US Life Insurance Industry Overview Rating Agency View. Scott Robinson, Senior Vice President

US Life Insurance Industry

Overview – Rating Agency View

Agenda

»

Overview

»

Rating Approach – Expected and Stress Scenarios

»

Macroeconomic Forecast

»

US Life Insurance Outlook

3

Ratings Trends in North American Life Insurance Sector

81%

12%

7%

0%

Outlook Distribution

Stable

Negative

Positive

Rating(s) Under Review

0

5

10

15

20

25

Upgrades and Downgrades

Upgrades

Downgrades

0

5

10

15

20

25

30

35

40

Aaa

Aa

A

Baa

Ba

Rating Distribution (58 Groups)

Average IFS Rating

Aa1 Aa2 Aa3 A1 A2 A3

Average IFS Rating

Average IFS Rating

as of March 31, 2014

Incorporating Expected and Stress into Scorecard (Life

Insurers)

Key Variables

Investment losses

Equity market decline

impact on VA

Access to capital markets

Disruption of distribution

Operating income decline

Liquidity stress – opco

XXX / AXXX solutions

Part 1- Business Profile

Factor

weight

Factor 1: Market Position and Brand

15

Factor 2: Distribution

10

Factor 3: Product Focus and Diversification

10

Part 2 - Financial Profile

Factor

weight

Factor 1: Asset Quality

10

Factor 2: Capital Adequacy

15

Factor 3: Profitability

15

Factor 4: Liquidity and ALM

10

Factor 5: Financial Flexibility

15

Expected and Stress

Scorecards - Projected

5

5

Incorporating Expected and Stress into Scorecard

Financial Strength Rating Scorecard

Traditional Raw Score (1&5 yr

metrics)

Last YE Raw Score (1 yr metrics)

Current YE Expected Case Raw Score (1 yr metrics)

Stress Case Raw Score (1 yr metrics) Last published adjusted score Expected Case Adjusted Score Stress Case Adjusted Score Proposed Adjusted Score

Business Profile Aa1 Aa1 Aa1 Aa2 Aa1 Aa1 A2 Aa2

Market Position and Brand (15%) Aaa Aaa Aaa Aa2 Aaa Aaa A1 Aa1

Relative Market Share Ratio Aaa Aaa Aaa Aa

Distribution (10%) Aa2 Aa2 Aa2 A1 Aa2 Aa2 Baa1 A1

Distribution Control Aa Aa Aa Aa Diversity of Distribution Aa Aa Aa A

Product Focus and Diversification (10%) Aa1 Aa1 Aa1 Aa2 Aa2 Aa2 A1 Aa2

Product Risk Aa Aa Aa Aa Life Insurance Product Diversification Aaa Aaa Aaa Aa

Financial Profile Baa1 Baa2 Baa2 Baa2 A2 A3 Ba1 Baa1

Asset Quality (10%) Baa2 Baa2 Ba1 Ba2 Baa2 Baa1 Baa3 Baa1

High Risk Assets % Shareholders' Equity 118.4%/Baa 118.4% 133.3% 150.0% Goodwill & Intangibles % Shareholders' Equity 72.6%/Ba 72.6% 112.3% 130.3%

Capital Adequacy (15%) Baa1 Baa1 Baa1 Baa2 Aa3 Baa1 Ba1 Baa1

Shareholders' Equity % Total Assets 5.5%/Baa 5.5% 5.4% 4.4%

Profitability (15%) Baa1 Baa1 Baa2 Ba2 A1 Baa2 Ba3 Baa2

Return on Capital (5 yr. avg) 7.1%/A 7.1% 4.0% 1.0% Sharpe Ratio of ROC (5 yr. avg) 93.6%/Ba 93.6% 96.0% 56.0%

Liquidity and Asset/Liability Management (10%) A2 A2 A3 A3 Aa3 A2 Baa1 A2

Liquid Assets % Liquid Liabilities 1.7x/A 1.7x 1.6x 1.6x

Financial Flexibility (15%) A3 Baa3 A3 Baa1 A3 A3 Ba1 Baa2

Adjusted Financial Leverage 28%/A 31.2% 29.0% 33.0% Total Leverage 51.5%/Ba 51.5% 52.1% 39.2% Earnings Coverage (5 yr. avg) 5.4x/A -2.3x 3.6x -1.5x Cashflow Coverage (5 yr. avg) 2.9x/Baa 3.3x 3.0x 1.0x

Operating Environment (0%) Aa Aa Aa Aa Aa Aa Aa Aa

Aggregate Profile A2 A2 A2 A3 Aa3 A1 Baa2 A2

Greater than 3 notch

differential between expected

Macroeconomic Forecast: Continuing recovery with greater

stability & less uncertainty; diminished downside risks

»

Below-trend GDP growth projection

–

GDP Growth: 2.5-3.5% in both ‘14/’15

–

Unemployment: 6-7% in ‘14; 5.5-6.5% in ’15

»

