affected by the Obama administration¡¯s proposed reforms.
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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 primary offering of common stock to the public for gross proceeds of $2.97 billion, which, less underwriting discounts and commissions, will be used to repurchase and cancel all of the MetLife preferred stock owned by AIG
In accordance with prior agreements, AIG will place $3 billion of the proceeds into escrow to secure obligations that may be owed to MetLife, and will use the remainder (after expenses) to redeem a like amount of the Treasury¡¯s preferred interests in AIG subsidiaries. These offerings are part of a long series of divestitures and capital markets transactions undertaken by AIG since it was rescued by the US government in 2008. The most significant event this year has been the recapitalization of 14 January. As part of that three-step process, AIG repaid its credit facility with the Federal Reserve Bank of New York, special purpose vehicles owned by AIG partially repaid the government¡¯s preferred interests in the vehicles, and the Treasury exchanged its preferred interests in AIG for AIG common stock. Additional future transactions include one or more sales by the Treasury of portions of its AIG common stock, one or more primary offerings by AIG of its common stock (perhaps concurrent with Treasury sales), and a registered exchange or similar offer by AIG for one or more series of its junior subordinated debt. To the extent that such transactions reduce the government¡¯s stake in AIG or reduce AIG¡¯s financial leverage, they would be credit positive. Government ownership and support were critical in helping AIG to withstand the credit crisis of 2008-09, but at this stage, we believe that AIG¡¯s clients and distributors would welcome a reduction in the government¡¯s role.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Helen Remeza Vice President - Senior Analyst +1.212.553.2724 helen.remeza@moodys.com
Increased RMBS Loss Reserves Are Credit Negative for Guarantors
Financial guarantors Assured Guaranty Corp. (Aa3 negative) and MBIA Insurance Corp. (Ba3 negative) on 24 February and 1 March, respectively, reported increased loss reserves for residential mortgage-backed securities (RMBS). The higher reserves are attributable to slower-than-expected improvements in mortgage performance despite higher expected recoveries following putbacks to originators because of breaches of representation and warranties. These increases are credit negative for guarantors, as losses that exceed the guarantors¡¯ expectations consume capital resources and highlight continuing uncertainty. The guarantors adjusted their RMBS reserves to reflect elevated delinquency levels, higher loss severities on loans, and reduced levels of excess spread, which is the excess cashflow available after debt service in securitization transactions. While new delinquencies continued to decline, the rate of decline was less than the guarantors previously expected for some RMBS deals. Assured Gua