institutional investment products

Institu

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April 2000

Contact Phone

New York

Patrick Finnegan 1.212.553.1653Laura BazerAnn PerryArthur FliegelmanRobert DonohueRajiv GuptaChristina SlatteryScott RobinsonEllen Fagin Natasha GoueyRobert Riegel

Institutional Investment Products: The Evolution Of A Popular Product:

Special Comment

Specia

l Com

ment

2 Moody’s Special Comment

© Copyright 2000 by Moody’s Investors Service, Inc., 99 Church Street, New York, New York 10007. All rights reserved. ALL INFORMATION CONTAINED HEREIN ISCOPYRIGHTED IN THE NAME OF MOODY’S INVESTORS SERVICE, INC. (“MOODY’S”), AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISEREPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FORANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIORWRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility ofhuman or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes norepresentation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information.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 inconnection 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 thepossibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, if any, constituting part of the information containedherein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NOWARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OFANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or otheropinion 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 mustaccordingly 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 mayconsider purchasing, holding or selling. Pursuant to Section 17(b) of the Securities Act of 1933, MOODY’S hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay toMOODY’S for appraisal and rating services rendered by it fees ranging from $1,000 to $1,500,000. PRINTED IN U.S.A.

Authors

Arthur Fliegelman, Christina Slattery

Senior Associates

Ellen FaginNatasha Gouey

Senior Production Associates

Susan HeckmanJohn Lentz

Moody's Insurance Research Internet Address:www.moodys.com/insurance

Table of Contents

Summary Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Why Are Insurers Interested In The Institutional Investment Marketplace? . . . . . . . . . . . . .6Separate Accounts’ Growth Outstripping Growth In The General Account . . . . . . . . . . . . . . . . . . . . . . .6

Insurers See Funding Agreements As A Means To Expand The General Account . . . . . . . . . . . . . . . . . .6

How We View the Institutional Investment Products Market . . . . . . . . . . . . . . . . . . . . . . . . . .6Strong Insurer/Client Relationships Are Important . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Reliance On Institutional Investment Products Should Be Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Assured Liquidity Is Crucial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

“Cash Capital” Analysis – What Every Institutional Investment Product Issuer Needs To Do . . . . . . . .10

Institutional Investment Products Rating Criteria – Key Factors Moody’s Uses In Evaluating An Institutional Investment Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Operational Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Liquidity Or Maturity Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Asset Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Liability Optionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Yield Curve Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Spread Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Funding Agreement Note Issuance Programs (FANIPs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

The Number Of Funding Agreement-Backed EMTNs Is Growing . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

An Expected Surge In Insurer Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Moody’s Rating Process For FANIPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Legal Standing Determines Priority Of Claims Of Funding Agreements . . . . . . . . . . . . . . . . . . . . . . .15

Perfected Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

The Institutional Investment Product Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16An Evolving Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Exhibit 1- Prominent Issuers’ Institutional Investment Products Outstanding . . . . . . . . . . . . . . . . . . . .20

Exhibit 2 - Selected Public Market FANIP Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Exhibit 3 – Moody’s Rated FANIP Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Prominent Issuer Reviews And Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

AEGON USA Life Insurance Companies – Monumental Life Insurance Company . . . . . . . . . . . . . . .24

Moody’s Special Comment 3

Table of Contents (cont’d.)

AIG Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Allstate Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Business Men’s Assurance Company of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

CIGNA Corporation - Connecticut General Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . .32

Combined Insurance Company of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

First Allmerica Financial Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

GE Financial Assurance - GE Life and Annuity Assurance Company . . . . . . . . . . . . . . . . . . . . . . . . . .38

Hartford Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

ING U.S. Life Insurance Companies – Life Insurance Company of Georgia . . . . . . . . . . . . . . . . . . . . .42

Jackson National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

John Hancock Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Massachusetts Mutual Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Metropolitan Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Mutual of Omaha Life Insurance Companies – United of Omaha Life Insurance Company . . . . . . . . . .52

Nationwide Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54

New York Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

Ohio National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

Pacific Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

Principal Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62

Protective Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64

Prudential Insurance Company of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

Security Benefit Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

SunAmerica Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70

Travelers Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72


Summary OpinionMoody’s believes that insurance companies take on additional risks in marketing funding agreement (FA)or GIC contracts, especially compared to those contained in some life insurance products. However,Moody’s continues to hold the view that insurers can issue these contracts if balanced with an appropriaterisk management system. An insurer’s overall exposure to institutional investment products needs to becarefully managed and controlled on an aggregate and detailed basis for the insurer to have an appropriaterisk/reward tradeoff.

Moody’s expects the new funding agreement backed global programs currently being developed byseveral large insurers will be a primary source of new investable funds for institutional investment productproviders during 2000. These programs, an expansion of the existing EMTN programs, will also permitthe issuance of these notes to U.S. domestic investors. Moody’s expects that most issuance will be fixed-term, non-callable and will be typically in the three to ten year maturity ranges.

Moody’s expects that additional product variations will be developed over time, and that FAs will con-tinue to grow in popularity. However, Moody’s believes that the more established general account GICssold to 401(k) and other employee retirement savings plans are likely to show only modest growth absenta significant change in market conditions.

As insurers continue to grow their institutional investment products books of business, Moody’s willrigorously evaluate the characteristics and the amounts outstanding of this business. As part of this review,we will pay careful attention to the processes and procedures used to manage the business, liquidity needsand resources, asset risks, and the company’s asset/liability management risk tolerance.

Moody’s determines what we believe to be the appropriate degree of institutional investment products’exposure for each company on a case-by-case basis. Moody’s includes in our evaluation criteria the insur-er’ asset/liability management capabilities, ratings level, experience, investment track record, and the pre-dictability of their liability structure.

Moody’s believes that combined institutional spread-based product liabilities in the range of 20% to30% of general account liabilities could be reasonable for an experienced company. However, insurancecompanies issuing institutional investment products need to be cognizant of the fact that these instru-ments are a form of operating leverage.

Moody’s factors the extent to which an insurer continues to operate as an insurance company as animportant criterion in our rating process. When institutional investment products reach a point where thecompany is overly dependent on these products, Moody’s will reduce the extent to which we primarilyevaluate the institution as an insurance company.

Alternatively, an insurer primarily or even exclusively managed as an institutionally focused banker willbe rated on a basis comparable to the other institutional spread-based businesses that Moody’s rates, suchas investment banks (with their matched books) and commercial finance companies.

Moody’s credit analysis of FA backed securitizations revolves primarily around whether the investorhas a perfected interest in the underlying funding agreement (FA) and whether that interest is pari-passuwith other policyholder obligations.


Why Are Insurers Interested In The Institutional InvestmentMarketplace?

SEPARATE ACCOUNTS’ GROWTH IS OUTSTRIPPING GROWTH IN THE GENERAL ACCOUNTThe changing purchasing habits of the individual retail clients from insurance buyer to investor has hadsignificant ramifications on the insurance industry. Clients have heavily migrated from purchasing fixedincome products (fixed rate annuities and other guaranteed products) to equity-based products (variableannuities and mutual funds) during the last few years. This, in turn, has caused the general accounts ofmany insurers to experience slow or no growth. Fixed annuity sales remain depressed as compared to sev-eral years ago and surrender activity continues at historically high levels.

To make matters worse for insurer’s general accounts, the best selling life insurance product is variableuniversal life insurance, which is becoming the product of choice in many situations. Therefore, it comesas no surprise that during the five years ended December 31, 1998, general account reserves have grown ata compound annual rate of less than 5% while separate accounts, which are largely equity-based, havegrown 27% annually.

Insurers typically have earned considerably wider spreads on fixed annuities than on variable annuities.This is due to several factors including that most insurers use external managers to manage the underlyingfunds in their equity-based separate accounts.

INSURERS SEE FUNDING AGREEMENTS AS A MEANS TO EXPAND THE GENERAL ACCOUNTDemand for funding agreements has been growing in recent years. They offer investors a favorable com-bination of yield, maturity and security. In addition, for many investors, these new insurance companycredits permit the portfolio manager to diversify the portfolio’s credit risk. Consequently, insurance com-panies view this market as a good opportunity to expand their general account business.

Structured transaction products, such as EMTNs and global programs, can enable a life insurer to growits general account balance sheet much more quickly and inexpensively than selling numerous annuity con-tracts in the retail market. Also, the funding agreements are sold with very minor marketing costs com-pared to those on almost all insurance products sold in the retail market. This results in a much reduced oreliminated surplus strain to the issuer for the issuance of these products compared to retail products.

While funding agreements may not be the only game in town for insurers desirous of growing theirgeneral account liabilities, they may well be the most attractive alternative for many insurers.

How We View The Institutional Investment Products Market

STRONG INSURER/CLIENT RELATIONSHIPS ARE IMPORTANTAn important criterion that Moody’s uses in evaluating business lines is the nature and strength of therelationship that exists between the insurer and the client. Moody’s believes that the existence of a strong,long term relationship between the two parties can lessen the risk to the insurer of contractual provisionssuch as surrender provisions.

New Markets More Credit Sensitive Than Traditional Life InsuranceMoody’s believes that the institutional investment product market is more credit sensitive than traditionallife insurance, or even other insurance products such as retail marketed annuities. This is in part becausethese products are marketed to sophisticated institutional buyers in millions of dollars amounts at a time.These funds are often managed by a professional investment manager with a fiduciary obligation to theultimate holder of the instrument.

In cases such as these, Moody’s believes that it is unrealistic to believe that the investor will give signif-icant forbearance to an insurer during a period under which it is undergoing financial stress. The invest-ment manager must at all times take actions in the best interest of his clients, regardless of the detrimentaleffect these actions might have on the insurer.


By definition, little if no business relationship exists between the investor and issuer when FAs are usedto back EMTN issuance.

In the short-term putable FA market, there may or may not be a broader relationship between the twoparties. Evidence of a broader relationship could include direct contact between the insurer and the client,long term vendor relationships, and contractual provisions specifying rolling maturity dates. Even then,Moody’s believes that these products are in large measure institutional investments and are subject to thesame credit forces affecting the commercial paper and medium term note market.

Short-term Putable Contracts Present The Greatest Credit RisksMoody’s most serious credit concerns are directed to short-term putable contracts that give the insurer 60days or less to respond to a request for funds.

Moody’s believes that the short-term FA market is particularly credit sensitive due to Securities andExchange Commission’s 2a-7 rule governing the primary buyers of these instruments, money marketfunds. The credit sensitivities of the remaining buyers of these products, security lenders, separateaccounts and other short-term institutional lenders, are similar. Qualifying a product for the “liquid” bas-ket of a money market fund, typically through the use of the put option, is also an important marketingconsideration for this product.

Moody’s believes that the institutional investment product market is more akin to banking than toinsurance. In fact, for years the investment banking community has distributed investment vehicles similarto FAs as a means of financing their purchase of securities.

Moody’s believes that there is a higher level of risk to an insurance company in marketing FA or GICcontracts than in marketing life insurance. However, Moody’s continues to believe that insurers canappropriately issue these contracts given appropriate risk management while maintaining a balance withinthe company’s overall product mix. However, an insurer’s overall exposure needs to be carefully managedand controlled on an aggregate and detailed basis.

RELIANCE ON INSTITUTIONAL INVESTMENT PRODUCTS SHOULD BE LIMITEDMoody’s believes that a highly rated insurer, having carefully developed experience and expertise in thisproduct area, can support a moderate level of institutional spread-based liabilities.

One method of evaluating an insurer’s exposure to this sector is as a percentage of general account lia-bilities. Moody’s believes that a highly rated insurer could have approximately 20% to 30% of generalaccount liabilities in such products assuming the product line is appropriately managed.

Moody’s will also evaluate the exposure to this sector relative to the company’s overall capital. Whilecompanies typically earmark a specific amount of capital to support the institutional investment productbusiness, in reality the company’s entire capital base supports all product lines.

Highly-rated Insurers Must Maintain Adequate CapitalMoody’s believes that for a highly rated insurer, in addition to needing an appropriate degree of operatingleverage in the institutional investment products business, overall capital levels must remain adequate toenable the insurer to meet all obligations even in times of unexpected stress.

Moody’s will evaluate what we believe to be an appropriate degree of exposure for each company tothis sector at its rating level on a case-by-case basis depending upon the individual facts and circumstancesof the company under consideration. We include in our evaluation the insurer’s asset/liability manage-ment capabilities, investment track record and the predictability of its liability structure. In special circum-stances, where relationship oriented clients are the primary product purchasers, we might feel comfortableeven with a moderately higher level of exposure to this sector.

Parental Support Is An Important Factor In Moody's AnalysisWhile Moody’s begins with an analysis of the financial capability of the legal entity directly responsiblefor the liability, Moody’s is also mindful of the likelihood and ability of external financial support beingsupplied when needed by a corporate parent or affiliate. This is especially important in circumstances


where a formal support agreement exists, and Moody’s believes that the terms of the support agreementare sufficiently rigorous to be legally enforceable.

In such a case, the capacity of the insurer to offer institutional investment products can be considerablyincreased beyond what Moody’s would consider appropriate on a stand-alone, unsupported basis.However, Moody’s will evaluate the effect of the explicit or implicit support on the financial strength andresulting rating of the combined organization. In some cases, with strong parent/affiliate support arrange-ments, Moody’s will evaluate the exposure of the overall entity to this business, instead of the specific legalentity issuing these products.

An insurance company issuing institutional investment products needs to be cognizant of the fact thatthese instruments are a form of operating leverage. At times these products can also be a form of financialleverage, but since they are rarely used as funding vehicles for corporate acquisitions and other corporatepurposes, Moody’s does not normally include them in computing financial leverage. In addition, marketparticipants must be mindful of the fact that funding opportunities could quickly disappear, especially atinopportune moments, emphasizing the need for product, market and customer diversification.

As an insurer becomes increasingly dependent upon these institutional investment products, Moody’swill begin to evaluate the institution less as an insurance company. Moody’s will instead begin to evaluatethe institution more like the other institutional spread-based businesses we rate, such as investment banks(with their matched books) and commercial finance operations.

ASSURED LIQUIDITY IS CRUCIAL

Tolerance For A/L Mismatches Is An Important Measure Of Credit RiskMoody’s believes that the level of mismatching a company is willing to undertake is an important measureof the level of risk that a company assumes in operating an investment products program.

Almost all institutional investment product issuers attempt to match their expected asset and liabilitycashflows for this product line to some degree. Some companies match as closely as possible as a matter ofcompany policy. Other companies are willing to tolerate some level of intentional mismatch in an effort tobenefit from expected future market movements. The more tightly run programs have strict limits on thelevel of mismatch permitted and regularly recalibrate their exposures to the permitted level.

Non-securitized Commercial Mortgages Can Carry Significant Cash Flow UncertaintyMoody’s has serious concerns about the inclusion of non-securitized commercial mortgages in institution-al investment product asset portfolios. Some companies like to include substantial amounts of these assetsin their portfolios to benefit from their favorable yields. However, Moody’s believes that these assets offera low level of liquidity when it is most needed, and have historically been prone to severe credit deteriora-tion on a cyclical basis.

During the early 1990s commercial mortgages that were supposed to mature were instead often extend-ed or refinanced by insurers, even when the insurer had a pressing need for the funds to service maturingliabilities. Moody’s recognizes that the risk assumed by an insurer in making a specific commercial mort-gage loan depends upon the loan’s specific characteristics with examples being loan-to value ratio, amorti-zation period, maturity term, and collateral type. However, Moody’s remains of the general opinion thatcommercial mortgages are a questionable choice to support liabilities with firm, unalterable maturity dates.

Moody's Analysis Focuses On The Insurer's Ability To Service Its ObligationsAs part of our rating process, Moody’s carefully evaluates the insurer’s ability to service its obligations.Moody’s believes that a highly rated insurer with defined liabilities, such as institutional investment prod-ucts with specific maturity dates, should support them with assets with an equally well defined maturitydate. Exceptions to this thinking would be when the insurer can demonstrate unquestioned access to thenecessary funds in some other alternative manner.

Our evaluation will include not only normal circumstances, but also the likelihood and consequencesof reasonably possible stress scenarios. Even in stress scenarios, a highly rated insurer should display anunquestioned ability to service obligations as they mature. While Moody’s would normally expect that


these liabilities would be serviced by operating cashflows and maturing assets, other sources of fundsmight be relied upon in exceptional stress circumstances.

