Credit Opinion: New York Life Insurance Company

Transcription

1 Credit Opinion: New York Life Insurance Company Global Credit Research - 23 Jul 2013 New York City, New York, United States Ratings Category Rating Outlook Insurance Financial Strength Surplus Notes New York Life Insurance & Annuity Corporation Rating Outlook Insurance Financial Strength Moody's Rating STA Aaa Aa2 (hyb) STA Aaa Contacts Analyst Phone Ann G. Perry/New York City Neil Strauss/New York City Robert Riegel/New York City Stefan Kahandaliyanage/New York City Key Indicators New York Life Insurance Company[1] Total Assets (USD millions) , , , , ,886 Shareholders' Equity (USD millions) Net Income (USD millions) 31,604 2,162 27,156 1,248 25,495 1,870 20,468 1,290 14,906 (1,197) Total Revenues (USD millions) 25,135 23,653 23,326 21,841 16,830 High Risk Assets % Shareholders' Equity Goodwill & Intangibles % Shareholders' Equity 84.3% 15.9% 85.7% 19.2% 87.6% 32.4% 106.0% 48.6% 139.4% 74.7% Shareholders' Equity % Total Assets Return on Capital (1 yr.) 11.5% 6.7% 10.5% 4.2% 10.3% 7.2% 8.9% 6.5% 6.9% -5.9% Sharpe Ratio of ROC (5 yr.) 67.9% 69.2% Adjusted Financial Leverage 13.0% 17.1% 14.0% 18.1% 18.6% Total Leverage 16.0% 19.4% 17.1% 22.0% 20.2% Earnings Coverage (1 yr.) 11.5x 6.3x 11.8x 9.6x -10.3x Cashflow Coverage (1 yr.) [1] Information based on GAAP financial statements Opinion SUMMARY RATING RATIONALE Moody's rates New York Life Insurance Company (NYLIC; and collectively with its subsidiaries, New York Life), and its wholly owned subsidiary, New York Life Insurance and Annuity Corporation (NYLIAC), Aaa for insurance

2 financial strength (IFS). The rating is based upon New York Life's intrinsic strengths including a leading position in the U.S. life insurance market, distribution channels, strong underwriting skills as shown by excellent persistency and mortality experience as well as a robust and resilient balance sheet highlighted by solid financial flexibility and generally a high-quality investment portfolio. The rating also reflects the group's earnings diversity, strong liquidity, and outstanding capitalization. New York Life is the largest mutual life insurer in the U.S. The company has been able to capitalize on this unique position by underscoring the difference in its form of corporate ownership with that of its stock company competitors. The company also has a large block of in-force participating life insurance business that contains a significant amount of embedded profitability that should benefit the company over many years. We also expect New York Life's individual life business to continue to experience favorable lapse, mortality and operating costs. These strengths are tempered by an earnings profile that is lower than the rating level, the company's moderatelysized direct equity and limited partnership investment portfolio, and challenges in growing its more traditional business lines. In addition, in 2012, the company narrowed its international focus to Mexico where it can garner significant market presence while exiting locations that have less potential (e.g., operations in Hong Kong, South Korea, China, Thailand, and India) - actions that we view as credit positive. NYLIAC's Aaa IFS rating is based upon the implied support from New York Life as well as commonality of the operations of this company with its parent: shared marketplace identification, products, management and distribution among other key factors. Credit Strengths New York Life's credit strengths are: - Top tier position in the domestic individual life insurance business. - Large block of individual life insurance contains significant embedded profits. - Productive and well-established career agency distribution force. - Well diversified investment portfolio, strong liquidity, and outstanding capitalization. - Solid profitability for a mutual insurance company, even after taking into account the payment of significant policyholder dividends. Credit Challenges New York Life's credit challenges are: - An earnings profile lower than the rating level. - Challenges in growing its more traditional business lines. - Continued maintenance of its strong growth and retention of its agency field force. - Modest market position in the competitive asset accumulation business. - A moderately-sized direct equity and limited partnership investment portfolio in addition to significant exposure to commercial mortgage loans and other commercial real estate related investments. Rating Outlook The outlook on New York Life's ratings is stable. NYL's stable outlook is primarily driven by the affirmation of the US government's Aaa rating with a stable outlook, and reflects the company's exceptional intrinsic strengths, including leading positions in its core markets and a significant focus on participating products, which leads to a resilient balance sheet. In addition, NYL's mutual ownership structure aligns the interests of policyholders/owners, creditors, and company management. What to Watch For: - Sustainability of individual life sales.

