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ALIRT REPORT - LifeAdvantage Insurance Network
Three Months 2014
ALIRT (AnaLysis of Insurer Risk Trends)
TABLE OF CONTENTS
PAGES
Three Months 2014 Results 1 - 15
ALIRT Model Description 17 - 28 Concept and Methodology 17 - 19 Credit Ratings Definitions and Distribution 20 - 21 Biases and Weightings 22 - 24 Discussion of ALIRT LIFE Model Performance Tiers 25 - 28
Core List
ALIRT Model Flagging Screen 29 - 31
Five-Year Credit Ratings Matrix 33 - 35
ALIRT Life Financial Performance Score Results Summaries 37 - 41 Companies listed alphabetically 38 - 39 Companies sorted by ALIRT Scores 40 - 41
Non-Core List
ALIRT Model Flagging Screen 43 - 44
Five-Year Credit Ratings Matrix 45 - 46
ALIRT Life Financial Performance Score Results Summaries 47 - 49 Companies listed alphabetically 48 Companies sorted by ALIRT Scores 49
ALL COMPANIES GROUPED TOGETHER
Five-Year ALIRT Life Financial Performance Ratios and Scores 51 - 155
Glossary of Terms and Key Financial Measure Definitions G1 - G6
The Going Gets Tougher . . . (First Quarter 2014 Life Insurance Industry Review – June 2, 2014)
The operating environment for life insurers, already challenging, became somewhat more so in the first quarter 2014. After a rise in interest rates in 2013, rates reversed to some degree in the first quarter, as the 10 Year U.S. Treasury Bond rate dropped 31 basis points to 2.72%. Equity markets, though higher in the first quarter (S&P 500 index up 1.3%), eased considerably from the near 30% increase in 2013, affecting variable product writers’ profitability. On the revenue side, both direct and net premiums fell on an annualized basis in the first quarter 2014, while net investment income rose modestly. Some of the key developments in the financial results for the ALIRT Life Composite1 in the first three months of 2014 included:
Statutory operating earnings were down markedly due to the sharply lower equity market gains in the period compared to 2013. As a result, annualized returns on equity and assets for the first quarter were the lowest since the full year 2011.
Net investment yield, already at a historical low in 2013, fell another 19 basis points to an annualized 4.77%, increasing the pressure on investment returns, policy crediting rates, and the profitability on existing policies.
Net capital gains were modest, a reversal from net capital losses incurred in the full year
2013, which may reflect gains on hedge instruments or bonds sold as interest rates fell.
The statutory earnings (though reduced) and modest net capital gains offset sizeable shareholder dividends and capital returned to parent companies, and led to a 1.0% gain in total surplus (4.1% on an annualized basis). Capitalization metrics were stable in the first quarter, though these measures are overstated in relation to prior years by the significantly increased use of intercompany reinsurance.
The difficult business environment for new sales continued, as direct premiums written fell
5.2% on an annualized basis for the ALIRT Life Composite, while net premiums fell 0.7%.
With pressure on profit margins, companies continue to change terms and conditions for existing policies and in some cases pursue “buy back” offers for legacy policies.
Ongoing rationalization in business lines showed few signs of abating, as insurers (and
perhaps more importantly their owners) continue to adjust (or consider adjusting) their activities in various business lines, distribution channels, or test the waters for M&A.
1 The ALIRT Life Composite is comprised of the 100 largest U.S. life insurers (= 85% of 2013 industry general account invested assets).
1
Financial Results for the ALIRT Life Insurance Industry Composite I. CAPITAL AND SURPLUS
Total surplus rose a modest 1.0% for the ALIRT Life Composite in the first quarter 2014, which would equal 4.1% if annualized for the entire year. The increase in surplus was driven by statutory after-tax earnings of $7.6 billion, which though down 38% from the first quarter 2013, were sufficient when combined with net capital gains of $5.2 billion to exceed shareholder dividends and capital returned to the parent company totaling $9.7 billion. The reduced statutory earnings were due in part to a much lower appreciation of equity markets (S&P 500 up 1.3%), which paled in comparison to the almost 30% rise for the full year 2013. Thus, variable product writers were much less able to release variable annuity reserves covering living and death benefit guarantees, as the 1Q2014 increase (5.3% if annualized) would likely be close to the assumed appreciation rate (when factoring in stock dividends) used in establishing reserves. First quarter 2014 net capital gains of $5.2 billion were a reversal from net capital losses of $7.8 billion incurred in 2013, and may reflect gains on the value of hedge instruments for variable life insurance and variable annuities, and/or hedging activity for interest rates.
190 190 195227 252 258 274 289
258297
326 343 365 376 380
050
100150200250300350400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life Composite - Total Surplus ($ in Billions)
11.2%10.3% 9.6% 10.4% 10.9% 10.8% 11.1% 11.3%
9.8%11.1% 11.7% 11.7% 12.0% 12.1% 12.1%
0%2%4%6%8%
10%12%14%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life Composite - "Pure" Capital Ratio 2000-2014*
*As of 3/31/2014 The pure capital ratio of 12.1% at 3/31/14 was little changed from year end 2013 or 2012, as surplus growth and general account invested asset growth have moved in close tandem to each other. Though this is close to a historical peak, it is important to consider that reported capitalization for the industry and for many individual insurers is overstated relative to prior years (especially before 2009) due to much greater utilization of intercompany reinsurance over the last few years. This has been especially prevalent for reserve intensive products such as variable annuities, term life, and guaranteed universal life insurance. Affiliated entities receiving the reinsurance can either be U.S. or foreign affiliated companies.
2
Data in $ Millions 2009 2010 2011 2012 2013 1Q2014Surplus Begin. of Period 257,891 296,883 326,346 343,499 364,752 376,078Operating Earnings 42,494 35,790 15,454 40,416 44,442 7,579Net Capital Gains/(Losses) (31,993) 2,363 15,623 1,332 (7,843) 5,185Surplus Paid-In ** 18,838 414 (1,367) 15 (3,532) (5,571)Shareholder Dividends (3,813) (14,325) (16,595) (14,476) (20,836) (3,796)Changes from Reinsur. 968 (255) 2,800 127 (614) (172)All Other Changes ** 12,498 5,476 1,238 (6,162) (291) 593Surplus End of Period 296,883 326,346 343,499 364,752 376,078 379,896Change in Surplus 15.1% 9.9% 5.3% 6.2% 3.1% 1.0%
Surplus Development: ALIRT Life Industry Composite
** These figures are adjusted for 2010 due to accounting transactions for the AIG U.S. life insurers.
These transactions cede statutory reserves considered “redundant” by insurers from the “direct” issuers of the products to the affiliated entities, leading to lower reserves and higher reported surplus and capitalization measures, not just for the direct writer of the product but in some cases for the organization as a whole. As the transactions benefit reported capitalization for insurers writing business directly, ALIRT Model benchmarks were adjusted in 2009 and again in 2012 to account for the much greater use of this activity, as well as somewhat more liberal regulatory standards in place since the financial crisis. There has been significant negative publicity in the press associated with these transactions, and state regulators (most notably by the New York State Department of Financial Services) and the NAIC are devoting additional scrutiny to such transactions (which must be approved in an insurer’s state of domicile). In its First Quarter 2014 10-Q SEC Report, Prudential Financial stated that the New York Department of Financial Services does not agree with their calculation of statutory reserves (including the applicable credit for reinsurance) for certain variable annuities. If the rules (formal or informal) surrounding affiliated reinsurance change, this could lead to a reduced ability of insurers to engage in such transactions, which in turn could result in higher carried reserves and/or lower capital for the "direct" writers of certain policies, and/or less availability or higher cost for certain products. Similar effects are possible for the three insurance groups (AIG, MetLife, and Prudential Financial) that were designated as Systemically Important Financial Institutions (SIFIs) by the Federal Reserve if their capitalization requirements are raised. On the other hand, there is some movement within the industry and regulators toward a principles based reserving approach, whereby insurers would gain more flexibility toward setting reserve levels than the present approach, which is heavily formula driven. This may make affiliated reinsurance less attractive, as it may reduce required reserves in the direct writing companies. Adopting principles based reserving is far from certain, as 42 of the 50 state regulators would have to approve it in order for implementation by the National Association of Insurance Commissioners (NAIC). New York State is already actively opposed and California has expressed reservations about the approach as well. In the end, setting policy reserves for many of the industry’s products is, was, and will continue to be an inexact science due to the long duration of the liabilities and the many variables (future interest rates, equity markets, mortality, policyholder behavior, etc.) that must be estimated in order to set reserve levels. It is possible that current statutory reserves for term life, universal life, and/or variable annuities with secondary guarantees are too onerous and reserves currently held in affiliated entities are sufficient, in which case the long-term effect of the affiliated reinsurance arrangements
3
proves minor. Despite being opposed to the use of captive reinsurers, The New York Department of Financial Services stated in April 2014 that it will reduce term life reserves between 30-35% starting in January 2015. Combined with the approval of a number of affiliated reinsurance transactions by many state insurance departments, it is reasonable to impute that regulators believe some industry policy reserves are redundant. However, it is also possible that current reserve levels (in a direct writing company or an affiliated entity) prove insufficient over time, which could result in an insurer or holding company boosting additional reserves, leading to reduced capital or earnings. Should reserves prove grossly insufficient (either as a whole or for certain product lines) a scenario could unfold similar to what is going on for long-term care insurance or variable annuities with living benefits today. This could include significantly scaled back product availability and/or features, higher costs for new/existing contracts, the exit of insurers from various businesses and/or and the outright sale (or placement into runoff) of existing blocks of businesses.
Surplus Infusions and Shareholder Dividends Thirty-four of the ALIRT Life Composite insurers paid a total of $9.7 billion of shareholder dividends and/or returned capital to parent companies in the first quarter 2014, which was above the 2003 run rate (when $29.6 billion was paid up for the whole year). However, more than half of the capital paid up related to the Hartford life insurers, which reflected a restructuring of the group’s intercompany ownership structure. In the first quarter 2014, ownership of Hartford Life Insurance Company (HLIC) and Hartford Life & Annuity Insurance Company (HLAN) was transferred from Hartford Life & Accident Insurance Company (HLAC) to Hartford Life Inc. Management stated that this was to separate the ongoing group employee benefits business written by HLAC (with HLIC’s New York State business reinsured to HLAC before the transaction closed) from the discontinued variable annuity and institutional group annuity business housed in HLAN and HLIC. This transaction was categorized and approved as an extraordinary dividend of $4.4 billion paid by HLAC to HLI. In addition, before the transfer of ownership both HLAN and HLIC paid extraordinary dividends of $642 million and $799 million respectively. Other companies paying large shareholder dividends in the first quarter 2014 were American General Life ($1.3 billion), Variable Annuity Life ($404 million), Connecticut General Life ($315 million), American Family Life of GA ($269 million), Sun Life of Canada US (soon to be renamed Delaware Life, $185 million), and Equitrust Life ($174 million). Eighteen insurers received capital infusions of an aggregate $303 million in the first quarter 2014, with the largest infusions reported by Athene U.S. subsidiaries Athene Annuity & Life Company (formerly Aviva Life & Annuity, $170 million) and Athene Annuity & Life Assurance Company ($39 million), as well as Nationwide Life & Annuity ($50 million).
Surplus Declines for Individual Companies
Surplus fell for twenty-four of the composite insurers in the first quarter 2014, roughly in line with the last few years. The three Hartford Financial life insurers were among companies with the largest declines in surplus, including HLAC (-73%), HLAN (-17%), and HLIC (-6%), which reflected the shareholder dividends paid by HLAN and HLIC, and the transfer of ownership of those two companies from HLAC. Other companies with large declines in surplus included MetLife subsidiaries MetLife Investors USA and MetLife Ins. Co. of Connecticut (-13% and -10% respectively, due to adjustments to prior year results), Lincoln Life & Annuity of NY (-12%, change in accounting principles), Equitrust Life (-10%, shareholder dividends) and Washington National (-6%, shareholder dividends).