Moody’s will pay particularly heavy attention to assuring the adequacy and reliability of projected cashflows to service obligations as they come due. This will include a review of the sensitivity of these project-ed cash flows to interest rate and other market movements, credit events and other uncontrollable factors.

Moody’s believes that an analysis of the line’s asset and liability cash flows, and any gap between them,is critical in evaluating the risk being assumed in writing this business. This analysis should be completedon a current interest rate base case basis, and also under stressed conditions of both rising and fallinginterest rates.

The review of a cash flow variability analysis that has been accomplished in a manner consistent withthat developed by the National Association of Insurance Commissioners’ (NAIC) Life Risk-Based CapitalInterest Rate Risk Project (C-3) is especially helpful in determining the level of cash flow variability riskbeing assumed by the insurer in this line of business.1

Short-term Putable Products Are In Special Need Of Cautious ManagementMoody’s believes that short-term putable products are prone to “runs” compared to other insurance com-pany products. Highly rated companies offering these products should have specific contingency plans inplace at all times to deal with such a possibility – even and particularly under stressful circumstances.

In the ideal situation, assets with maturity dates equivalent to the liabilities’ put date would support theliabilities, but other alternative liquidity mechanisms may be available to the insurer. If assets with dissimi-lar maturities are used, adequate provision must be made to account for any realized losses that could beincurred in premature market sales of these instruments.

Most Insurers We Rate Have Sound A/L ManagementIn Moody’s opinion, the vast majority of insurers have sound asset/liability management programs. Theyhave also limited their involvement in the riskiest products, especially short-dated paper such as 7-day putcontracts. As Moody’s stated in our 1998 report, “Funding Agreements – The New Frontier of StableValue”, our concern with shorter dated liabilities is based upon the belief that “the shorter the put, the lessroom there is to maneuver if problems develop.”

Assurance Of Adequate Liquidity Is Crucial For Short-term Put ProductsMoody’s continues to believe that the availability of adequate liquidity is fundamental for the issuance ofshort-term put products. As Moody’s has stated in the past, “the less liquid and lower quality the assetportfolio, the higher the potential for losses and increased probability of the funding agreement issuerbecoming troubled.”2

However, Moody’s believes that the liquidity and asset problems that General American LifeInsurance Company (General American) experienced during August 1999 were exceptional. GeneralAmerican’s exposure to 7-day put funding agreement contracts was far beyond life insurance industrynorms both in terms of absolute dollar size and relative to the size of the institution’s balance sheet, capitaland liquidity.

General American’s reliance upon an unusually large reinsurance contract with a lower rated reinsureronly compounded this already outsized exposure. This reinsurance contract effectively ceded control ofover $3 billion of General American assets to another party while leaving General American contingentlyat risk.

In the ensuing weeks after the default, several other insurers also encountered relatively high levels ofput activity. However, every one of them met their obligations with little strain and without absorbing sig-nificant investment losses. Most of these puts were not related to investor concerns regarding the financialstrength of the insurer, but were instead due to a reconsideration by the investor of the appropriateness ofthis relatively new and previously untested asset class.

1 For more information on this project see the NAIC’s web site at http://www.naic.org/finance/interest_rate_risk_project_c3.htm.2 See Moody’s Special Comment, Funding Agreements –The New Frontier of Stable Value, April, 1998.


“CASH CAPITAL” ANALYSIS – WHAT EVERY INSTITUTIONAL INVESTMENT PRODUCT ISSUERNEEDS TO DOMoody’s believes cash capital analysis can be an important method for testing spread-based product linessuch as an institutional investment product portfolio. Cash capital analysis values liabilities to their putdate. In addition, the method incorporates the existence of any other embedded options in the valuationprocess.

Once the initial valuation process is complete, asset values are measured applying appropriate haircutsto account for the possible loss of value and liquidity discounts. Alternative stress scenarios can then becalculated to estimate the company’s ability to cover, through asset sales or other means, an unusual surgein liability redemptions.

This methodology, commonly performed by investment banks for their matched book business, is notfool proof, but provides a significant degree of comfort that the insurer can handle any reasonably foresee-able occurrence.

Another useful test is to engage in a “spread at risk” examination where assets are “marked-to-market”as are the liabilities. This test measures any unrealized losses that exist within the book of business.Moody’s believes that this measure can be a more accurate profitability gauge than the more conventionalspread analysis method of using the book yield of assets minus any expense charges and liability creditingrates. This approach is of importance primarily if the liabilities can be withdrawn before their expectedmaturity date. If the liability cash flows are completely predictable, this test is of a reduced degree ofimportance.

Institutional Investment Products Rating Criteria – Key FactorsMoody’s Uses In Evaluating An Institutional Investment ProgramMoody’s assigns financial strength ratings to entire companies, not lines of business and usually not specif-ic products. Nonetheless, as part of the rating process, Moody’s carefully reviews and evaluates the degreeof risk in each business line and the relationship between the financial and business performance of thesevarious lines.

OPERATIONAL LEVERAGEOperational leverage is expressed as the business lines’ ratio of liabilities to internally assigned statutorycapital. The level of this parameter is a crucial determinant of the economic attractiveness of the institu-tional investment products to an insurer. A high amount of operational leverage permits the program toimprove its return on equity (ROE), but at a higher level of risk to the insurer. Conversely, a conservative,lower level of operational leverage reduces program risk, but can quickly make the program uneconomicdue to a low resulting ROE.

Moody’s is frequently asked to express our views regarding the degree of operational leverage we viewappropriate in the operation of these programs. As discussed above, Moody’s rates companies, not lines ofbusiness, so we only secondarily look at the amount of leverage attributed to any specific line; our primaryattention remains focused on the combined organization.

However, during our review process, Moody’s expects that the degree of operational leverage attrib-uted to any specific line should be consistent with the risks assumed in operation of the line. Insurersshould be able to explain the operational leverage used in managing this line, just as they would with anyother business. Some of the risks that Moody’s compares capital levels to are options embedded in the lia-bility portfolio, asset credit quality, liquidity, volatility and interest rate sensitivity of the underlying assetportfolio.

Moody’s believes that an appropriate operating leverage for this business is 11:1 to 15:1, dependentupon factors such as the company’s rating level, experience and management of the business, its otherbusinesses, and its risk tolerance. This leverage range was based on a risk-based capital assessment for thisline of business, assuming a typical investment allocation for companies active in this market. Moody’sviews this range as appropriate for a well managed business, assuming the risks discussed below are care-fully measured and managed in a manner consistent with what is expected from a highly rated entity.


Under certain circumstances, Moody’s would consider operational leverages outside of this range,either up or down, as appropriate. Such circumstances could include especially risky asset or liability port-folios, relative inexperience in operating the business, or explicit parental or third-part support.

LIQUIDITY OR MATURITY RISKSAs institutional investment products become an increasingly important component of insurers’ balancesheets, liquidity or refinancing risk becomes increasingly important. This risk describes the ability of theinsurer to service the liabilities as they come due, either on an expected or, more importantly, on an unex-pected basis.

Rollover risk is the risk that if new liabilities need to be issued to finance maturing liabilities, the issuermay be unable to do so. It is a given in financial markets that such circumstances occur during the mostinopportune moments.

General Account Assets Support All Business LinesFor some companies, the institutional investment product line is operated on a standalone basis. For othercompanies, the business is operated as an integral part of a larger business. In either case, from a legal per-spective, the resources of the entire organization support all the liabilities, including the institutionalinvestment products.

Spreading Liability Maturities Help Disperse RiskOne method for managing this risk is to carefully disperse liabilities’ maturities over time – a ladderedmaturity structure. It is normally less risky to have liability maturities spread out over a wide time spec-trum rather than highly concentrated in a short time period. Special care should be taken in environmentslike now, when issuers are writing large amounts of new liabilities during a fairly tight time frame, toensure that the resulting liability portfolio is well diversified over time. Without appropriate attention, theliability portfolio could end up being highly concentrated.

The spreading of the liability structure is especially crucial if mismatches can occur between asset andliability maturities. It is less important if asset cash flows are sufficient to service the liabilities as theymature. Any mismatch, either expected or unexpected, could require the insurer to dispose of assets at aninopportune time in order to service its liabilities if the insurer is also simultaneously unable to issue newliabilities as the old ones mature.

One simple but effective method to reduce the level of maturity risk assumed by the insurer is to cre-ate a laddered liability maturity structure where each year’s maturities are limited to a specified percentageof the total institutional investment products outstanding. Under this approach, the adverse financialaffect of stressful market conditions or specific company credit problems can be managed over an exten-sive time period, instead of having to be resolved quickly under stress.

Other useful precautions that can be taken include matching near term liability payments due withshort-term assets, ownership of adequate amounts of liquid securities, and the development of alternativeliquidity facilities such as committed bank lines.

Moody's Introduces Short-term Insurance Financial Strength RatingsConstant access to adequate liquidity resources is especially crucial to issuers of short-term funding agree-ments. Moody’s believes that 90-day putable FAs need to be considered for liquidity testing purposes as90-day liabilities, even if they are unlikely to be put. To qualify for a Moody’s Prime-1 short-term insur-ance financial strength rating, significant issuers of short-dated put products need to have available accessto alternative liquidity, which can be in the form of back-up lines of credit, liquidity facilities, unused secu-rities reverse purchase facilities, or readily-available marketable securities.

ASSET RISKMoody’s believes that asset risk is important. However, asset management principles such as diversifica-tion, careful underwriting, and adequate credit quality are not much different than those that apply toother product lines. One important consideration is that given the tight margins involved in institutionalinvestment products, insurers do not have much room for error in their institutional investment manage-ment portfolios. Any significant level of investment losses will rapidly push the line into marginal prof-itability or worse.


LIABILITY OPTIONALITYAnother potential source of risk are options embedded in the institutional investment product liabilities.Some liabilities have no embedded options, such as funding agreements used to back most FANIP pro-grams. Moody’s views institutional investment product programs that issue liabilities without embeddedoptions as a favorable credit factor.

Benefit Responsive GICs Contain Weak Embedded OptionOther liabilities have weak options embedded in them. Examples include most benefit responsive GICsmarketed to defined contribution plans. While these GICs contain put options, these options are difficultto exercise and expose the insurer to limited losses even when exercised. In addition, most issuers haveconsiderable expertise in evaluating and underwriting this risk. Consequently, Moody’s has typically notbeen especially concerned regarding the limited optionality embedded in these liabilities.

Moody’s most serious concerns arise with liabilities containing short or unusual put provisions.Examples include short-term putable funding agreements and funding agreements containing unusual putor index provisions. Moody’s believes that an issuer of such a product carefully understand and managethe option risk, and carefully controls the amount of the exposure. The issuer should also be able todemonstrate that it can satisfy these option obligations, even under exceptional circumstances, withoutcompromising the institution’s financial strength.

Downgrade Provisions In Muni-GICs Compound Other RisksMoody’s views the incorporation of “downgrade” provisions in contracts as substantially increasing therisk level of the contract both to the insurer and to policyholders not benefiting from this provision.These provisions permit the contract holder to put the contract back to the insurer prior to the contract’snormally scheduled maturity date. This special put is triggered when the insurer’s insurance financialstrength rating is downgraded by a designated rating agency below a predefined threshold. Contracts withthese provisions are typically issued to municipalities and are consequently referred to as “muni-GICs”.

Puts exercised under these provisions are by definition exercised at a time when the insurer is alreadyunder financial stress. This stress is further exacerbated by the fact that there is no realistic method for theinsurer to hedge this risk.

YIELD CURVE MOVEMENTSMoody’s expects that highly rated institutional investment product issuers will carefully evaluate and man-age risks assumed from yield curve movements. This can be accomplished directly through the liabilitiesissued and assets purchased, or indirectly through hedging transactions. Hedging transactions used tohedge yield curve movements include interest rate futures and, more notably, interest rate swaps.

Cash Matching Is Lowest Risk But Impractical In PracticeWhen the block is managed on a cash matched basis, the issuer’s entire exposure to yield curve move-ments is automatically eliminated. However, Moody’s believes few if any companies manage their portfo-lio on this basis since cash matched portfolios leave issuers very limited flexibility in managing their pro-gram. It is also difficult to manage a program in this manner profitably. Consequently, issuers managethese blocks on another basis, permitting them more flexibility in the program management, but with theneed for more sophisticated analysis to control the program’s risk profile.

Moody’s believes that to limit the risk of a duration-managed program to the sponsoring insurer,financial affects of both parallel and non-parallel yield curve shifts have to be evaluated and controlled.Parallel yield curve shifts can be more easily managed and are evaluated on a duration basis.

Non-parallel Yield Curve Shifts Are Most Common And Are Harder To ManageHowever, yield curve shifts are almost never completely parallel. Non-parallel movements are both therule and considerably more challenging to manage. Therefore management requires partial durationanalysis along with the construction of carefully designed hedging programs.


SPREAD RISKEven programs managed on a “perfectly matched” interest rate risk basis remain exposed to potentialspread risk, or the risk that asset yield spreads will vary from those expected against their Treasury orLIBOR benchmark rates. These spread deviations occur regularly in financial markets, although typicallyin more modest fashions than for interest rate movements. Unfortunately, spread movements are especial-ly difficult, although not necessarily impossible to hedge.

Moody’s believes that almost all insurers elect to assume spread risks, and consequently need to havesufficient capital to absorb reasonably anticipated spread movements.

Spread risk is relatively unimportant if the insurer will not need to sell the asset prior to its maturity togenerate liquidity. This would be true in cases when the assets’ maturity is matched to the liability, orwhen funds are available from other sources to service the liabilities.

However, if these assets may have to be sold, spread risk becomes much important. This is especiallytrue if the assets under consideration are relatively illiquid or prone to significant spread moves. An exam-ple of the potential importance of spread risk is the General American situation. Moody’s believes thatspread risk, and not interest rate movements, caused much of the problem that lead to its insolvency.

DIVERSIFICATIONMoody’s carefully evaluates both the risks of the program and its effect on the insurer’s overall risk profileduring our rating process. Institutional investment products, while not without risk on a stand-alone basis,may permit the insurer to better manage the over all risks assumed by the insurer. For example, the pres-ence of a book of institutional investment products may help lower the overall risk profile of an insurerthat had previously just written retail immediately surrenderable deferred annuities. In such a case, longerdated institutional investment products may serve as a base of stable, predictable liabilities while thedeferred annuities’ surrender experience varies considerably over time.

Funding Agreement Note Issuance Programs (FANIPS)

BACKGROUNDMoody’s credit analysis of funding agreement backed securitizations, such as the widely marketed EMTNprograms, revolves around the primary question of whether the investor has a perfected interest in theunderlying FA and whether that interest is pari-passu with other policyholder obligations.

Under a funding agreement note issuance program (FANIP), whether it is an EMTN program or adomestic Medium Term Note Program (MTN), a special-purpose, bankruptcy-remote vehicle (SPV) isestablished. The SPV’s sole purpose is to issue notes to investors and then use the proceeds to purchasefunding agreements from the sponsoring insurance company. The funding agreement therefore serves asthe sole asset collateralizing the SPV’s debt issuance. (See EMTN Program Structure below.)

EMTN Program Structure

Special PurposeVehicleInsurer Noteholder

Trustee/PayingAgent

FundingAgreements

EMTN Notes

Principal +Interest

Principal +Interest

AssignFundingAgreement

Proceeds Proceeds


The indenture governing the program will ensure that the terms of the funding agreements will mir-ror the terms of the notes issued by the SPV in order to eliminate any mismatches. As subsequent notesare issued by the SPV, this matching principle is reapplied. If mismatches occur, the SPV would assumerisk and would need to be adequately capitalized to absorb any potential losses. Programs are designed toissue a series of notes up to an initially authorized program limit, which can be raised at a later date.

FANIP SPVs are created in non-US jurisdictions with favorable tax laws such as the Cayman Islands.The notes issued by these vehicles are rarely marketed in the U.S. for a variety of reasons, including theirnot being registered with the SEC. Instead of registering the instruments with the SEC, these offeringsare instead subject to “Regulation S” of the Securities Act of 1933, as amended, for non-U.S. investors.

The notes are marketed to numerous investors around the world outside the U.S., most prominentlyEurope, Asia and Australia. Many of these transactions are publicly placed and are listed on a Europeanexchange in an effort to improve their liquidity.