3 - Changes in the health of the commercial real estate market. - Improvements in profitability. What Could Change the Rating - Down New York Life's ratings could go down as a result of: - Downgrade of the US government - Company action level NAIC RBC ratio falling below 400% for more than a short time period (522% at 12/31/12) or a reduction in capital of more than 10% over a 12 month period. - GAAP pre-tax realized credit losses and impairments of more than $400 million in 2013 ($53 million for full year 2012). - Adjusted financial leverage of 20% or more on a consolidated GAAP basis (13% at 12/31/12). - Earnings coverage consistently below mid-single digits on a consolidated GAAP basis (11.5x in 2012). Notching Considerations The spread between NYLIC's Aa2 surplus notes rating and its Aaa IFS rating is two notches, consistent with Moody's typical notching spread for surplus notes issued by life insurance operating companies. DETAILED RATING CONSIDERATIONS Moody's rates New York Life Aaa for insurance financial strength, which is higher than the Aa1 rating indicated by the adjusted insurance financial strength rating scorecard, with the principal differences being: (a) an intense focus and a very strong market position in the participating life insurance business, (b) a governance structure with a strong focus on the best interests of policyholders/creditors, and (c) an emphasis on superior customer value with very substantial experience-rated policyholder dividends, and a strong capital position that depresses reported profitability metrics. Insurance Financial Strength Rating The key factors currently influencing the rating and outlook are: MARKET POSITION AND BRAND: Aaa - LEADING MARKET POSITION IN A NUMBER OF IMPORTANT SEGMENTS New York Life has one of the most well-recognized and respected brands in the U.S. and a leading market position in a number of important segments of the industry. According to LIMRA, New York Life was among the largest sellers of life insurance and lifetime income annuities in the U.S. in New York Life is also the leading direct marketer of life insurance, a top long term care insurance provider, and the largest underwriter of professional association insurance programs in the U.S. Accordingly, we view the company's market position and brand to be in line with expectations for Aaa insurers and have moved this factor up from the Aa indicated by the scorecard metrics. DISTRIBUTION: Aa - WIDE DIVERSITY OF DISTRIBUTION CHANNELS The company benefits from a wide diversity of distribution channels including career agents, independent brokers, banks, direct/sponsored distribution (e.g. AARP), and an institutional sales force. Distribution diversity is one of the broadest in the industry and is consistent with a Aaa rating. One of New York Life's greatest strengths is its productive, 12,000 plus member career agency force which is its primary channel for distributing permanent, cash value life insurance products, the company's core product. The controlled nature of the company's career agency channel contributes to New York Life's strong business retention rates. The other distribution channels are primarily used to distribute specialized insurance and investment products such as COLI/BOLI, sponsored life products (AARP and Professional Affinity Organizations), fixed annuities, and investment products; however, the company has less control over its producers in these channels. We have kept the score on this factor at Aa, consistent with the unadjusted scorecard. PRODUCT FOCUS AND DIVERSIFICATION: Aaa - OVERALL RISK PROFILE SUPPORTED BY LOW-RISK BLOCK OF PARTICIPATING WHOLE LIFE