4
46 47 47
7 9
35 34 35
70
14 21 22 2032
240
1020304050607080
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life CompositeThe number of Insurers with a Decline in Total Surplus (2000-2014*)
The largest increase in surplus for 2013 was reported by Global Atlantic Financial Group subsidiary Commonwealth Annuity & Life, which reflected the issuance of a $300 million surplus note to its direct parent company. This was in large part to support CA&L becoming the direct owner of Forethought Life Ins. Co. in the first quarter 2014, as the acquisition of Forethought by the Global Atlantic group closed in early January. Other insurers with large gains in surplus were AXA Equitable Life (+35%), MONY Life Ins. Co. (+15%), and Forethought Life Ins. Co. (+10%), as operating earnings and net capital gains contributed to the higher surplus for each of the insurers. II. OPERATING EARNINGS
The sharp rise in equity markets (+30% on the S&P 500 index) in 2013 contributed to very strong statutory earnings and returns on equity and assets, as was the case in 2012, 2010, and 2009. This is the result of variable annuity (and life insurance) issuers releasing statutory reserves for secondary guarantees, as the higher equity markets make it less likely that the insurer itself will have to fund such guarantees with its own assets/capital. In addition, the fee income insurers earn for variable products rises along with equity markets, which also benefits earnings (though with some lag). Though markets moved higher in the first quarter, the rate of increase eased dramatically (as shown on the following page). When annualized, the gain in markets in the first quarter may be close to what insurer reserves (and pricing) assume for annual appreciation, which would allow for little release of current variable annuity reserves. As a result, first quarter 2014 statutory earnings and returns were down sharply from 2013 levels. The low investment yield (which fell to a new historical low in the first quarter 2014) was also a drag on statutory earnings. Markets have moved somewhat higher thus far in the second quarter (through May 30), which may improve the six month industry operating returns, barring an equity market reversal in June. The lack of significant premium volume is benefiting near term earnings (perhaps at the expense of future earnings and vitality) as aggregate commissions and other business acquisition costs are not presenting significant strain on earnings at this time, which has been the case more or less since the financial crisis of 2008-2009. The tough growth environment is also contributing to the ongoing rationalization of businesses by insurers, exits from business lines, changes to policy terms & conditions, sales of businesses, etc.
5
9.3
-0.7
12.815.3
9.34.7
-7.4
8.6
16.6
1.011.9 11.1 12.2 10.3 11.2 10.7
7.6
-10-505
1015202530
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
ALIRT Life Composite - Quarterly After-Tax Statutory Earnings($ in Billions)
-5%
0%
5%
10%
15%
20%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*
ALIRT Life CompositeReturns on Equity
Pre-Tax After-Tax
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*
ALIRT Life CompositeReturns on Assets
Pre-Tax After-Tax *Annualized returns on equity and assets for the first quarter of 2014.
2010 2011 2012 2013 1Q2014 2Q2014* 2014*
DJIA 11.0% 5.5% 7.3% 26.5% -0.7% 1.6% 0.8%
S&P 500 12.8% 0.0% 13.4% 29.6% 1.3% 2.7% 4.1%
NASDAQ 16.9% -1.8% 15.9% 38.3% 0.3% 1.3% 1.6%
% Change in SA Assets 14.0% 0.3% 13.3% 13.7% 0.9% ??? ???
% Co’s with Lower SA Assets 16.0% 60.0% 20.0% 14.0% 31.0% ??? ???
Changes in Stock Market Indices and ALIRT Life Composite Separate Account Assets
*2014 equity market results are through May 30, 2014.
III. NET CAPITAL GAINS / (LOSSES)
Net capital gains totaled $5.2 billion in the first quarter 2014, a reversal from net capital losses of $7.8 billion in 2013. Gains from hedging (for variable products and interest rates) may have been a substantial factor in the total net gains, as the small gains in equity markets and decline in interest rates in the first quarter (which continued through the beginning of June) may have led to gains in the value of derivative instruments. The opposite occurred in 2013 when equity markets and interest rates rose sharply (reducing the value of hedge assets). In addition, the lower interest rates may have produced some realized capital gains as insurers sold bonds in the first quarter. Seventy-seven of the composite insurers reported net capital gains in the first quarter 2014, with large companies and to some extent variable product writers leading the way, including John Hancock Life USA ($943 million), AXA Equitable Life ($657 million), Prudential Ins. Co. of America ($499 million), Mass. Mutual Life ($467 million), New York Life Ins. Co. ($373 million), Teachers Ins. & Annuity ($368 million), and Metropolitan Life Ins. Co. ($286 million).
6
The largest net capital losses in the first quarter 2014 were incurred by MetLife Ins. Co. of Connecticut ($265 million), ING USA Annuity & Life ($155 million), Hartford Life & Annuity ($141 million), and Nationwide Life Ins. Co. ($130 million).
(7.1) (10.0)(18.1)
9.4 8.8 5.7 10.4 1.7
(75.3)
(32.0)
2.4 15.6
1.3
(7.8)
5.2
-90
-70
-50
-30
-10
10
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life Composite - Annual Net Capital Gains (Losses)($ in Billions)
*As of 3/31/2014
0.0 5.0 4.7
(7.3)
(0.1)
3.1
12.5
0.0
(5.6)
9.6
0.8
(3.3)
1.9
(6.5)(1.5) (1.8)
5.2
-15-10
-505
101520
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
ALIRT Life Composite - Quarterly Net Capital Gains (Losses)($ in Billions)
Under statutory accounting rules, bonds are carried at book value on the balance sheet, and thus changes in the market value of the bond portfolio are not included in capital gains or losses, unless bonds are sold or impaired. At 12/31/13, the ALIRT Life Composite reported unrealized gains of $97 billion on the bond portfolio. Though this was down sharply from 2012 ($244 billion of statutory unrealized bond gains), it likely moved higher in the first quarter 2014 (and in April and May) as interest rates declined. As a result of the above, statutory capital is much less volatile than GAAP shareholders’ equity, as bonds are carried at market value in GAAP accounting. In addition, given the low interest rates that have persisted for quite some time, GAAP shareholders’ equity for insurers is somewhat inflated by unrealized gains, which could evaporate quickly if interest rates rise significantly.
IV. PREMIUM GROWTH (Includes Fixed and Variable Business, Deposit Funds) The difficult revenue generation environment continued in the first quarter 2014, as direct and net premiums written for the ALIRT Life Composite fell 5.2% and 0.7% respectively, as compared to the full year 2013 (on an annualized basis). As has been the case for the last few years, several companies had distorted premium levels in 2013 and the first quarter 2014, which was the result of intercompany reinsurance transactions or acquisitions in many cases. However, even if all of these companies were excluded, premium levels still fell for the ALIRT Life Composite. Two of the Global Atlantic Financial Group insurers had among the largest annualized percentage increases in direct premiums written in the first quarter 2014, including Commonwealth Annuity & Life (+178%) and Forethought Life (+36%), which reflected planned growth for the group in the annuity business. Indexed annuity writers were heavily represented among the other companies with significant increases in direct premiums, including Fidelity & Guaranty Life (+85%), Allianz
7
Life (+30%), Sun Life of Canada US (+29%, admittedly off a small base as the company began issuing new contracts again in late 2013), and Reliance Standard Life (+28%).
-25%-20%-15%-10%-5%0%5%
10%15%20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life Composite - Annual % Change in Premiums Written
Net Premiums WrittenDirect Premiums Written
*Annualized premium growth rates for the first quarter of 2014.
-30%-20%-10%
0%10%20%30%40%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life Composite - Annual % Change in Assets
General Account AssetsSeparate Account Assets
*As of 3/31/2014 The largest decline in direct premiums written in the first quarter was reported by Connecticut General Life Ins. Co., as the company ceased writing new business in 2013, with its products either in run-off or now issued by other CIGNA insurers. Other companies with a large drop in premiums included ING USA Annuity & Life (-47%, lower group annuities), Allstate Life (-45%, lower individual annuities), Horace Mann Life (-37%), and Protective Life (-34%).
-30%-20%-10%
0%10%20%30%
All Lines Indiv.Life
Indiv. Annuity
GroupAnnuity
DepositFunds
GroupLife
GroupHealth
Indiv.Health
Credit
ALIRT Life Composite - Annual % Change in Direct Premiums(Fixed and Variable)
2009 2010 2011 2012 2013 2014*
2009 16.2% 29.3% 23.3% 13.7% 4.3% 7.3% 5.7% 0.1%2010 16.7% 28.5% 24.8% 12.0% 4.4% 7.4% 6.1% 0.1%2011 16.1% 29.9% 24.7% 12.3% 4.2% 6.8% 5.8% 0.1%2012 15.8% 26.0% 29.1% 12.5% 4.4% 6.4% 5.7% 0.1%2013 16.8% 29.3% 24.8% 12.1% 4.5% 6.4% 6.0% 0.1%
2014* 17.2% 31.0% 18.6% 15.4% 4.8% 6.8% 6.1% 0.1%
Direct Premium Mix: ALIRT Life CompositeIndividual
LifeIndividualAnnuities
GroupAnnuities
AnnuityDeposits
GroupLife
GroupHealth
IndividualHealth Credit
*As of 3/31/2014
8
Variable annuity issuers MetLife Investors USA (-25%) and Pruco Life of Arizona (-22%) also reported large drops in premiums, continuing the trend from 2013 as those entities (and groups) scaled back their products to limit the rapid growth in their equity market risks. Other companies have followed similar paths in recent years with variable annuities as well as other product lines, which reflects the equity market volatility, long duration low interest rate environment, lower than expected profitability for existing policies, and weak customer demand for the industry’s products. The end result has been a move toward offering products with lesser risk, the rationalization of existing products and distribution channels, policy “buy-out” offers and higher costs for existing policies, and in some cases the exit from business lines or the industry altogether. Industry consolidation would be a rational response to some of the challenges above, but in the present environment, the historical consolidators (the large insurers) may not have much appetite for acquisitions, perhaps in large part due to pressure from their outside constituencies (investors, owners, rating agencies, etc.). This may leave the door open for alternative investors such as private equity investors, hedge funds, etc. to enter the industry or expand their efforts, which has already taken place for some insurers and may continue at least until industry operating conditions improve. The alternative investors may be finding pricing for insurance and annuity properties attractive, and in many cases have management teams with substantial experience in the business and/or have expertise in managing insurance company investments. At the same time, it remains to be seen as to how any acquired company may be managed by new ownership, though insurers that are owned by “traditional” firms have not been immune to substantial change historically, with plenty of examples of this just over the last few years.
V. INVESTMENTS
General account invested assets grew modestly (0.8%) in the first quarter 2014, continuing a trend of modest growth that has been in place since the beginning of 2012, as a lack of premium growth, continued low investment yields, reduced statutory after-tax earnings, and still elevated shareholder dividend payments weighed on industry asset growth in early 2014, with only the earnings a difference from the trends in 2012 and 2013. Until or unless industry dynamics on one or more of these items change, asset growth may remain limited for the life insurance industry. The tables below and on the next page show the mix of investments and bond credit quality for the ALIRT Life Composite over the last several years. The investment portfolio showed little change in the first quarter 2014 in the aggregate, which is not terribly surprising in light of the small change in total investments.
2009 2010 2011 2012 2013 3/31/2014
Inv. Grade Bonds 69.6% 70.5% 70.0% 70.4% 70.2% 70.4%
Non-Inv. Grade Bonds 6.1% 5.6% 5.3% 4.9% 4.5% 4.5%
Mortgage Loans 11.1% 10.3% 10.3% 10.4% 10.7% 10.6%
Real Estate 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%
Unaffiliated Stocks 0.9% 1.0% 0.9% 0.8% 0.9% 1.0%
Affiliated Stocks 2.9% 2.9% 2.9% 2.7% 2.7% 2.5%
Policy Loans 4.0% 3.9% 3.8% 3.8% 3.7% 3.7%
Schedule BA 3.8% 3.9% 4.1% 4.3% 4.5% 4.5%
Cash & Other Invest. 1.0% 1.3% 2.2% 2.1% 2.2% 2.3%
General Account Investment Mix: ALIRT Life Composite
9
2009 2010 2011 2012 2013 3/31/2014
Class 1 (AAA, AA, A) 63.9% 64.3% 63.5% 62.3% 62.0% 62.2%
Class 2 (BBB) 28.0% 28.3% 29.5% 31.2% 31.9% 31.8%
Class 3 (BB) 4.6% 4.3% 4.2% 4.0% 3.8% 3.7%
Class 4 (B) 2.2% 2.0% 2.0% 1.9% 1.7% 1.6%
Class 5 (C) 1.0% 0.9% 0.7% 0.6% 0.4% 0.4%
Class 6 (< C) 0.3% 0.2% 0.2% 0.1% 0.2% 0.4%
Inv.-Grade (>= BBB-) 91.9% 92.6% 93.0% 93.4% 93.9% 94.0%
Non-Inv. Grade (< BBB-) 8.1% 7.4% 7.0% 6.6% 6.1% 6.3%
ALIRT Life Industry Composite - Bond Credit Quality Distribution
Bonds Non-investment grade bonds declined in each year 2010-2013 and once again in the first quarter 2014, down $25 billion (15%) since year end 2009. This has resulted from reduced purchases of below investment grade securities, and perhaps especially the ongoing run-off of downgraded mortgage-backed securities and related assets. It also may reflect insurer views that relative value in the sector is not especially high at this time. Total non-investment grade bonds fell to 4.5% of invested assets and 37% of surplus at year end 2013, down from 6.1% and 55% respectively in 2009. As non-investment grade bonds have fallen over the last few years, insurers have added to their holdings of NAIC Class 2 (BBB level ratings) bonds, which rose 43% ($223 billion) from year end 2008 to 3/31/14. This augments yield somewhat above Class 1 Bonds, but without an insurer facing the stigma of reporting higher levels of non-investment grade bonds. The increase in Class 2 also resulted from increased corporate bond holdings and reduced holdings of mortgage-backed securities. The table below shows the 10 ALIRT composite insurers with the largest holdings of below investment grade bonds relative to invested assets and total surplus at 3/31/14. Three UNUM life insurers (Provident Life & Accident, UNUM Life of America, and Paul Revere Life), Western-Southern Life Assurance Co. and Metropolitan Life Ins. Co. were among the 10 highest exposures relative to both invested assets and surplus, while the two CIGNA life insurers (Connecticut General Life and Life Ins. Co. of North America) had the highest exposures relative to invested assets.
