overview and trends in insurance portfolio management · combination of asset management, insurance...

Investment Symposium March 2010

I4: Market Overview and Trends in Insurance Portfolio Management

Len Carlson Scott Robinson

Greg Smith

Moderator Ken Griffin

1

Presented by

Government: New Partner or Peril?

Len Carlson, CFAManaging Director, Portfolio Management

SOA Investment Symposium, Marriott New York Marquis, March 22, 2010

All rights reserved. This presentation is produced by Conning and may not be reproduced or disseminated in any form without the express permission of Conning. This presentation is intended only to inform readers about general developments of interest and does not constitute investment advice. While every effort has been made to ensure the accuracy of the information contained herein, Conning does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Conning does not guarantee that this presentation is complete Opinions expressed herein are subject to change without notice Past performance is no indication ofcomplete. Opinions expressed herein are subject to change without notice. Past performance is no indication of future results. Conning is a portfolio company of the funds managed by Aquiline Capital Partners LLC ("Aquiline", a New York-based private equity firm,) with offices in Hartford, New York, Dublin and London.

1Investment Actuarial Symposium – March 22, 2010

2

The Debt Cycle - Levels Rise to New Highs

(US Debt/GDP)


Source: Morgan Stanley, Federal Reserve, BEA, Datastream, “The Statistical History of the United States”

Policy Responses to the Financial Crisis

Stabilize financial institutions

Provide liquidity

Deficit spending

Increased regulation

Increased and lasting market influence


3

Policy Response Effects – Fixed Income SpreadsBarclays Indices OAS 1998 - 2010


Source: Barclays

The Federal Reserve Balance SheetU.S. Federal Reserve Balance Sheet

($BN)

US

Billi

on


Source: Strategas

4

Excess Reserve Worries – Inflationary Tinder?Depository Institutions Monetary Base, Excess Reserves

$1,800

$2,000

$2,200

$million

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Depository Institutions Monetary Base

Depository Institutions Excess


Source: Source: Bloomberg, Conning Analytics

$0

$200

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Reserves

The Fed’s Exit Strategy

Raise the Fed Funds rate

Wind-down of short-term lending

Interest on excess reserves

Reverse repurchase agreements

Term deposits

Portfolio runoff and asset sales


5

The Fed’s Exit Strategy

Use of multiple tools

Despite knowledge of responses, experience is limited

Timing is critical

Too early – choke off recovery, increased fiscal stimulus and deficit spending likely

Too late – inflationary pressures rise

Historically, bias has been one of extended easing


Tightening policy rarely initiated in months preceding elections

Alternative tools less visible than Fed Funds

FOMC telegraphing change

Deficit Spending – Balloons Government DebtCBO’s Baseline Budget Outlook


Source: CBO Jan. 2010

6

Deficit Spending – Balloons Government DebtBudget Outlook 2010

Effects of Selected Policy Alternatives on the Deficit (In billions of dollars)


Source: CBO Jan. 2010

Deficit Spending – Balloons Government DebtBudget Balance

(% of GDP)


Source: Action Economics

7

Greece – Tragedy avoided or the canary in the coal mine?

Deficit Spending – Implications

Crisis of confidence and credibility for Greece

Large deficits and weak growth plague others

Increasing focus on structural versus cyclical deficits

Return of sovereign risk considerations

Developed and developing countries alike


p p g

Deficit Spending – Implications

Increased volatility

Sovereign to corporate spreads relationships may tighten, but unlikely to remain invertedunlikely to remain inverted

Risk of crowding out as private sector credit demand rises

Growth dampened by debt loads, higher taxes, fiscal restraint

Policy errors/shifts – “IMF Tells Bankers to Rethink Inflation”-Wall Street Journal, February 12, 2010


y

Inflation levels that are not priced into the market

8

Municipal Issuers Feel the Pinch

State and local issuers are experiencing significant revenue shortfalls

State Revenue Declines over the Past Two Recessions

Revenue squeezes are expected through 2011

Many pension plans are significantly underfunded

Other post-retirement benefit obligations (OPEB) pose additional f di i


funding issues

Fundamentals are declining, unpopular actions are needed to arrest these trends

Source: Pew Center on the States 2010, Nelson A. Rockefeller Institute of Government’s State Revenue Reports

