New York Life Insurance Company

FINANCIAL INSTITUTIONS
CREDIT OPINION
9 August 2016
New York Life Insurance Company
Semi-Annual Update
Update
Summary Rating Rationale
Moody's rates New York Life Insurance Company (NYLIC) and its wholly owned subsidiary,
New York Life Insurance and Annuity Corporation (NYLIAC – collectively, New York Life)
Aaa for insurance financial strength (IFS). The rating is based upon New York Life's intrinsic
strengths as the largest US mutual insurer, with a leading position in the US life insurance
market and a large, profitable in-force block of participating whole life, its strong earnings
diversity and liquidity, good distribution, and excellent capitalization.
Contacts
Laura Bazer
VP-Sr Credit Officer
[email protected]
212-553-7919
Weigang Bo
Associate Analyst
[email protected]
212-553-4331
Exhibit 1
Net Income and Return on Capital (1-yr. avg.)
Scott Robinson
212-553-3746
Associate Managing
Director
[email protected]
Marc R. Pinto, CFA
Managing Director
[email protected]
212-553-4352
Source: Moody's Investors Service; company filings
These strengths are tempered by earnings that are somewhat weak for its rating level and
material holdings of below investment-grade bonds, alternative investments (e.g., private
equities), and commercial mortgage loans, etc. Other challenges are the slower growth
prospects for traditional participating life insurance (which Moody's considers the most
creditworthy product, relative to higher growth products and businesses) and NYLIC’s sizable
asset management business (which, however, does provide earnings diversity). Rapid growth
of the asset management business could put downward pressure on New York Life's ratings,
although this is not what we are expecting.
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Credit Strengths
»
Top-tier position in the domestic individual life insurance business;
»
Large block of individual life insurance containing significant embedded profits;
»
Productive and well-established career agency distribution force;
»
Well diversified investment portfolio, strong liquidity, and outstanding capitalization.
Credit Challenges
»
An earnings profile lower than the rating level;
»
Challenges in growing its participating business lines;
»
Continued maintenance of its strong growth and retention of its agency field force;
»
Material holdings of higher risk assets, including below investment-grade bonds, private equities and alternative investments, as
well as real estate-related investments.
Rating Outlook
New York Life has a stable outlook.
What to Watch For:
- Impact of the Department of Labor’s (DOL’s) revised fiduciary standard rules on the cost and sales of career agency-advised/sold
products of some of those of NYLIC and its mutual peers.
- Sustainability of individual life sales.
- Profitability and growth of the asset management and other non-par businesses relative to participating businesses.
Factors that Could Lead to a Downgrade
»
A downgrade of the US government rating;
»
Risk-sharing products sustained below 50% of total statutory reserves (currently in the 53%-54% range);
»
Consolidated statutory-based high risk asset ratio greater than 140%, or NAIC 2-rated securities above 40% of total bonds (29%
at YE 2015);
»
The company action level NAIC Risk Based Capital (RBC) ratio falling below 400% for more than a short time period or a reduction
in capital of more than 10% over a 12 month period;
»
Adjusted financial leverage of 20% or more; or earnings coverage consistently below 10x.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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Key Indicators
Exhibit 2
Source: Moody's Investors Service; company reports.
Notching Considerations
The spread between NYLIC's Aa2 surplus notes rating and its Aaa IFS rating is two notches, consistent with Moody's typical notching
spread for surplus notes issued by life insurance operating companies.
Detailed Rating Considerations
Moody's rates New York Life Aaa for insurance financial strength, which is higher than the Aa1 rating indicated by the adjusted
insurance financial strength rating scorecard. The principal differences are: (a) a focus on, and a very strong market position in the
participating life insurance business, (b) a governance structure with a strong focus on the best interests of policyholders/creditors, and
(c) an emphasis on superior customer value with substantial experience-rated policyholder dividends, and a strong capital position that
depresses reported profitability metrics.
Insurance Financial Strength Rating
The key factors currently influencing the rating and outlook are:
MARKET POSITION & BRAND: Aaa - LEADING POSITIONS IN A NUMBER OF MARKETS
New York Life has one of the most well-recognized and respected brands in the U.S., and a leading market position in a number of
important segments of the industry. According to LIMRA, New York Life was among the largest sellers of life insurance and fixed
annuities in the U.S. (including lifetime income annuities) in 2015 - trends that have continued in 2016. New York Life is also the
leading direct marketer of life insurance, a top long term care insurance provider, and the largest underwriter of professional association
insurance programs in the U.S. Accordingly, we view the company's market position and brand to be in line with expectations for Aaa
insurers and have moved this factor up from the Aa indicated by the scorecard metric.