As a % of As % ofCompany Inv. Assets Company Total SurplusConnecticut General Life 10.5% Metropolitan Life Ins. Co. 103%Life Ins. Co. of N. America 9.7% Prudential Retirement Ins. 93%Western-South. Life Assur. 8.7% UNUM Life of America 91%Provident Life & Accident 8.7% Athene Annuity and Life Co., IA 85%UNUM Life of America 8.7% Western-South. Life Assur. 80%Metropolitan Life Ins. Co. 7.7% Provident Life & Accident 79%Paul Revere Life 7.2% Phoenix Life Ins. Co. 78%Reliance Standard Life 7.0% Principal Life Ins. Co. 68%Aetna Life Ins. Co., CT 6.7% Monumental Life Ins. Co. 68%Fidelity & Guaranty Ins. Co. 6.6% Paul Revere Life 67%ALIRT Life Composite 4.5% ALIRT Life Composite 37%
10 ALIRT Composite Insurers: Highest Below Inv. Grade Bond Exposures: 3/31/2014
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At year end 2013, the ALIRT Life Composite reported net unrealized bond capital gains of $97 billion at 12/31/13, equal to 4.3% of bonds and 26% of surplus. This was down sharply from 2012 ($244 billion), as interest rates rose almost 140 basis points from the beginning of May 2013 through the end of the year. However, interest rates reversed course in the first quarter 2014, with the Ten Year U.S. Treasury Bond Yield Rate down 31 basis points (and down another 26 basis points through the end of May 2014). Statutory accounting carries bonds at their statutory book value, and thus any change in the market value of bonds does not affect statutory capital or net capital gains/losses, unless a bond is sold or impaired. This contrasts with GAAP accounting where changes in the market value for most bonds flow through to shareholders’ equity and unrealized capital gains/losses. Thus GAAP capital has been more volatile than statutory surplus, and insurers reported sharply lower GAAP unrealized capital gains in 2013, but higher gains in the first three (and five) months of 2014. This volatility, as well as the fairly high level of unrealized gains owing to years of low interest rates, may overstate the amount of “excess” capital held by some insurers, especially on a GAAP basis. A gradual rise in interest rates would be welcomed by most insurers, in spite of the impact on existing bond market values. Higher rates would lessen pressure in a variety of areas, including investment yield rates, hedging costs, reserve discount rates, and the ability to offer attractive products. However, a rapid rise in interest rates may incent a higher level of policyholder surrenders/lapses in an environment where investment market values are declining sharply. If not adequately managed for, this could lead to realized capital losses and reduced surplus and earnings. Mortgage Loans
Mortgage loans have been the second largest investment class for the life insurance industry for the last two decades, and this remained the case in the first quarter 2014. Mortgage loans rose slightly in the first quarter to $332 billion, equal to 10.6% of invested assets. These assets consist almost entirely of loans made directly by life insurers to commercial borrowers/developers, and do not include any bonds backed by mortgages (residential or commercial), real estate investment trusts, or joint venture real estate investments. Industry and individual insurer mortgage portfolios are diversified by property type and geographic region, as detailed in insurers’ SEC and/or policyholder reports, management discussion & analysis documents that accompany the statutory statements, and in meetings with ALIRT. Though many commercial real estate lenders experienced sizeable losses and writedowns in their mortgage portfolios in the wake of the financial crisis of 2008-2009 and the economic weakness that has persisted since then, the U.S. life insurance industry's mortgage loans have performed very well in comparison. Problem loans (restructured loans, loans with interest overdue 90 days, or loans in the process of foreclosure) equaled just 0.41% of total mortgages for the ALIRT Life Composite at 3/31/14, a number that has been fairly steady over the last few years. However, the very low level of reported problem loans may understate the “true” level of such assets, as life insurers have considerable incentive under the risk-based capital ratio to avoid classifying any loans as restructured or delinquent, as even a few problem loans can lead to much higher risk-based capital requirements, thus reducing the reported risk-based capital ratio. The ten ALIRT Composite insurers with the highest mortgage exposures as a percent of invested assets and surplus as of 3/31/14 are provided in the table on the next page. Once again, Standard Insurance Company had by far the largest exposure to mortgage loans, both relative to investments and surplus. However, problem mortgages remained manageable, at 0.9% of total mortgages at 3/31/14.
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Other insurers with among the 10 highest exposures to mortgage loans (both relative to assets and surplus) were Metropolitan Life Ins. Co., Principal Life, and Prudential insurers Prudential Ins. Co. of America and Prudential Retirement Insurance & Annuity, each of which has a sizeable block of institutional group annuities and active in mortgage loan investing for a number of years. Mortgage loans exceeded 5% of invested assets for 80 of the ALIRT Life Composite insurers at 3/31/14, and problem mortgage loans exceeded 1% of total mortgages for 15 of the 80 companies. Companies with the largest percentage of problem loans (> 2%) were Sun Life of Canada US (soon to be named Delaware Life), Connecticut General Life, American General Life, Farm Bureau Life of Iowa, Western-Southern Life Assurance, Ameritas Life, and Variable Annuity Life.
As a % of As % ofCompany Inv. Assets Company Total SurplusStandard Ins. Co. 42.4% Standard Ins. Co. 366%American National Ins. Co. 19.4% Athene Annuity and Life Co., IA 334%Prudential Retirement Ins. 18.6% Prudential Retirement Ins. 330%Metropolitan Life Ins. Co. 18.1% Metropolitan Life Ins. Co. 242%Principal Life Ins. Co. 17.5% Principal Life Ins. Co. 216%Nationwide Life Ins. Co. 16.6% Great-West Life & Annuity 206%Life Ins. Co. of N. America 16.0% Life Ins. Co. of the SW 195%Pruco Life Ins. Co., AZ 15.7% MONY Life Ins. Co., NY 176%Pacific Life Ins. Co. 15.7% Prudential Ins. Co. of Amer. 167%Prudential Ins. Co. of Amer. 15.0% Equitrust Life Ins. Co. 153%ALIRT Life Composite 10.6% ALIRT Life Composite 87%
10 ALIRT Composite Insurers: Highest Mortgage Exposures: 3/31/2014
Alternative Assets: Schedule BA
Life insurers’ holdings of alternative investments have increased over the last several years due to a search for higher returns, diversification of investment portfolios, and increased comfort with some of the alternative asset classes and/or third party asset managers that specialize in these categories. These assets include but are not limited to interests in private equity, hedge funds, venture capital, real estate-related joint ventures, limited partnerships, oil & gas exploration, insurer surplus notes, collateral notes, and some other assets. These assets are carried in Schedule BA of the statutory financial statement, and though they can provide elevated returns relative to more “traditional” investments, they also have volatile market values and liquidity, and sometimes require a long-term funding commitment from the insurer. ALIRT Life Composite Schedule BA assets grew 1.3% to $141 billion in the first quarter 2014, following 6.0% growth in 2013, and equaled 4.5% of invested assets and 37% of surplus at 3/31/14. The table on the next page shows the 10 ALIRT composite insurers with the highest exposures to Schedule BA assets at 3/31/14 relative to investments and surplus. Companies owned by some of the “alternative” investors had some of the largest exposures, including companies owned by some of the Guggenheim Partners (Sun Life of Canada US, Security Benefit Life, Equitrust Life, and Guggenheim Life & Annuity), as well as insurers owned by Athene Life. This may reflect a more non-traditional investment strategy on the part of some of the newer participants in the industry, though we note that both Guggenheim (who manages investments for the four insurers listed above) and Athene have established track records in managing U.S. life insurer investments.
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As a % of As % ofCompany Inv. Assets Company Total SurplusAthene Annuity & Life 12.5% Guggenheim Life & Ann. Co. 122%Western & South. Life Ins. 10.5% Security Benefit Life 105%Guggenheim Life & Ann. Co. 10.3% Athene Annuity and Life Co., IA 101%New York Life Ins. Co. 9.3% Metropolitan Life Ins. Co. 90%Teachers Ins. & Annuity 9.2% Equitrust Life Ins. Co. 87%Security Benefit Life 8.6% Allstate Life, IL 79%Penn Mutual Life 8.4% Athene Annuity & Life 74%Aetna Life Ins. Co., CT 8.3% Phoenix Life Ins. Co. 72%MetLife Investors USA 8.0% MetLife Investors USA 68%Metlife Ins. Co. of CT 7.4% Principal Life Ins. Co. 67%ALIRT Life Composite 4.5% ALIRT Life Composite 37%
10 ALIRT Composite Insurers: Highest BA Exposures: 3/31/2014
VI. INVESTMENT RESULTS
The long duration, low interest rate environment showed some signs of easing in 2013, as interest rates rose almost 140 basis points on the Ten Year U.S. Treasury Bond from early May through the end of the year. However, interest rates changed direction thus far in 2014, and the 10 year rate was down 31 basis points in the first quarter. As a partial result, net investment yield reached a new historical low of 4.77% (annualized) for the ALIRT Life Composite for the first three months of 2014, down 19 basis points from 4.96% for the full year 2013. This trend may continue in the second quarter, as the 10 Year bond rate fell another 26 basis points through the end of May. Insurers cited some relief in their operations in the latter part of 2013 owing to the higher rates, unfortunately some of that has been clawed away by the falling interest rates since. It will take a much longer period of higher rates to materially alter the challenges for insurers from low investment returns, the profitability of current products (some more than others), and the ability to offer more competitive products. Net capital gains of $5.2 billion in the first quarter 2014 were a reversal from net capital losses incurred in the full year 2013, and thus net total return edged higher than yield in the first quarter 2014, rising to an annualized 5.46% from 4.69% for the full year 2013. As mentioned earlier, the net capital gains may relate to gains on hedge instruments for interest rates and/or equity markets.
2.00%2.50%3.00%3.50%4.00%4.50%5.00%5.50%6.00%6.50%7.00%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
ALIRT Life Composite Investment Returns
Net Investment YieldNet Total Return
*Annualized returns for the first three months of 2014.
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CONCLUSIONS
The challenging environment for life insurers showed no signs of easing in the first quarter 2014. The higher interest rates that provided some relief for insurer investment returns, product profitability, and ability to offer new products in 2013 reversed in the first five months of 2014, as the Ten Year U.S. Treasury Bond Yield rate fell 21 basis points in the first quarter and another 26 basis points through the end of May. Thus, it will now take even longer than what may have been anticipated last year for the hoped for gradual rise in interest rates, which in the best case scenario could lead to more attractive product offerings, improved profitability of existing business, and/or lower hedging costs. However, the key word in that sentence may be gradual, as rapidly rising interest rates would be a case of too much, too fast. Though the rapid rise would alleviate some of the industry’s current challenges, it could create new ones, including potentially higher policy lapses and surrenders, a large decline in investment market values and/or liquidity, an increase in investment/capital losses, and reduced earnings and capitalization. As for current developments, total surplus rose 1.0% for the ALIRT Life Composite in the first quarter 2014, enough to keep up with asset growth, especially in light of the conservatism of insurers toward new product offerings (and hence premium/revenue growth). However, reported capitalization measures remain overstated in comparison to historical levels by regulatory changes in statutory accounting and especially much larger use of intercompany reinsurance. Additionally, a reduction in the rate of increase in equity markets led to lower statutory earnings and returns on equity and assets, as the release of variable annuity secondary guarantee reserves that helped boost earnings in 2012 and 2013 slowed dramatically or halted altogether in the first quarter 2014. Finally, direct premiums written fell sharply in the first quarter 2014, and net premiums declined as well, as a result of the continued lack of appetite of insurers for taking on significant additional product risks. In the years since the financial crisis eased, insurers and perhaps especially their investors, owners, and rating agencies have been comfortable with this dynamic – but how long will this continue? Some ALIRT clients have noted in recent weeks that they have noticed signs of the product cycle reversing (finally) – but will the recent fall in interest rates and more tepid equity market appreciation observed thus far in 2014 reverse this trend and stop it before it gets started?
This review is prepared by ALIRT Insurance Research, an independent insurance industry financial analysis firm. ALIRT provides its ALIRT (AnaLysis of InsuRer performance Trends) Services to institutional clients responsible for monitoring exposures to insurance company financial deterioration. This review is for the specific internal use of our clients, and
may not be redistributed without the express written permission of ALIRT Insurance Research.