Municipal Opportunities – Taxable IssuesBuild America Bonds - BABS - Authorized under the American Recovery and Reinvestment Act of 2009Provides municipal issuers a taxable issuance option with a federal interest subsidy for capital projects.BAB interest subsidy equal to 35% of taxable interest paid is provided to the issuer in arrearsin arrearsStates, transportation agencies and utilities with large capital programs are larges issuersTypically 30 to 40 year non-call 10 and bullet maturities with make whole call features tailored to the taxable marketOpportunity to diversify long credit risk away from corporates, but credit work is essential!

Issuer Rating Coupon MaturityRecent* Spread

NY MTA- Dedicated Tax AA/A+ 7.336 11/15/39 +170bpsMi i D d T it A1/AA/A 6 910 07/01/39 225b


*As of 2/18/10

Miami-Dade Transit A1/AA/A+ 6.910 07/01/39 +225bpsDallas Rapid Trans Aa3/AAA 6.249 12/01/34 +135 bpsIllinois St Tolls Aa3/AA-/AA- 5.293 01/01/24 150bps/10'sNew Jersey St Trans A1/AA-/A+ 6.875 12/15/39 +190bpsNYC Water Auth Aa3/AA+/AA 6.250 06/15/41 +180bpsPort Seattle Wash Aa2/AA-/AA 7.000 05/01/36 +165bpsUniv of Texas Aaa/AAA/AAA 6.276 08/15/41 +120bpsUniv of North Carolina Aa1/AA+/AA+ 5.757 12/01/39 +140bpsLos Angeles Schools Aa3/AA- 6.758 07/01/34 +200bps

Source: Conning, Bank of America Merrill Lynch

9

CMBS - Government Medication Treats the Symptoms

6250 6250 100%

Commercial and Residential Cumulative Property Price Returns

AAA spreads have recovered Property values remain depressed

Barclays CMBS Index Spreads

0

1250

2500

3750

5000

6250

Spre

ad

0

1250

2500

3750

5000

6250

Spre

ad

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ulat

ive

Pric

e R

etur

n (fr

om 1

2/00

)

Moody's/Real Commercial Price Index

Case Shiller 20 MSA Residential Price Index

Current index down 29% from 07/06 peak


0Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

0

Source: Bloomberg/Conning Analytics

01/31/2010 MIN MAX MEAN5 Yr AAA CMBS vs. Treasury 250 50 1000 25510 Yr AAA CMBS vs. Treasury 430 61 1125 28110 Yr AA CMBS vs. Treasury 3600 68 4125 112310 Yr A CMBS vs. Treasury 4660 77 4850 141910 Yr BBB CMBS vs. Treasury 5870 119 6000 1843

0%

10%

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Current index down 43% from 10/07 peak

Source: Barclays

Source: Moody’s, Real Estate Analytics LLC, Bloomberg

CMBS – The Fundamentals are ChallengingCommercial Mortgage Maturities By Lender Type


Source: Congressional Oversight Panel, Foresight Analytics

10

Corporate Sector Impact

Increased regulation and scrutiny for Financials

Consumer protection

Systemic risk

Derivatives

Reduction of implied support could negatively effect ratings on senior debt


Financial sector most exposed to sovereign issues

Mortgage Backed Securities

250

300

350

32

37

42The $1.25B Fed purchase program has kept valuations at rich levels. Spreads are vulnerable to some

id i th

50

0

50

100

150

200

Spr

ead

12

17

22

27

3

Vol %

widening as the Government medication wears off

Program to be completed by March 31

Reinvestment of funds from Agency buyouts of delinquent mortgages may mitigate near-term