In many cases insurers have also issued FANIPs in private transactions under these programs inresponse to investor “reverse inquiry.” Such issues are customer tailored for the need of a specific buyer,often are of smaller size, and usually offer the investor lesser liquidity than public deals.

THE NUMBER OF FUNDING AGREEMENT-BACKED EMTNs IS GROWINGMoody’s believes that currently the amount outstanding of EMTNs backed by funding agreementsapproximates $20 billion. The tables at the end of this report supply further detail on the actual issuancethat has taken place.

To date, most notes have had bullet maturities ranging from three to twenty years in length. Couponsare usually set at a fixed-rate. Notes with floating rates or step-up coupons have been issued when the all-in cost for doing so was favorable.

Until recently, legal and regulatory issues limited the use of domestic MTNs backed by FAs. Onemajor impediment was that the New York Insurance Department (NYID) believed that transactions suchas these constituted the marketing of an insurance policy by an intermediary. In the NYID’s view, such atransaction is not permitted under New York law unless the intermediary and its employees are licensed asinsurance agents. This is very rarely the case for investment banks and their employees. However, theNYID has subsequently reconsidered its view on this issue and it is believed that this is no longer anobstacle to launching a domestic program.

AN EXPECTED SURGE IN INSURER PARTICIPATIONMoody’s believes that several insurers are in the process of developing domestic programs and thatapproximately 10 to 15 U.S. life insurers will access the market domestically during the next 24 months.To date only Protective Life has issued notes domestically to U.S. investors through a domestic DelawareSPV trust.

Moody’s believes that the volume that will be eventually issued in the domestic U.S. market could eas-ily exceed that of the Europe market, and that this may well occur in a fairly short period of time. Thiswill be driven by the fact that the insurers will often be able to place debt domestically at more favorablelevels than that required in Europe. These savings will result from a variety of factors including the moreliquid U.S. bond market, improved issuer name recognition in the domestic market, and the fact that atleast some of these issuers have name scarcity value.

MOODY’S RATING PROCESS FOR FANIPsWhen Moody’s assigns a rating to a FANIP program, it is usually equal to the underlying insurer’sinsurance financial strength rating (IFSR). The IFSR rating is the most senior rating that Moody’sassigns to insurance company obligations. This rating applies only to the insurer’s most senior policy-holder obligations.

A crucial part of the evaluation process in assigning this rating is that Moody’s determines that thefunding agreements supporting this obligation are pari-passu with other senior policyholder obligations.

When an individual program draw takes place, Moody’s rates the specific drawdown. “Plain vanilla”tranches or notes without unusual features will carry the program rating. However, in some cases the draw-down may contain a credit linked or other embedded derivatives and might be rated lower than the pro-gram rating.


The actual documentation reviewed by Moody’s in its analysis done to assign a FANIP rating willvary depending on the details of the transaction. Typical documentation in these transactions include thefollowing:

• Indenture governing issuance of debt by SPV• Legal opinions

- Priority status of FA- Perfection of security interest- Tax opinion- Corporate opinion

• Incorporation documents for the SPV• Form of Funding Agreement• Offering document• Dealership agreement

LEGAL STANDING DETERMINES PRIORITY OF CLAIMS OF FUNDING AGREEMENTSIn the U.S., insurance companies are primarily regulated by the insurance department of their state ofdomicile. Consequently the laws of that state determine the priority of claims in the case of the insurer’sinsolvency, and therefore, have a bearing on the ultimate rating assigned to an issue.

Under some state insurance laws or regulations, FAs and/or GICs are specifically mentioned as beingconsidered policyholder liabilities and therefore receive the highest priority of claims. In other states, FAsor GICs may not be explicitly mentioned in the state insurance regulations, making the priority of claimsfor these instruments in the event of an insolvency unclear, or even worse, subordinate to other policyhold-er obligations. As a result, some issuers of FAs in states with unclear regulatory environments have soughtand received legal opinions from an attorney familiar with that state’s insurance laws and regulations.

Moody’s approach is to review the state of domicile’s insurance law as well as relevant legal opinions. Ifthe state insurance law and/or legal opinions suggest that the FA/GIC may be relegated below policyhold-ers in standing under an insolvency or other regulatory action, Moody’s rating assigned will most likelyreflect that increased risk profile. In such a case the FANIP rating would usually be one notch lower thanthe insurer’s financial strength rating. Additionally, Moody’s will monitor the state insurance laws todetermine whether the regulations or opinions have changed since the ratings were initially assigned.

To date, Moody’s has determined that only one state, Massachusetts, has insurance laws where fund-ing agreements are subordinate to other policyholder obligations. Recently, the Massachusetts StateSenate passed a bill which would make funding agreements pari-passu with othr insurance obligations.The legislation additionally needs House and Governor approval to become law. If this change takesplace, Moody’s expects to treat funding agreements issued by Massachusetts domiciled life insurance com-panies consistent with our practice for companies domiciled in other states.3

PERFECTED SECURITY INTERESTEach SPV note issuance is secured by a funding agreement issued by the sponsoring insurer. The notesthemselves are non-recourse to the insurer. Moody’s, in our ratings process, will need to establish thatholders of the SPV notes have a perfected interest in the supporting funding agreement and that it willcontinue to serve as their collateral.

Under New York law, which is generally regarded as the industry standard for securitizations, fundingagreements usually constitute collateral that is excluded from New York Uniform Commercial Code(NYUCC). The economic equivalence of a security interest in the funding agreement can be achieved byassigning the funding agreement to the indenture trustee for the benefit of the note investors. In addition,

3 See Moody’s Special Comment, All Funding Agreements Are Not The Same – Priority of Claims Varies And is Determined By The Issuer’s State of Domicile, June, 1999.


the insurer will change its books and records to reflect the assignment and will acknowledge such actionswith a notice to the trustee. The trustee, who takes possession of the funding agreements, therebyachieves perfection of the security interest.

In the event that funding agreements are interpreted as eligible collateral covered under NYUCC, thetrustee will have achieved security interest perfection by filing Uniform Commercial Code (UCC-1)financing statements with relevant New York local offices, naming the SPV as debtor, and the trustee assecured party for the benefit of the note investors. In an effort to ensure perfection under non-New Yorkjurisdiction, the trustee will also file UCC-1 statements in the state where the insurer is domiciled.4

The Institutional Investment Product Marketplace

AN EVOLVING MARKETThe institutional investment products market has rapidly been transformed during the last decade. It hasevolved from simple fixed rate, fixed maturity general account GICs sold primarily to 401(k) plans into a
marketplace containing a multitude of productspurchased by a wide assortment of institutionalinvestors. Some of the products now sold includesynthetic GICs, short-term funding agreements,separate account GICs, funding agreement noteissuance programs, and other securitized programs.
Moody’s expects that new products will contin-ue to be developed, that the relatively new FAs willcontinue to grow in popularity, while the older tra-ditional general account GICs sold to 401(k) planswill likely enjoy only modest growth, at best.

Short-term FAs Sales Have ResumedDuring the first six months of 1999, sales of short-term funding agreements continued to quicklyexpand. Several new issuers entered the market andmore money market funds began buying short-term FAs.

However, the General American default inearly August caused sales of short-term “putable”FAs to stop almost overnight. Even some financial-ly strong issuers were subject to put activity byinvestors reconsidering their commitment to thisasset class.

The market for these products has stabilized in late 1999 and early 2000, and some sales have resumedon a deliberate basis. However, it is too early to tell whether both insurers will fully resume their market-ing efforts and if investors will purchase these products with their previous enthusiasm.

Popularity Of GICs May Have Peaked For NowTraditional GICs, separate account GICs and synthetic GICs all can be expected to experience slowgrowth in the near term. Traditional GICs may attract additional attention if interest rates rise andspreads widen further, but the dynamics of the 401(k) business (advent of 404c5, the life insurance defaultsof the early 1990’s, and the favorable performance of equity markets) have lowered the demand consider-ably for traditional GICs.

4 See also Moody’s Special Comment, A Brave New World – U.S. Life Insurers Get Innovative with European Medium Term Note Program Backed by Funding Agreements, April, 1999.

5 Under Federal law, ERISA Section 404c, a company can reduce its fiduciary liability by allowing plan participants to take control of their assets in the plan.


Sales Activity Survey*(Billions of dollars)

1999 1998

General Account GIC $16 $17General Account FA $34 $25Separate Account Products $8 $7

Total $58 $49

*Source: LIMRA-SVIA Stable Value and Funding AgreementProducts 1999 Sales and Assets Survey, dated March 9, 2000

Institutional Investment ProductsAssets Under Management as ofDecember 31, 1999(Billions of dollars)

Stable Value $235Funding Agreements $62

Total $298

*Source: SVIA-LIMRA Stable Value and Funding AgreementsProducts 1999 Sales and Assets Survey.

Additionally, pressures on synthetic GIC fees have been in place for years. This has substantially low-ered the profitability on notional value for all providers of this product. Because of this, only a few insur-ance providers remain committed to the business.

New Domestic And Global MTN Programs Offer Best Chance For GrowthIf growth in the institutional investment products business is to occur in the near term, it will be throughthe new domestic MTN programs and related trust structures that can benefit from the large corporatedebt market in the United States. The potential issuers of the funding agreements backing domesticMTN instruments have little debt outstanding today so investors may be enticed by the diversificationthese offerings afford compared to bank debt, industrials or finance companies.


Appendix

Following are three exhibits and a discussion by Moody’s analysts of the credit characteristics of theprominent institutional investment product issuers.

Exhibit 1 is a table of Prominent Issuers and their institutional investment products exposures. This mea-sures the amount of institutional investment product business written by the insurer and expresses thisexposure as a percent of liabilities and capital. Several of the legal entities listed are affiliates of largerinsurance groups. In many cases, membership in the group significantly influences the insurance financialstrength rating Moody’s has assigned the company.

Exhibit 2 includes selected public market FANIP issuances during 1999 and 2000. The listing is useful forthose investors that have or are considering investing in this sector. Private issues and certain public issuesmay not be included in this list. Additionally, Exhibit 3 lists all FANIP programs currently rated byMoody’s.

Following the exhibits, Moody’s discusses the credit characteristics of the prominent institutional invest-ment product issuers. This includes a discussion of the company’s insurance financial strength rating, therating outlook and selected statutory statistics for the company. In cases of more than one company in agroup active in the institutional investment products market, statistics are published only for the group’sprimary issuer. This section also briefly discusses the management approach of the company in this mar-ket. For further information on these companies, please refer to the company’s annual Moody’s report.


Exhibit 1

Prominent Issuers’ Institutional Investment Products OutstandingData as of September 30, 1999Dollars in Millions

IIPs as % of PolicyMoody’s Policy Res IIPs as % of IIPs Reserves

Company Name IFSR Rating & Liabs Capital Outstanding and Liabs

1 Principal Life Insurance Co * Aa2 48% 420% $17,346 $36,4992 John Hancock Life Insurance Co Aa2 36% 249% 12,895 35,9943 Prudential Insurance Co of America ** A1 14% 92% 12,576 90,6924 New York Life Insurance Co Aa1 23% 146% 12,541 55,4425 Sunamerica Life Insurance Co Aaa 59% 605% 10,048 17,1416 Monumental Life Insurance Co Aa3 55% 793% 9,342 16,8747 Metropolitan Life Insurance Co Aa2 8% 75% 8,557 104,2928 Travelers Insurance Company Aa3 28% 118% 6,549 23,0619 Pacific Life Insurance Co Aa3 32% 434% 6,300 19,466

10 Jackson National Life Insurance Co Aa3 19% 218% 5,906 30,54711 Transamerica Life Insurance & Annuity Co Aa3 50% 521% 5,668 11,44712 Allstate Life Insurance Co Aa2 20% 184% 5,351 26,73713 GE Life and Annuity Assurance Co Aa2 44% 559% 3,952 8,93514 Protective Life Insurance Co A1 46% 466% 2,670 5,74815 Hartford Life Insurance Co Aa3 16% 116% 2,272 13,85516 First Allmerica Financial Life Ins Co A1 50% 355% 2,210 4,43617 Peoples Benefit Life Insurance Co Aa3 26% 202% 1,495 5,66018 United of Omaha Life Insurance Co Aa3 17% 178% 1,406 8,25219 Ohio National Life Insurance Co A1 31% 205% 1,181 3,82420 Connecticut General Life Insurance Co Aa3 4% 48% 1,088 28,10721 Business Men’s Assurance Co of America A1 42% 378% 1,054 2,48822 AIG Life Insurance Company Aaa 15% 234% 873 5,72923 Life Insurance Co of Georgia Aa2 39% 479% 858 2,20924 Combined Insurance Co of America A1 31% 145% 842 2,75125 Massachusetts Mutual Life Ins Co Aa1 2% 14% 709 37,92226 American Int'l Life Assurance Co New York Aaa 13% 146% 685 5,41427 Security Benefit Life Ins Co A2 23% 113% 594 2,59028 Nationwide Life Insurance Co Aa2 2% 22% 344 19,690

* Company did not provide data. Estimated from Liabilities line 10.2 + 10.3, Guaranteed Interest Contracts and Other Contract Deposit Funds,of quarterly statement.

** Includes $6.2 billion of institutional spread business issued by Prudential Insurance Company and backed by commercial paper issued byPruFunding Corp.

IIP = Institutional Investment Products

Policy Reserves & Liabilities is the sum of Liabilities lines 1 thru 11.3 in the quarterly statement.


Exhibit 2

Selected Public Market FANIP IssuanceJanuary 1999 to PresentDollars in thousands

Maturity Final Amount Amount Moody’s Ann Date Issuer Date Coupon Currency (‘000) (US $’000) Rating

7-Jun-99 AIG SunAmerica Institutional Funding 2-Jun-04 6.2500 US$ 250,000 250,000 Aaa19-May-99 AIG SunAmerica Institutional Funding 2-Jun-04 6.2500 US$ 500,000 500,000 Aaa17-Jan-00 AIG SunAmerica Institutional Funding II 26-Jan-05 1.2000 JPY 50,000,000 476,644 Aaa4-Jan-00 AIG SunAmerica Institutional Funding II 25-Nov-05 5.0000 EUR 150,000 154,500 Aaa8-Dec-99 AIG SunAmerica Institutional Funding II 6-Oct-03 6.3750 US$ 100,000 100,000 Aaa

30-Nov-99 AIG SunAmerica Institutional Funding II 8-Dec-04 4.7500 EUR 200,000 203,000 Aaa18-Nov-99 AIG SunAmerica Institutional Funding II 25-Nov-05 5.0000 EUR 50,000 51,560 Aaa17-Nov-99 AIG SunAmerica Institutional Funding II 8-Dec-04 4.7500 EUR 300,000 312,000 Aaa11-Oct-99 AIG SunAmerica Institutional Funding II 25-Nov-05 5.0000 EUR 100,000 106,380 Aaa27-Sep-99 AIG SunAmerica Institutional Funding II 6-Oct-03 6.3750 US$ 250,000 250,000 Aaa25-Aug-99 AIG SunAmerica Institutional Funding II 26-May-04 6.5000 STG 100,000 158,000 Aaa12-Aug-99 AIG SunAmerica Institutional Funding II 25-Nov-05 5.0000 EUR 250,000 269,542 Aaa

AIG Sun America Subtotal 3,086,626

30-Nov-99 Allstate Life Funding 14-Jan-10 4.2500 SFR 250,000 157,710 NR14-Jul-99 Allstate Life Funding 25-Jul-04 3mth Libor + .30% US$ 250,000 250,000 NR

Allstate Subtotal 407,710

26-Jan-00 Jackson National Life Funding 28-Aug-03 3.5000 SFR 250,000 155,280 Aa325-Jan-00 Jackson National Life Funding 8-Feb-05 US$Libor+20 bps US$ 250,000 250,000 Aa313-Jan-00 Jackson National Life Funding 15-Nov-02 BBSW+25 bps AUD 250,000 166,980 Aa3

18-Mar-99 Jackson National Life Funding LLC 6-Apr-04 3mth Libor+0.20% US$ 300,000 300,000 Aa3Jackson National Subtotal 872,260

11-Jan-00 John Hancock Global Funding Ltd 31-Jan-05 7.5000 US$ 300,000 300,000 NR2-Nov-99 John Hancock Global Funding Ltd 30-Nov-04 5.2500 EUR 300,000 315,300 NR