While this review is prepared for your personal use, it is not a substitute for an impartial and thorough investigation of insurance company relative financial strength, and does not satisfy federal and state mandated fiduciary due diligence. Financial information contained in this review is obtained from public sources we consider reliable, but we cannot guarantee
as accurate. This review should not be considered complete, includes expressions of our opinion, and must be accepted without responsibility to ALIRT. ALIRT Insurance Research, 200 Day Hill Road, Ste. 220, Windsor, CT 06095
Phone: (860) 683-2070 Fax: (860) 683-4020 Email: [email protected] Website: HTUwww.alirtresearch.comUTH
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INTRODUCTION TO THE ALIRT MODEL
The ALIRT (AnaLysis of Insurance Company Risk Trends) Service is a comprehensive, customized due diligence tool designed to aid institutional clients in monitoring the financial performance, quality and stability of the Life and/or Property & Casualty insurers with whom they have significant exposures or are considering as business partners. Through the use of historical comparative analysis, rating agency biases, and benchmark ranges, ALIRT organizes insurance company exposures into four TIERS of financial and operating performance. These TIERS represent a synthesis of the leading indicators of insurance company financial deterioration. Monitoring the combined ALIRT Performance TIER measures is crucial in assessing an insurer’s underlying financial solvency.
The sum of each of the Performance TIERS below results in an Overall ALIRT Financial Performance Score.
LIFE • +TIER 1: Investment Performance, major contributor to financial weakness • +TIER 2: Operational Performance, significant contributor to financial weakness • +TIER 3: Financial Performance, important contributor to financial weakness • +TIER 4: Credit Ratings, susceptibility to event Performance • ALIRT Financial Performance Score
All ALIRT Life Model results are compared to an industry composite comprised of the largest 100 Life companies representing over 80% of total industry invested assets.
PROPERTY & CASUALTY
• +TIER 1: Operating Performance, major contributor to financial weakness • +TIER 2: Investment Performance, significant contributor to financial weakness • +TIER 3: Financial Performance, important contributor to financial weakness • +TIER 4: Credit Ratings, closure of business opportunities • ALIRT Financial Performance Score
All ALIRT Property & Casualty Model results are compared to line of business composites for Personal Lines or Commercial Lines, depending on clients’ peer universe.
Each ALIRT Performance TIER is weighted relative to its severity and potential impact on an insurer’s solvency. For instance, adverse experience in one Category, such as Exposure to Credit and Default Risk, might result in a lower score for TIER 1 Investment Performance, even if the company performs better in other Investment Performance Categories like Liquidity, Investment Performance, Market Risk and Interest Rate Risk. Thus, the ALIRT methodology makes it easy to assess strength/weakness and trend comparisons between peers and industry composites, allowing clients to be proactive versus reactive in monitoring the financial risks of insurance company partners.
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Basis of Financial Information While the ALIRT Model focuses on the solvency and credit quality of individual insurance companies on a statutory stand-alone basis, it also reviews the potential impact of parents, subsidiaries and/or other affiliates on each legal entity. To do this, the ALIRT Model utilizes both GAAP and Consolidated Statutory filings, as well as consolidated financial results (where available) for foreign holding companies of U.S. insurers.
Thus, TIER 3 (Group Performance) of our ALIRT Service examines financial elements of holding companies which may positively or negatively impact the business, capitalization, and/or financial flexibility of individual statutory entities.
Statutory Accounting Versus GAAP
As the majority of the ALIRT Model measures are based upon publicly available annual and quarterly statutory statements required by the National Association of Insurance Commissioners (NAIC), it is relevant to mention important distinctions between Statutory and GAAP Accounting methodologies. Statutory Accounting differs from GAAP in three very important ways, which make statutory financial analysis invaluable in analyzing the solvency of insurance companies.
1. Statutory accounting is designed to protect policyholders and is more conservative than
GAAP. Statutory accounting rules require insurers to expense items such as underwriting expenses and commissions as soon as they are paid. GAAP allows for the matching of revenues and expenses and therefore permits insurers to defer a certain portion of expenses and amortize them over the life of an insurance contract. Thus, new business under statutory accounting would typically show lower earnings (or higher operating losses) versus GAAP accounting, thereby reducing statutory surplus versus GAAP.
2. Independent insurance departments in all 50 states regulate insurers. Thus, regulators
depend on statutory financial statements to examine insurance companies and enforce policyholder solvency.
3. Since statutory financial statements are required for all insurance companies on a legal
entity basis, it is the only way to accurately compare individual life and property and casualty company financial strength. This is important because only the issuing company (e.g. a “statutory entity”) supports insurance policies. No parent, subsidiary, or affiliate has any “legal obligation” to fulfill the promises made by any issuing company. GAAP accounting, on the other hand, consolidates the operations of insurance holding companies, obscuring the financial risks, results, and performance of individual legal entities as recognized and licensed by state insurance regulators.
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Qualitative Credit Rating Methodology
ALIRT Insurance Research issues confidential, independent, credit ratings on Life insurers for the internal due diligence of fiduciaries. Unlike public credit rating agencies, insurance companies do not compensate ALIRT Insurance Research for issuing ratings. Any Life insurer a client requests can be rated.
ALIRT Qualitative Credit Ratings are based on both quantitative and qualitative information, including but not limited to the ALIRT Model results, and objective qualitative analysis of events, uniqueness, situations, industry trends, developments, relationships, and statistical distortions that cannot be easily quantified. Some additional qualitative factors we consider include:
1. Susceptibility to public rating agency actions, 2. Developments in strategic value to the enterprise, 3. Trend and composition of surplus growth, 4. Trends and changes in quality of earnings, 5. Trends and changes in investment asset classes and exposures, 6. Competitive position in markets, 7. Changes in lines of business, premium mix, capacity to grow, 8. Exposure to inter-company demands, 9. Reinsurance impact on surplus, 10. Impact of litigation, class action lawsuits, 11. Variability of fee income as a percentage of surplus growth,
12 Restructuring, divestitures, acquisitions, consolidations, 13. Uniqueness (control and diversity of distribution, exposure to new distribution
channels, consumer vs. institutional, mono-line vs. multi-line), 14. Commentary from industry analysts, and 15. Synopsis of relative position of company to industry.
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ALIRT Insurance Research Qualitative Credit Rating Definitions
The conclusions of our qualitative assessment result in credit ratings which we believe define a statutory Life insurance company’s** ability to sustain financial stability, meet its financial obligations, and remain solvent over the foreseeable future. ALIRT Insurance Research qualitative credit ratings are not debt ratings, but rather indicate our level of comfort with an insurer’s solvency. Thus, while our qualitative considerations reflect each company’s current and historical financial profile, our credit ratings do not include future assumptions and projections of an insurer’s financial performance. Our credit ratings are a retrospective measure of the demonstrated ability of an insurer to attain and sustain financial performance on an absolute basis. This methodology prevents material changes in credit ratings resulting from transactions and unmet expectations (notably artificially high ratings based on company projected future financial performance), and categorizes companies based on proven and sustained financial performance. For clients, this methodology assures stability in our Qualitative Credit Ratings. Our qualitative credit ratings are as follows:
AAA & AA+ Excellent ability to meet policyholder obligations.
No material exposures. AA & AA- Very High ability to meet policyholder obligations.
Modest exposures. A+ & A High ability to meet policyholder obligations.
Material exposures. A- Average ability to meet policyholder obligations. Some significant exposures.
Companies failing to attain a credit rating after our review may fall under the following categories: new company without sufficient operating history, company failing to file or provide complete and timely financial information, or companies in rehabilitation/liquidation.
Our qualitative credit ratings are also factored into the ALIRT Financial Performance Score from both a quality and trend perspective in TIER 4 (Size & Ratings). Summary credit analysis is discussed in the Trend Summary and Overview Sections of the ALIRT Service.
____________________________________________________________________________ **Our objective Credit Analysis and ALIRT quantitative financial analyses focus on solvency. Statutes require policyholder contracts to be backed solely by the statutory entity named on a policy contract. We acknowledge that each issuing company bears any and all such obligations solely. Thus, net-worth maintenance agreements, surplus, or capital guarantees, reinsurance, and/or additional financial structures issued by subsidiaries, parents, or affiliates theoretically intended to support policies issued by a company generally will not materially impact the credit rating of any statutory entity. Each statutory entity earns a credit rating based upon its own financial results.
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ALIRT INSURANCE RESEARCH QUALITATIVE CREDIT RATINGS
(March 25, 2014) ALIRT qualitative credit ratings are ALIRT’s “bottom line” on an insurer’s relative financial strengths and weaknesses. The ratings incorporate a thorough quantitative review of each insurer and their relative performance versus peers and the industry, including but not limited to our proprietary ALIRT Model (ALIRT Scores, Flagging Screens and historical trends). In addition, ALIRT ratings also incorporate qualitative factors such as the stability and makeup of a company’s business, management team, organizational structure, a company’s position and performance in its chosen business lines, and other subjective observations. ALIRT qualitative credit ratings are based largely on the individual operating profile and financial results for each insurer, with lesser consideration given to the group or parent company. The higher the ALIRT ratings, the longer the expected “staying power” of that rating, unless unforeseen transactions/events materially alter the nature of a company. Below is the rating distribution of the ALIRT qualitative credit ratings for the 425 life insurers that we are presently reviewing for clients. Nine percent of rated insurers received an upgrade based upon our review of the 2013 financial results while 6% of insurers received a downgrade, which equated to about the same number of rating changes as last year. About 15% of rated insurers are under “watch status”, equally split between possible upgrades and downgrades.
Rating Rating Definition # of Co’s % of Total Co’s AAA Excellent ability to meet policyholder obligations.
No material exposures. 7 1.6%
AA+ 6 1.4% AA Very High ability to meet policyholder obligations.
Modest exposures. 20 4.7%
AA- 44 10.3% A+ High ability to meet policyholder obligations.
Material exposures. 89 20.9%
A 131 30.8%
A- Average ability to meet policyholder obligations. Some significant exposures. 90 21.2%
Below A- Fails to meet ALIRT Research Minimum Rating Criteria. 38 8.9%
Below is a distribution of current qualitative credit ratings for 91 U.S. life companies rated in common by ALIRT and each of the major public rating agencies. As discussed above, ALIRT qualitative ratings are based largely on the specific financial profile for each individual statutory life insurer. The individual insurers are the only legal entities that issue insurance and annuities (i.e. the policyholder’s legal claim). As each insurer is a legally separate entity from its parent company, there is no legal requirement for a parent company to support its insurance subsidiaries at any time, and insurers can be sold at any time and often without warning. Thus, ALIRT’s individual insurer focus can lead to significant differences in our ratings versus the major rating agencies that concentrate their review at the parent company level.
Rating ALIRT Moody’s Standard & Poor’s Fitch A.M. Best
AAA 7% 6% 0% 7% 12% (A++)
AA+ 5% 1% 12% 6% 51% (A+)
AA 12% 5% 12% 12%
AA- 16% 21% 27% 25% 26% (A)
A+ 30% 29% 19% 15%
A 24% 15% 10% 12% 6% (A-)
A- 6% 14% 11% 18%
< A- 0% 9% 9% 5% 5%
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DESCRIPTION OF ALIRT LIFE MODEL ALIRT LIFE WEIGHTING BIASES
In preparing our ALIRT Model TIERS, we applied measurement weightings to emphasize trends and exposures which have historically impacted life insurance company financial strength. Also included is our perspective on the influence public rating agencies, economic trends and regulatory pressures have on insurance company solvency. The following is a brief synopsis of biases that impact our model, credit ratings and outlook:
1. Historical Comparative Analysis
The ALIRT Model focuses on comparative analysis and time series trends. By comparing company financial performance to peers and historical industry benchmarks, company financial strength is reviewed on a “relative” basis over long time periods. This methodology highlights companies with financial strength above or below the industry and its peers, which generates questions that, when explored, uncover differences in risks, results and performance.
2. Surplus Size
Since surplus is the cushion for policyholder safety, the more surplus a company has the greater its ability to weather adversity. The ALIRT Model also gives credit to companies with solid surplus growth above industry average, and the ability to generate surplus growth from organic operating earnings excluding the impact of capital gains.
3. Life Companies and Property & Casualty Organizations/Affiliates
ALIRT Insurance Research negatively views life companies within property and casualty company organizations. The property and casualty industry tends to be cyclical which increases the volatility of financial results. In such an environment, life companies with steadier earnings, premium and investment income streams, can be tapped for capital contributions to property and casualty affiliates. Thus, life company growth and flexibility can be constrained. Also, P&C oriented holding companies can sell life companies to meet deteriorating financial performance from catastrophes and cycle adversity. On another front, life company holding concerns with property and casualty operations may leverage life companies to shore up adverse experience at property and casualty affiliates. However, in light of the growth in variable annuities with living benefits, the life insurance industry exhibits substantially greater volatility than in years past.
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4. Accident & Health Business
A leading cause of life company financial stress is poor accident & health underwriting performance. Thus, the ALIRT Model penalizes companies with a large share of health business. Companies with no exposure receive the highest scores, while companies with even modest exposure are penalized for it. Large exposures, however, do not mean that a company is on the verge of insolvency; they simply indicate the potential for adverse experience.
