Rating Action: TIAA-CREF, New York Life, Northwestern Mutual (Affirmation, Outlook Revision)

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1 Rating Action: TIAA-CREF, New York Life, Northwestern Mutual (Affirmation, Outlook Revision) On December 11, Moody s Investors Service affirmed the Aaa (Exceptional) insurance financial strength ratings of three U.S. life insurers and their affiliates and changed their outlooks to negative from stable. The companies New York Life Insurance Co., Northwestern Mutual Life Insurance Co., and Teachers Insurance & Annuity Association all have the highest possible insurance financial strength ratings from Moody s. According to Moody s, the change in outlook was influenced by Moody s view that the link between the credit profiles of these insurers and the U.S. government are very strong, and that these insurers lack sufficient diversification to address the systemic risks that affect the U.S. government s creditworthiness. Moody s currently has a negative outlook on the U.S. government s Aaa sovereign credit rating. This action aligns the ratings and outlooks of the aforementioned companies with those of the U.S. government. Moody s said these life insurers investments, businesses, revenues, and reserves are predominately domestic and the securities they invest in are typically correlated with the U.S. government and economy. A material weakening of the credit quality of the U.S. government would be major drivers of similar problems in the credit profiles of U.S. life insurance companies. In affirming the ratings, Moody s stated the companies each exhibit leading positions in their core markets, excellent underwriting skills, and strong balance sheets. Rating Action: Prudential (Affirmation) On December 6, Fitch Ratings affirmed the A+ (Strong) insurer financial strength ratings of the U.S. insurance subsidiaries of Prudential Financial, Inc. (Prudential). The rating outlook is stable. According to Fitch, the ratings reflect Prudential s strong market position and diversified mix of businesses, strong risk-adjusted capitalization, solid liquidity profile, and good operating performance. Fitch estimates that Prudential s combined NAIC risk-based capital (RBC) ratio for the U.S. insurance operations was about 475% percent as of September 30, Fitch stated that credit-related investment losses continued to trend lower in line with rating expectations and the holding company has a net cash position of $3.6 billion, well above the company s $1.2 billion minimum target. Ratings concerns cited by Fitch include Prudential s high financial leverage and uncertainty associated with macroeconomic headwinds, in particular sustained low interest rates and ongoing financial market volatility. Prudential s financial leverage ratio stood at 35% as of September 30, 2012, which is above Fitch s expectations for the rating level. Page 1 of 7

2 Rating Action: Lincoln National (Affirmation) On November 30, A.M. Best affirmed the financial strength rating of A+ (Superior) of the key life/health subsidiaries of Lincoln National Corp. (Lincoln National), including Lincoln National Life Insurance Co. Additionally, A.M. Best downgraded the financial strength rating of standalone subsidiary First-Penn Pacific Life Insurance Co. to A (Excellent) from A+ (Superior), reflecting the company s limited new business profile. The outlook for the ratings is stable. According to A.M. Best, Lincoln National s ratings reflect its leadership position across various lines of business, improved investment performance, and solid level of risk-adjusted capital. A.M. Best noted that the company has been proactive in managing its universal life products with secondary guarantees and variable annuity living benefit liabilities. A.M. Best also believes that Lincoln National s capital level adequately supports its current balance sheet risks under most stress scenarios. A.M. Best said Lincoln National s investment portfolio continues to perform well and it believes exposure to riskier assets is manageable. A.M. Best noted that direct premiums have declined as a result of pricing changes to products with secondary guarantees and that Lincoln National faces ongoing challenges from competition in its core businesses. Rating Action: Aviva USA (Downgrade) On December 13, Moody s Investors Service downgraded the insurance financial strength rating of Aviva Life and Annuity Co. (Aviva USA) to Baa1 (Adequate) from A1 (Good). The rating was assigned a developing outlook. According to Moody s, the downgrade followed the conclusion of a ratings review of Aviva USA that was initiated on June 27, Moody s said the downgrade was driven by the announcement by Aviva plc that it was in discussions with external parties which could lead to the sale of its U.S. operations. Moody s described the current rating as reflective of Aviva USA s standalone credit profile and reflects the removal of three notches of ratings support from the parent company. Moody s stated that the announcement was indicative of Aviva USA s status as non-core to Aviva plc. Moody s said it expects Aviva plc to provide minimal capital support to Aviva USA as a result of public statements. The developing outlook reflects the uncertainty surrounding the outcome of a possible sale of the company since the acquiring company could have ratings that are higher, lower, or the same as Aviva USA. Rating Actions: Phoenix Life The Phoenix Companies, Inc., parent company of Phoenix Life Insurance Co. (Phoenix Life), has announced that the company is seeking consent from bondholders to waive the requirement to furnish timely financials to the trustee on its Quarterly Interest Bonds due 2032, following a previous announcement by the company that it was postponing the release of its third quarter Page 2 of 7