26-Aug-99 John Hancock Global Funding Ltd 15-Feb-06 6.7500 AUD 300,000 189,000 NR9-Jul-99 John Hancock Global Funding Ltd 13-Aug-09 4.0000 SFR 300,000 190,913 NR

7-Jun-99 John Hancock Global Funding Ltd 22-Jun-04 6.5000 US$ 300,000 300,000 NR2-Jun-99 John Hancock Global Funding Ltd 6-Jul-04 4.3750 US$ 150,000 86,972 NR

6-May-99 John Hancock Global Funding Ltd 30-Mar-09 6.1250 US$ 350,000 250,000 NR22-Mar-99 John Hancock Global Funding Ltd 18-Feb-04 2.5000 SFR 150,000 102,585 NR17-Mar-99 John Hancock Global Funding Ltd 30-Mar-09 6.1250 US$ 250,000 250,000 NR22-Jan-99 John Hancock Global Funding Ltd 8-Feb-06 3.8750 EUR 300,000 347,705 NR7-Jan-99 John Hancock Global Funding Ltd 18-Feb-04 2.5000 SFR 182,017 182,017 NR

John Hancock Subtotal 2,514,492

23-Jun-99 MassMutual Global Funding LLC 7-Jul-06 7.0000 US$ 300,000 300,000 NR

20-Jan-00 Monumental Global Funding 28-Feb-05 3.5000 SFR 200,000 125,172 NR1-Dec-99 Monumental Global Funding Ltd 31-Mar-03 3.2500 SFR 50,000 31,490 NR

19-Nov-99 Monumental Global Funding Ltd 31-Mar-03 3.2500 SFR 200,000 129,030 NR30-Sep-99 Monumental Global Funding Ltd 20-Oct-04 3mth Euribor+.15% EUR 500,000 533,650 NR16-Apr-99 Monumental Global Funding Ltd 15-Jul-09 4.3750 EUR 250,000 269,426 NR

Monumental Global Subtotal 1,088,768

5-Jan-00 Nationwide Financial Funding LLC 8-Feb-05 SFR Libor+15 bps SFR 250,000 161,436 Aa29-Nov-99 Nationwide Financial Services 24-Nov-06 5.3750 EUR 250,000 260,075 Aa214-Jul-99 Nationwide Financial Services 18-Aug-04 3.0000 SFR 500,000 316,670 Aa2

Nationwide Subtotal 738,181

17-Aug-99 Pacific Life Funding LLC 15-Sep-05 3.5000 SFR 200,000 131,580 Aa32-Jun-99 Pacific Life Funding LLC 15-Mar-07 3.0000 SFR 50,000 32,560 Aa3

18-Feb-99 Pacific Life Funding LLC 23-Dec-03 2.5000 SFR 100,000 70,651 Aa31-Feb-99 Pacific Life Funding LLC 15-Mar-07 3.0000 SFR 350,000 246,600 Aa3

Pacific Life Subtotal 481,391


Exhibit 2

Selected Public Market FANIP Issuance (cont.)January 1999 to PresentDollars in thousands

Maturity Final Amount Amount Moody’s Ann Date Issuer Date Coupon Currency (‘000) (US$’000) Rating

11-Nov-99 Principal Financial Global Funding LLC 7-Apr-04 2.2500 SFR 250,000 161,290 Aa24-Nov-99 Principal Financial Global Funding LLC 15-Oct-02 6.7500 AUD 150,000 95,610 Aa23-Mar-99 Principal Financial Global Funding LLC 7-Apr-04 2.2500 SFR 250,000 172,521 Aa212-Jan-99 Principal Financial Global Funding LLC 22-Jan-09 4.5000 EUR 300,000 346,580 Aa227-Jan-00 Principal Global Financial 17-Feb-05 5.6250 EUR 300,000 301,000 Aa2

Principal Subtotal 1,077,001

21-Jun-99 SunAmerica Institutional Funding 27-Apr-04 2.0000 SFR 150,000 97,428 Aaa5-May-99 SunAmerica Institutional Funding 21-May-02 3mth Euribor+0.05% EUR 500,000 528,989 na22-Apr-99 SunAmerica Institutional Funding 7-Dec-09 5.3750 STG 250,000 403,551 na10-Mar-99 SunAmerica Institutional Funding 27-Apr-04 2.0000 SFR 250,000 170,381 Aaa16-Feb-99 SunAmerica Institutional Funding 15-Feb-09 5.7500 US$ 150,000 150,000 Aaa2-Feb-99 SunAmerica Institutional Funding 15-Feb-09 5.7500 US$ 850,000 850,000 Aaa

SunAmerica Subtotal 2,200,349

9-Jun-99 Travelers Insur Co Institutional Funding Ltd 16-Jun-06 4.2500 EUR 250,000 257,626 Aa324-Feb-99 Travelers Insur Co Institutional Funding Ltd 5-Mar-09 4.5000 EUR 300,000 332,853 Aa3

Travelers Subtotal 590,479

Total 13,357,257

Source: Warburg Dillon Read and Capital Data Bondware


Exhibit 3

Moody’s Rated FANIP Programs

Dollars in Millions

Issuer Program Rating Amount Market Type

AIG SunAmerica Institutional Funding Aaa US$ 5,000 GlobalFederal Kemper Life Assurance Company* Aa3 US$ 300 MultipleJackson National Life Funding LLC Aa3 US$ 2,000 EuromarketNationwide Financial Funding LLC Aa2 US$ 2,000 GlobalPacific Life Funding, LLC Aa3 US$ 5,000 EuromarketPrincipal Financial Global Funding, LLC Aa2 US$ 2,000 EuromarketProtective Life U.S. Funding Trust A1 US$ 200 United StatesAIG SunAmerica Institutional Funding II & III Aaa US$ 12,500 EuromarketTransamerica Global Funding Corporation I Aa3 US$ 2,000 EuromarketTransamerica Global Funding Corporation II Aa3 US$ 2,000 EuromarketTravelers Insurance Co. Institutional Funding Ltd. Aa3 US$ 2,000 Euromarket

*Premium Asset Trust Certificates is actual issuer


Institutional Investment Products Review AEGON USA Life Insurance Companies-Monumental Life Insurance Company

Company Overview

Moody’s Aa3 insurance financial strength rating and P-1 short-term financial strength rating ofMonumental Life Insurance Company (MLIC), and the other members of the AEGON USA andTransamerica life companies reflect the group’s good profitability and established market positions in itscore business segments, as well as its strong liquidity, its good-quality investment portfolios, and its soundgroup capitalization. The rating also incorporates the financial strength of the group’s ultimate parent,Netherlands-based AEGON N.V. (AEG). These strengths are tempered by the group’s focus on com-modity-like accumulation products, financial leverage at the parent company level and the group’s expo-sure to interest rate and derivatives basis risk. MLIC and the other members of the AEGON USA Lifeinsurance group have a stable ratings outlook.

AEG acquired Transamerica Corporation (TA), a significant U.S.-based insurer on July 21, 1999. TAis functionally a sister company of AEGON USA. The acquisition further strengthens the group’s signifi-cant position in several markets including individual annuities, life insurance, and GICs as well as givingAEG entry into the life reinsurance and Canadian insurance markets. The chief risks include increasedleverage at AEG, the issue of integration of TA into AEG, and TA’s commercial finance and leasing oper-ation, which has a higher risk profile than the insurance operations.

On November 30, 1998, three sister companies (Commonwealth Life Insurance Company, PeoplesSecurity Life Insurance Company and Capital Security Life Insurance Company) were merged intoMLIC, creating a legal entity with close to $16 billion in assets.

Institutional Investment Products

AEGON USA and Transamerica provide investment only products such as fixed and floating rate GICs,synthetic GICs, separate account GICs, and other investment products to various institutional pensionplans – public, union, and corporate, both defined contribution and defined benefit. Aggregate spread-based business (funding agreements and GICs) totaled almost $21 billion, and fee-based operations (syn-thetic GICs) amounted to over $17 billion as of June 30, 1999. In addition, the company has also devel-oped an EMTN program that has issued over $1.1 billion of funding agreement backed notes.

A significant percentage of the company’s spread-based business has embedded put options. Moody’sbelieves the potential exists for high levels of unexpected withdrawals in this operation. However, thecompany protects itself by utilizing a fixed-to-floating investment philosophy to match fund its operationsand by issuing contracts (most have a 365 day put feature compared to the industry average of 90-days)with less near-term withdrawal risk than most of its competitors. Moody’s views AEGON USA’s marketleading fee-based synthetic GIC business as incurring a low level of underwriting risk, but being very sen-sitive to fee pressures.


Monumental Life Insurance Co. (AEGON)1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 15,199 3,990 4,067 3,949 3,651Total assets 17,276 3,990 4,067 3,949 3,651Surplus 913 267 256 244 193Investment reserve 159 44 43 38 3150% of dividend reserve liab. 1 0 0 0 0Capital 1,072 311 299 282 224Insurance revenues 4,122 584 606 663 685Net investment income 1,143 290 291 283 256Total revenues 5,358 931 948 988 969Gain fr ops pre - tax & div 400 98 68 76 67Gain Before Real Capital Gains 329 63 35 40 41Real Cap Gains bef IMR transfer 18 11 1 0 -13Real Cap Gains after IMR transfer -11 0 -1 -5 -5Net Income 318 63 35 35 36Segment Analysis (as % policy reserves & liabilities)Individual life 33.1 42.3 39.3 37.0 36.8Individual health 0.9 0.2 0.2 0.2 0.3Individual annuities 19.9 54.7 57.8 60.0 59.8Group life & health 0.5 0.6 0.6 0.6 0.7Group pension 44.8 0.1 0.1 0.1 0.1Other 0.2 0.5 0.6 0.7 0.9Segment Analysis (as % of total net premiums)Individual life 15.3 42.3 40.2 35.3 32.5Individual health 1.6 2.7 2.5 2.3 2.1Individual annuities 11.3 17.9 19.8 28.8 35.5Group life & health 1.6 10.0 10.8 10.1 7.9Group pension 65.7 0.0 0.0 0.0 0.0Other 0.1 -1.3 1.1 1.2 2.5Investment Profile (as % of cash and invested assets)Bonds 75.1 85.2 85.7 86.0 86.8Common & preferred stock 0.9 0.0 0.3 0.4 0.4Mortgage loans 17.1 11.4 10.6 9.2 9.5Real estate 0.3 0.6 0.6 0.6 0.8Policy loans 2.6 2.0 1.8 1.8 1.8Cash & short term investment 1.4 0.4 0.1 1.4 0.2Other invested assets 2.6 0.4 0.8 0.6 0.5Asset QualityBelow Inv Grade Bonds as % of Invested Assets 6.5 3.8 4.4 4.9 5.1Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.2Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 3.2 7.8 6.1 10.5 11.4Underperf Mtgs+Fclsd RE as % of Invested Assets 0.6 0.9 0.7 1.0 1.1Profitability ROA (%) 2.99 1.56 0.86 0.93 1.04ROE (%) 45.98 20.67 11.92 13.93 16.79Ordinary life lapse ratio (%) 12.0 10.9 11.8 13.7 15.1Net investment yield 13.03 7.68 7.72 7.92 7.81Total investment return 12.68 7.87 7.72 7.99 7.77Commissions/Premiums 6.76 25.53 26.24 22.20 19.22Total general expenses/Premiums 7.83 22.34 19.51 16.45 15.58Total general expenses/Avg assets 3.04 3.24 2.95 2.87 3.06Gain (loss) from operations ($mil)Individual life 192 37 21 20 26Individual health 9 -1 0 2 1Individual annuities 55 24 9 10 10Group life & health 14 5 1 3 -1Group pension 51 0 0 0 0Other 2 0 1 0 -2Capitalization (%)Capital/Assets 7.1 7.8 7.3 7.1 6.1Moody's Risk adjusted capital ratio 136.9 149.0 136.6 129.6 109.6NAIC Risk based capital ratio 294.7 290.9 269.3 250.7 212.9Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 88.3 46.8 57.4 66.4 80.0CMO's and Loan-Backed Bonds/Capital — 414.6 435.9 447.4 563.2Mortgages + RE/Capital 236.6 147.5 146.6 132.5 162.6Total Underperforming Assets/Capital 7.6 11.1 8.8 13.5 19.9Total Affiliated Inv/Capital 5.4 0.0 2.5 2.3 2.2


Institutional Investment Products Review

AIG Life Insurance Company

Company Overview

Moody’s Aaa insurance financial strength ratings of AIG Life Insurance Company (AIG Life) andAmerican International Life Assurance Company of New York (AI Life)(The AIG Life Companies(US)) are based on the explicit support provided by American International Group, Inc. (AIG), which isthe ultimate parent of the life insurance companies. The companies benefit from their diversified earningssources and distribution channels and their high quality investment portfolios. These strengths are offsetsomewhat by the companies’ concentration in interest-sensitive annuity liabilities that present some inter-est rate risks and by the competitive markets in which they operate.

The rating outlooks for AIG Life and AI Life are stable, but are dependent on the financial strength ofthe parent, AIG.


The AIG Life Companies’ stable value business consists of traditional GICs of $1.3 billion as ofSeptember 30, 1999 and $300 million in putable funding agreements. Asset/liability management for thecompany is focused on balancing its short duration and long duration annuities. For its traditional GICportfolio, the company’s assets and liabilities are tightly matched and the company does not take any callrisk because it does not invest in mortgage-backed securities to back this product.

AIG Life and AI Life enjoy the explicit support of their ultimate parent, AIG. The support agreementsbetween AIG and the AIG Life Companies (US) contain net worth, liquidity provisions, and policyholderrights language that effectively guarantees that AIG will provide the necessary funds to the companies toensure the timely payment of those companies’ policyholder claims. AIG may terminate this supportagreement upon 30 days of written notice to the AIG Life Companies (US); however, even in the event ofa termination of the agreement, the obligations to AIG under the support agreement for all contractswritten before the termination would still apply.


AIG Life Insurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 5,959 5,536 4,662 5,573 3,193Total assets 7,930 6,740 5,307 5,763 3,277Surplus 298 285 222 177 145Investment reserve 55 41 38 34 3050% of dividend reserve liab. 0 0 0 0 0Capital 353 327 260 210 175Insurance revenues 2,397 1,526 1,575 2,325 1,664Net investment income 444 381 504 434 237Total revenues 2,890 2,087 2,074 2,768 1,910Gain fr ops pre - tax & div 36 52 69 55 70Gain Before Real Capital Gains 28 34 47 39 45Real Cap Gains bef IMR transfer 5 3 0 1 3Real Cap Gains after IMR transfer 1 1 0 1 2Net Income 29 35 47 40 47Segment Analysis (as % policy reserves & liabilities)Individual life 43.9 46.4 56.9 67.1 54.5Individual health 0.1 0.0 0.0 0.0 0.0Individual annuities 15.2 16.0 14.2 10.4 15.4Group life & health 1.0 1.0 0.9 0.8 1.3Group pension 38.7 35.1 26.6 19.7 25.7Other 0.1 0.2 0.3 0.9 1.4Segment Analysis (as % of total net premiums)Individual life 36.4 15.3 46.5 71.1 78.2Individual health 0.2 0.0 0.0 0.0 0.0Individual annuities 27.0 33.3 27.5 8.8 5.2Group life & health 1.6 13.4 1.4 0.7 0.8Group pension 25.9 26.5 14.5 12.7 6.6Other 0.0 0.0 -0.1 0.8 1.8Investment Profile (as % of cash and invested assets)Bonds 70.4 52.3 48.4 34.4 43.9Common & preferred stock 0.5 0.2 0.4 0.3 0.4Mortgage loans 8.3 6.7 6.7 4.7 6.0Real estate 0.0 0.0 0.1 0.1 0.1Policy loans 17.4 27.7 41.4 55.9 45.0Cash & short term investment 2.4 12.1 2.0 3.5 2.7Other invested assets 1.0 0.8 1.1 1.2 1.9Asset QualityBelow Inv Grade Bonds as % of Invested Assets 5.9 4.5 3.0 1.4 2.2Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.4Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.0 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Invested Assets 0.0 0.0 0.0 0.0 0.0Profitability ROA (%) 0.39 0.59 0.85 0.88 1.85ROE (%) 8.47 12.05 20.01 20.59 30.99Ordinary life lapse ratio (%) 10.1 17.6 1.9 2.5 3.0Net investment yield 8.12 7.83 10.42 10.49 10.22Total investment return 8.17 7.87 10.47 10.53 10.39Commissions/Premiums 5.24 7.27 6.12 2.89 2.98Total general expenses/Premiums 4.16 5.05 4.99 3.53 4.27Total general expenses/Avg assets 1.36 1.28 1.42 1.82 2.80Gain (loss) from operations ($mil)Individual life -4 14 24 13 36Individual health -3 -1 0 -1 0Individual annuities 5 2 -3 4 1Group life & health 1 2 0 0 -1Group pension 22 9 14 15 10Other 1 3 7 -3 -10Capitalization (%)Capital/Assets 5.9 5.9 5.6 3.8 5.5Moody's Risk adjusted capital ratio 129.1 155.8 149.5 138.2 148.6NAIC Risk based capital ratio 221.2 276.8 245.3 193.5 196.5Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 97.7 74.2 52.5 35.4 37.4CMO's and Loan-Backed Bonds/Capital — 132.0 164.8 210.6 245.2Mortgages + RE/Capital 136.7 111.9 118.2 118.4 106.6Total Underperforming Assets/Capital 0.0 0.0 0.0 0.9 7.1Total Affiliated Inv/Capital 2.9 3.2 4.0 4.2 5.0



Allstate Life Insurance Company

Company Overview

Moody’s Aa2 insurance financial strength rating and P-1 short-term insurance financial strength rating ofAllstate Life Insurance Company and of four of its life subsidiaries– Northbrook Life InsuranceCompany, Lincoln Benefit Life Company, Glenbrook Life and Annuity Company and Allstate LifeInsurance Company of New York – is based on their established positions in the markets for life insur-ance, individual annuities, and group pensions, as well as on their broad product portfolios and extensivemultiple channel distribution network, which position the companies well for future growth. Additionalrating factors include reinsurance agreements between Allstate Life and three of these four subsidiaries;and the brand name, financial support, distribution, and other benefits of ownership by the multilineAllstate Insurance Company.