DISTRIBUTION: Aa - WIDE DIVERSITY OF DISTRIBUTION CHANNELS
New York Life benefits from a diverse network of distribution channels including career agents, independent brokers, banks, direct/
sponsored distribution (e.g. AARP), and an institutional sales force. Distribution diversity is one of the broadest in the industry and
is consistent with a Aaa rating. One of New York Life's greatest strengths is its productive, 12,000 plus member career agency force
that is its primary channel for distributing permanent, cash value life insurance products, the company's core product. The controlled
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nature of the company's career agency channel contributes to New York Life's strong business retention rates. The other distribution
channels are primarily used to distribute specialized insurance and investment products, such as COLI/BOLI, sponsored life products
(AARP and Professional Affinity Organizations), fixed annuities, and investment products; however, the company has less control over
its producers in these channels.
We have kept the score on this factor at Aa, consistent with the unadjusted scorecard result. However, we note that the DOL’s new
fiduciary rules, while allowing the sale of proprietary products by career agents to qualified plans and IRA's, also raise the cost, litigation
risk, and minimum standards for their sale as the rules are implemented in 2017 and 2018. This could put pressure on agent numbers at
mutuals, like New York Life (although the company’s qualified/IRA sales are not that extensive).
PRODUCT FOCUS AND DIVERSIFICATION: Aa - OVERALL RISK PROFILE SUPPORTED BY LOW-RISK BLOCK OF
PARTICIPATING WHOLE LIFE
New York Life manufactures and markets a wide range of products for both retail and institutional buyers. The company's principal
product lines include individual life insurance, individual annuities (fixed, immediate, and variable annuities-VAs), long-term care
insurance, pensions & institutional investment products business, and asset management through its New York Life Investment
Management subsidiary. The overall risk profile of the company's product portfolio, which is well-positioned among its competitors,
is supported by its large block of participating life insurance, one of the lowest risk products sold by U.S. firms; however, participating
business has been a slower growing product relative to other higher risk products and lines of business (e.g., variable and fixed
annuities). Although New York Life has been growing its asset management business, both organically and through acquisition (e.g.,
Dexia Asset Management (Dexia), acquired in 2014), we expect that this will continue to be a relatively small business segment in
relation to the company's lower-risk life insurance businesses. We maintain the adjusted score at Aa, the same as the unadjusted score,
because of the large block of low risk participating life insurance. However, material shifts in the business mix away from participating
whole life insurance would put pressure on this factor.
ASSET QUALITY: Aa - HIGH RISK ASSET EXPOSURE MOSTLY DRIVEN BY BELOW INVESTMENT GRADE BONDS AND
ALTERNATIVE INVESTMENTS
The overall quality of New York Life's investment portfolio is good. On an unadjusted basis, the company's GAAP exposure to high risk
assets was about 108% of equity as of December 31, 2015, consistent with Moody's expectations for Baa-rated companies, rising from
90% since 2012, as the company has increased risk while adding incremental yield in the continuing low interest rate environment. The
ratio was about 110% on a statutory basis, given a lower level of statutory vs. GAAP capital (vs. 126% in 2014). Approximately 35%
of high risk assets are non-investment grade bonds, although many of these are private placements with covenant and/or collateral
protections. Privates were 40% of corporate bond portfolio, incrementally higher than in prior years. New York Life's exposure to noninvestment grade corporate bonds as a percent of long-term bonds, at 8% at year-end 2015, is above the industry average. Most of
the remainder of high risk assets are various forms of alternative investments, such as partnership interests in investment funds. The
company’s energy exposure, which is largely bonds, was $9 billion or 4% of 2015 cash and invested assets. We note that $1 billion of
the energy exposure was non-investment grade and $2 billion was not rated by a rating agency, but was rated investment grade by the
NAIC's securities valuation office. Because investment results can generally be shared with participating policyholders, the company
substantially reduces its risk of owning these assets. However, under a stress scenario, the overall portfolio investment losses would be
well in excess of the annual policyholder dividend, and would negatively affect profitability and capital.
New York Life also has an exposure to structured securities (RMBS, CMBS, ABS), but about 83% of the RMBS are agency securities. The
company's non-agency residential mortgage-backed security (RMBS) exposure as of 31 December 2015 was relatively modest at 1% of
invested assets. This segment of the portfolio has been the source of asset losses, but overall portfolio losses have been very modest
and should remain low in 2016. Approximately 10% of the non-agency RMBS (or $261 M) portfolio is rated below investment-grade
- using the NAIC SVO rating scale. The $8.5 billion non-agency CMBS portfolio is high quality with 65% rated Aaa as of December
31, 2015. The company also had a high quality $27 billion direct commercial mortgage loan (CML) portfolio as of December 31,
2015, which has continued to perform well. General Account credit impairments – although rising, have been very modest, were at a
level of at roughly 10 basis points through Q4 2015. We expect NYL to remain within industry averages (i.e., 20-30 b.p. per annum)
throughout 2016. Goodwill and other intangibles (primarily reflecting DAC associated with the sale of the company's stable, profitable
life and annuity business) are equal to about 28% of capital, consistent with a Aa rating.