3 2012 financial statements. As a result of the announcement, several rating agencies took actions related to the financial strength ratings of Phoenix Life. A.M. Best placed the financial strength rating of B+ (Good) under review with negative implications. Fitch placed the BB+ (Moderately Weak) insurer financial strength rating on Rating Watch Negative. Moody s placed the Ba2 (Questionable) insurance financial strength rating on review for downgrade. Standard & Poor s affirmed its BB- (Marginal) financial strength rating and placed it on CreditWatch with negative implications. Rating Action: MassMutual (Affirmation) On November 20, Fitch Ratings affirmed the AA+ (Very Strong) insurer financial strength ratings of Massachusetts Mutual Life Insurance Co. (MassMutual) and its wholly owned domestic insurance subsidiaries. The rating outlook is stable. According to Fitch, the ratings reflect MassMutual s large and stable block of traditional life insurance, strong capital levels, strong competitive positions in major business lines, high-quality investment portfolio, and moderate financial leverage. Fitch stated that total adjusted capital at MassMutual grew by 9% during the first nine months of However, Fitch commented that the quality of MassMutual s statutory capital has deteriorated somewhat in recent years due to the addition of a significant amount of surplus notes. Fitch said its key rating concerns include challenges related to macroeconomic factors and slow industry growth in the company s core insurance product lines. Fitch said it expects challenges associated with the European debt crisis, the U.S. fiscal cliff, and the weak economic recovery will constrain MassMutual s earnings over the near term and could have a negative effect on capital in a severe stress scenario. Rating Action: Guardian Life (Affirmation) On November 15, A.M. Best affirmed the financial strength rating of A++ (Superior) of Guardian Life Insurance Co. of America (Guardian Life) and its primary life/health subsidiaries. The outlook for the ratings is stable. According to A.M. Best, Guardian Life s ratings reflect its superior capitalization and positive premium trends in its core business segments despite challenging economic conditions. A.M. Best said Guardian s consistent earnings provide a stable stream of earnings and cash flow. The company has also executed a number of de-risking initiatives to counteract the low interest rate environment. Page 3 of 7

4 A.M. Best noted that Guardian s core life and group businesses face a high level of competition. In addition, A.M. Best expects continued pressure on investment spreads as a result of prolonged low interest rates. Rating Action: MetLife (Affirmation) On November 28, A.M. Best affirmed the financial strength rating of A+ (Superior) of the primary life/health insurance subsidiaries of MetLife, Inc. (MetLife). The outlook for the ratings is stable. According to A.M. Best, the affirmations reflect MetLife s diverse business mix, leading market positions in core business lines, favorable operating results, and significant operating scale. Additionally, MetLife s ratings are enhanced by de-risking strategies which focuses on products which are less capital intensive and sensitive to markets. MetLife has also benefitted from gains on interest rate hedges which have helped to reduce its earnings volatility in the current low interest rate environment. A.M. Best also stated that MetLife maintains a very strong liquidity position at the holding company level and is able to fund upcoming debt maturities without accessing capital markets. Partially offsetting these positive rating factors is MetLife s risk-adjusted capital position, which is viewed by A.M. Best as somewhat low for its current rating level. A.M. Best also remains concerned about the company s high exposure to real estate-related assets, primarily from its large commercial mortgage loan portfolio, and its higher overall level of below investment grade bonds. Rating Action: Principal Life (Affirmation) On December 3, A.M. Best affirmed the financial strength rating of A+ (Superior) of Principal Life Insurance Co. (Principal Life). The outlook for the rating is stable. According to A.M. Best, Principal Life s ratings reflect its diversified operating earnings, substantial assets under management, solid risk-adjusted capitalization, and continued improvement in the performance of its investment portfolio. Principal Life continues to generate favorable operating income across its multiple business segments. Significant improvement in net flows in Principal Life s fee-based businesses has generated fee income which has offset declines in net investment income. Net realized losses have decreased considerably since the financial crisis but A.M. Best said it expects realized losses to continue in 2013, as more of its commercial mortgage-backed securities portfolio continues to mature. Partially offsetting these positive factors are Principal Life s exposure to equity market risk in its fee-based businesses and its exposure to country risk due to the rapid expansion of its international operations. A.M. Best said it is also concerned with the negative impact an extended period of low interest rates could have on Principal Life s spread business and net investment income. Page 4 of 7