These strengths are tempered by the companies’ narrow focus on highly competitive interest sensitivelife and annuity products, and by the revenue and earnings volatility associated both with these productsand the opportunistic sale of structured settlements and GICs. The rating outlooks of Allstate Life and itslife insurance subsidiaries, which are closely linked with the ratings of Allstate Insurance, are stable.


Group pension products are sold only by Allstate Life and Allstate Life of New York. Products consist pri-marily of guaranteed investment contracts (GICs) marketed by independent brokers to medium- andlarge-sized pension funds. Other products include separate account GICs, short-term indexed fundingagreements (IFAs) and synthetic GICs. Allstate Life has also established a funding agreement backedEMTN program to access longer dated fixed maturity contracts.

Although Allstate Life participates in the market on an opportunistic basis, we anticipate sales ofindexed funding agreements may grow thereby exposing the company to some liquidity risk. This risk issomewhat mitigated as Allstate’s strategy is to focus principally on long put IFAs over 365 days. We donot expect the aggregate amount of GICs and funding agreements to exceed 20% of consolidated insur-ance reserves for the Allstate Life insurance companies. As of September 30, 1999, total general and sepa-rate account short-term funding agreement exposure was $1.6 billion, which represented less than 6% ofgeneral account liabilities and approximately 4% of total liabilities on a consolidated basis.

Allstate Life segments its portfolio by product, and duration matching and/or cash flow matching isestablished for each product segment. Investment decisions are made on a company wide basis. The orga-nization has a disciplined asset/liability management process and we believe that Allstate Life will managethe institutional investment products portfolio well. Because Allstate Life sells GIC products on an oppor-tunistic basis when appropriate investment yields are available, premiums associated with this business arelikely to remain volatile.

Allstate Life has good operating cash flow as well as over $16 billion of publicly traded investment-grade bonds, mitigating liquidity risk. Additionally, Allstate Corporation maintains a US $1 billion com-mercial paper program initiated in 1996, supported by a $1.5 billion back-up bank credit facility.


Allstate Life Insurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 27,429 26,393 25,420 24,061 22,404Total assets 29,145 27,499 26,517 24,854 22,952Surplus 2,425 2,205 1,850 1,642 1,446Investment reserve 365 358 443 396 35850% of dividend reserve liab. 0 0 0 0 0Capital 2,790 2,563 2,293 2,038 1,804Insurance revenues 5,741 4,828 5,009 4,720 4,337Net investment income 1,886 1,903 1,825 1,756 1,634Total revenues 7,882 6,781 6,848 6,481 5,974Gain fr ops pre - tax & div 279 384 283 283 171Gain Before Real Capital Gains 204 269 181 189 58Real Cap Gains bef IMR transfer 265 133 4 26 0Real Cap Gains after IMR transfer 149 68 5 9 -21Net Income 353 338 185 198 37Segment Analysis (as % policy reserves & liabilities)Individual life 19.1 18.2 17.1 16.1 15.6Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 50.4 49.5 47.6 45.3 50.4Group life & health 0.4 0.3 0.2 0.1 0.1Group pension 29.7 31.6 34.5 37.9 33.4Other 0.1 0.1 0.3 0.3 0.3Segment Analysis (as % of total net premiums)Individual life 18.6 21.3 20.1 18.1 18.1Individual health 0.1 0.1 0.1 0.1 0.1Individual annuities 38.4 40.1 38.3 45.4 49.8Group life & health 1.7 1.8 1.4 1.0 0.6Group pension 38.6 34.0 36.2 31.6 27.7Other 0.7 0.3 1.3 1.1 1.2Investment Profile (as % of cash and invested assets)Bonds 79.1 79.5 77.6 76.0 74.9Common & preferred stock 4.7 4.7 5.2 5.2 5.2Mortgage loans 11.8 11.1 12.4 13.6 14.4Real estate 0.1 0.9 1.2 1.5 1.6Policy loans 2.0 1.9 1.9 1.8 1.7Cash & short term investment 1.6 0.5 1.0 1.1 1.6Other invested assets 0.8 1.3 0.7 0.7 0.5Asset QualityBelow Inv Grade Bonds as % of Invested Assets 5.9 5.0 4.7 3.7 4.2Bonds in or near default as % of Invested Assets 0.1 0.0 0.0 0.2 0.2Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 3.0 4.2 9.0 10.4 8.3Underperf Mtgs+Fclsd RE as % of Invested Assets 0.4 0.5 1.1 1.4 1.2Profitability ROA (%) 1.25 1.25 0.72 0.83 0.17ROE (%) 13.20 13.90 8.55 10.29 2.25Ordinary life lapse ratio (%) 10.4 11.1 10.5 9.1 9.0Net investment yield 7.32 7.69 7.72 7.91 7.91Total investment return 8.16 8.44 8.42 8.34 7.81Commissions/Premiums 10.33 10.26 9.43 9.00 7.92Total general expenses/Premiums 6.12 7.22 6.86 6.89 6.92Total general expenses/Avg assets 1.24 1.29 1.34 1.36 1.36Gain (loss) from operations ($mil)Individual life 126 93 52 43 17Individual health 0 1 1 1 1Individual annuities 35 104 64 88 30Group life & health -17 -10 -11 -5 -2Group pension 54 63 64 56 14Other 0 8 1 1 -1Capitalization (%)Capital/Assets 10.2 9.7 9.0 8.5 8.1Moody's Risk adjusted capital ratio 140.8 133.7 120.0 112.9 106.2NAIC Risk based capital ratio 311.9 312.2 256.9 238.3 211.9Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 57.1 50.4 50.8 42.5 51.2CMO's and Loan-Backed Bonds/Capital — 167.0 171.3 188.2 198.4Mortgages + RE/Capital 114.5 121.6 147.7 175.4 194.5Total Underperforming Assets/Capital 4.6 4.8 12.4 19.4 16.9Total Affiliated Inv/Capital 26.5 27.7 31.1 32.3 31.8



Business Men’s Assurance Company of America

Company Overview

Moody’s A1 insurance financial strength rating of Business Men’s Assurance Company of America (BMA)is based on the company’s developed life reinsurance business, its improved earnings and capitalization,and its strategic importance to Assicurazioni Generali S.p.A. (Generali), its ultimate parent. Thesestrengths are offset somewhat by the relatively small scale of operations, rapid growth in interest sensitiveliabilities, and high – though declining – expense structure. BMA also has a large investment in commercialmortgage loans as well as a significant exposure to mortgage- backed securities and other structured securi-ties. BMA recently exited the group life and accident market (primarily disability and dental products), abusiness line which had produced a volatile earnings pattern in recent years, from losses to small gains.

BMA provides life insurance, life reinsurance, and asset accumulation products including individualannuities, mutual funds and guaranteed investment contracts (GICs). Growth during the last several yearshas occurred in the GIC and fixed individual annuity operations – together they account for over 68% ofliabilities. The mutual fund operation has also enjoyed success. The life reinsurance operation remains atop 15 reinsurer of U.S. life insurance. BMA’s rating outlook was changed to negative from stable follow-ing an outlook change to negative from stable at Generali. The effect of Generali’s outlook change onBMA is pronounced in that BMA’s rating reflects substantial implied support from Generali. The outlookchange came about from an apparent shift in Generali’s future tolerance for financial leverage, as evi-denced by recent statements made in context of its bid for Istituto Nazionale delle Assicurazioni S.p.A.


Since BMA entered the GIC business in 1991, it has grown into over $1 billion in liabilities. Most of thecontracts range in size between $500,000 to $5 million, are lump sum deposits and have been sold largelythrough stable value managers and consultants to mid-sized 401(k) plans. The marketing source is some-what diversified, but upwards of 25% of contracts have been placed through a single stable value manager,and an additional 20% placed through a second entity.

BMA successfully introduced a credit enhanced GIC product in the third quarter of 1997. The prod-uct, which is placed in the company’s separate account, functions similarly to the general account GICproduct, but has special provisions including an external liability guarantee from MBIA, a “Aaa” ratedfinancial guarantor, on a contract-by-contact basis which would be enforced if BMA was unable to satisfyits contractual obligations.

Approximately 90% of all GIC contracts issued are benefit responsive at book value under a variety ofterms. Approximately 5% are non-benefit responsive and the remaining 5% are nonqualified, sold tomoney market funds as 90-day “putable” funding agreements. BMA’s benefit responsive withdrawal expe-rience has been minimal, but some of the “putable” funding agreements have been exercised. We believethis has been the case due to the failure of an unrelated funding agreement provider, not an issue directlyrelated to any change in BMA’s financial strength. We note that BMA’s involvement in the “putable”funding agreement business has been modest ($100 million at its peak); the company’s true exposure is tothe longer-term pension GIC market which accounts for a significant percentage of the company’s totalliabilities and profits.


Business Men’s Assurance Company of America1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 2,469 2,388 2,392 2,211 1,890Total assets 2,890 2,689 2,469 2,211 1,890Surplus 251 226 188 171 155Investment reserve 34 32 36 27 2350% of dividend reserve liab. 0 0 0 0 0Capital 285 259 224 199 178Insurance revenues 643 657 562 526 442Net investment income 168 169 168 146 126Total revenues 805 828 756 730 724Gain fr ops pre - tax & div 33 46 21 14 10Gain Before Real Capital Gains 29 36 19 11 8Real Cap Gains bef IMR transfer 7 13 -1 3 6Real Cap Gains after IMR transfer 4 8 -4 -1 1Net Income 33 45 15 10 9Segment Analysis (as % policy reserves & liabilities)Individual life 35.0 35.2 33.4 34.4 39.0Individual health 0.7 0.8 2.0 1.7 1.8Individual annuities 27.6 27.1 27.3 27.2 25.4Group life & health 1.5 1.2 1.1 1.0 1.1Group pension 33.1 34.0 34.2 33.3 30.6Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 26.5 24.2 28.4 27.8 31.7Individual health 0.7 1.6 3.0 3.1 3.1Individual annuities 11.5 5.3 8.9 14.8 35.3Group life & health 10.6 7.6 7.1 7.8 8.7Group pension 45.1 58.1 47.2 37.4 15.1Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 52.2 52.9 55.0 59.2 60.0Common & preferred stock 3.2 3.2 3.9 2.6 2.7Mortgage loans 36.5 37.7 36.2 32.8 28.6Real estate 0.4 0.5 0.5 0.8 1.1Policy loans 2.4 2.5 2.6 3.0 3.6Cash & short term investment 4.0 1.3 1.6 1.4 3.8Other invested assets 1.3 1.9 0.1 0.2 0.2Asset QualityBelow Inv Grade Bonds as % of Invested Assets 0.8 0.0 0.1 0.3 0.3Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.1 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.1 0.7 1.2 2.6 3.8Underperf Mtgs+Fclsd RE as % of Invested Assets 0.0 0.3 0.4 0.9 1.1Profitability ROA (%) 1.18 1.73 0.62 0.51 0.55ROE (%) 12.10 18.49 6.87 5.51 5.32Ordinary life lapse ratio (%) 12.3 12.9 13.6 14.5 14.0Net investment yield 7.33 7.50 7.72 7.52 7.76Total investment return 7.27 7.57 8.13 7.51 7.91Commissions/Premiums 9.98 8.63 10.64 11.00 14.83Total general expenses/Premiums 10.53 10.61 13.56 12.99 17.39Total general expenses/Avg assets 2.43 2.70 3.26 3.33 4.46Gain (loss) from operations ($mil)Individual life 26 12 11 9 10Individual health 1 8 -7 -3 -3Individual annuities 1 3 5 3 -2Group life & health -4 0 -1 0 -1Group pension 9 10 11 6 7Other 0 0 0 0 0Capitalization (%)Capital/Assets 11.5 10.8 9.4 9.0 9.4Moody's Risk adjusted capital ratio 139.4 136.0 123.5 122.8 133.9NAIC Risk based capital ratio 293.4 312.4 275.5 274.2 267.0Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 6.9 0.3 1.1 3.5 3.1CMO's and Loan-Backed Bonds/Capital — — 232.8 231.5 223.0Mortgages + RE/Capital 314.3 345.6 384.0 366.9 305.7Total Underperforming Assets/Capital 0.3 2.5 4.6 10.8 11.4Total Affiliated Inv/Capital 4.8 6.5 7.2 7.6 8.8



CIGNA Corporation-Connecticut General Life Insurance Company

Company Overview

Moody’s A3 senior debt rating of CIGNA Corporation primarily reflects the strong market position ofConnecticut General Life Insurance Company (CG Life) in the medium and large case group employeelife and health benefits markets. That position is enhanced by CG Life’s integrated indemnity and man-aged health care products, large, stable blocks of experience-rated pension business, and strong technolog-ical capabilities. Additionally, CG Life maintains an overall good quality investment portfolio, with animproving risk-adjusted capital position. The sale of its entire property and casualty insurance operationsreaffirms CIGNA’s commitment to focusing on its core businesses. CIGNA is now a broad-basedemployee benefits company, with a full range of customized health care products complemented by aportfolio of disability, life and accident, investment and retirement savings products.

The rating outlook for CIGNA Corporation and its life and health subsidiaries – Connecticut GeneralLife Insurance Company (insurance financial strength at Aa3) and Life Insurance Company of NorthAmerica (insurance financial strength at A1) – was changed to stable from negative on March 19, 1999.The change was primarily based on CIGNA’s overall improved risk profile resulting from the divestitureof its domestic and international property and casualty insurance operations.


Management has taken a conservative position by restraining the amount of competitively priced and non-service-intensive products it sells, such as guaranteed investment contracts (GICs) and single-premiumannuities that are associated with pension plan terminations and terminal-funding contracts. A significantproportion of the company’s assets back experience-rated pension contracts, where investment experienceis shared with policyholders.

More recently, CG Life is considering plans to enter the long-term funding agreement market, alsoreferred to as European GICs (EuroGIC) or Global GICs. Our concerns with this product are similar tothose for traditional GICs. However, in light of the fact that EuroGICs are non-benefit responsive andnon-putable, they carry lower liquidity risk, compared with traditional GICs, over the long term. However,the Euro GICs are sold in tranches larger than those sold to a pension plan. Thus we believe Euro GICshave higher refinancing risk. We note that the company does not have any exposure to short-term putablefunding agreements that expose companies to short-term liquidity risk. As of September 30, 1999, institu-tional spread based business was $1.1 billion, less than 4% of general account liabilities. We do not expectthe aggregate spread-based institutional business to exceed 20% of consolidated insurance reserves.