-50Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

12

Source: Bloomberg/Barclays/Conning Analytics

01/31/2010 MIN MAX MEAN30 Yr MBS Curr.Cpn vs.Treasury 155 96 300 1565 x 5 Swaption Volatility 24.87% 13.80% 36.70% 20.34%30 Yr MBS OAS Spread 1 -18 135 4430 Yr MBS Zero Volatility Spread 45 21 187 10630 Yr MBS OAS vs. 10 Yr Agcy -23 -81 60 -430 Yr MBS vs. 10YSwap Spread 64 53 173 80.43

may mitigate near-term widening

Many investors already positioned for widening

11

U.S. Government Accountability Office (GAO) produced a detailed reportto Congress in October, 2009 examining potential structures:

Establishment of a government corporation or agency: Focus on purchasing qualifying mortgages and issuing MBS, but eliminate retained mortgage portfolios Probability relatively high

Future Structure of FNMA & Freddie Mac?

mortgage portfolios. Probability relatively high

Re-establish for-profit enterprises with government sponsorship: Restore the enterprises to their previous status, but add controls and regulation; Impose public-utility-like regulation with business activity restrictions and profitability limits. Probability low

Privatization: Abolish the enterprises and disperse mortgage lending and risk management to the private sector. Probability low

Under all of these scenarios we believe pre existing GSE debt and MBS


Under all of these scenarios, we believe pre-existing GSE debt and MBS guarantees will continue to be fully supported by the Treasury

The sustainability of AAA ratings of the U.S. government will be the topic of increasing scrutiny in the intermediate term

GSE debt and MBS will remain closely tied to this issue

Summary

Sovereign risk has returned

Volatility likely to be higher, systemic risk elevated

Combined effect is an upward pressure on spreads

Financials most exposed corporate sector

Markets likely to become less tolerant of delays in addressing cyclical and/or structural deficits


Seeds of secular change in policy makers’ views on inflation? (Markets are not priced for this)

12

ABOUT CONNING

As a knowledge leader for the insurance industry, Conning serves clients with a unique combination of asset management, insurance research and strategic consulting.

Headquartered in Hartford, CT, with offices in New York, London and Dublin.

CONNING RESEARCH & CONSULTING

is a Hartford, CT-based publisher and consulting firm with more than 40 years of industry experience.

Conning Research’s team of analysts bring a wealth of industry knowledge from their prior operating roles in insurance.

For more information on Conning Research & Consulting and its services, please call 888-707-1177 or visit www.conningresearch.com

All rights reserved. This presentation is produced by Conning and may not be reproduced or disseminated in any form without the express permission of Conning. This presentation is intended only to inform readers about general developments of interest and does

not constitute investment advice. While every effort has been made to ensure the accuracy of the information contained herein, Conning does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Conning does not guarantee that this presentation is complete. Opinions expressed herein are subject to change without notice. Past performance is no indication of future results. Conning is a portfolio company of the funds managed by Aquiline Capital Partners LLC ("Aquiline", a New

York-based private equity firm,) with offices in Hartford, New York, Dublin and London.

1

An Update on the Life Insurance Industry p yA Rating Agency Perspective

Investment Actuarial SymposiumMarch 22, 2010

Scott A. Robinson, Senior Vice President

2

Agenda

• Ratings/Financial Trends

• How Has Moody’s Life Insurance Group Reacted to the Financial Turmoil?

• What Does the Market Think?

• Lingering Questions on Investor’s Minds


»Commercial Real Estate

2

Ratings/Financial Trendsg

Ratings Trends in North American Life Insurance Sector

4

20253035

Rating Distribution (53 Groups)

atin

gs

Insurance Financial Strength Rating

Aa3

A1

A2

57%

Outlook Distribution

20

25

Upgrades and Downgrades

05

1015

Aaa Aa A Baa <Baa

2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 2010

Ra

Average IFS Rating

A2

A3

Baa1


38%2% 4%

Negative Positive Stable Developing

0

5

10

15

2000 2002 2004 2006 2008Upgrades Downgrades

As of March-11-2010

3

Financial Profile:Net Income (2001-2009)