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The adjusted score on this factor is raised to Aa from the unadjusted score of A, given the portfolio's strong diversification, the ability
to share investment losses with policyholders, limited exposure to non-agency RMBS, and high likelihood of DAC recoverability.
However, material growth of the company's high risk exposures will put pressure on the asset quality score.
CAPITAL ADEQUACY: Aaa - RBC RATIO IS STRONG; HIGH QUALITY CAPITAL
New York Life's capital-to-total asset ratio of about 9% in the scorecard suggests a Aa score, but we believe that the NAIC RBC ratio
is a better indicator of the company's capital adequacy. NYLIC's year-end 2015 NAIC RBC ratio was 549% (company action level), a
level commensurate with Aaa-rated companies, and higher than in 2014 (RBC was 534%), due to the absence of a pension and post
retirement-related charge in 2015. Total Adjusted Capital of NYLIC at 31 March2016, which was $22.6 billion, is high quality, as New
York Life does not use captive reinsurers to boost its capital adequacy. Moody's expects the company's RBC ratio to remain above
400% at year-end 2016, and over time, although under a situation of severe stress it would be lower, due to significant investment
losses. We have moved this factor to Aaa, from its unadjusted scorecard of Aa, because of the good quality of New York Life's capital
and the company's flexibility in adjusting dividends on its sizeable participating whole life business, as well as other risk sharing
mechanisms in its various other products, which mitigate some of the impact of investment losses in times of severe stress.
PROFITABILITY: Aa - POLICYHOLDER DIVIDENDS AND STRONG CAPITAL POSITION DEPRESS NOMINAL PROFITABILITY
New York Life's historical profitability performance, as measured by its five-year average return on capital (ROC) sub-factor score of
5.6%, has been below our expectations for a Aaa-rated company (i.e., aligns with an A sub-factor score). However, this is due, in part,
to New York Life's outstanding capital position (which depresses reported return on capital measures) and also due to an emphasis on
superior policyholder value, which reduces profitability through policyholder dividends that are treated as operating expenses. Although
a portion of policyholder dividends is economically equivalent to shareholder dividends for a mutual insurer, under GAAP accounting
these dividends are considered expenses, and thus depress the company's reported ROC, whereas shareholder dividends do not impact
ROC for a stock company. Accounting noise, associated with the closing of New York Life’s acquisition (via reinsurance) of a closed
block of life insurance in Q3 2015 resulted in a statutory loss of $152 million for 2015 (compared to net income of $848 million in
2014), although energy-related investment losses also contributed, and have continued through the first quarter of 2016. Realized
investment losses aside, we believe the economics of the company’s profitability remain unchanged in 2016, with ROC in the mid-tohigh single digits.
The Sharpe Ratio of ROC, at approximately almost 517%, has remained in the Aaa-range, given the relative stability of earnings.
The company’s earnings should continue to be driven by its large block of in-force participating whole life insurance in 2016, which
continues to dominate its overall core earnings profile. Over the longer term, we expect earnings growth to continue to come largely
from the fixed annuity and third-party investment management businesses, although equity market volatility may depress earnings
from asset management if these trends continue during the remainder of 2016. The par life block also continues to experience singledigit growth.
Because New York Life's ROC would be more akin to the Aa-range if its policyholder dividends were treated similarly to the stockholder
dividends of a public company, and because its RBC ratio remains high, we believe the company's profitability score is consistent
with that of Aa-rated peers, the same as its unadjusted score for this factor. We note, however, that rising investment losses will put
pressure on the ROC metric and this factor if they continue to rise in 2016.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (ALM): Aaa - STABLE LIABILITIES AND STRONG LIQUIDITY
The results of Moody's 2015 year-end liquidity model for New York Life were consistent with a Aa rating – the same as is unadjusted
score for this factor. However, ALM at New York Life is greatly enhanced by the large amount of very stable participating business on
the company's books, which effectively allows the company to share some of its inherent risks with its participating policyholders, and
also benefits the company's liquidity profile. The company's liquidity profile is further bolstered by a relatively liquid general account
investment portfolio and approximately $37 billion in holdings of cash, short term investments, and U.S. Treasury and agency securities
at December 31, 2015. We expect the company’s liquidity to show similar strength in 2016. New York Life is one of the smaller number
of companies that continue to issue funding agreement-backed notes. However, we believe that the program is well managed and that
these exposures are well matched, from both a duration and from a cash perspective - the latter as issues approach maturity.