Expectation of slowing rising interest rates

–

Interest rates (10 yr Treasury): rising to 3.2%

at year-end ’14 and to 4.0% at year-end ‘15

»

Downside risks:

–

Disorderly exit from monetary stimulus

–

Fed tapering disrupts emerging markets

–

Flare-up of European debt crisis; deflation

0% 2% 4% 6% 8% 10% 12%

US Unemployment Rate

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

7

Stable Outlook on US Life Industry

»

A gradual increase in interest rates is credit positive for life insurers

–

Portfolio yields will continue to decline, but at a slower pace, diminishing spread compression

–

Profitability and capital generation should be less constrained

»

Macro-economic recovery will support insurance sales

–

Improvement in both GDP growth and unemployment will reduce pressure on household income

and insurance sales (which are discretionary purchase)

»

Greater stability in economy and therefore in financial markets is positive for insurers

–

Higher equity market levels has reduced risks in variable annuity business

–

Also supported results of fee businesses (as AUM has increased)

»

Strong balance sheets (opco and holdco) buffer downside risks

Life Insurers Have Mitigated Impact of Low Interest Rates

»

Strong ALM discipline and lowering of crediting rates mitigate impact

»

Diminished risk of insurers’ yields declining below level of policyholders’ guarantees

»

Diminished risk of balance sheet hits (reserve strengthening, DAC/intangible writedowns)

»

New business re-priced to reflect low rates; legacy inforce business still vulnerable

»

Stretching for yield with incremental allocation to higher risk & lower liquidity assets, but

rising rates will slow down the “hunt for yield”

Source : Moody’s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient’s Internal Use Only

-100

-50

0

50

100

150

200

0%

1%

2%

3%

4%

5%

6%

7%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

9

Weak Economy has Constrained Top-line Growth, but

Strengthening Recovery Should Bolster Sales

Source : Moody’s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient’s Internal Use Only

»

Lower unemployment, improving consumer & business confidence, and higher household

income will help increase discretionary expenditures

»

Most life & annuity products are discretionary purchases

»

Recent slowdown in sales growth partly reflects disciplined pricing and capital management

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Policyholder Behavior Remains a Wildcard

Group

Insurance Financial

Strength Rating *

Recent Charge

Comment

AXA Financial

Aa3 Negative

> $1 bil in 2011

Reserve charge due to lower than

expected lapse rates & partial withdrawals

ING US

A3 Stable

> $1 bil in 2011

Reserve charge due to lower lapse rates

MetLife Inc.

Aa3 Negative

4Q12: $752 mil

Lower than expected realized returns over

_{the life of guaranteed VA policies}

Prudential Financial Inc.

A1 Stable

3Q13: $1.7 bil

Largely driven by updated lapse

assumptions based on actuarial review

»

Policyholder behavior is unhedgeable

»

Actual behavior experience is limited for VA living benefits

»

Accounting charges for policyholder behavior assumption changes are very subjective

11

Profitability & Capital Formation Should Improve Given

Impact of Rising Rates & Improving Economy

Source : Moody’s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient’s Internal Use Only

»

Profitability remains below pre-crisis levels, but it should be given de-risking and

more appropriate assessment of capital needs for products with guarantees

»

Greater deployment of capital to shareholders & acquisitions expected to continue

»

Earnings & cash flow coverage should continue to improve but from weak starting

point

0x

2x

4x

6x

8x

10x

12x

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2006

2007

2008

2009

2010

2011

2012

2013

Balance Sheets Remain Strong

Source : Moody’s, SNL Financial LC. Contains Copyrighted And Trade Secret Materials Distributed Under License From SNL - For Recipient’s Internal Use Only

»

Strong RBC ratios, but captives and looser

RBC requirements weaken quality of capital

»

Well-diversified & high-quality Investments

- Credit losses back to historical norm (<25

BP)

- Re-risking as companies search for yield

»

Strong liquidity at operating subsidiaries and

holding companies

»

Financial leverage trending down

300%

350%

400%

450%

500%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Median Risk Based Capital (CAL)

US Treasury 3% Other Gov't 7% Agency MBS 6% Nonagency MBS 6% Corporate Bonds 51% Equity 2% Commercial Mortgage Loans 9% Other Mortgage Loans 2% Real Estate Investments 1% Contract Loans 4% Other Invested Assets 6% Cash 3%

2013 Investment Portfolio

Pretax Realized Bond & Commercial Mortgage Loan Losses

CML

13

De-risked Product Management Strategy Helpful with New

Business, but Legacy Blocks Remain

Strategy\Issue

Interest Rate

Sensitivity

Capital Efficiency

Improve ROE

Earnings/Capital

Volatility

De-emphasis of

guarantee products

x

x

x

x

Shift to capital-efficient

products

x

x

x

Sell more fee business

x

x

x

x

Sell more protection

policies (critical illness,

voluntary benefits)

x

x

x

Expense management

x

Expand hedging

programs

x

x

x

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