20

30

5

-30

-20

-10

0

10


-50

-40

2001 2002 2003 2004 2005 2005 2006 2007 2008 2009 *

AIG Insurance* Excludes 2 companies

Below Investment Grade Bonds % of Total Bonds

6

10%

12%

s

4%4% 4% 3% 4% 4%

5% 5% 4% 5%

2%

2% 2% 2% 2% 2%

2%2%

2% 2%

1%

1%0% 0% 1%

1%

1%1% 2%

1%

2%

4%

6%

8%

BIG

Bon

ds %

of T

otal

Bon

ds


4% 4% 3% 4% 4%

0%

2%

2003 2004 2005 2006 2007 2008 Q1-09 Q2-09 Q3-09 2009

Class 3 Class 4 Class 5 Class 6

4

NAIC RBC Trend

400%

450%

500%

7

200%

250%

300%

350%

400%


100%

150%

2001 2002 2003 2004 2005 2006 2007 2008 2009 *

Average RBC * Excludes 2 companies

How Has Moody’s Life Insurance Group Reacted y pto the Financial Turmoil?

5

9

Stress Testing Insurers

» Ratings need to be forward-looking (incorporating expectations), and not wait until reported results

» Apply firm wide macroeconomic scenario to industry and establish

L

» Apply firm-wide macroeconomic scenario to industry and establish expectations for key uncertainties under base case and stress case scenarios


» Using rating methodology & scorecards, evaluate rating profile under base case and stress case scenarios

» Scenarios impact business as well as financial profiles

L

10

Stress Testing Insurers, continued

St i di t d ti i fl ti» Stress case indicated rating influences our rating now

» Differentiate between 2 insurers with same base case rating but different stress ratings

» Position rating today so if the stress scenario happens, we would not expect to downgrade more than a few notches

» If stress scenario appears more likely, then ratings will move closer t d t ti l l


toward stress rating level

6

11

Stress Testing Insurers--InvestmentsEconomic Loss Factors

Base Case Stress CaseCash and short term 0% 0%US Government and agencies 0% 0%Agency MBS 0% 0%

Foreign governments .25% 1.5%Municipals .25% 1.5%

I-G Corporates .25% 1.5%B-I-G Corporates 5% 10%

Structured – RMBS Varies VariesStructured – CMBS Varies VariesStructured – ABS Varies VariesStructured – Other Varies Varies


Redeemable preferred stock .5% 2.5%Non redeemable preferred 1% 5%

Commercial Mortgages 3% 10%Real Estate 5% 20%

Equities 0% 25%Limited partnerships/Alternatives 0% 25%

12

Life Insurance Investment Portfolio

Distribution of Stress Case Losses (US $ 120 - 130 billion)

B-I-G corporates8%

Equities12% Limited partnerships

7%

Other11%

Commerical Mortgage / Real Estate19%


RMBS 22%

CMBS1%

ABS8%

I-G Corporates12%

8%

7

13

Stress Testing Insurers—Variable Annuities

• Life Insurers Stress Case:

» VAs with Guarantees: Stress Case—S&P 500 @ 800

» Look at GAAP, regulatory as well as economic impact, the latter two being captured through Moody’s VA survey

– Regulatory impact – VACARVM, C3 Phase II

– Economic impact - look at CTE 98, looking through offshore reinsurance

» Consider variables other than S&P levels - interest rates, volatility, foreign currency in deterministic scenarios


foreign currency in deterministic scenarios

» Ranges of policyholder behavior effectiveness

» What are companies hedging? What are they not hedging?

14

Incorporating Base and Stress into Scorecard

Key VariablesPart 1 Business Profile

Factor weight

Base and Stress Scorecards

Investment losses

Equity market decline impact on VA

Disruption of distribution

Operating income decline

Credit ratings migration on investment portfolio

Part 1- Business Profile weight

Factor 1: Market Position and Brand 15

Factor 2: Distribution 10

Factor 3: Product Focus and Diversification 15

Part 2 - Financial Profile Factor weight

Factor 1: Asset Quality 5


investment portfolio

Liquidity stress – opco and holdco

XXX / AXXX solutions

Factor 2: Capital Adequacy 10

Factor 3: Profitability 15

Factor 4: Liquidity 10

Factor 5: Financial Flexibility 20

8

15

Incorporating Base and Stress into ScorecardA B C D E F G H I

Financial Strength Rating Scorecard [1]

Traditional Raw Score (1&5 yr

metrics)