CG Life manages its asset/liability matching risks well and has minimal liquidity needs. It has estab-lished separate investment portfolios for its principal lines of business, which specifically recognize theinterest sensitivity and the liquidity needs of the products within each line. Assets supporting the GIC lia-bilities are located in CG Life’s separate accounts; the GIC portfolio is immunized by duration matching.For those products that are highly sensitive to interest rate changes, the degree of duration match is usual-ly kept within half a year. Also, the type of assets used generally excludes CMOs and other callable securi-ties, which are capable of altering the portfolio duration as rates change. Most of the company’s privatesecurities contain make-whole provisions, which offset their call risk.

CIGNA Corporation maintains a commercial paper program of $300 million (Moody’s rating of P-2),with committed back-up lines of credit for 100% of the program’s maximum borrowings. The company alsohas additional lines on an advised basis for a total of $135 million. Since the sale of the P&C operations,including its premium finance company, commercial paper has fallen to zero, and is likely to fluctuatebetween $0 and $150 million, with occasional spikes above that level. Proceeds from commercial paper areused predominately for working capital needs such as temporary investment mismatches related to the settle-ment process.


Connecticut General Life Insurance Company (CIGNA)1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 32,270 38,055 37,511 37,918 34,843Total assets 69,213 69,705 62,279 57,913 50,912Surplus 1,789 2,182 2,120 2,138 2,019Investment reserve 448 538 389 412 37250% of dividend reserve liab. 2 23 52 17 20Capital 2,239 2,743 2,561 2,567 2,411Insurance revenues 12,794 13,216 12,303 12,816 7,123Net investment income 2,413 2,949 3,018 2,992 2,690Total revenues 16,520 16,382 15,535 16,276 10,244Gain fr ops pre - tax & div 1,462 1,055 1,444 1,416 954Gain Before Real Capital Gains 839 548 629 432 429Real Cap Gains bef IMR transfer 141 -117 32 9 5Real Cap Gains after IMR transfer -15 -131 -18 -43 -1Net Income 824 417 611 390 428Segment Analysis (as % policy reserves & liabilities)Individual life 22.7 30.3 29.5 28.0 25.7Individual health 0.1 0.4 0.4 0.4 0.4Individual annuities 6.4 8.8 8.4 7.7 7.2Group life & health 5.6 4.9 5.0 5.1 5.2Group pension 61.0 52.5 53.3 55.5 61.0Other 0.1 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 5.8 11.0 17.0 24.8 40.1Individual health 0.1 0.3 0.3 0.3 0.5Individual annuities 1.6 3.3 5.1 6.6 9.2Group life & health 11.1 16.9 13.2 13.1 22.2Group pension 60.2 52.3 47.8 39.5 2.7Other 0.1 0.1 0.1 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 50.2 52.7 52.6 52.4 53.8Common & preferred stock 0.4 0.5 0.4 0.5 0.6Mortgage loans 26.3 25.8 27.0 26.8 27.1Real estate 1.9 1.6 2.2 2.7 3.3Policy loans 16.6 16.6 16.9 16.0 12.9Cash & short term investment 3.8 2.2 0.3 0.7 1.0Other invested assets 0.8 0.7 0.6 0.8 1.2Asset QualityBelow Inv Grade Bonds as % of Invested Assets 3.7 3.3 3.5 3.7 4.6Bonds in or near default as % of Invested Assets 0.1 0.2 0.2 0.2 0.2Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 4.6 4.5 8.7 11.3 15.7Underperf Mtgs+Fclsd RE as % of Invested Assets 1.3 1.2 2.5 3.2 4.6Profitability ROA (%) 1.19 0.63 1.02 0.72 0.86ROE (%) 33.09 15.72 23.84 15.65 18.29Ordinary life lapse ratio (%) 3.8 4.2 6.2 4.5 6.0Net investment yield 7.34 8.38 8.63 8.94 8.68Total investment return 7.54 8.69 8.45 8.91 8.78Commissions/Premiums 1.84 1.60 1.62 1.74 2.74Total general expenses/Premiums 3.91 5.18 4.58 4.65 8.71Total general expenses/Avg assets 0.72 1.04 0.94 1.10 1.25Gain (loss) from operations ($mil)Individual life 427 151 208 144 15Individual health 5 9 0 6 1Individual annuities 104 16 -11 -53 -11Group life & health -214 15 52 30 170Group pension 187 182 241 212 196Other -13 -13 -2 1 0Capitalization (%)Capital/Assets 6.7 7.0 6.6 6.5 6.7Moody's Risk adjusted capital ratio 97.1 115.7 107.9 104.9 100.1NAIC Risk based capital ratio 250.6 308.5 270.3 230.1 206.7Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 50.2 43.8 49.3 51.8 63.0CMO's and Loan-Backed Bonds/Capital — 133.1 143.3 136.1 127.5Mortgages + RE/Capital 387.1 364.5 407.2 417.1 412.8Total Underperforming Assets/Capital 18.8 18.3 36.5 47.7 65.0Total Affiliated Inv/Capital 3.6 4.1 2.3 2.3 2.8



Combined Insurance Company of America

Company Overview

Moody’s A1 insurance financial strength rating and P-1 short-term insurance financial strength rating ofCombined Insurance Company of America (CICA) reflects the insurer’s large and stable block of accidentand health insurance products, its historically strong underwriting position and its consistent level of oper-ating earnings. Additionally, the company has a good capital position, a good quality investment portfolioand an established, defensible position in its core markets. Somewhat offsetting these strengths is themature nature of its core business, which is currently experiencing modest growth. Additionally, CICA’sparent, Aon Corporation (Aon), has followed an aggressive acquisition strategy focused on insurance bro-kerage and consulting, which has produced substantial fixed interest funding requirements.

CICA is a leading provider of supplemental disability income insurance, accident insurance and otherhealth insurance to rural America. The company also has significant business in some European countriesas well as a smaller operation in the Pacific region. Additionally, CICA entered the guaranteed investmentcontract marketplace in 1994 and is also a marketer of funding agreements. CICA’s rating outlook is stable.


CICA entered the GIC and funding agreement market in 1994, prior to the divestiture of Life InsuranceCompany of Virginia, which itself was a large GIC writer. As of year-end 1998, approximately $1.2 billionof GICs and funding agreements were outstanding. The portfolio is roughly 50% qualified GICs sold topension funds and 50% non-qualified funding agreements sold to money market funds and other short-term money pools.

The funding agreements have embedded put options, and therefore can be liquidated at the option ofthe holder within a relatively short period of time. Moody’s concern in regards to this product is that amarket event or a company specific credit event could cause holders to exercise their put options, puttingstress on the company to liquidate assets. To mitigate this concern, CICA is currently renewing the short-er-term (7 and 30-day) contracts out with 90-day options. In addition, the company is not looking to growits funding agreement business significantly in the near term.


Combined Insurance Company of America1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 3,502 3,400 3,018 3,496 2,654Total assets 3,502 3,400 3,018 3,496 2,654Surplus 594 687 562 686 652Investment reserve 97 166 123 97 8750% of dividend reserve liab. 0 0 0 0 0Capital 690 853 685 783 739Insurance revenues 1,247 1,117 513 1,849 1,460Net investment income 257 283 316 335 161Total revenues 1,612 1,552 995 2,244 1,632Gain fr ops pre - tax & div 306 342 402 324 203Gain Before Real Capital Gains 222 244 298 241 139Real Cap Gains bef IMR transfer 23 74 617 -14 113Real Cap Gains after IMR transfer 17 59 612 -3 101Net Income 239 303 910 238 240Segment Analysis (as % policy reserves & liabilities)Individual life 19.4 21.7 23.9 27.2 26.2Individual health 28.8 31.3 34.1 27.6 37.8Individual annuities 0.0 0.0 0.0 16.8 0.0Group life & health 2.6 3.1 3.6 4.0 1.1Group pension 46.5 36.9 23.2 18.3 25.7Other 2.4 6.0 14.1 0.6 1.8Segment Analysis (as % of total net premiums)Individual life 6.2 7.0 -19.3 5.3 5.3Individual health 63.0 68.9 150.0 42.8 53.0Individual annuities 0.0 0.0 -83.6 32.5 0.0Group life & health 0.0 0.0 -3.2 1.3 1.5Group pension 34.9 33.2 10.4 11.5 30.7Other -4.1 -9.3 62.3 -0.4 -0.2Investment Profile (as % of cash and invested assets)Bonds 61.4 64.1 60.8 53.2 38.1Common & preferred stock 23.5 23.7 28.4 38.0 51.3Mortgage loans 0.1 0.1 0.2 0.2 0.3Real estate 0.2 0.2 0.3 0.2 0.2Policy loans 1.7 1.7 1.9 2.1 1.5Cash & short term investment 6.9 5.4 3.7 3.1 6.5Other invested assets 6.3 4.8 4.6 3.1 2.1Asset QualityBelow Inv Grade Bonds as % of Invested Assets 5.2 3.8 2.7 4.5 1.3Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.0 0.0 0.0 0.0 29.5Underperf Mtgs+Fclsd RE as % of Invested Assets 0.0 0.0 0.0 0.0 0.1Profitability ROA (%) 6.94 9.44 27.93 7.73 9.64ROE (%) 31.02 39.41 123.98 31.24 29.80Ordinary life lapse ratio (%) 8.7 7.6 8.4 12.4 12.9Net investment yield 8.24 9.59 10.48 11.95 6.96Total investment return 6.05 12.70 30.70 10.48 6.78Commissions/Premiums 16.87 23.57 57.73 13.24 14.51Total general expenses/Premiums 20.35 21.94 49.34 15.06 20.00Total general expenses/Avg assets 7.35 7.63 7.78 9.06 11.71Gain (loss) from operations ($mil)Individual life 32 39 70 42 31Individual health 150 141 160 156 93Individual annuities 0 0 0 3 0Group life & health 0 2 4 16 0Group pension 7 2 2 4 0Other 28 59 62 11 10Capitalization (%)Capital/Assets 19.7 25.1 22.7 22.4 27.8Moody's Risk adjusted capital ratio 153.1 194.9 134.3 89.5 86.9NAIC Risk based capital ratio 288.1 341.1 301.7 221.1 220.9Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 24.2 14.4 11.4 19.5 4.3CMO's and Loan-Backed Bonds/Capital — 36.3 22.8 49.6 39.5Mortgages + RE/Capital 1.3 1.1 2.1 1.9 1.6Total Underperforming Assets/Capital 0.0 0.0 0.0 0.0 0.3Total Affiliated Inv/Capital 48.0 39.7 54.5 112.6 117.4



First Allmerica Financial Life Insurance Company

Company Overview

Moody’s A1 insurance financial strength rating and P-1 short-term financial strength rating of FirstAllmerica Financial Life Insurance Company (FAFLIC) is based on the company’s improved earningstrend, its important position within Allmerica Financial Corporation (AFC), increased efficiencies, anddiverse distribution. These strengths are tempered by the competitive pressures facing its life insuranceand annuity operations.

The life insurance segment principally markets fee-based variable products and group pension ser-vices. The variable annuity enterprise has been successful in attracting assets, though its recent sales per-formance has trailed off. The group pension operation – which continues to experience the orderly roll-off of its pension GIC product – has recently experienced substantial growth through the sale of fundingagreements. The rating outlook is stable.


The traditional GIC portfolio, which is the most interest sensitive of all the segments, continues to dwin-dle because it is essentially in a run-off mode. As of year-end 1999, it had liabilities of $144 million, asharp drop from the balance of $2.2 billion at year-end 1994. Moody’s expects the portfolio will continueto dwindle.

Reserves in the funding agreement portfolio – primarily floating rated GICs sold mostly to moneymarket funds and securities lending programs – have increased dramatically to $1.2 billion as of year-end1999. Approximately 84% of the contracts contain 90-day put features. AFC manages the investmentportfolio more conservatively than its other general account products; assets consist of approximately 88%investment-grade bonds, predominately corporates. When fixed-rate securities are purchased, the compa-ny enters into interest rate swap agreements to match the index and timing of the rate resets on the float-ing rate GICs. Nevertheless, Moody’s believes that the rapid expansion of the company’s floating-rateportfolio heightens it’s liquidity risk profile, as a market event could cause floating-rate GIC holders toexercise their put options. The company’s recent entrance into the EMTN market should help alleviatesome of this risk by providing the company with less option risk on its liabilities.


First Allmerica Financial Life Insurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 5,699 4,983 5,165 5,628 5,535Total assets 8,376 7,171 6,874 6,984 6,631Surplus 1,164 1,221 1,120 966 465Investment reserve 262 249 338 323 12450% of dividend reserve liab. 13 13 14 14 15Capital 1,439 1,484 1,473 1,304 604Insurance revenues 2,316 1,173 909 941 1,287Net investment income 373 412 391 464 404Total revenues 2,751 1,647 1,355 1,464 1,737Gain fr ops pre - tax & div 138 251 196 209 119Gain Before Real Capital Gains 100 196 152 145 69Real Cap Gains bef IMR transfer -11 0 -17 -11 -27Real Cap Gains after IMR transfer -14 -5 -19 -11 -28Net Income 86 191 133 134 41Segment Analysis (as % policy reserves & liabilities)Individual life 22.0 27.5 26.2 22.3 19.3Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 1.9 3.1 3.3 3.1 2.9Group life & health 1.2 1.4 1.1 0.8 0.6Group pension 69.2 61.6 63.8 69.5 73.9Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 4.1 5.8 7.4 7.3 5.4Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 1.6 6.5 8.6 6.2 3.7Group life & health 3.2 4.9 5.7 4.6 3.2Group pension 78.8 59.5 51.1 57.5 70.2Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 55.3 50.7 51.0 55.6 58.1Common & preferred stock 23.2 25.2 25.3 21.9 15.4Mortgage loans 8.7 9.6 11.2 11.7 15.6Real estate 1.4 2.2 3.1 3.7 3.5Policy loans 3.9 4.7 4.7 4.5 4.7Cash & short term investment 1.5 1.8 1.4 1.4 1.8Other invested assets 5.9 5.8 3.3 1.3 0.9Asset QualityBelow Inv Grade Bonds as % of Invested Assets 6.8 8.1 8.2 7.4 8.1Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.1Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 1.4 1.7 5.5 17.6 18.2Underperf Mtgs+Fclsd RE as % of Invested Assets 0.1 0.2 0.6 2.2 3.0Profitability ROA (%) 1.11 2.72 1.92 1.97 0.60ROE (%) 5.91 12.93 9.60 14.07 5.78Ordinary life lapse ratio (%) 5.3 5.9 7.2 15.2 12.9Net investment yield 7.55 8.83 7.80 8.98 7.44Total investment return 6.19 4.84 8.08 13.22 3.32Commissions/Premiums 3.63 5.71 5.74 4.55 2.99Total general expenses/Premiums 5.49 10.12 14.16 14.29 10.74Total general expenses/Avg assets 1.64 1.69 1.86 1.97 2.03Gain (loss) from operations ($mil)Individual life 65 115 81 90 20Individual health -1 0 0 0 -1Individual annuities 9 5 2 7 5Group life & health 17 14 21 9 8Group pension 42 55 50 34 30Other 1 1 0 1 0Capitalization (%)Capital/Assets 25.3 29.8 28.5 23.2 10.9Moody's Risk adjusted capital ratio 121.5 133.1 126.9 117.4 69.1NAIC Risk based capital ratio 291.2 314.7 278.0 259.6 145.2Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 25.4 25.8 27.2 30.5 70.8CMO's and Loan-Backed Bonds/Capital — 12.6 7.7 4.0 8.9Mortgages + RE/Capital 38.2 37.9 47.7 63.3 167.2Total Underperforming Assets/Capital 0.5 0.5 2.1 9.3 27.4Total Affiliated Inv/Capital 85.1 79.1 83.8 87.3 132.0



GE Financial Assurance Holdings -GE Life and Annuity Assurance Company

Company Overview

Moody’s Aa3 senior unsecured debt rating of GE Financial Assurance Holdings, Inc. (GE FinancialAssurance) and the Aa2 insurance financial strength ratings of the insurance companies are influenced bythe implied financial strength and financial flexibility of the parent company, General Electric CapitalCorporation (GECC). The rating is also based on GE Financial Assurance’s diversified earnings, broadrange of distribution channels and product portfolios, and solid management team with considerable orga-nizational depth.