5 Rating Action: Genworth (Affirmation) On November 16, Fitch Ratings affirmed the A- (Strong) of the life subsidiaries of Genworth Financial Inc. (Genworth). The outlook for the rating is negative. According to Fitch, the affirmation reflects the view that Genworth s statutory capital position remains strong, liquidity profile has improved, and investment losses have tapered off. Genworth has improved its capital position by selling its Medicare supplement business and completing a life insurance block transaction. The negative outlook reflects Fitch s concerns regarding continuing losses in Genworth s U.S. mortgage insurance affiliate, low life insurance statutory earnings, limited financial flexibility, and exposure to the low interest rate environment within its long-term care and annuity businesses. Standard & Poor's Issues Analysis of Lincoln Financial Group On December 4, S&P released its analysis of Lincoln Financial Group (Lincoln) and its insurance operating subsidiaries. The report details the rationale for S&P's current AA- (Very Strong) financial strength ratings for Lincoln. Major rating factors cited as strengths are Lincoln's very strong competitive position, very strong capitalization and liquidity, strong enterprise risk management, and its balanced business mix. Major rating factors cited as weaknesses are the operating performance sensitivity to interest rates and equity market volatility, increasing pressure from interest rate spread compression, and fixed-charge coverage below historical levels. A copy of the report can be obtained from M's Product Management team. Fitch s Outlook for U.S. Life Insurance Industry Remains Stable for 2013 Fitch Ratings stated in a report that its credit outlook for the U.S. life insurance industry remains stable for 2013, which reflects the industry s strong balance sheet fundamentals and improved liquidity profile. Fitch said the sound financial position of the industry has somewhat mitigated Fitch s concerns over the challenging macroeconomic environment, which continues to pressure operating fundamentals. Fitch stated the industry has improved capitalization and the quality of assets in investment portfolios following the financial crisis. Persistent low interest rates will limit earnings capacity for life insurers but will not have a material negative impact on industry capital levels in The fiscal cliff and eurozone debt crisis remain the predominant risks to the industry, but Fitch said it expects policymakers to take the necessary steps to avoid a shock scenario. Page 5 of 7

6 S&P s Credit Outlook for North American Life Insurance Industry is Cautious Standard & Poor s stated that its credit outlook on the North American life insurance industry is cautious as macroeconomic risks could cause downgrades to outpace upgrades in In its Industry Economic and Ratings Outlook report, S&P said the while the industry remains well capitalized, it expects a weak global economy, persistent low interest rates, and intense competition will dampen revenue growth and limit the potential for higher operating margins at life insurers. S&P said its economists have placed the probability of recession in 2013 at percent. On a positive note, S&P said strong capital and liquidity support the investment-grade ratings on the majority of its rated life insurers. S&P mentioned that a downgrade of the U.S. sovereign credit rating, which S&P downgraded to AA+ from AAA in August 2011, could result in downgrades at the eight life insurance groups that currently share the same financial strength rating. U.S. Government to Sell Last Ownership Stake in AIG The U.S. Department of the Treasury said it will sell the last of its government-owned American International Group (AIG) common stock. The final stake amounts to million shares, which Treasury plans to sell at $32.50 a share for a total of $7.6 billion in proceeds. Treasury will continue to hold warrants to purchase about 2.7 million shares of AIG common stock. AIG stated that following the sale the U.S. government will have netted a $22.7 billion profit from its actions to rescue the company following the financial crisis. LIMRA Reports U.S. Sales of Variable Annuities Decline 8% in Third Quarter According to LIMRA, U.S. sales of variable annuities (VA) declined in the third quarter of 2012 by 8% from the same quarter a year ago to $36.6 billion. Year-to-date sales total $112 billion which is 7% lower than sales in the same period of The sales decline was attributed to the scaling back of attractive guaranteed benefits and de-risking actions by insurance companies. Prudential remained as the top seller of VAs year-to-date with $16.2 billion in sales. Following Prudential was Jackson National Life Insurance ($15.3 billion), MetLife ($14.1 billion), TIAA- CREF ($10.7 billion), and Lincoln National ($7.3 billion). A complete summary of M Carrier financial strength ratings can be found at the end of this update. M Financial Group will continue to monitor and evaluate developments relating to M Carriers and the industry as a whole. If you have any questions or comments, please contact any member of the M Product Management team at Page 6 of 7

