Supervision and Examination Department issuing detailed guidelines. We expect the new guidelines to shed more light on the implementation of the policies. Currently, retail banking represents around 25% of total earnings at UAE banks, but is much more profitable than corporate banking. While improving lending prudence, these measures come at a time of stagnant recovery, where low loan growth year on year was just 2.4% in 2009 and 1.3% in 2010. Provisioning levels are also high, with the ratio of loan-loss provision expense to gross loans at 2.1% in 2009 and 1.4% in 2010. As such, these new regulations on retail lending will further pressure the profitability of local banks.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
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Credit Implications of recent worldwide news events
Insurers & Asset Managers
Steve Zaharuk Senior Vice President +1.212.553.1634 stephen.zaharuk@moodys.com
Premium Reviews Would Pose Credit Concerns for US Health Insurers
During the last week of February, advocacy groups filed comments to the Department of Health and Human Services (HHS) regarding the agency¡¯s proposed premium rate increase regulations released in December. A key element of the proposed regulations requires an HHS review of all health insurance rate increases of 10% or more to determine if the increase is ¡°reasonable,¡± as defined in the proposal. The proposed rate regulations are credit negative for health insurers, as they may interfere with the approval of rate increases that they need to maintain their profit margins. The regulations are scheduled to become effective 1 July, making the adoption of final regulations imminent. Our credit concern is that rather than scrutinizing the adequacy of premium rates to cover liabilities, the regulations emphasize the appropriateness of rate increases from a public advocacy viewpoint, where affordability is a driving issue. This process is likely to result in a denial or delay of some rate increases that may be actuarially sound and necessary to maintain profit margins, which is an important factor from a credit perspective. As a result, implementation of the proposed regulations would be credit negative for health insurers. We expect the regulations to negatively impact health insurers¡¯ credit profiles and that is factored into our negative outlook on the sector.16 Because insurance is regulated at the state level, HHS does not have the authority to deny a rate increase. Instead, its review process is designed to provide additional scrutiny and rigor to a state¡¯s existing review process. And, if HHS determines any rate increase to be ¡°unreasonable¡± under its prescribed review process, states would have a justification to deny a rate increase. Under HHS¡¯s proposed methodology, an ¡°unreasonable¡± rate increase is one found to be excessive, unjustified, or unfairly discriminatory. Given the volume of rate increases that may need to be reviewed under the proposed 10% limit, we are concerned that a lengthy or backed-up review process would delay rate-increase approvals, which could hurt insurer¡¯s profitability even if rates are ultimately approved. Over the past several months, we have seen examples where state regulatory agencies have denied or delayed premium rate increases, resulting in net losses on the products impacted according to the health insurers. More recently, delays by regulators in California have resulted in WellPoint (financial strength A1 stable), UnitedHealth (financial strength A2 stable), and Aetna (financial strength A1 stable) postponing requested rate increases.
16
See Moody¡¯s Industry Outlook: US Healthcare Insurers: Outlook Remains Negative, 29 December 2010.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
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NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Rokhaya Cissé Associate Analyst +1.212.553.3870 rokhaya.cisse@moodys.com Laura Bazer Vice President - Senior Credit Officer +1.212.553.7919 laura.bazer@moodys.com
Proposed FHLB Reform Will Hurt Liquidity of US Life Insurers
Last Tuesday, US Treasury Secretary Timothy Geithner told the House Financial Services Committee that the Federal Home Loan Banks (FHLBs) should be reformed to ¡°include instituting single district membership, [and] capping the level of advances for any institution.¡± If adopted, such reforms would be credit negative for some US life insurers that use the FHLBs as a readily available, and relatively cheap, source of liquidity. The FHLB system was established by the Federal Home Loan Bank Act of 1932 to provide a reserve banking system to support thrift institutions¡¯ residential mortgage lending activities. These days, it counts insurance companies with mortgage loan portfolios among its members. Membership is obtained by eligible financial institutions with the purchase of untraded FHLB capital stock. The exhibit below shows some of the public life insurance companies with FHLB membership likely to be affected by the Obama administration¡¯s proposed reforms.