Last YE Raw Score (1 yr metrics)

Current YE Base Case Raw Score

(1 yr metrics)

Stress Case Raw Score

(1 yr metrics)

Last published adjusted

score

Base Case Adjusted

Score

Stress Case Adjusted

Score

Proposed Adjusted

Score

Business Profile Aa2 Aa2 Aa3 A1 A1 A1 A3 A1Market Position Brand and Distribution (15%) Aa1 Aa1 Aa1 Aa3 Aa2 Aa3 A2 Aa3Market Position, Brand and Distribution (15%) Aa1 Aa1 Aa1 Aa3 Aa2 Aa3 A2 Aa3

Market Share Ratio Aa Aa Aa ARelative Market Share Ratio Aaa Aaa Aaa Aa

Distribution (10%) A1 A1 A1 A2 A1 A1 Baa1 A1Distribution Control A A A ADiversity of Distribution Aa Aa Aa A

Product Focus and Diversification (15%) Aa3 Aa3 A2 A2 A2 A2 A3 A2Product Risk A A Baa BaaLife Insurance Product Diversification Aaa Aaa Aaa Aaa

Financial Profile A2 A2 A1 Baa1 A1 A1 Ba1 Baa1Asset Quality (5%) Aa1 Aa1 Aa1 Aa1 A1 A1 A3 A1

High Risk Assets % Invested Assets 6.0%/Aaa 6% 6.0% 9.0%Goodwill % Equity 28.0%/A 28.0% 25.0% 35.0%

Capital Adequacy (10%) Baa2 Baa2 Baa2 Baa2 Aa3 A3 Ba3 Baa2Equity % Total Assets 5.0%/Baa 5.0% 5.0% 4.0%

Profitability (15%) Baa1 Baa2 A2 Ba2 A1 A1 Ba2 Baa2Return on Equity (5 yr avg ) 9 0%/A 14 0% -5 0%


Return on Equity (5 yr. avg.) 9.0%/A 14.0% -5.0%Sharpe Ratio of Growth in Net Income (5 yr.) 20.0%/Baa 20% 30.0% -1.0%

Liquid and Asset/Liability Management (10%) Aaa Aaa Aaa Aa2 Aa3 Aa3 A3 Aa3Liquid Assets Divided by Policyholder Reserves 90.0%/Aaa 90% 90.0% 80.0%

Financial Flexibility (20%) A2 A1 A1 Baa3 A2 A2 Ba3 Baa2Financial Leverage 29.0%/Aa 29.0% 26.0% 35.0%Earnings Coverage (5 yr. avg.) 4.0x/A 4.0x 4.0x -1.0xCashflow Coverage (5 yr. avg.) 2.0x/Baa 3.0x 3.0x -1.0x

Total Scorecard Rating A1 A1 Aa3 A3 A1 A1 Baa3 A3Total Scorecard Rating -- Value 4.67 4.71 4.50 7.09 4.74 5.19 9.50 6.65

Wh t D th M k t Thi k?What Does the Market Think?

9

17

The Credit Market’s view: Life Insurers

1,000

1,100

2

4

Life Insurance (CDS Ratings)

MonthlyQuarterly

300

400

500

600

700

800

900

-6

-4

-2

0Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Aug-07

Oct-07 Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08 Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09 Dec-09

Feb-10

CD

S Sp

read

s

CD

S G

AP (M

DY

-CD

S R

ATIN

G)


-

100

200

-10

-8

MEDIAN GAP Median CDS Spreads

18

Life Insurer CDS-Implied Ratings

Aa2

A2

Ba2

B2

Baa2


J-08 F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 F-09 M-09 A-09 M-09 J-09 J-09 A-09 S-09 O-09 N-09 D-09 J-10 F-10

AEGON N.V Genworth Financial, Inc. Lincoln National Corporation

MetLife, Inc. Prudential Financial, Inc. Prudential plc

Caa2

10

Why Are Moody’s Ratings Not in line with y y gMarket-Implied Ratings?