5. Asset Analysis
Many past life insurance failures resulted from mismanaged assets. Because companies are not required to file detailed financials on their liabilities, asset analysis is invaluable. Life insurers are large asset accumulators, creating leverage. Asset leverage is expressed as a ratio of assets to capital/surplus*. If assets become impaired from writedowns, capital/surplus can be negatively impacted. The higher the asset leverage, (or the lower the capital/surplus ratio) the higher the risk of poor quality assets negatively impacting surplus. Thus, ALIRT penalizes companies with riskier assets and growth in riskier assets at levels above industry norms. Riskier assets include common stocks, non-investment grade bonds, alternative assets (included in Schedule BA of the statutory financial statement), mortgages, and real estate.
6. Overexposure to Asset Classes
The ALIRT Model penalizes companies with lower than average investment diversification, or unusually large exposures to one or more asset classes (especially risky assets). Diversification of assets reduces the impact of market volatility and investment performance.
7. Business Line Diversification
Generally, companies with at least three distinct lines of business is a plus. We also like to see five years of unabated profitability and surplus growth with manageable “top line” growth. Furthermore, the ALIRT Model penalizes companies that do not generate “organic earnings” (net operating gain before capital gains). Business and earnings diversification protects against adverse experience or regulatory and economic changes that impact business profitability.
8. Liquidity
ALIRT penalizes companies with above average exposure to non-investment grade bonds, long maturity bonds, mortgages, real estate, alternative assets (those in Schedule BA), and private placements, which often exhibit less liquidity than other asset classes. The ALIRT Model also penalizes companies with large amounts of surrenderable institutional liabilities as well as other distribution relationships conducive to “runs on the bank”.
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9. Core & Strategic Value
Companies that are not core or strategic components within their organizational structures are considered less likely to receive parent or affiliate support. In addition, companies that can stand on their own without parent support are viewed more positively than companies dependent upon parent or affiliate support.
*Capital/surplus is expressed as the difference between assets and liabilities. When assets are reduced without a corresponding decrease in liabilities, capital/surplus is reduced.
10. Summary of Biases within ALIRT Benchmarking/Scoring
Higher weightings for each TIER imply emphasis. Poor company results in higher weighted measures will have a larger negative impact on overall financial strength results.
A. TIER Exposure Benchmarks/Weightings Investment Performance 40/100, or 40% of the total ALIRT Score Operating Performance 35/100, or 35% of the total ALIRT Score B. Emphasized Category Benchmarks/Weightings within the TIERS
#1 Leverage, Credit & Default Risk = 33% of Tier 1 Investment Performance #2 Investment Results = 30% of Tier 1 Investment Performance #3 Capital Growth & Business Leverage = 49% of Tier 2 Operating Performance #4 Profitability & Earnings comprises 31% of Tier 2 Operating Performance
C. Highest Weighted Measures within each Performance Screen
1. Tier 1 Investment Performance Measures: Non-Investment Grade Bonds/Surplus, Mortgages & Real Estate/Surplus, CMOs/Surplus 2. Tier 2 Operating Performance Measures: Total Surplus, Health Insurance Leverage, Return on Equity, Cash Flow 3. Tier 3 Group Performance Measures: Financial Leverage, Coverage & Profitability
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DESCRIPTION OF ALIRT LIFE MODEL PERFORMANCE TIERS
The ALIRT Life Model uses the results of each of the four following PERFORMANCE TIERS (TIER 1: Investment Performance, TIER 2: Operational Performance, TIER 3: Group Performance, TIER 4: Size & Ratings) to render a proprietary ALIRT Life Financial Performance Score representing financial strength and trend.
We provide a schematic presentation of the overall ALIRT Life Model on the following page. TIER 1: Investment Performance
The primary focus of the ALIRT Life Service is to determine relative insurance company solvency. Because investment concentration, quality, and/or overexposure have been primary contributors to life company financial weakness/failure, The TIER 1 Investment Performance Score is overweighted in proportion to the four PERFORMANCE TIERS analyzed. Investment Performance is calculated by summing weighted scores and trends in Investment Leverage, Credit and Default Performance, Investment Interest Rate Performance, Market Performance, and Investment Results for each individual company. Each of the four categories above is comprised of several ratio range tests and trend factors, the sum of which quantifies the relative Performance of each company within each of the Categories.
For example:
A. TIER 1: Investment Performance includes the following four Categories:
1. Investment Leverage, Credit and Default Performance 2. Investment Interest Rate Performance 3. Market Performance 4. Investment Results
B. Below are the factors in the Category Investment Leverage, Credit and Default Performance which resulted in the ALIRT Scores in the example on the following page.
• Performance-Based Capital Ratio • Pure Capital Ratio • Non-Investment Grade Bonds as a Percent of Total Surplus • Mortgages and Real Estate as Percent of Total Surplus • Affiliate Investments as a Percent of Total Surplus
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26
C. Below are the five-year ALIRT Score trends for the TIER 1: Investment Performance, Category 1– Investment Leverage, Credit & Default Risk, and the equivalent Risk Level for a company versus the industry.
INVESTMENT LEVERAGE, CREDIT AND DEFAULT RISK (Maximum Possible Score = 13)
Year 2005 2006 2007 2008 2009
Company 7 5 5 4 4
Industry 8 7 7 9 10
The example indicates how easy it is to determine the Relative Performance Level for a company. For instance, the company in the example has above average exposure to Investment Leverage, Credit Quality and Default Risk relative to the industry. Also, while the industry reduced exposure in this area (exhibited by the rising scores) over the last few years, the company above has maintained a steady to increasing exposure to investment leverage and credit risk. Companies achieving the maximum score of 40 for TIER 1: Investment Performance would have strong capital ratios, investment grade bond portfolios, little or no mortgage and real estate investments, low schedule BA assets, immaterial affiliate investments, low interest rate risk, and short bond maturities, combined with strong investment results. Increasing scores indicate positive trends and results. Decreasing scores indicate potential weakness. Company weaknesses relative to peer and industry trends are examined in further detail in the Notes Section of the Individual Company Trend Summaries.
TIER 2: Operational Performance Operational exposure results are defined by the sum of weighted scores and trends for each company in four key Categories that focus on each company from a “going concern” perspective. The Categories are: Capital Growth and Business Leverage, Profitability and Earnings, Revenue Vitality, and Liquidity. Each of the four Categories is comprised of several ratio range tests and trend factors, the sum of which quantifies the relative performance of each company within each Category. Companies achieving the maximum score of 35, indicating Lowest Risk, possess superior capitalization, very strong and increasing earnings, and have no significant business leverage or liquidity concerns. Increasing scores indicate positive trends and results. Decreasing scores indicate potential weakness. Company weaknesses relative to peer and industry trends are examined in further detail in the Notes Section of the Individual Company Trend Summaries.
27
TIER 3: Group Performance The Tier 3 Group Performance Score is defined by the sum of weighted scores and trends in three key Categories focusing on the potential financial impact on life insurance companies from interrelationships with their affiliates, subsidiaries, and parents. Three key Categories are quantified by the following areas: Strategic Value & Importance, Financial Flexibility and Liquidity, Financial Leverage, Coverage and Profitability.
Companies achieving the maximum score of 11 are significant parts of financially vibrant organizational structures, with the ability to survive well independently. Holding companies should be well respected in the marketplace, with strong financial flexibility, and access to capital markets. Mutual companies are assessed based upon consolidated statutory results and/or Mutual GAAP results where available. This analysis detects the reliance or dependence of the holding company on the life unit and vice versa. Company weaknesses relative to peer and industry trends are examined in further detail in the Notes Section of the Individual Company Trend Summaries.
TIER 4: Size & Ratings TIER 4 measures a company’s relative size and credit ratings. ALIRT Insurance Research believes that larger companies in general have greater wherewithal to withstand financial stress, and are more strategically important within their organizations. Furthermore, larger companies are often more likely to achieve economies of scale in at least some of their chosen business lines. Companies with general account assets exceeding $5 billion are given credit, as are companies with separate account assets exceeding $10 billion, as those companies are more likely to have significant market position and scale in the variable business. Qualitative credit rating trends are represented by a weighted composite score of ratings from the major four public rating agencies, as well as incorporating the ALIRT Insurance Research qualitative credit rating. Companies achieving the maximum score of 14 have the highest weighted composite rating described above, and are of significant enough size to be considered among the leaders in their market(s).
ALIRT Life Financial Performance Score
The sum of each of the four weighted Financial Performance TIER Scores equals the ALIRT Life Financial Performance Score. An ALIRT Life Financial Performance Score is calculated over five years for each company, industry composite and various peer groups, by size and/or line of business depending upon client preference. To achieve a perfect score of 100, a company would have to have almost no risk under our benchmarking parameters. While theoretically possible, we believe that every insurance company has some risk and therefore no company will achieve a perfect score.
28
ALIRT LIFE MODEL FLAGGING SCREEN
The ALIRT Service includes a flagging screen for each client, based on mutually agreed upon criteria. Each quarter, this section identifies how well life and/or property and casualty insurance companies are meeting these specified criteria.
A suggested flagging screen criteria might be:
• All Total ALIRT Financial Performance Scores below 45
• All ALIRT Model “Higher Risk” results for each Performance Tier
• Negative credit rating trends, or downgrades
• Low (Below A+) ALIRT Research qualitative credit rating, or low Weighted Composite Credit rating
• Changes of 10 or more points in the Total ALIRT Financial Performance Score
• Other Leading Indicators of financial weakness
• Low Total ALIRT Financial Performance Scores, High Credit Ratings
• Transactions, Divestitures, Mergers & Acquisitions
• Other Significant Items (e.g. material litigation)
CORE LIST-------------------------
29
ALIRT INSURANCE RESEARCH "FLAGS" FOR LIFE INSURERS - AS OF 3/31/2014Companies Sorted Alphabetically
TOTALALIRT
SCORESBELOW
45
CHANGE OF10 OR MORE
POINTSIN TOTAL
ALIRT SCORE
GROUPPERF.
(Score 2 or lower)
LOW(<A+)ALIRT
CREDITRATING
NEGATIVETRENDS IN
PUBLICRATINGS
LOW ALIRTSCORES,STRONG
ALIRT CREDIT
RATINGS
ABOVEAVERAGEHEALTH
INSURANCEEXPOSURE
(150% or higher)
EXPOSURETO
DISINTER-MEDIATION
RISK
TRANSACTIONS,MERGERS,
DIVESTITURES,ACQUISITIONS
OTHERSIGNIFICANTAND/OR NON-QUANTITATIVE
ITEMS
TOTALALIRT
"FLAGS"RAISED
(OUT OF 14)
HIGHER RISK LEVEL VS INDUSTRY
SIZE &RATINGS
(Score 4 or lower)
OPERATINGPERF.
(Score 10 or lower)
INVESTMENTPERF.
(Score 12 or lower)COMPANY
DOWNGRADEOF ALIRTCREDITRATING
CURR. YR.
4XXXAccordia Life and Annuity X
1XAmerican Gen'l Life, TX
3XXAthene Ann. & Life Assr. X
6XXXXXAthene Annuity & Life (IA) X
6XXXXXAthene Annuity & Life Assr. (NY) X
4XXXAthene Life Ins. Co. of NY X
0Axa Equitable Life Ins Co
4XXXCommonwealth A & L X
4XXXFirst Allmerica Financial X
4XXXFirst Metlife Investors Ins. X
2XXForethought Life Ins. Co.
0John Hancock Life (USA)
1XJohn Hancock Life, NY
3XXLincoln Benefit X
0Lincoln Life & Annuity, NY
0Lincoln National Life
5XXXXMetLife Investors USA X
6XXXXXXMetropolitan Life Ins. Co.
0Minnesota Life Ins. Co.
1Principal National Life X
1XProtective Life Ins. Co.
3XXReliaStar Life of NY X
1XReliaStar Life, MN
3XXSecurity Life of Denver X
30
ALIRT INSURANCE RESEARCH "FLAGS" FOR LIFE INSURERS - AS OF 3/31/2014Companies Sorted Alphabetically
TOTALALIRT
SCORESBELOW
45
CHANGE OF10 OR MORE
POINTSIN TOTAL
ALIRT SCORE
GROUPPERF.
(Score 2 or lower)
LOW(<A+)ALIRT
CREDITRATING
NEGATIVETRENDS IN
PUBLICRATINGS
LOW ALIRTSCORES,STRONG
ALIRT CREDIT
RATINGS
ABOVEAVERAGEHEALTH
INSURANCEEXPOSURE
(150% or higher)
EXPOSURETO
DISINTER-MEDIATION
RISK
TRANSACTIONS,MERGERS,
DIVESTITURES,ACQUISITIONS
OTHERSIGNIFICANTAND/OR NON-QUANTITATIVE
ITEMS
TOTALALIRT
"FLAGS"RAISED
(OUT OF 14)
HIGHER RISK LEVEL VS INDUSTRY
SIZE &RATINGS
(Score 4 or lower)
OPERATINGPERF.