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FINANCIAL INSTITUTIONS
For the 18 months following 31 March 2016, New York Life had approximately $8.3 billion of GICs, non-putable funding agreements,
funding agreement-backed notes (FANIPs) and FHLB borrowings maturing. To service these maturing liabilities, the company has cash
on hand and maturing investment grade bonds. As of 31 March 2016, unencumbered cash and short-term investments amounted to
approximately $3.4 billion, unused credit facilities totaled about $1.0 billion (increased to $1.25 billion effective April 13, 2016) and
investment-grade bonds maturing over the next twelve months amounted to approximately $15.4 billion (although credit facilities
may be unavailable in times of stress).
We recognize the stability of the majority of the company's liabilities as well as the substantial liquidity available in the investment
portfolio. Therefore, , we have moved the adjusted score on this factor to Aaa, from the unadjusted scorecard result of Aa.
FINANCIAL FLEXIBILITY: Aa - LOW FINANCIAL LEVERAGE, BUT MUTUALS ARE UNABLE TO ISSUE EQUITY
On a GAAP basis, the company's adjusted financial leverage was 11.4% as of year-end 2015, and total leverage, which excludes
Moody's equity credit treatment for the company's surplus notes and includes operating debt, was 12.7%. The company's nearly $2
billion of surplus notes receive 25% equity credit in accordance with Moody's hybrid methodology, which is factored into the adjusted
financial leverage calculation. We expect adjusted leverage and total leverage for year-end 2016 to be in the same range as year-end
2015. The adjusted financial leverage and total leverage metrics are consistent with Aaa and Aa ratings, respectively.
Average earnings coverage of 15x over the past five years is consistent with the metrics expected for Aaa-rated companies. Given
stronger earnings coverage since 2012 (i.e., one-year coverage ratios in the 16x-18x range), we expect earnings coverage to remain in
line with the Aaa companies, i.e., over 12x on a consistent basis. We also expect New York Life's adjusted financial leverage will remain
below 20%. However, as a mutual company, New York Life's lack of ready access to the public equity markets somewhat limits its
financial flexibility. As a result, we have lowered this factor score to Aa from the unadjusted score of Aaa.
Exhibit 3
Financial Flexibility
Source: Moody's Investors Service; company reports.
Other Considerations
New York Life has a very strong commitment to serving its policyholders, and writes primarily business that provides risk sharing with
its customers through dividend-paying products. Its branding and consumer marketing is tightly linked with its participating product
focus and commitment to policyholder value and financial strength.
Considering its generally conservative investment philosophy, together with its emphasis on the sale of dividend-paying products,
New York Life presents very conservative business and financial profiles, and the company's management does not stray from its core
policyholder oriented principles, which align well with creditor interests.
Although some aspects of the company's credit profile are directly captured by the key rating factors, the additional benefit from the
company's deeply ingrained focus on financial strength, policyholder value, and overall conservative management philosophy results in
a one-notch uplift, raising the company's IFS rating to Aaa from the adjusted scorecard rating of Aa1.
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Liquidity Analysis
New York Life's debt consists of two issues of surplus notes, $992 million and $998 million, maturing in 2033 and 2039, respectively.
In addition to its own direct debt, New York Life's subsidiary, New York Life Capital Corporation (NYL Capital) issues commercial paper.
NYL Capital benefits from explicit support from its parent. Its $2 billion commercial paper (CP) program is rated Prime-1 (P-1) and the
program is available for spread arbitrage opportunities and occasionally used for liquidity management.
The average amount of CP outstanding in Q1 2016 was approximately $503.5 million, with a maximum of $503.5 million outstanding
during the quarter, and approximately $503.5 million outstanding as of 31 March 2016.
NYL Capital Corp's CP program is backed by a $1.25 billion five year bank credit facility which matures in April 2021. The bank facility
does not contain a material adverse change (MAC) clause, and the financial covenants in the bank facility are not restrictive and are
quite manageable for the company.
Rating Methodology and Scorecard Factors
Exhibit 4
Source: Moody's Investors Service; company reports.
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Ratings
Exhibit 5
Category
NEW YORK LIFE INSURANCE COMPANY
Rating Outlook
Insurance Financial Strength
Surplus Notes
Moody's Rating
STA
Aaa
Aa2 (hyb)
NEW YORK LIFE INSURANCE & ANNUITY
CORPORATION
Rating Outlook
Insurance Financial Strength
STA
Aaa
Source: Moody's Investors Service
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