20

Fundamental Reasons for the Gap

1. Investment horizon

2 O fi i l d l li biliti2. Opaque financials and complex liabilities

3. Unrealized investment losses could materialize into losses

4. Concern over inability to access capital markets / capitalization at statutory entities

5. Fear of run-on-the bank scenario

6. Lingering concerns about commercial real estate


11

Lingering Questions from Investors g g Q

22

How big an issue is CRE / CMBS for the life industry?

» ~$300 billion of CRE loans outstanding on balance sheet– 10% of invested assets, 125% of regulatory capital, g y p

» CMBS (mostly super senior Aaa) represent another ~$225 billion of investments on balance sheet

» Relative exposure to commercial mortgage loans declining since 1990s when it represented ~30% of invested assets and burned the industry


12

23

CRE Exposure & Trends

» Life insurers lost market share to CMBS conduits in past 10 years– Industry didn’t loosen underwriting standards as much as CMBS

loans

» Instead, industry purchased super-senior Aaa CMBS tranches


24

CRE Exposure—Lending Activity Relative to CMBS

100%240

New Issuance Growth: Life insurers vs. CMBS

-75%

-50%

-25%

0%

25%

50%

75%

30

60

90

120

150

180

210

$ in

Bill

ions


-100%02000 2001 2002 2003 2004 2005 2006 2007 2008 Est 2009

CMBS issuance (L axis) Life insurers issuance (L axis)

CMBS annual growth rate (R axis) Life Ins. annual growth rate (R axis)

13

25

Profile of CRE

» Mostly fixed-rate 10 year (20-30 yr amortization) loans on fully developed, stabilized properties– No construction or speculative lending

» Loans outstanding– 60% LTV, 1.8x DSC, 7%-8% cap rates– Well-diversified by property-type and geographic region


» Well-laddered portfolio with ~10%-15% maturing annually– Average life is 7-10 years

26

Profile of CRE

» Mostly fixed-rate 10 year (20-30 yr amortization) loans on fully developed, stabilized properties– No construction or speculative lending

» Loans outstanding– 60% LTV, 1.8x DSC, 7%-8% cap rates– Well-diversified by property-type and geographic region


» Well-laddered portfolio with ~10%-15% maturing annually– Average life is 7-10 years

14

27

Loss Estimates for CRE

» Our concerns focused on loans with LTVs > 90% and/or DSCs < 1.2x, especially those maturing

» CMBS Team provided us with lifetime loss factors based on profile of insurers’ CRE– Base case: 3%– Stress case: 10%


SSummary

15

29

Bumpy Road to Recovery Positives:

» Access to capital markets is improving for institutions broadly, including life insurers

» Capital erosion is moderating

» Fixed income spreads have tightened dramatically

» Recent stabilization in equity markets: both market level and volatility

Negatives:

» Although capital markets appear to be stabilizing, sustainability of improvement is not assured

» Continued elevated investment losses and downgrades of securities will pressure capital adequacy; commercial mortgage loan losses have yet to emerge

» Inforce blocks of marginally profitable VAs with guarantees; hedging cost and


» Inforce blocks of marginally profitable VAs with guarantees; hedging cost and effectiveness remain concerns

» Product sales are down significantly and consumers remain under pressure (winners and losers in the current environment)Signs of stabilization in life insurer credit profiles, but significant negative pressures persist, making for a bumpy road to recovery

mood s comwww.moodys.com

16

31

© 2009 Moody’s Corporation and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are and must be construed solely as statements of opinion and not statements of fact or recommendations to purchase sell or hold any securities


the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.

Moody’s Investors Service, Inc. (“MIS”), a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

1

Life Insurance Investments in 2009

Presented by

1SOA Investment Actuary Symposium Session I4, Marriott New York Marquis, March 22, 2010

Gregory M. Smith, FSA, MAAAVice President, Research & Publications

All rights reserved. This presentation is produced by Conning and may not be reproduced or disseminated in any form without the express permission of Conning. This presentation is intended only to inform readers about general developments of interest and does not constitute investment advice. While every effort has been made to ensure the accuracy of the information contained herein, Conning does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Conning does not guarantee that this presentation is complete. Opinions expressed herein are subject to change without notice. Past performance is no indication of future results Conning is a portfolio company of the funds managed by Aquiline Capital Partnersno indication of future results. Conning is a portfolio company of the funds managed by Aquiline Capital Partners LLC ("Aquiline", a New York-based private equity firm,) with offices in Hartford, New York, Dublin and London.