(Score 10 or lower)
INVESTMENTPERF.
(Score 12 or lower)COMPANY
DOWNGRADEOF ALIRTCREDITRATING
CURR. YR.
0Symetra Life Ins. Co.
2XTransamerica Fin'l Life, NY X
0Transamerica Life Ins Co
0United of Omaha Life
2XXUnited States Life, NY
ALIRT LIFE COMPOSITE 14 8 6 1 7 11 21 2 3 10 2 17 25 15 66
31
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32
FIVE-YEAR CREDIT RATINGS MATRIX
The Credit Ratings Trend Matrix highlights companies with declining or improving credit quality. ALIRT Insurance Research believes fiduciaries should be proactive rather than reactive when weighing public rating agency credit concerns. Since these quality indicators are public, institutional clients, distribution systems, policyholders, and regulators could react en masse to ratings changes, negatively impacting policyholder safety. By utilizing the ALIRT Life Service, observing historical credit trends, and monitoring how rating agencies view the insurance industry, fiduciaries and institutional investors can better “predict” significant financial deterioration and ratings downgrades before they occur. The Credit Ratings Trend Matrix includes for each insurer a five year history of the ALIRT qualitative credit ratings, as well as the ratings from Moody’s, Standard & Poor’s, and Fitch.
CORE LIST-------------------------
33
ALIRT INSURANCE RESEARCH
CURRENT LIFE CREDIT RATING AND FIVE-YEAR TREND OF RATINGS
COMPANY 2011 2012 2013 20142010
RATING CHANGEIN YEAR
RATING CHANGEIN YEAR
RATING CHANGEIN YEAR
20142013201220112010 20142013201220112010FITCHSTANDARD
& POORMOODY'S
RATING CHANGEIN YEAR
ALIRTCREDITRATING 2013201220112010 2014
Accordia Life and Annuity N/RNCIss.BBB+N/RIss.NCA-American Gen'l Life, TX NC1NC1NCA+NCNCNCNCNCA+NCNCNC-1NCA21NCNCNCNCAA+Athene Ann. & Life Assr. NCNCNC-1-2BBB+N/RN/RNCNC-1NCNCA-Athene Annuity & Life (IA) N/RNCNC-2NC-1A-N/R-1NCNCNCNCA-Athene Annuity & Life Assr. (NY) N/RN/RN/R-1NCNCNC-1A-Athene Life Ins. Co. of NY N/RNCNC-2NC-1A-N/RNC-11NCNCA-Axa Equitable Life Ins Co NCNCNCNC-1AA-NCNC-1NC-1A+NCNCNCNCNCAa3NCNCNCNCNCA+Commonwealth A & L N/RNCNC1-1NCA-NC-1-1NCNCBaa1NCNC1NCNCAFirst Allmerica Financial N/RNCNC1-13A-NC-1-1NCNCBaa1NCNCNCNC1AFirst Metlife Investors Ins. N/RNCNCNCNCNCAA-N/RNCNCNCNCNCA-Forethought Life Ins. Co. N/RNCNCNCNCIss.A--1NCNCIss.Baa1NCNCNC1NCA+John Hancock Life (USA) NCNCNCNC-1AA-NCNCNCNC-2AA-NCNCNCNC-1A1NCNCNCNCNCA+John Hancock Life, NY NCNCNCNC-1AA-NCNCNCNC-2AA-NCNCNCNC-1A11NCNC-1NCA+Lincoln Benefit N/RNC-3NCNC-1BBB+NC-3NCNCNCBaa1NCNCNCNCNCALincoln Life & Annuity, NY NCNCNCNCNCA+NCNCNCNCNCAA-NC1NCNCNCA1NCNCNCNCNCA+Lincoln National Life NCNCNCNCNCA+NCNCNCNCNCAA-NC1NCNCNCA1NCNCNCNCNCAA-MetLife Investors USA NCNCNCNC-1AA-NCNCNCNCNCAA-NCNCNCNCNCAa3NCNCNCNCNCAMetropolitan Life Ins. Co. NCNCNCNC-1AA-NCNCNCNCNCAA-NCNCNCNCNCAa3-1NCNCNCNCAA-Minnesota Life Ins. Co. NCNCNCNCNCAA-NCNCNC-1NCA+NCNCNCNCNCAa3NCNCNCNCNCAAPrincipal National Life NCNCNCNCNCAA-NCNC1NC-1A+NC-1NCNCNCA1NCNCNC1NCAProtective Life Ins. Co. NCNCNCNCNCANCNCNCNCNCAA-NCNCNCNCNCA2NCNCNCNCNCAA-ReliaStar Life of NY NCNCNCNCNCA-NCNCNC-1-1A-NCNCNC-1NCA3NCNCNCNCNCAReliaStar Life, MN NCNCNCNCNCA-NCNCNC-1-1A-NCNCNC-1NCA3NCNC-1NCNCA+Security Life of Denver NCNCNCNCNCA-NCNCNC-1-1A-NCNCNC-1NCA3NCNCNC-1NCA
34
ALIRT INSURANCE RESEARCH
CURRENT LIFE CREDIT RATING AND FIVE-YEAR TREND OF RATINGS
COMPANY 2011 2012 2013 20142010
RATING CHANGEIN YEAR
RATING CHANGEIN YEAR
RATING CHANGEIN YEAR
20142013201220112010 20142013201220112010FITCHSTANDARD
& POORMOODY'S
RATING CHANGEIN YEAR
ALIRTCREDITRATING 2013201220112010 2014
Symetra Life Ins. Co. NCNCNCNCNCA+NCNCNCNCNCANCNCNCNCNCA3NCNCNCNCNCAATransamerica Fin'l Life, NY NCNCNCNC-1AA-NCNCNCNCNCAA-NCNCNCNCNCA1NCNC-1NCNCATransamerica Life Ins Co NCNCNCNC-1AA-NCNCNCNCNCAA-NCNCNCNCNCA1NCNCNCNCNCA+United of Omaha Life N/RNCNCNC-1NCA+NCNCNC-1NCA1NCNCNC-1NCA+United States Life, NY NC1NC1NCA+NCNCNCNCNCA+NCNCNC-1NCA2NCNCNC11A+
ALIRT Life Composite A+ A+
+ OR - INDICATES CHANGE IN RATING, NUMBER INDICATES RATING LEVELS OF CHANGE NC NO CHANGE IN RATING
Iss. RATING ISSUED IN CURRENT YEARBMRS BELOW ALIRT INSURANCE RESEARCH"S MINIMUM RATING STANDARD
A+ A1
35
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36
ALIRT LIFE FINANCIAL PERFORMANCE SCORE RESULTS SUMMARY
This section provides a matrix of company results screened and graded by the ALIRT Life Model. Companies are sorted alphabetically and by each of the five ALIRT Life Financial Performance TIER Scores (Investment Performance Score, Operational Performance Score, Group Performance Score, Size & Ratings and Total ALIRT Life Financial Performance Score) versus an industry composite for each measure. Total ALIRT Scores are compared to the prior period and the change in Score between periods is highlighted. Also, each Performance Tier is sorted on ALIRT Scores, high to low, highlighting outliers.
CORE LIST-------------------------
37
ALIRT INSURANCE RESEARCH LIFE FINANCIAL PERFORMANCE SCORES - AS OF 3/31/2014TIER ONE
INVESTMENTPERFORMANCE
MAX SCORE = 40
TIER TWOOPERATING
PERFORMANCE
MAX SCORE = 35
TIER THREEGROUP
PERFORMANCE
MAX SCORE = 11
TIER FOUR SIZE &RATINGS
MAX SCORE = 14
TOTAL ALIRT SCORE
MAX SCORE = 100
TOTAL SCORE TOTAL SCORE TOTAL SCORE TOTAL SCORE ALIRT SCORECHANGE IN
COMPANY
3/31/2014 12/31/2013
2014ALIRT SCORE2 46 3 7 17 19Accordia Life and Annuity 44
-6 59 10 3 24 22American Gen'l Life, TX 65
4 47 1 5 20 21Athene Ann. & Life Assr. 43
4 36 0 4 12 20Athene Annuity & Life Assr. (NY) 32
1 37 2 6 13 16Athene Annuity & Life (IA) 36
0 43 0 4 15 24Athene Life Ins. Co. of NY 43
7 58 8 4 20 26Axa Equitable Life Ins Co 51
2 56 3 7 20 26Commonwealth A & L 54
1 45 2 5 18 20First Allmerica Financial 44
-6 44 4 4 13 23First Metlife Investors Ins. 50
0 56 5 7 20 24Forethought Life Ins. Co. 56
-5 46 8 4 14 20John Hancock Life (USA) 51
-11 52 6 3 18 25John Hancock Life, NY 63
2 50 4 6 13 27Lincoln Benefit 48
-9 48 6 4 14 24Lincoln Life & Annuity, NY 57
5 55 10 6 20 19Lincoln National Life 50
-12 43 8 4 14 17MetLife Investors USA 55
7 40 10 5 17 8Metropolitan Life Ins. Co. 33
0 57 10 7 17 23Minnesota Life Ins. Co. 57
2 61 5 8 21 27Principal National Life 59
-1 59 10 6 20 23Protective Life Ins. Co. 60
0 53 4 5 16 28ReliaStar Life of NY 53
0 48 6 5 14 23ReliaStar Life, MN 48
-1 44 6 5 16 17Security Life of Denver 45
38
ALIRT INSURANCE RESEARCH LIFE FINANCIAL PERFORMANCE SCORES - AS OF 3/31/2014TIER ONE
INVESTMENTPERFORMANCE
MAX SCORE = 40
TIER TWOOPERATING
PERFORMANCE
MAX SCORE = 35
TIER THREEGROUP
PERFORMANCE
MAX SCORE = 11
TIER FOUR SIZE &RATINGS
MAX SCORE = 14
TOTAL ALIRT SCORE
MAX SCORE = 100
TOTAL SCORE TOTAL SCORE TOTAL SCORE TOTAL SCORE ALIRT SCORECHANGE IN
COMPANY
3/31/2014 12/31/2013
2014ALIRT SCORE5 62 9 8 25 20Symetra Life Ins. Co. 57
-1 53 7 2 18 26Transamerica Fin'l Life, NY 54
-2 46 8 3 16 19Transamerica Life Ins Co 48
6 47 7 7 16 17United of Omaha Life 41
-7 52 7 2 23 20United States Life, NY 59
ALIRT Life Composite -8 54 46 7 3 18 18
39
ALIRT INSURANCE RESEARCH LIFE FINANCIAL PERFORMANCE SCORES - AS OF 3/31/2014
TOTAL ALIRT SCORE
MAX SCORE = 100
TIER ONEINVESTMENT PERF. SCORE
MAX SCORE = 40
TIER TWOOPERATING PERF. SCORE
MAX SCORE = 35
TIER THREEGROUP PERF. SCORE
MAX SCORE = 11
TIER FOURSIZE & RATING
MAX SCORE = 14
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
ReliaStar Life of NY 28 Symetra Life Ins. Co. 25 Principal National Life 8 American Gen'l Life, TX 10 Symetra Life Ins. Co. 62Lincoln Benefit 27 American Gen'l Life, TX 24 Symetra Life Ins. Co. 8 Lincoln National Life 10 Principal National Life 61Principal National Life 27 United States Life, NY 23 Accordia Life and Annuity 7 Metropolitan Life Ins. Co. 10 American Gen'l Life, TX 59Axa Equitable Life Ins Co 26 Principal National Life 21 Commonwealth A & L 7 Minnesota Life Ins. Co. 10 Protective Life Ins. Co. 59Commonwealth A & L 26 Athene Ann. & Life Assr. 20 Forethought Life Ins. Co. 7 Protective Life Ins. Co. 10 Axa Equitable Life Ins Co 58Transamerica Fin'l Life, NY 26 Axa Equitable Life Ins Co 20 Minnesota Life Ins. Co. 7 Symetra Life Ins. Co. 9 Minnesota Life Ins. Co. 57John Hancock Life, NY 25 Commonwealth A & L 20 United of Omaha Life 7 Axa Equitable Life Ins Co 8 Commonwealth A & L 56Athene Life Ins. Co. of NY 24 Forethought Life Ins. Co. 20 Athene Annuity & Life (IA) 6 John Hancock Life (USA) 8 Forethought Life Ins. Co. 56Forethought Life Ins. Co. 24 Lincoln National Life 20 Lincoln Benefit 6 MetLife Investors USA 8 Lincoln National Life 55Lincoln Life & Annuity, NY 24 Protective Life Ins. Co. 20 Lincoln National Life 6 Transamerica Life Ins Co 8 ReliaStar Life of NY 53First Metlife Investors Ins. 23 First Allmerica Financial 18 Protective Life Ins. Co. 6 Transamerica Fin'l Life, NY 7 Transamerica Fin'l Life, NY 53Minnesota Life Ins. Co. 23 John Hancock Life, NY 18 Athene Ann. & Life Assr. 5 United of Omaha Life 7 John Hancock Life, NY 52Protective