4 New York Life manufactures and markets a wide range of products for both retail and institutional buyers. The company's principal product lines include individual life insurance, individual fixed and immediate annuities, longterm care insurance, pensions & institutional investment products business, and asset management through its New York Life Investments subsidiary. The overall risk profile of the company's product portfolio, which is wellpositioned among its competitors, is supported by its large block of participating life insurance, one of the lowest risk products sold by U.S. firms. The large block of low risk participating life insurance as well as the company's broad product diversification raises the adjusted score on this factor to Aaa from the unadjusted Aa score. ASSET QUALITY: Aa - HIGH RISK ASSET EXPOSURE MOSTLY DRIVEN BY BIG BONDS AND ALTERNATIVE INVESTMENTS The overall quality of New York Life's investment portfolio is very good. The company's exposure to high risk assets at 84.3% of equity as of December 31, 2012 is consistent with Moody's expectations for A-rated companies. Approximately 39% of this amount is in non-investment grade bonds, although many are private placements with covenant and/or collateral protections. New York Life's exposure to non-investment grade corporate bonds as a percent of invested assets is slightly above the industry average, but the performance of this portfolio has been considerably better than average for this asset class. Most of the remainder of high risk assets are various forms of alternative investments such as partnership interests in investment funds. Because investment results are largely shared with participating policyholders, the company substantially reduces its risk of owning these investments. The company's non-agency residential mortgage-backed security (RMBS) exposure as of December 31, 2012 was relatively modest at 3% of invested assets. We believe that there will be additional, but modest losses in Approximately 22% of this portfolio is rated below investment grade using the NAIC SVO rating scale. The $8.8 billion CMBS portfolio is of high quality with over 80% rated Aaa as of December 31, The company also had a high quality $19 billion direct commercial mortgage loan (CML) portfolio as of December 31, 2012, which has continued to perform well. Total portfolio credit impairments fell in 2012, to $53 million, from $245 million in Goodwill and other intangibles are equal to 16% of capital, consistent with a Aaa rating. The adjusted score on this factor is raised to Aa from the unadjusted score of A given the portfolio's strong diversification, limited exposure to non-agency RMBS, strong credit performance of non-investment grade holdings and high likelihood of DAC recoverability. CAPITAL ADEQUACY: Aaa - CONSISTENTLY STRONG RBC RATIO While New York Life's capital-to-total asset ratio of 11.5% in the scorecard suggests a lower score (Aa), we believe that the NAIC RBC ratio is a better indicator of the company's capital adequacy. NYLIC's year-end 2012 NAIC RBC ratio was 522%, a level commensurate with Aaa-rated companies. Moody's expects that this ratio will continue to remain above 400% over time (and expects the year-end 2013 ratio to be in the same range as yearend 2012), consistent with the company's Aaa insurance financial strength rating. Total Adjusted Capital at December 31, 2012 was $19.5 billion ($19.8 billion at 3/31/13). As a mutual, New York Life's long-term capital adequacy benefits from flexibility in adjusting dividends related to its sizeable participating whole life business. We have adjusted the score on this factor to Aaa from the unadjusted scorecard result of Aa based upon the company's current and expected future capitalization on an RBC basis, as well as its relative stability under a stress scenario. PROFITABILITY: A - ROC IS BELOW EXPECTATIONS GIVEN SUBSTANTIAL CAPITAL POSITION AND POLICYHOLDER DIVIDENDS New York Life's historical profitability performance as measured by its five year average return on capital (ROC) of 3.7% has been below our expectations for a Aaa-rated company. This is due in part to New York Life's outstanding capital position (which depresses reported return on capital measures) and also due to an emphasis on superior policyholder value, which reduces profitability through policyholder dividends that are treated as operating expenses. Although a portion of policyholder dividends is economically equivalent to shareholder dividends for a mutual insurer, under GAAP accounting these dividends are considered expenses and thus serve to depress the company's reported ROC, whereas shareholder dividends do not impact ROC for a stock company. The Sharpe Ratio of ROC, at 68%, is in the Ba range primarily due to a net loss reported in 2008, partially driven by capital variability related to the company's capital loss tax planning strategy. Core earnings (New York Life