2

Aggregate Results for 2009

Operating Gain, Capital Gains and Losses, and Net Income– Net Stat Gain of $21.4 billion($ in billions)

$60

Realized Capital Gain Realized Capital Loss Net Income

-$20

-$10

$0

$10

$20

$30

$40

$50

$60


Source: Conning Research & Consulting, Inc. analysis

-$60

-$50

-$40

-$30

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

E

Statutory Net Income by Component

Net Operating Gain (Loss) Excluding Individual AnnuitiesIndividual Annuities Net Operating Gain (Loss)Realized Capital Gains and Losses

Indi

v A

nnA

nn G

ain

lized

CG

Let

Inco

me$0

$30

$60

$ in

Bill

ions


Source: Company filings, Conning analysis

Gai

n, e

x In

div

Rea N

-$60

-$30

2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 09EYears

3

Noticeable Changes in the Mix of Assets

Asset Mix

100%

84% 84%

82%81% 81%

85%

80%

90%

As

% o

f Inv

esta

ble

Ass

ets Other

Schedule BA

Common Stock

Preferred Stock

Mortgages & Real Estate

Cash & Bonds



70%2004 2005 2006 2007 2008 2009E

Allocations Then and Now

Allocations to Major Asset Classes in 2004 versus 2008 by Business Focus

100%

Cash & Bonds Mortgages & Real Estate Preferred Stock Common Stock Schedule BA Other

78% 77%

86%

81%

88%91%

82%81%

97%

93%

80%

90%

100%

% o

f Inv

esta

ble

Ass

ets



78% 77%

70%'04 Life '08 LIfe '04

Annuity'08

Annuity'04 A&H '08 A&H '04

Mixed'08

Mixed'04 Reins '08 Reins

4

Impairments by Business Focus

Impairments by Asset Class and Business Focus

Cash & Bonds Mortgages & Real Estate Preferred Stock

Common Stock Schedule BA Other

as % of BOY Surplus + AVR

78%

69%70%

80%

90%

100%

of T

otal

Impa

irmen

ts

6%

8%

10%

12%

14%

16%

18%

20%A

s % of B

OY

Surplus


Source: Company filings, Conning analysis*Certain AIG impairments in aggregate write-ins are omitted from 2008.

55%

64%67% 66%

69%

50%

60%

2004 2005 2006 2007 2008* 2009E

As

%

0%

2%

4%

6% + AV

R

AVR’s Impact on Surplus was Modest in 2009

Asset Valuation Reserve versus Realized Gains & Losses

$50

Realized Gains & Losses Impact of AVR on Surplus EOY AVR

$30

-$20

-$10$0

$10

$20

$30

$40

$50

$ in

Bill

ions



-$60

-$50

-$40

-$30

2001 2002 2003 2004 2005 2006 2007 2008 2009E

5

Liquidity of Bond Portfolio—All Companies

Allocations to Cash Increase

100%

% Public % 144(a) Public % Cash & Short-Term Bonds

74% 75% 74% 73%69% 69%

50%

60%

70%

80%

90%

100%

As

% o

f Tot

al B

onds


Source: Company filings, Conning Research & Consulting analysis

Cash holdings at 185% and 160% of 2007 levels

40%2004 2005 2006 2007 2008 2009E

NAIC Designations and Average Quality of Bond Portfolio

Bonds: BIGs Are Up - Overall Quality Slips Again

100% 1.50

9 3 . 8 % 9 4 . 2 % 9 4 . 3 % 9 4 . 2 % 9 3 . 6 %9 2 . 3 %

6 . 4 %7 . 7 %

5 . 8 %6 . 2 % 5 . 7 % 5 . 8 %

92%

94%

96%

98%

1.30

1.35

1.40

1.45BIG

InvestmentGr ade

Over al lQual i t y (RH)



Lower scores on the right hand scale equate to higher quality.