These strengths are somewhat offset by the increasingly competitive nature of GE FinancialAssurance’s target markets — wealth accumulation and wealth protection — and the interest rate riskassociated with its portfolio of interest-sensitive liabilities. The rating outlook for GE Financial Assuranceis stable, but is influenced by the senior unsecured debt rating of GECC.


GE Financial Assurance is an opportunistic player in the market for guaranteed investment contracts(GICs) and fixed and floating rate funding agreements through its GE Life and Annuity subsidiary, ratedAa2 for insurance financial strength and P-1 for short-term insurance financial strength. GE FinancialAssurance markets its stable value products through investment managers and directly to institutionalinvestors.

GE Financial Assurance’s sales of stable value GIC products have increased dramatically in recentyears. GIC sales in 1999 totaled $909 million compared to $544 million in 1997. Funding agreementsadded an additional $1.1 billion to 1999 sales, after being reintroduced in the fall of 1998. As of December30, 1999, GE Financial Assurance’s stable value business, GICs and funding agreements, amounted to$4.2 billion. Funding agreements, issued only by GE Life and Annuity, were $1.5 billion, which repre-sented 16% of general account liabilities.

Although GE Financial Assurance participates in the market on an opportunistic basis, we anticipatethat sales of floating rate funding agreements may grow substantially in the near-term thereby exposingthe company to some liquidity risk. However, we do not expect the aggregate amount of GICs and fund-ing agreements to exceed 20% of consolidated insurance reserves.

The issuance of floating rate funding agreements exposes the organization to some liquidity riskbecause the agreements are highly credit and market sensitive and contain put options. We believe, how-ever, that GE Financial Assurance manages this risk through its disciplined asset/liability managementprocess. In addition, we believe that GECC would provide additional liquidity to any GE FinancialAssurance companies in the event it was needed.


GE Life & Annuity Assurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 7,135 6,496 6,225 5,406 5,942Total assets 12,706 10,565 9,003 7,445 7,297Surplus 481 522 419 364 401Investment reserve 83 78 86 75 6750% of dividend reserve liab. 0 0 0 0 0Capital 564 600 505 439 467Insurance revenues 2,281 1,956 2,218 475 1,154Net investment income 474 469 453 400 455Total revenues 2,833 2,496 2,725 915 1,626Gain fr ops pre - tax & div 76 127 118 96 107Gain Before Real Capital Gains 51 72 65 55 60Real Cap Gains bef IMR transfer 21 17 -23 -15 -24Real Cap Gains after IMR transfer 1 2 -3 -2 -7Net Income 52 74 61 54 53Segment Analysis (as % policy reserves & liabilities)Individual life 30.9 33.1 34.4 34.4 30.2Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 29.4 36.9 38.2 36.9 43.8Group life & health 0.5 0.6 0.6 0.6 0.5Group pension 39.1 29.4 26.7 28.0 25.4Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 10.4 12.8 18.4 45.4 18.5Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 40.1 55.8 60.3 -6.4 79.8Group life & health 1.5 2.0 1.5 6.5 2.6Group pension 47.8 29.2 19.7 53.9 -1.1Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 85.8 86.7 84.2 80.5 82.5Common & preferred stock 0.8 1.5 2.1 2.7 3.4Mortgage loans 7.9 8.2 10.0 11.6 9.5Real estate 0.1 0.2 0.3 0.7 0.6Policy loans 2.8 3.0 3.0 2.9 2.4Cash & short term investment -0.1 -0.3 0.5 1.6 1.5Other invested assets 2.6 0.8 0.0 0.1 0.1Asset QualityBelow Inv Grade Bonds as % of Invested Assets 10.8 8.3 4.3 4.6 4.4Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.1Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 3.8 6.4 6.8 9.1 10.9Underperf Mtgs+Fclsd RE as % of Invested Assets 0.3 0.5 0.7 1.1 1.1Profitability ROA (%) 0.45 0.76 0.75 0.73 0.75ROE (%) 8.97 13.38 13.02 11.89 11.65Ordinary life lapse ratio (%) 8.5 0.0 8.0 8.4 9.1Net investment yield 7.28 7.69 8.17 7.36 7.90Total investment return 7.07 7.70 8.17 7.37 8.05Commissions/Premiums 4.26 5.92 5.02 17.14 7.87Total general expenses/Premiums 4.40 3.98 2.90 12.27 5.09Total general expenses/Avg assets 0.86 0.80 0.78 0.79 0.83Gain (loss) from operations ($mil)Individual life 28 36 29 21 17Individual health 0 0 0 0 0Individual annuities 6 19 20 12 23Group life & health -1 2 1 2 3Group pension 15 14 14 20 18Other 0 0 0 0 0Capitalization (%)Capital/Assets 7.9 9.2 8.1 8.1 7.9Moody's Risk adjusted capital ratio 155.4 187.8 172.7 161.2 145.6NAIC Risk based capital ratio 263.6 350.4 320.8 275.1 283.1Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 133.0 87.4 51.8 55.4 54.9CMO's and Loan-Backed Bonds/Capital — 251.5 306.7 371.8 581.5Mortgages + RE/Capital 99.4 88.6 123.9 147.9 125.7Total Underperforming Assets/Capital 3.8 5.7 8.3 13.3 14.2Total Affiliated Inv/Capital 0.5 0.4 8.9 18.8 31.5



Hartford Life Insurance Company

Company Overview

Moody’s Aa3 insurance financial strength rating for Hartford Life Insurance Company, Hartford Life &Accident Insurance Company, and Hartford Life & Annuity Insurance Company (collectively,“Hartford”) is based on the company’s leading market position in the fast growing individual variableannuity business, a business with fee-based income and no investment risk. The rating also reflectsHartford’s excellent asset quality and the fact that it is 81% owned by the Hartford Financial ServicesGroup, Inc.

Hartford benefits from diversified distribution channels with a broad degree of variable costs, owner-ship of a strong annuity wholesaler (Planco), and varied sources of earnings, including top tier positions inthe group life and group disability markets.

These strengths are tempered by the fact that annuities, which represent a major portion of Hartford’searning, are subject to narrowing margins as the annuity marketplace becomes increasingly competitiveand scale-driven. Hartford’s annuities are sold through non-captive and third party distribution channels,including broker/dealers and banks. Such annuities tend to have lower persistency than those sold throughcaptive channels. Also, there is moderate financial leverage at Hartford’s holding company, Hartford Life,Inc. The servicing of this financial leverage places a modest degree of strain on the company’s operatingsubsidiaries.


Hartford’s stable value business consists predominantly of guaranteed investment contracts (GICs), with asmaller portfolio of funding agreements. Stable value reserves decreased every year from 1995 through1998, and as of September 30, 1999 were down slightly from the prior year-end. The decrease during thisperiod was driven by a declining amount of general account GICs outstanding. The decline in the GICportfolio followed the company’s strategic decision several years ago to pull back from this business afterexperiencing heavy losses in this line in the early and mid-1990s. Specifically, the losses resulted fromspread deficiency that occurred because the GIC portfolio was partially backed by CMOs which experi-enced heavy prepayments in 1993 and early 1994, and the cash proceeds from the CMO prepayments hadto reinvested at lower prevailing rates.

We expect Hartford to continue to opportunistically write GIC business, although at a significantlylower level than in the early 1990s. GAAP and statutory provisions have been established for losses fromthe existing GIC portfolio. By year-end 1999, the run-off block was expected to decrease to less than $500million. In 1997, Hartford entered the funding agreement business. The company’s calculated entry intothe funding agreement business has not been excessive given Hartford’s overall size. We note, however,that Hartford’s focus has been on funding agreements with 30-day puts. As of September 30, 1999, thecompany’s funding agreement portfolio totaled only about $500 million. This equates to less than 2% ofits general account assets (including guaranteed separate accounts). Hartford has ample liquidity to sup-port this portfolio.


Hartford Life Insurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 16,397 16,978 17,198 17,637 17,355Total assets 73,783 62,824 52,274 46,641 36,836Surplus 1,676 1,441 1,207 1,125 941Investment reserve 142 137 186 142 9550% of dividend reserve liab. 2 4 4 3 3Capital 1,820 1,582 1,397 1,270 1,039Insurance revenues 8,076 7,549 5,269 7,356 9,917Net investment income 1,273 1,249 1,302 1,243 1,212Total revenues 12,293 11,404 9,538 11,468 12,203Gain fr ops pre - tax & div 502 405 564 584 440Gain Before Real Capital Gains 147 120 60 133 24Real Cap Gains bef IMR transfer -7 -42 -57 -24 33Real Cap Gains after IMR transfer -3 14 9 -65 32Net Income 143 134 70 68 57Segment Analysis (as % policy reserves & liabilities)Individual life 17.9 21.7 19.4 15.9 14.7Individual health 0.1 0.1 0.1 0.0 0.0Individual annuities 54.3 47.3 47.5 46.6 38.5Group life & health 2.5 2.3 2.3 2.2 2.2Group pension 25.1 28.6 30.8 35.3 44.5Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 48.5 42.5 31.9 18.6 17.3Individual health 0.0 0.1 0.2 0.0 -0.2Individual annuities 15.5 18.8 24.7 26.4 29.8Group life & health 15.9 17.7 12.0 15.3 4.4Group pension 19.8 20.7 31.2 39.6 48.8Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 69.1 67.5 70.8 72.2 76.3Common & preferred stock 3.6 2.7 2.4 1.9 1.0Mortgage loans 0.9 0.0 0.0 1.5 1.9Real estate 0.0 0.0 0.0 0.0 0.0Policy loans 18.8 22.7 23.0 19.6 15.4Cash & short term investment 6.7 6.3 3.0 3.9 4.2Other invested assets 0.9 0.8 0.8 0.8 1.1Asset QualityBelow Inv Grade Bonds as % of Invested Assets 1.5 0.8 0.5 0.2 0.2Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.1 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.0 0.0 0.0 5.3 6.0Underperf Mtgs+Fclsd RE as % of Invested Assets 0.0 0.0 0.0 0.1 0.1Profitability ROA (%) 0.21 0.23 0.14 0.16 0.17ROE (%) 8.42 8.97 5.21 5.89 5.88Ordinary life lapse ratio (%) 1.6 2.2 3.9 2.5 2.0Net investment yield 8.06 7.70 7.85 7.43 7.91Total investment return 8.22 8.08 8.42 8.12 8.14Commissions/Premiums 4.23 1.63 3.45 2.66 1.73Total general expenses/Premiums 4.44 3.93 4.86 3.11 2.00Total general expenses/Avg assets 0.52 0.52 0.52 0.55 0.60Gain (loss) from operations ($mil)Individual life 81 49 -26 26 17Individual health -4 0 -3 2 1Individual annuities 102 87 86 119 -114Group life & health 3 -1 8 1 6Group pension 17 -1 -62 -32 85Other -52 -15 57 16 29Capitalization (%)Capital/Assets 7.0 5.8 5.1 4.5 4.2Moody's Risk adjusted capital ratio 106.6 99.9 95.0 87.8 89.8NAIC Risk based capital ratio 318.3 298.2 288.8 258.1 261.3Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 12.8 8.5 5.5 2.4 3.4CMO's and Loan-Backed Bonds/Capital — 181.1 168.7 387.3 481.0Mortgages + RE/Capital 8.1 0.0 0.1 21.1 31.1Total Underperforming Assets/Capital 0.0 0.0 0.0 2.4 2.5Total Affiliated Inv/Capital 29.9 27.2 25.0 22.1 10.7



ING U.S. Life Insurance Companies-Life Insurance Company of Georgia

Company Overview

Moody’s Aa2 insurance financial strength rating of the ING U.S. life insurance group (the group) appliesto the following companies: Security Life of Denver Insurance Company, Life Insurance Company ofGeorgia, Southland Life Insurance Company, Equitable Life Insurance Company of Iowa, and USGAnnuity & Life Company. The rating is based primarily on the support and financial strength of the com-panies’ ultimate parent, Netherlands-based ING Group, N.V. ING Group is one of the largest diversifiedfinancial services companies in the world. The Aa2 insurance financial strength rating also incorporatesthe group’s diversified sources of earnings and distribution channels, above average returns on its invest-ment portfolio, and good positioning in the life reinsurance and GIC/funding agreement markets.

These strengths are tempered by the group’s shift in business mix from individual life insurancetoward more commodity-like deferred annuities, GICs/funding agreements, and reinsurance, and theinherent challenges of building an integrated financial services organization. Also, high financial leverageat the U.S. holding company may constrain capital formation at the operating insurance companies andthe group has above average exposure to below-investment grade bonds, commercial mortgages, andinterest sensitive assets. In addition, the group has taken an opportunistic stance in the market for fundingagreements with short-dated puts.


ING is an active participant in the GIC and funding agreement markets. Historically, ING’s InstitutionalMarkets Group (IMG) focused on the defined contribution area of the pension market offering GICs asassets in support of the stable value options of 401(k) plans. Subsequently, IMG began selling non-quali-fied funding agreements to various short-term debt investors, such as money market funds, and alsoentered the structured settlement market. This movement into putable funding agreements was based onthe belief that this market provided the business unit with an attractive risk/return tradeoff at that timegiven the aggressive funding levels in other markets, and considering the significant amount of liquidityavailable within the IMG portfolio. Despite the potential attractiveness of this market, IMG has put inplace prudent internal limits regarding the amount of business that would be placed in the funding agree-ment sector. The GIC/funding agreement business has shown steady growth, and has become increasing-ly profitable for the group. Historically, GICs outsold funding agreements by a ratio of 85%-to-15%.However, with the rise of the funding agreement market and the continued slowdown and aggressive pric-ing in the GIC market, this sales ratio reversed itself in 1998 with funding agreement sales far outpacingGIC sales. Throughout 1999, traditional GIC sales increased as a percentage of total sales when comparedto the previous year as sales in the funding agreement market slowed significantly.

As an opportunistic participant in the funding agreement market, IMG actively maintains exposure tofunding agreements with 30- and 90-day puts. With the funding agreement market disruption of August1999, IMG experienced $277 million of puts of various durations; $217 million was actually taken ($60million of put requests were later cancelled by customers). IMG had ample time and liquidity to handlethese withdrawals. As of August 31, 1999, IMG still had some $1.3 billion of putable funding agreementson its books and $227 million of putable pension GIC business within a total GIC/funding agreementportfolio of $4.1 billion. The putable funding agreement portfolio, after the August puts, included no 7-day, $682 million of 30-day, $496 million of 90-day, and the remainder in 180-day putable contracts. Thetotal of these categories represents the total risk exposure that must be prudently managed from anasset/liability standpoint. Given the liquidity within IMG’s portfolio and its internal management of thisexposure, as well as the business unit’s affiliation with the ING Group and therefore its indirect access toliquidity sources, this exposure seems manageable.