EXHIBIT 1
Insurance Company Membership in FHLBs
Common Stock in FHLB Ticker Member Subsidiary FHLB Membership With Total FHLB Liabilities Capacity
$M as of December 31, 2010
MetLife Insurance Company of Connecticut (Aa3, Negative) Metropolitan Life Insurance Company (Aa3, Negative) MET MetLife Investors Insurance Company (Aa3, Negative) General American Life Insurance Company (Aa3, Negative) MetLife Bank (unrated) PRU GNW DFG LNC PL RGA PFG Prudential Insurance Company of America (A2, Stable) Prudential Retirement Insurance & Annuity Company (A2, Stable) Genworth Life Insurance Company (A2, RUR-down) Genworth Life & Annuity Insurance Company (A2, RUR-down) Reliance Standard Life Insurance Company of Texas (unrated) Lincoln National Life Insurance Company (A2, Stable) Protective Life Insurance Company (A2, Stable) RGA Reinsurance Company (A1, Stable) Principal Life Insurance Company (Aa3, Stable)
Boston New York Des Moines Des Moines New York New York Boston Pittsburgh Atlanta Dallas Indiannapolis Cincinnati Des Moines Des Moines
70 890 10 10 187 N/A N/A 24 47 N/A N/A 61 19 N/A
100 12,600 0 0 3,800 2,500 0 493 140 55 350 976 199 2,748**
N/A N/A N/A N/A N/A 6,200 1,100 N/A 798 N/A 630 1,016 997 N/A
**Represents the amount of securities posted and does not necessarily equal the company's total liability Source: 2010 10K filings and NAIC annual statements
Current eligibility rules require life insurers to have mortgage-related assets that reflect a commitment to housing finance. Members may obtain loan advances from the 12 regional banks that make up the FHLB system by posting real estate related securities as collateral. Provided that arrangements of pledged collateral are maintained, members can get same-day access to funds upon request. Insurance companies have used these advances as operating liquidity to manage expected or unexpected cashflow shortfalls, and to opportunistically buy attractively priced bonds. They have also,
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
at times, used the low-cost FHLB advances to reduce their cost of funds and increase yields on their institutional investment product (IIP) spread lending business, reducing capacity that could be used for emergency liquidity. Total FHLB liabilities of our rated US life insurers totaled approximately $33 billion as of 30 September 2010, up from very low levels in 2002. Exhibit 2 displays the rapid growth in FHLB lending activity to our-rated insurers.
EXHIBIT 2
FHLB Advances for Moody¡¯s Rated Life Insurers
45 40 35 30 82%
$Billions
25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 3Q10
Source: Moody¡¯s
Reliance on these advances peaked during the financial crisis at year-end 2008 at $42 billion, when the heightened need for liquidity caused some IIP investors to non-extend or ¡°put¡± back certain shortterm contracts to life insurers. Because the capital markets were closed at that time, and selling investments was certain to crystallize unrealized losses in insurers¡¯ investment portfolios, insurers with FHLB membership accessed their borrowing lines for needed funds. In his report to congress, Mr. Geithner did not specify how the caps on advances would be established or measured.17 Although caps could encourage insurers to use better discipline in deciding how and when to use these emergency funds, we believe that a significant reduction in insurers¡¯ borrowing capacity would constrain their liquidity in the future. Insurance company membership in the FHLB system is very small (e.g., 3% of total FHLB membership at year-end 2009, versus 97% for banking institutions). However, life insurers¡¯ use of advances during the financial crisis proved important in sustaining their liquidity. Maintaining and even expanding the FHLB system is a vehicle that could enable the government to make an important source of liquidity available to the insurance sector during stressful periods.
17
¡°Reforming America¡¯s Housing Finance Market, A Report to Congress,¡± released 11 February 2011.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Bruce Ballentine Vice President - Senior Credit Officer +1.212.553.7212 bruce.ballentine@moodys.com
Sale of MetLife Securities is Credit Positive for AIG
On 2 March, American International Group Inc. (AIG, Baa1 stable), MetLife Inc. (A3 negative), and the US Treasury announced the pricing of concurrent offerings of MetLife common stock and MetLife common equity units. These offerings will allow AIG to monetize all of the MetLife securities it received through the sale of American Life Insurance Company (ALICO) in November 2010. AIG expects to receive aggregate proceeds of approximately $9.6 billion from these transactions, the majority of which will be applied toward redemption of the Treasury¡¯s preferred interests in AIG subsidiaries. The offerings are credit positive for AIG and, to a lesser extent, for MetLife. For AIG, the transactions remove any uncertainty surrounding the realizable values of the MetLife securities, and they mark another step in the repayment of government funding. For MetLife, the positive is that the transactions provide, at a time of MetLife¡¯s choosing, for an orderly disposition of the AIG stake in MetLife, a large block of stock and other securities that was destined for sale. The original terms of the ALICO sale required AIG to hold the MetLife securities for minimum holding periods of at least nine months from the date of closing, meaning that the earliest possible date for securities sales would have been August 2011. AIG and MetLife recently reached an agreement permitting AIG to monetize the securities promptly. The concurrent offerings priced last week were:
» » »
AIG offered all of its MetLife common stock to the public for gross proceeds of $3.38 billion AIG offered all of its MetLife common equity units to the public for gross proceeds of $3.32 billion MetLife conducted a