90%2004 2005 2006 2007 2008 2009E

1.25

6

Returns for Bond Portfolio Drive Overall Results

2005 2006 2007 2008 2009E

Bonds Gross Book Yield (GBY) 5.81% 5.87% 5.98% 5.73% 5.60%

Returns by Asset Class (% of average investable assets)

( )

Bonds Gross Total Return (GTR) 3.18% 4.56% 5.19% (5.02%) 14.17%

Mortgages GBY 7.12% 6.87% 6.58% 6.25% 6.13%

Mortgages GTR 7.15% 6.86% 6.78% 5.81% 5.59%

Preferred Stock GBY 5.96% 7.90% 6.52% 6.25% 6.74%

Preferred Stock GTR (2.07%) 10.65% 0.33% (28.55%) N/A*

Common Stock GBY 2.65% 2.82% 2.91% 3.40% 2.70%


Common Stock GTR 8.77% 16.72% 5.86% (33.44%) 25.05%

Total Investable GBY 6.03% 6.15% 6.18% 5.77% 5.47%

Total Investable GTR 3.98% 5.39% 5.48% (4.28%) 11.93%


*GTR is not available at this time due to accounting reclassification.

Forecast Asset Mix, Gross Book Yield and Risk-Free Rate($ in millions, as % of underlying investable assets)

Quest for Yield was Successful…in 2006 and 2007

$2,800 6.5%

84 2,15

8

$2,3

29

107

$2,200

$2,400

$2,600

5.0%

5.5%

6.0%Other

Schedule BA

Common Stock

Preferred Stock

Mortgages & Real Estate

Cash & Bonds

Moving Avg 10-yr Treasury



$2,0

8 $

$2,0

87 $2, 1

$1,800

$2,000

2005 2006 2007 2008 2009E4.0%

4.5% Gross Book Yield

7

The View from 40,000 Feet

$

$2,000

$2,400

$2,800

$3,200

$3,600

Billi

ons

6%

8%

10%

12%

Separate Account General Account Year-over-Year Growth in GA Assets

60%

80%

100%

120%

nves

ted

at S

ep 2

007

S&P 500 FTSE DAX Hang Seng


2%

3%

4%

t HH

Inco

me

2001 2002 2003 2004 2005 2006 2007 2008

$0

$400

$800

$1,200

$1,600

2001 2002 2003 2004 2005 2006 2007 2008 2009E

$ in

0%

2%

4%

Source: Yahoo Finance

0%

20%

40%

9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10

Gro

wth

of $

1 In

135 0

137.5

140.0

nt in

Milli

ons


-4%

-3%

-2%

-1%

0%

1%

Top Quintile Fourth Quintile Third Quintile Second Quintile

% R

eal C

hang

e in

Low

er L

imi

Source: Bureau of Labor StatisticsSource: U.S. Census Bureau

127.5

130.0

132.5

135.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Non

farm

Em

ploy

me

ABOUT CONNING

As a knowledge leader for the insurance industry, Conning serves clients with a unique combination of asset management, insurance research and strategic consulting.

Headquartered in Hartford, CT, with offices in New York, London and Dublin.

CONNING RESEARCH & CONSULTING

is a Hartford, CT-based publisher and consulting firm with more than 40 years of industry experience.

Conning Research’s team of analysts bring a wealth of industry knowledge from their prior operating roles in insurance.

For more information on Conning Research & Consulting and its services, please call 888-707-1177 or visit www.conningresearch.com

All rights reserved. This presentation is produced by Conning and may not be reproduced or disseminated in any form without the express permission of Conning. This presentation is intended only to inform readers about general developments of interest and does

not constitute investment advice. While every effort has been made to ensure the accuracy of the information contained herein, Conning does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Conning does not guarantee that this presentation is complete. Opinions expressed herein are subject to change without notice. Past performance is no indication of future results. Conning is a portfolio company of the funds managed by Aquiline Capital Partners LLC ("Aquiline", a New

York-based private equity firm,) with offices in Hartford, New York, Dublin and London.

overview and trends in insurance portfolio management · combination of asset management, insurance...

Documents