5 Management GAAP), which excludes non-recurring items, continues to grow, mainly driven by the company's large block of in-force participating life insurance. As such, we expect profitability to continue to trend towards historical levels, in the 7%-8% range for ROC. We have adjusted the score on this factor to A from Baa on the scorecard in recognition of the business model issues and the tax loss harvesting in 2008, which account for the lower level of reported ROC relative to stock company peers. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (ALM): Aa - STABLE LIABILITIES AND STRONG LIQUIDITY The results of Moody's 2011 year-end liquidity model (latest available) for New York Life were consistent with a Aa rating. ALM at New York Life is greatly enhanced by the large amount of very stable participating business on the company's books, which effectively allows the company to share some of its inherent risks with its participating policyholders. This also serves to benefit the company's liquidity profile. The company's liquidity profile is further bolstered by a relatively liquid general account investment portfolio and $34.6 billion in holdings of cash, short term investments, and U.S Treasury and agency securities at December 31, 2012 ($36.6 billion at December 31, 2011). New York Life is one of the few companies that continues to issue funding agreement backed notes. However, we believe that the program is well managed and that these exposures are well matched from both a duration and, as issues approach maturity, from a cash perspective. For the twelve months following March 31, 2013, New York Life has approximately $4.5 billion of GICs, nonputable funding agreements, funding agreement-backed notes (FANIPs) and FHLB borrowings maturing. To service these maturing liabilities, the company has cash-on-hand and maturing investment grade bonds. As of March 31, 2013, unencumbered cash, short-term investments and unused credit facilities totaled about $16.2 billion and included investment grade bonds maturing over the next twelve months of about $12.2 billion. We recognize the stability of the majority of the company's liabilities as well as the substantial liquidity available in the investment portfolio. However, given the asset-liability management needs of its annuity portfolios, we have left the adjusted score on this factor unchanged from the unadjusted scorecard result of Aa. FINANCIAL FLEXIBILITY: Aa - LOW FINANCIAL LEVERAGE, BUT MUTUALS ARE UNABLE TO ISSUE EQUITY On a GAAP basis, the company's adjusted financial leverage was 13% as of year-end 2012, and total leverage, which excludes Moody's equity credit treatment for the company's surplus notes and includes operating debt, was 16%. The company's nearly $2 billion of surplus notes receive 25% equity credit in accordance with Moody's hybrid methodology, which is factored into the adjusted financial leverage calculation. We expect adjusted leverage and total leverage for year-end 2013 to be in the same range as year-end The adjusted financial leverage and total leverage metrics are consistent with Aaa and Aa ratings, respectively. Average earnings coverage of about 6x over the past 5 years is consistent with the metrics expected for A-rated companies. We expect that in 2013 and in future years earnings coverage will be somewhat constrained from interest expense from the company's surplus notes, and, over time increase to a level more in line with the Aaa companies (earnings coverage was approximately 11.5x, on the high end of the Aa range). We also expect New York Life's adjusted financial leverage will remain below 20%. As a mutual company, New York Life's lack of ready access to the public equity markets, given its mutual status, and limited access to the debt capital markets somewhat limits its financial flexibility. We have left this factor at Aa, consistent with the unadjusted scorecard result. Other Considerations New York Life has a very strong commitment to serving its policyholders, and writes primarily business that provides risk sharing with its customers through dividend-paying products. Its branding and consumer marketing is tightly linked with its participating product focus and commitment to policyholder value and financial strength. Considering its generally conservative investment philosophy, together with its emphasis on the sale of dividendpaying products, New York Life presents very conservative business and financial profiles, and the company's management does not stray from its core policyholder oriented principles, which align well with creditor interests. Although some aspects of the company's credit profile are directly captured by the key rating factors, the additional benefit from the company's deeply engrained focus on financial strength, policyholder value, and overall conservative management philosophy results in a one-notch uplift, raising the company's IFS rating to Aaa from the adjusted scorecard rating of Aa1.

6 Liquidity Profile New York Life's debt consists of two issues of surplus notes, $992 million and $998 million, maturing in 2033 and 2039, respectively. In addition to its own direct debt, New York Life's subsidiary, New York Life Capital Corporation (NYL Capital) issues commercial paper. NYL Capital benefits from explicit support from its parent. Its $2 billion commercial paper (CP) program is rated Prime-1 (P-1) and the program is available for spread arbitrage opportunities and occasionally used for liquidity management. The average amount of CP outstanding in Q was approximately $503 million, with a maximum of $503 million outstanding during the quarter, and approximately $503 million outstanding as of March 31, NYL Capital Corp's CP program is backed by a $1.0 billion bank credit facility. This facility is comprised of a $500 million 3 year component which matures in June 2016 and a 5 year $500 million component which matures in June The bank facility does not contain a material adverse change (MAC) clause, and the financial covenants in the bank facility are not restrictive and are quite manageable for the company. Rating Factors New York Life Insurance Company Financial Strength Rating Scorecard [1][2] Aaa Aa A Baa Ba B Caa Score Adjusted Score Business Profile Aa Aaa Market Position and Brand (15%) Aa Aaa Relative Market Share Ratio X Distribution (10%) Aa Aa Distribution Control X Diversity of Distribution X Product Focus and Diversification (10%) Aa Aaa Product Risk X Life Insurance Product Diversification X Financial Profile A Aa Asset Quality (10%) A Aa High Risk Assets % Shareholders' Equity 84.3% Goodwill & Intangibles % Shareholders' 15.9% Equity Capital Adequacy (15%) Aa Aaa Shareholders' Equity % Total Assets 11.5% Profitability (15%) Baa A Return on Capital (5 yr. avg) 3.7% Sharpe Ratio of ROC (5 yr. avg) 67.9% Liquidity and Asset/Liability Management (10%) Liquid Assets % Liquid Liabilities X Financial Flexibility (15%) Aa Aa Adjusted Financial Leverage 13.0% Total Leverage 16.0% Earnings Coverage (5 yr. avg) 5.8x Cashflow Coverage (5 yr. avg) Operating Environment (0%) Aaa - A Aa Aa Aaa - A Aggregate Profile Aa3 Aa1

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