Life Ins. Co. 23 Transamerica Fin'l Life, NY 18 First Allmerica Financial 5 United States Life, NY 7 United States Life, NY 52ReliaStar Life, MN 23 Accordia Life and Annuity 17 Metropolitan Life Ins. Co. 5 John Hancock Life, NY 6 Lincoln Benefit 50American Gen'l Life, TX 22 Metropolitan Life Ins. Co. 17 ReliaStar Life of NY 5 Lincoln Life & Annuity, NY 6 Lincoln Life & Annuity, NY 48Athene Ann. & Life Assr. 21 Minnesota Life Ins. Co. 17 ReliaStar Life, MN 5 ReliaStar Life, MN 6 ReliaStar Life, MN 48Athene Annuity & Life Assr. 20 ReliaStar Life of NY 16 Security Life of Denver 5 Security Life of Denver 6 Athene Ann. & Life Assr. 47First Allmerica Financial 20 Security Life of Denver 16 Athene Annuity & Life Ass 4 Forethought Life Ins. Co. 5 United of Omaha Life 47John Hancock Life (USA) 20 Transamerica Life Ins Co 16 Athene Life Ins. Co. of NY 4 Principal National Life 5 Accordia Life and Annuity 46Symetra Life Ins. Co. 20 United of Omaha Life 16 Axa Equitable Life Ins Co 4 First Metlife Investors Ins. 4 John Hancock Life (USA) 46United States Life, NY 20 Athene Life Ins. Co. of NY 15 First Metlife Investors Ins. 4 Lincoln Benefit 4 Transamerica Life Ins Co 46Accordia Life and Annuity 19 John Hancock Life (USA) 14 John Hancock Life (USA) 4 ReliaStar Life of NY 4 First Allmerica Financial 45Lincoln National Life 19 Lincoln Life & Annuity, NY 14 Lincoln Life & Annuity, NY 4 Accordia Life and Annuity 3 First Metlife Investors Ins. 44Transamerica Life Ins Co 19 MetLife Investors USA 14 MetLife Investors USA 4 Commonwealth A & L 3 Security Life of Denver 44
40
ALIRT INSURANCE RESEARCH LIFE FINANCIAL PERFORMANCE SCORES - AS OF 3/31/2014
TOTAL ALIRT SCORE
MAX SCORE = 100
TIER ONEINVESTMENT PERF. SCORE
MAX SCORE = 40
TIER TWOOPERATING PERF. SCORE
MAX SCORE = 35
TIER THREEGROUP PERF. SCORE
MAX SCORE = 11
TIER FOURSIZE & RATING
MAX SCORE = 14
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
MetLife Investors USA 17 ReliaStar Life, MN 14 American Gen'l Life, TX 3 Athene Annuity & Life (IA) 2 Athene Life Ins. Co. of NY 43Security Life of Denver 17 Athene Annuity & Life (IA) 13 John Hancock Life, NY 3 First Allmerica Financial 2 MetLife Investors USA 43United of Omaha Life 17 First Metlife Investors Ins. 13 Transamerica Life Ins Co 3 Athene Ann. & Life Assr. 1 Metropolitan Life Ins. Co. 40Athene Annuity & Life (IA) 16 Lincoln Benefit 13 Transamerica Fin'l Life, NY 2 Athene Annuity & Life Assr. 0 Athene Annuity & Life (IA) 37Metropolitan Life Ins. Co. 8 Athene Annuity & Life Assr 12 United States Life, NY 2 Athene Life Ins. Co. of NY 0 Athene Annuity & Life Assr. ( 36
Alirt Life Composite 18 18 3 7 46Alirt Life Composite Alirt Life Composite Alirt Life CompositeAlirt Life Composite
41
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42
ALIRT LIFE MODEL FLAGGING SCREEN
The ALIRT Service includes a flagging screen for each client, based on mutually agreed upon criteria. Each quarter, this section identifies how well life and/or property and casualty insurance companies are meeting these specified criteria.
A suggested flagging screen criteria might be:
• All Total ALIRT Financial Performance Scores below 45
• All ALIRT Model “Higher Risk” results for each Performance Tier
• Negative credit rating trends, or downgrades
• Low (Below A+) ALIRT Research qualitative credit rating, or low Weighted Composite Credit rating
• Changes of 10 or more points in the Total ALIRT Financial Performance Score
• Other Leading Indicators of financial weakness
• Low Total ALIRT Financial Performance Scores, High Credit Ratings
• Transactions, Divestitures, Mergers & Acquisitions
• Other Significant Items (e.g. material litigation)
NON-CORE LIST------------------------------------
43
ALIRT INSURANCE RESEARCH "FLAGS" FOR LIFE INSURERS - AS OF 3/31/2014Companies Sorted Alphabetically
TOTALALIRT
SCORESBELOW
45
CHANGE OF10 OR MORE
POINTSIN TOTAL
ALIRT SCORE
GROUPPERF.
(Score 2 or lower)
LOW(<A+)ALIRT
CREDITRATING
NEGATIVETRENDS IN
PUBLICRATINGS
LOW ALIRTSCORES,STRONG
ALIRT CREDIT
RATINGS
ABOVEAVERAGEHEALTH
INSURANCEEXPOSURE
(150% or higher)
EXPOSURETO
DISINTER-MEDIATION
RISK
TRANSACTIONS,MERGERS,
DIVESTITURES,ACQUISITIONS
OTHERSIGNIFICANTAND/OR NON-QUANTITATIVE
ITEMS
TOTALALIRT
"FLAGS"RAISED
(OUT OF 14)
HIGHER RISK LEVEL VS INDUSTRY
SIZE &RATINGS
(Score 4 or lower)
OPERATINGPERF.
(Score 10 or lower)
INVESTMENTPERF.
(Score 12 or lower)COMPANY
DOWNGRADEOF ALIRTCREDITRATING
CURR. YR.
1Allianz Life Ins. Co. of NY X
0Allianz Life of N. America
2XColumbus Life Ins. Co. X
1XGenworth Life & Annuity
2XXGenworth Life Ins. Co.
3XXXGenworth Life, NY
2XXHartford Life Ins. Co.
1XING Life Ins. & Annuity
2XING USA Annuity & Life X
3XXLiberty Life of Boston X
2XXLife Ins. Co. of the SW
1XMass. Mutual Life
1XNew York Life Ins. & Ann.
0New York Life Ins. Co.
1XNorth Amer. Co. for L&H
0Northwestern Mutual Life
0Ohio National Life Ins Co
0Pacific Life Ins. Co.
0Penn Mutual Life
2XXPruco Life Ins. Co., AZ
1XPruco Life Ins. Co., NJ
1XUnion Central Life
2XWestern Reserve Life X
ALIRT LIFE COMPOSITE 14 8 6 1 7 11 21 2 3 10 2 17 25 15 28
44
FIVE-YEAR CREDIT RATINGS MATRIX
The Credit Ratings Trend Matrix highlights companies with declining or improving credit quality. ALIRT Insurance Research believes fiduciaries should be proactive rather than reactive when weighing public rating agency credit concerns. Since these quality indicators are public, institutional clients, distribution systems, policyholders, and regulators could react en masse to ratings changes, negatively impacting policyholder safety. By utilizing the ALIRT Life Service, observing historical credit trends, and monitoring how rating agencies view the insurance industry, fiduciaries and institutional investors can better “predict” significant financial deterioration and ratings downgrades before they occur. The Credit Ratings Trend Matrix includes for each insurer a five year history of the ALIRT qualitative credit ratings, as well as the ratings from Moody’s, Standard & Poor’s, and Fitch.
NON-CORE LIST------------------------------------
45
ALIRT INSURANCE RESEARCH
CURRENT LIFE CREDIT RATING AND FIVE-YEAR TREND OF RATINGS
COMPANY 2011 2012 2013 20142010
RATING CHANGEIN YEAR
RATING CHANGEIN YEAR
RATING CHANGEIN YEAR
20142013201220112010 20142013201220112010FITCHSTANDARD
& POORMOODY'S
RATING CHANGEIN YEAR
ALIRTCREDITRATING 2013201220112010 2014
Allianz Life Ins. Co. of NY N/RNCNCNCNCNCAAN/RNCNCNCNC1AAllianz Life of N. America N/RNCNCNCNCNCAANCNCNCNCNCA2NCNCNC11AA-Columbus Life Ins. Co. NCNCNCNCNCAANC-1NCNCNCAANCNCNCNCNCAa3NCNC-1NC1AGenworth Life & Annuity NCNCNCNCNCA-NCNC-1NCNCA-NCNC-1NCNCA31NCNC-1NCAA-Genworth Life Ins. Co. NCNCNCNCNCA-NCNC-1NCNCA-NCNC-1NCNCA31NC-1NCNCA+Genworth Life, NY NCNCNCNCNCA-NCNC-1NCNCA-NCNC-1NCNCA3NCNCNC1NCA+Hartford Life Ins. Co. -1NCNCNCNCBBB+NC-1-1NCNCBBB+-2NCNCNCNCBaa2NCNCNCNCNCA+ING Life Ins. & Annuity NCNCNCNCNCA-NCNCNC-1-1A-NCNCNC-1NCA31NCNCNCNCAA-ING USA Annuity & Life NCNCNCNCNCA-NCNCNC-1-1A-NCNCNC-1NCA3NCNCNCNC-1ALiberty Life of Boston N/RNCNCNCNCNCA-N/RNCNCNCNCNCALife Ins. Co. of the SW N/RNCNCNCNC-1ANCNCNCNCNCA2NCNCNCNC1A+Mass. Mutual Life NCNCNCNC-1AA+NCNCNCNCNCAA+NCNCNCNCNCAa2NCNCNCNCNCAAANew York Life Ins. & Ann. NCNCNCNCNCAAANCNCNC-1NCAA+NCNCNCNCNCAaaNCNCNC1NCAA+New York Life Ins. Co. NCNCNCNCNCAAANCNCNC-1NCAA+NCNCNCNCNCAaaNCNCNCNCNCAAANorth Amer. Co. for L&H N/RNCNCNCNCNCA+N/RNC1NC1NCAA-Northwestern Mutual Life NCNCNCNCNCAAANCNCNC-1NCAA+NCNCNCNCNCAaaNCNCNCNCNCAAAOhio National Life Ins Co N/RNC-1NCNCNCAA-NCNCNCNCNCA1NCNCNCNCNCAA-Pacific Life Ins. Co. NCNCNCNC-1A+NCNCNCNC-1A+NCNCNCNCNCA1NCNCNCNCNCAAPenn Mutual Life N/RNC-1NCNCNCA+NCNCNCNCNCAa3NCNCNCNCNCAA-Pruco Life Ins. Co., AZ NCNCNCNCNCA+NCNCNCNCNCAA-NC1NCNCNCA1NCNCNC1NCA+Pruco Life Ins. Co., NJ NCNCNCNCNCA+NCNCNCNCNCAA-N/RNC1NCNCNCA+Union Central Life N/RNCNCNCNC-1A+N/RNC1NCNCNCA+Western Reserve Life NCNCNCNC-1AA-NCNCNCNCNCAA-NCNCNCNCNCA1NCNC-1NCNCA
ALIRT Life Composite A+ A+
+ OR - INDICATES CHANGE IN RATING, NUMBER INDICATES RATING LEVELS OF CHANGE NC NO CHANGE IN RATING
Iss. RATING ISSUED IN CURRENT YEARBMRS BELOW ALIRT INSURANCE RESEARCH"S MINIMUM RATING STANDARD
A+ A1
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ALIRT LIFE FINANCIAL PERFORMANCE SCORE RESULTS SUMMARY
This section provides a matrix of company results screened and graded by the ALIRT Life Model. Companies are sorted alphabetically and by each of the five ALIRT Life Financial Performance TIER Scores (Investment Performance Score, Operational Performance Score, Group Performance Score, Size & Ratings and Total ALIRT Life Financial Performance Score) versus an industry composite for each measure. Total ALIRT Scores are compared to the prior period and the change in Score between periods is highlighted. Also, each Performance Tier is sorted on ALIRT Scores, high to low, highlighting outliers.