7 M Financial Carriers Summary of Financial Strength Ratings () A.M. Best John Hancock A+ Superior 2nd of 15 Stable 12/12/2011 Nationwide A+ Superior 2nd of 15 Negative 3/27/2012 Pacific Life A+ Superior 2nd of 15 Stable 7/6/2012 Prudential A+ Superior 2nd of 15 Stable 6/12/2012 TIAA-CREF A++ Superior 1st of 15 Stable 4/11/2012 UNUM A Excellent 3rd of 15 Stable 3/15/2012 ING-Security Life A Excellent 3rd of 15 Stable 7/23/2012 Lincoln Benefit A+ Superior 2nd of 15 Stable 1/26/2012 Lincoln National A+ Superior 2nd of 15 Stable 11/30/2012 Sun Life of CA A+ Superior 2nd of 15 Stable 4/11/2012 Sun Life (US) A Excellent 3rd of 15 Stable 4/11/2012 Standard & Poor's John Hancock AA- Very Strong 4th of 20 Stable 3/21/2012 Nationwide A+ Strong 5th of 20 Stable 8/31/2012 Pacific Life A+ Strong 5th of 20 Stable 6/20/2012 Prudential AA- Very Strong 4th of 20 Stable 8/30/2012 TIAA-CREF AA+ Very Strong 2nd of 20 Negative 5/25/2012 UNUM A Strong 6th of 20 Stable 10/26/2012 ING-Security Life A- Strong 7th of 20 Stable 3/20/2012 Lincoln Benefit A+ Strong 5th of 20 Negative 5/15/2012 Lincoln National AA- Very Strong 4th of 20 Stable 12/4/2012 Sun Life of CA AA- Very Strong 4th of 20 Stable 3/20/2012 Sun Life (US) BBB+ Good 8th of 20 Stable 3/19/2012 Moody's John Hancock A1 Good 5th of 21 Stable 11/26/2012 Nationwide A1 Good 5th of 21 Stable 11/12/2012 Pacific Life A1 Good 5th of 21 Stable 12/6/2012 Prudential A2 Good 6th of 21 Positive 7/26/2012 TIAA-CREF Aaa Exceptional 1st of 21 Negative 12/11/2012 UNUM A2 Good 6th of 21 Stable 8/16/2012 ING-Security Life A3 Good 7th of 21 Stable 7/16/2012 Lincoln Benefit A1 Good 5th of 21 Negative 11/26/2012 Lincoln National A2 Good 6th of 21 Positive 11/16/2012 Sun Life of CA Aa3 Excellent 4th of 21 Negative 8/2/2012 Sun Life (US) A3 Good 7th of 21 Negative 6/26/2012 Fitch Ratings John Hancock AA- Very Strong 4th of 21 Negative 5/21/2012 Nationwide A Strong 6th of 21 Stable 5/14/2012 Pacific Life A+ Strong 5th of 21 Stable 11/1/2012 Prudential A+ Strong 5th of 21 Stable 12/6/2012 TIAA-CREF AAA Exceptional 1st of 21 Stable 7/13/2012 UNUM A Strong 6th of 21 Stable 8/3/2012 ING-Security Life A- Strong 7th of 21 Evolving 7/12/2012 Lincoln Benefit A- Strong 7th of 21 Stable 2/14/2012 Lincoln National A+ Strong 5th of 21 Stable 10/22/2012 Sun Life of CA AA- Very Strong 4th of 21 Negative 5/17/2012 Sun Life (US) A- Strong 7th of 21 Negative 5/17/2012 DUE CARE UPDATE Page 7 of 7