.0 29.8 54.8 68.7 7.4 54.5 16.1 182.0 350.3 0.0 26.6 67.9 87.1 17.7 34.8 14.6 176.4 331.1 0.0 24.6 86.8 112.9 26.5 33.1 Fundamentals ($mil) General account assets Total assets Surplus Investment reserve 50% of dividend reserve liab. Capital Insurance revenues Net investment income Total revenues Gain fr ops pre - tax & div Gain Before Real Capital Gains Real Cap Gains bef IMR transfer Real Cap Gains after IMR transfer Net Income Segment Analysis (as % policy reserves & liabilities) Individual life Individual health Individual annuities Group life & health Group pension Other Segment Analysis (as % of total net premiums) Individual life Individual health Individual annuities Group life & health Group pension Other Investment Profile (as % of cash and invested assets) Bonds Common & preferred stock Mortgage loans Real estate Policy loans Cash & short term investment Other invested assets Asset Quality Below Inv Grade Bonds as % of Invested Assets Bonds in or near default as % of Invested Assets Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE Underperf Mtgs+Fclsd RE as % of Invested Assets Profitability ROA (%) ROE (%) Ordinary life lapse ratio (%) Net investment yield Total investment return Commissions/Premiums Total general expenses/Premiums Total general expenses/Avg assets Gain (loss) from operations ($mil) Individual life Individual health Individual annuities Group life & health Group pension Other Capitalization (%) Capital/Assets Moody's Risk adjusted capital ratio NAIC Risk based capital ratio Surplus Notes/Capital Below inv grade bonds/Capital CMO's and Loan-Backed Bonds/Capital Mortgages + RE/Capital Total Underperforming Assets/Capital Total Affiliated Inv/Capital Moody’s Special Comment 73
  • Institutional Investment Products: The Evolution Of A Popular Product: Special Comment To order reprints of this report (100 copies minimum), please call 800.811.6980 toll free in the USA. Outside the US, please call 1.212.553.1658. Report Number: 54860