NON-CORE LIST------------------------------------
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ALIRT INSURANCE RESEARCH LIFE FINANCIAL PERFORMANCE SCORES - AS OF 3/31/2014TIER ONE
INVESTMENTPERFORMANCE
MAX SCORE = 40
TIER TWOOPERATING
PERFORMANCE
MAX SCORE = 35
TIER THREEGROUP
PERFORMANCE
MAX SCORE = 11
TIER FOUR SIZE &RATINGS
MAX SCORE = 14
TOTAL ALIRT SCORE
MAX SCORE = 100
TOTAL SCORE TOTAL SCORE TOTAL SCORE TOTAL SCORE ALIRT SCORECHANGE IN
COMPANY
3/31/2014 12/31/2013
2014ALIRT SCORE9 69 5 6 26 32Allianz Life Ins. Co. of NY 60
0 55 10 6 19 20Allianz Life of N. America 55
-2 40 5 6 16 13Columbus Life Ins. Co. 42
-8 45 7 3 15 20Genworth Life & Annuity 53
-7 44 6 3 16 19Genworth Life Ins. Co. 51
-4 37 5 2 13 17Genworth Life, NY 41
-6 49 7 4 14 24Hartford Life Ins. Co. 55
-1 51 8 6 14 23ING Life Ins. & Annuity 52
4 52 7 6 22 17ING USA Annuity & Life 48
-5 39 6 3 14 16Liberty Life of Boston 44
-13 52 7 7 19 19Life Ins. Co. of the SW 65
7 61 13 7 21 20Mass. Mutual Life 54
0 57 13 8 23 13New York Life Ins. & Ann. 57
2 64 14 8 21 21New York Life Ins. Co. 62
-1 60 9 8 23 20North Amer. Co. for L&H 61
1 63 14 8 22 19Northwestern Mutual Life 62
7 64 9 7 21 27Ohio National Life Ins Co 57
-1 58 10 5 19 24Pacific Life Ins. Co. 59
6 61 8 8 21 24Penn Mutual Life 55
2 63 6 6 24 27Pruco Life Ins. Co., NJ 61
3 67 7 6 24 30Pruco Life Ins. Co., AZ 64
-4 64 5 6 24 29Union Central Life 68
-1 52 5 2 19 26Western Reserve Life 53
ALIRT Life Composite -8 54 46 7 3 18 18
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ALIRT INSURANCE RESEARCH LIFE FINANCIAL PERFORMANCE SCORES - AS OF 3/31/2014
TOTAL ALIRT SCORE
MAX SCORE = 100
TIER ONEINVESTMENT PERF. SCORE
MAX SCORE = 40
TIER TWOOPERATING PERF. SCORE
MAX SCORE = 35
TIER THREEGROUP PERF. SCORE
MAX SCORE = 11
TIER FOURSIZE & RATING
MAX SCORE = 14
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
TOTALSCORECOMPANY
Allianz Life Ins. Co. of NY 32 Allianz Life Ins. Co. of NY 26 New York Life Ins. & Ann. 8 New York Life Ins. Co. 14 Allianz Life Ins. Co. of NY 69Pruco Life Ins. Co., AZ 30 Pruco Life Ins. Co., AZ 24 New York Life Ins. Co. 8 Northwestern Mutual Life 14 Pruco Life Ins. Co., AZ 67Union Central Life 29 Pruco Life Ins. Co., NJ 24 North Amer. Co. for L&H 8 Mass. Mutual Life 13 New York Life Ins. Co. 64Ohio National Life Ins Co 27 Union Central Life 24 Northwestern Mutual Life 8 New York Life Ins. & Ann. 13 Ohio National Life Ins Co 64Pruco Life Ins. Co., NJ 27 New York Life Ins. & Ann. 23 Penn Mutual Life 8 Allianz Life of N. America 10 Union Central Life 64Western Reserve Life 26 North Amer. Co. for L&H 23 Life Ins. Co. of the SW 7 Pacific Life Ins. Co. 10 Northwestern Mutual Life 63Hartford Life Ins. Co. 24 ING USA Annuity & Life 22 Mass. Mutual Life 7 North Amer. Co. for L&H 9 Pruco Life Ins. Co., NJ 63Pacific Life Ins. Co. 24 Northwestern Mutual Life 22 Ohio National Life Ins Co 7 Ohio National Life Ins Co 9 Mass. Mutual Life 61Penn Mutual Life 24 Mass. Mutual Life 21 Allianz Life Ins. Co. of NY 6 ING Life Ins. & Annuity 8 Penn Mutual Life 61ING Life Ins. & Annuity 23 New York Life Ins. Co. 21 Allianz Life of N. America 6 Penn Mutual Life 8 North Amer. Co. for L&H 60New York Life Ins. Co. 21 Ohio National Life Ins Co 21 Columbus Life Ins. Co. 6 Genworth Life & Annuity 7 Pacific Life Ins. Co. 58Allianz Life of N. America 20 Penn Mutual Life 21 ING Life Ins. & Annuity 6 Hartford Life Ins. Co. 7 New York Life Ins. & Ann. 57Genworth Life & Annuity 20 Allianz Life of N. America 19 ING USA Annuity & Life 6 ING USA Annuity & Life 7 Allianz Life of N. America 55Mass. Mutual Life 20 Life Ins. Co. of the SW 19 Pruco Life Ins. Co., AZ 6 Life Ins. Co. of the SW 7 ING USA Annuity & Life 52North Amer. Co. for L&H 20 Pacific Life Ins. Co. 19 Pruco Life Ins. Co., NJ 6 Pruco Life Ins. Co., AZ 7 Life Ins. Co. of the SW 52Genworth Life Ins. Co. 19 Western Reserve Life 19 Union Central Life 6 Genworth Life Ins. Co. 6 Western Reserve Life 52Life Ins. Co. of the SW 19 Columbus Life Ins. Co. 16 Pacific Life Ins. Co. 5 Liberty Life of Boston 6 ING Life Ins. & Annuity 51Northwestern Mutual Life 19 Genworth Life Ins. Co. 16 Hartford Life Ins. Co. 4 Pruco Life Ins. Co., NJ 6 Hartford Life Ins. Co. 49Genworth Life, NY 17 Genworth Life & Annuity 15 Genworth Life & Annuity 3 Allianz Life Ins. Co. of NY 5 Genworth Life & Annuity 45ING USA Annuity & Life 17 Hartford Life Ins. Co. 14 Genworth Life Ins. Co. 3 Columbus Life Ins. Co. 5 Genworth Life Ins. Co. 44Liberty Life of Boston 16 ING Life Ins. & Annuity 14 Liberty Life of Boston 3 Genworth Life, NY 5 Columbus Life Ins. Co. 40Columbus Life Ins. Co. 13 Liberty Life of Boston 14 Genworth Life, NY 2 Union Central Life 5 Liberty Life of Boston 39New York Life Ins. & Ann. 13 Genworth Life, NY 13 Western Reserve Life 2 Western Reserve Life 5 Genworth Life, NY 37
Alirt Life Composite 18 18 3 7 46Alirt Life Composite Alirt Life Composite Alirt Life CompositeAlirt Life Composite
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FIVE-YEAR TREND SUMMARIES OF ALIRT FINANCIAL PERFORMANCE RATIOS AND SCORES
Two facing pages display five years of ALIRT FINANCIAL PERFORMANCE Scores and Key Financial Ratios for each company. Each page includes a Notes Column in which ALIRT Insurance Research includes important handwritten analyses on each company. Clients can also use this area to incorporate their own notes from conversations, conference calls, and/or meetings with ALIRT Insurance Research analysts.
ALL COMPANIES--------------------------------------
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ALIRT LIFE MODEL GLOSSARY OF TERMS AND KEY FINANCIAL MEASURES
Includes a description of key financial ratios and operating data.
G1
GLOSSARY OF KEY LIFE FINANCIAL RATIOS Annuity Surrender Rate: Surrenders as a percent of prior year annuity reserves. Measures the persistency of a company’s annuity business. Structured settlement writers would have low surrender ratios, as structured settlements typically can not be surrendered. Fixed annuity writers, however, could have high surrender rates, as policyholders surrender to take advantage investments that could provide higher returns (such as variable annuities or mutual funds). Asset-Backed Securities: Bonds where interest and principal payments are generated from the proceeds of underlying loans (excluding mortgages), including home equity loans, auto loans, and credit card receivables. Securityholders receive interest and principal payments as determined by the structure of their bond, rather than receiving a pro-rata share of the loan pool’s proceeds. Asset Valuation Reserve (AVR): A reserve established by the NAIC in 1992, whereby companies hold reserves relating to their holdings of specific asset types or classes. Higher reserve amounts are required for assets perceived to have higher risk (real estate, schedule BA, non-investment grade bonds, etc.). The AVR replaced the Mandatory Securities Valuation Reserve (MSVR). Capital Ratio: Total surplus (surplus, asset valuation reserve (AVR), and interest maintenance reserve (IMR)) as a percent of general account invested assets. Measures the cushion a company has against a decline in the value of its assets, before its surplus is depleted. For example, a company with a capital ratio of 5% can withstand a 5% reduction in the value of its assets before its surplus is depleted, while a company with a 10% capital ratio can withstand a 10% reduction. Fixed Charges: Interest expense, minority interest, and preferred dividends. Health Insurance Combined Ratio: A measure of the profitability of health insurance lines. The combined ratio is the sum of incurred claims and expenses as a percent of total health insurance premiums earned. A combined ratio of 100% indicates that premiums earned exactly offset claims and expenses. However, a combined ratio exceeding 100% does not necessarily mean the company is losing money, as investment income offsets a certain level of losses.
G2
GLOSSARY OF KEY LIFE FINANCIAL RATIOS
Health Insurance Leverage: Net health insurance premiums written to surplus. Measures exposure to health insurance lines relative to a company’s surplus. A company with higher health insurance leverage will experience, all things equal, a greater decline in surplus when adverse health insurance underwriting or claims experience occurs. Health insurance premiums for life insurers’ can comprise many distinct product lines, including indemnity medical insurance, dental, disability, cancer, Medicare supplement, and other coverages.
Higher Risk Assets: Includes non-investment grade bonds, unaffiliated stocks, mortgage loans delinquent or in the process of foreclosure and foreclosed real estate. Individual Life Lapse Ratio: Lapses and surrenders as a percent of total life insurance in force. Measures the persistency of a company’s life insurance business. The lower the ratio, the more persistent a company’s life insurance business. Companies with higher persistency, all things equal, usually enjoy higher levels of earnings, as the business they sell initially remains with the company longer. This contrasts with companies that continually having to sell new policies to offset policies leaving the company via lapse or surrender.
Interest Maintenance Reserve (IMR): A reserve established by the NAIC in 1992, in order to “smooth” fluctuations in surplus from interest rate changes. All interest-related realized capital gains (or losses) are transferred to IMR in the year that they occur, and the gains (or losses) are amortized into net income over time. Life Insurance Leverage: Face amount of life insurance in force to surplus. Measures a exposure to life insurance underwriting results relative to a company’s surplus. A company with higher life insurance leverage will experience, all things equal, a greater decline in surplus when adverse life insurance underwriting or claims experience occurs.
Non-investment grade bonds: Bonds with credit ratings below BBB-. Bonds in NAIC Classes 3, 4, 5, and 6.
Other ABS and MBS: Includes “Pass-Throughs” and “Asset-Backed Securities”.
G3
GLOSSARY OF KEY LIFE FINANCIAL RATIOS Quick Liquidity: Assets a company could convert to cash very quickly (with small losses) as a percent of annuity reserves. Recent liquidity problems at Mutual Benefit, Confederation Life, and General American were driven by large volumes of group annuity surrenders over a short period of time. Furthermore, individual annuity business could be surrender-prone, especially if large volumes were sold by only a few institutions (stock brokerage firms, for example). Reinsurance Leverage: Reserve credit taken on reinsurance ceded as a percent of surplus. Measures exposure if all reinsurers fail to make good on their reinsurance obligations to the company. In that case, the company would be liable for all liabilities ceded to reinsurers, in addition to all liabilities retained at the company. Companies with high ratios have higher exposure to reinsurance risks. This is often mitigated for some companies, which have a arrangement with an affiliated company to automatically reinsure certain or all types of business written. Return on Assets: Operating earnings as a percent of invested assets. Returns are expressed both before and after taxes, using pretax or after-tax earnings as the numerator. Return on Equity: Operating earnings as a percent of total surplus, AVR, and IMR. Returns are expressed both before and after taxes, using pretax or after-tax earnings as the numerator. Reserve Credit: The amount of insurance or annuity reserves associated with a reinsurance transaction.
Risk-Based Capital Ratio: This ratio was developed by the NAIC, and became effective in 1993. Under RBC, a company must hold a certain amount of capital relative to its specific asset and liability profile. Higher charges are assessed to assets, liabilities, and businesses perceived to have higher risk. The company’s total amount of capital is then divided by the required amount, and the resulting ratio is the RBC Ratio.
Schedule BA Assets: Assets listed in schedule BA of the annual statutory statement include (among other things) joint venture and limited partnership shares, private equity investments, oil and gas partnerships, and surplus notes.
G4
GLOSSARY OF KEY LIFE FINANCIAL RATIOS
Surplus Relief: A means by which insurance companies, by using reinsurance, can boost their current profitability and surplus level, at the expense of future profitability. Total Liquidity: A measure of the assets a company could convert to cash relatively quickly with low or moderately low losses, relative to the company’s liability profile. Traditional Bonds: Bonds where interest and principal is generated by the proceeds of the issuing entity (a corporation or government, for example), rather than proceeds from a pool of loans (CMOs, credit card receivables, etc.).
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