Life Insurance Company of Georgia (ING)1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 2,477 2,563 2,796 2,905 2,775Total assets 2,477 2,563 2,843 2,941 2,810Surplus 92 130 190 171 156Investment reserve 28 30 29 31 2750% of dividend reserve liab. 0 0 0 0 0Capital 121 160 219 203 184Insurance revenues 882 460 400 735 682Net investment income 180 191 209 214 211Total revenues 1,064 656 619 964 980Gain fr ops pre - tax & div 57 34 45 37 40Gain Before Real Capital Gains 19 23 29 15 17Real Cap Gains bef IMR transfer -11 1 13 10 11Real Cap Gains after IMR transfer -9 -2 1 3 2Net Income 10 21 30 18 19Segment Analysis (as % policy reserves & liabilities)Individual life 47.9 44.8 41.5 37.6 38.9Individual health 2.1 2.0 1.7 1.7 2.0Individual annuities 3.9 4.3 4.3 4.2 4.6Group life & health 0.0 0.9 0.8 0.8 0.9Group pension 46.0 48.0 51.4 55.4 53.2Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 18.8 33.1 37.4 21.7 38.2Individual health 4.4 9.0 11.8 7.2 9.1Individual annuities 0.2 1.4 1.4 0.9 1.3Group life & health 0.0 1.9 3.0 1.7 2.0Group pension 77.6 53.3 42.5 66.9 45.7Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 67.7 65.3 67.1 72.2 74.6Common & preferred stock 1.0 0.9 0.8 0.6 0.5Mortgage loans 25.3 19.2 18.2 19.1 19.7Real estate 0.3 0.5 0.7 0.8 1.1Policy loans 3.3 3.2 2.8 2.8 2.9Cash & short term investment 0.0 4.7 2.6 1.3 -0.1Other invested assets 2.3 6.3 7.7 3.2 1.4Asset QualityBelow Inv Grade Bonds as % of Invested Assets 4.6 4.2 2.8 1.8 1.3Bonds in or near default as % of Invested Assets 0.3 0.1 0.1 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.4 1.5 2.1 2.8 5.1Underperf Mtgs+Fclsd RE as % of Invested Assets 0.1 0.3 0.4 0.5 1.0Profitability ROA (%) 0.39 0.78 1.03 0.63 0.67ROE (%) 6.94 11.13 14.11 9.32 8.66Ordinary life lapse ratio (%) 10.1 22.5 12.9 15.2 11.5Net investment yield 7.63 7.59 7.79 7.96 8.28Total investment return 7.52 7.49 8.03 8.40 8.61Commissions/Premiums 3.87 7.52 10.49 7.25 11.86Total general expenses/Premiums 8.37 17.30 19.26 10.45 11.66Total general expenses/Avg assets 2.93 2.94 2.66 2.67 2.86Gain (loss) from operations ($mil)Individual life 12 23 14 0 8Individual health -2 -6 -2 0 -3Individual annuities 2 1 3 1 2Group life & health 4 -1 0 0 0Group pension 5 13 15 12 9Other 0 0 0 0 0Capitalization (%)Capital/Assets 4.9 6.3 7.8 7.0 6.6Moody's Risk adjusted capital ratio 99.0 119.2 147.7 140.9 133.6NAIC Risk based capital ratio 202.1 275.1 400.8 280.4 302.4Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 91.2 65.3 35.4 24.7 19.3CMO's and Loan-Backed Bonds/Capital — — 205.7 264.7 287.8Mortgages + RE/Capital 503.3 305.6 236.1 277.0 304.6Total Underperforming Assets/Capital 6.9 5.6 5.8 7.6 14.9Total Affiliated Inv/Capital 0.4 0.3 0.2 0.3 0.3



Jackson National Life Insurance Company

Company Overview

Moody’s Aa3 insurance financial strength rating and P-1 short-term insurance financial strength rating forJackson National Life Insurance Company (JNL) is based on the company’s profitable growth in the indi-vidual fixed annuity market, its low-cost operating structure, and the support provided by its ultimate par-ent, Prudential Plc. These strengths are offset somewhat by the risks associated with the company’semphasis on competitive and commodity-like interest-sensitive products, the firm’s aggressive growth, thedecline in individual life insurance sales activity in recent years, and its relatively large mortgage-backed-securities and non-investment grade bond portfolios.

JNL’s efficient operations have enabled the company to profitably expand its book of business. Inrecent years, the company has successfully diversified its distribution systems to include banks and bro-ker/dealers, in addition to its traditional focus on independent agents. Also, product diversification hasoccurred with the introduction of group pension products (including GICs and funding agreements), vari-able annuities, universal life insurance, and equity-linked annuities.


JNL entered the GIC market in 1995. During its first three full years, the operation underwrote over $5billion of business, over 80% of which were funding agreements. All of the funding agreements are float-ing-rate, mainly LIBOR or Fed Funds-based instruments, primarily sold to securities lending operationsand money market funds. The average size of the contracts is about $50 million, and JNL has been a par-ticipant in the market for shorter dated puts. Moody’s believes the put option, especially 7 and 30 dayputs, makes these liabilities potentially very fluid. We feel that this potential volatility, and its possibleimpact on the company’s liquidity, could complicate JNL’s asset-liability management process. However,JNL has thus far successfully managed this risk. In doing this, management has limited the sale of shorterput products, and is most interested in underwriting traditional GIC business sold to pension plans, andother longer duration products which do not have put options.

In early 1999, JNL established a $2 billion European medium-term note (EMTN) program to accesslonger-term institutional funding. The company’s EMTN program uses a special purpose vehicle toissue notes, which are backed by JNL funding agreements, to European institutional investors. Theseinstruments allow the company some diversification benefits from the short-term put risk in its fundingagreement portfolio, as they do not grant options to investors. JNL is focusing on issuing EMTN noteswith maturities ranging from 5 to 10 years, although the program allows for the issuance of notes withany maturity.

The 5 to 10 year maturity range brings an added dimension to the company’s institutional spreadbusiness, in that its traditional GICs typically have 2 to 5 year maturities, while its U.S. funding agree-ments are usually issued with maturities under two years. Moody’s believes that the EMTN program canhave a positive effect on JNL’s institutional spread business due to its longer maturities and absence ofput options.


Jackson National Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 34,908 33,043 31,361 26,987 24,099Total assets 39,356 34,995 32,483 27,357 24,100Surplus 2,261 2,127 1,942 1,501 1,196Investment reserve 472 391 349 313 29150% of dividend reserve liab. 0 0 0 0 0Capital 2,733 2,519 2,291 1,814 1,487Insurance revenues 8,078 6,066 5,871 4,458 2,632Net investment income 2,402 2,366 2,219 2,007 1,661Total revenues 10,667 8,532 8,214 6,524 4,303Gain fr ops pre - tax & div 472 495 394 317 247Gain Before Real Capital Gains 335 342 244 276 158Real Cap Gains bef IMR transfer 56 36 47 8 43Real Cap Gains after IMR transfer 21 -20 -7 -4 -2Net Income 355 322 237 272 157Segment Analysis (as % policy reserves & liabilities)Individual life 16.2 16.6 17.5 18.7 20.2Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 62.4 64.5 68.5 70.9 74.1Group life & health 0.0 0.0 0.0 0.0 0.0Group pension 21.5 18.9 14.0 10.4 5.8Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 6.4 9.3 10.4 14.4 23.6Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 47.0 40.5 55.5 53.7 72.3Group life & health 0.0 0.0 0.0 0.0 0.0Group pension 46.5 50.2 34.1 31.9 4.2Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 79.6 82.1 83.4 90.7 95.3Common & preferred stock 1.5 1.1 0.8 0.8 1.1Mortgage loans 10.0 7.7 5.2 3.2 0.7Real estate 0.1 0.1 0.0 0.1 0.1Policy loans 2.0 2.0 2.0 2.3 2.2Cash & short term investment 5.1 6.1 7.9 2.6 0.4Other invested assets 1.6 1.0 0.6 0.4 0.2Asset QualityBelow Inv Grade Bonds as % of Invested Assets 8.9 8.0 8.5 8.2 9.8Bonds in or near default as % of Invested Assets 0.0 0.0 0.1 0.1 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.2 0.6 0.9 1.8 0.9Underperf Mtgs+Fclsd RE as % of Invested Assets 0.0 0.0 0.0 0.1 0.0Profitability ROA (%) 0.96 0.95 0.79 1.06 0.72ROE (%) 13.53 13.38 11.56 16.49 11.24Ordinary life lapse ratio (%) 11.7 9.7 9.3 9.9 9.1Net investment yield 7.38 7.68 7.98 8.27 8.06Total investment return 7.42 7.66 8.17 8.25 8.22Commissions/Premiums 3.76 3.43 4.68 5.22 7.46Total general expenses/Premiums 2.90 3.43 3.34 3.47 4.76Total general expenses/Avg assets 0.63 0.62 0.66 0.60 0.58Gain (loss) from operations ($mil)Individual life 55 122 54 45 37Individual health 0 0 0 0 0Individual annuities 210 193 173 218 117Group life & health 0 0 0 0 0Group pension 69 27 17 13 4Other 0 0 0 0 0Capitalization (%)Capital/Assets 7.8 7.6 7.3 6.7 6.2Moody's Risk adjusted capital ratio 139.9 137.5 140.3 125.5 107.7NAIC Risk based capital ratio 245.3 267.8 274.7 251.5 219.3Surplus Notes/Capital 9.1 9.9 10.9 0.0 0.0Below inv grade bonds/Capital 111.0 103.3 113.9 118.9 155.3CMO's and Loan-Backed Bonds/Capital — — 482.9 636.7 724.9Mortgages + RE/Capital 127.3 99.3 70.3 47.2 12.7Total Underperforming Assets/Capital 0.2 0.9 2.0 2.1 0.1Total Affiliated Inv/Capital 2.9 8.6 7.0 44.7 14.8



John Hancock Life Insurance Company

Company Overview

The Aa2 insurance financial strength rating of the John Hancock Life Insurance Company (JohnHancock) reflects the company’s diversification of revenue sources, good capitalization, and its large andstable base of traditional life insurance policies, as well as its strong positions in the individual life, long-term care, and investment management markets. These strengths are offset somewhat by the company’sbelow-average bond quality, increasingly independent distribution channels, and significant exposure tocommercial and agricultural mortgage loans.

John Hancock’s rating outlook is negative due to the company’s exposure to potential losses from theworkers’ compensation reinsurance risks assumed, the company’s sizable guaranteed and structured prod-ucts business, and the effects of business changes that could result from the completion of the company’srecent demutualization. John Hancock has allocated $134 million after tax for the reinsurance exposures,and based on the best information available, the company believes that this reserve is sufficient. However,there is no guarantee that this reserve will be sufficient until all parties involved have settled their claims.

John Hancock is a major provider of life insurance protection products to the middle-income market,and the company has also begun serving more affluent markets through the use of alternative distributionchannels. John Hancock’s strength in the asset accumulation market creates a good, albeit less stable,source of earnings. John Hancock is also one of the leading providers of investment and related services topension and retirement savings plans and other institutional investors. The company is lowering its riskprofile by increasingly emphasizing less risky fee-for-service investment management products such asvariable products and mutual funds.


John Hancock has long been one of the largest providers in the stable value market through the compa-ny’s Guaranteed and Structured Financial Product’s business unit. Some, but not all, of the business isdirect marketed to plan sponsors, giving the company an unusually strong relationship with its customers.John Hancock offers a very wide assortment of institutional investment products, making the companywell diversified in this line.

In the last few years, John Hancock has diversified its stable value business by developing and sellingproducts for the non-qualified funding agreement market (including European Medium Term Notes);46% of the unit’s 1999 sales were from products in this area that had not existed two years previously.John Hancock had a total of $13.1 billion of GICs (69%) and funding agreements (31%) outstanding as ofDecember 31, 1999, one of the higher percentages of these types of liabilities of any company in theindustry. John Hancock had no short-term put funding agreements outstanding at year-end.

Moody’s believes that John Hancock carefully manages its stable value business with close attentionpaid to both the credit and asset/liability management risk assumed. The company’s investment portfoliois heavily tilted towards private placement and commercial mortgages, but is well diversified and carefullymanaged, including little or no surrender rights for over ninety-five percent of in-force liabilities. JohnHancock prefers the assumption of moderate amounts of credit risk to the assumption of interest risk, sothe company’s interest rate risk is tightly controlled.

As of December 31, 1999 considerable liquidity exists within John Hancock with $10 billion of invest-ment-grade public bonds, $1.2 billion in cash and short-term assets and a $1.0 billion committed bankline.


John Hancock Life Insurance Company

1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 43,986 40,915 39,424 39,622 37,848Total assets 60,732 58,363 55,446 53,591 50,777Surplus 3,457 3,389 3,158 2,856 2,533Investment reserve 1,243 1,290 1,166 1,065 1,01450% of dividend reserve liab. 214 206 185 176 167Capital 4,914 4,884 4,509 4,097 3,715Insurance revenues 9,763 8,973 7,456 8,156 8,281Net investment income 3,033 2,956 2,856 2,803 2,678Total revenues 13,038 12,163 10,412 11,028 11,050Gain fr ops pre - tax & div 710 1,050 884 821 874Gain Before Real Capital Gains 466 607 467 314 279Real Cap Gains bef IMR transfer 81 132 -21 28 54Real Cap Gains after IMR transfer 29 1 -90 -44 21Net Income 495 608 377 270 300Segment Analysis (as % policy reserves & liabilities)Individual life 30.7 31.9 31.7 30.5 30.3Individual health 1.3 1.0 0.8 0.5 0.5Individual annuities 12.2 12.3 12.3 10.9 10.0Group life & health 0.6 0.6 0.6 1.4 1.3Group pension 54.5 53.4 53.9 55.4 56.9Other 0.0 0.0 0.0 0.0 0.1Segment Analysis (as % of total net premiums)Individual life 14.2 15.8 18.4 16.7 15.6Individual health 1.9 1.7 1.9 1.2 1.1Individual annuities 7.9 6.5 12.0 11.4 9.2Group life & health 2.9 3.4 5.5 7.2 6.5Group pension 72.6 71.7 60.9 59.0 63.3Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 61.2 58.6 59.8 58.4 57.4Common & preferred stock 6.7 6.6 6.1 5.0 4.7Mortgage loans 21.4 20.7 20.4 20.7 24.0Real estate 2.0 4.6 5.9 6.3 6.3Policy loans 3.7 4.0 4.1 4.1 4.4Cash & short term investment 2.7 3.4 1.9 3.7 1.5Other invested assets 2.4 2.1 1.8 1.9 1.7Asset QualityBelow Inv Grade Bonds as % of Invested Assets 8.6 7.5 7.3 6.1 7.4Bonds in or near default as % of Invested Assets 0.4 0.4 0.4 0.3 0.2Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 3.8 7.2 8.5 10.6 12.7Underperf Mtgs+Fclsd RE as % of Invested Assets 0.8 1.5 1.8 2.3 3.2Profitability ROA (%) 0.83 1.07 0.69 0.52 0.62ROE (%) 10.11 12.94 8.77 6.92 8.53Ordinary life lapse ratio (%) 0.0 7.6 7.5 7.5 7.5Net investment yield 7.52 7.77 7.68 7.69 7.64Total investment return 7.24 7.63 7.94 8.29 8.01Commissions/Premiums 2.55 2.68 3.21 3.07 2.51Total general expenses/Premiums 10.00 9.97 11.47 10.68 10.36Total general expenses/Avg assets 1.64 1.57 1.57 1.67 1.76Gain (loss) from operations ($mil)Individual life 160 276 247 132 122Individual health -44 -19 -26 -18 -19Individual annuities 10 52 32 3 3Group life & health 21 18 28 8 27Group pension 283 270 206 191 170Other 58 10 7 5 1Capitalization (%)Capital/Assets 11.2 11.9 11.4 10.3 9.8Moody's Risk adjusted capital ratio 137.4 143.2 134.2 125.3 114.4NAIC Risk based capital ratio 240.3 256.3 242.8 214.9 197.6Surplus Notes/Capital 9.2 9.2 10.0 11.0 12.1Below inv grade bonds/Capital 75.3 60.8 62.5 57.0 73.5CMO's and Loan-Backed Bonds/Capital — — 39.5 53.0 33.2Mortgages + RE/Capital 204.2 206.1 224.4 253.3 299.6Total Underperforming Assets/Capital 10.4 16.1 18.6 24.3 33.5Total Affiliated Inv/Capital 29.8 30.3 32.0 31.5 34.6



Massachusetts Mutual Life Insurance Company

Company Overview

Moody’s Aa1 insurance financial strength rating of Massachusetts Mutual Life Insurance Company(MassMutual) is based on the company’s strong market position in individual life insurance, its large blockof participating liabilities, growing asset management business, and sound capitalization. The rating out-look is stable.

MassMutual is a leading provider of individual life insurance and related products to the affluent busi-ness and professional markets. Moody’s considers the company’s productive career agency system a majorcompetitive strength, but the company will be challenged to maintain long-term revenue growth throughits controlled sales force. MassMutual also owns a controlling interest in OppenheimerFunds, one of thelargest retail mutual fund complexes in the U.S.

The company’s investment portfolio is capably managed and well diversified, although it has a signifi-cant investment concentration in private placements and commercial mortgages that tend to be of lowerquality and are less liquid than other asset classes. MassMutual’s capital level is strong and is expected togrow further as the separate account business becomes increasingly important.


MassMutual reentered the GIC business in 1999, marketing the product on an opportunistic basis to theretirement plan market as well as the EMTN market. MassMutual had actively marketed stable valueproducts during the late 1980s and early 1990s, but the company withdrew from further marketing theseproducts. MassMutual also inherited a GIC block when it merged with Connecticut Mutual LifeInsurance Company in 1996. While MassMutual did not actively market these products for some time,the company has continued to manage an existing albeit shrinking book and has remained active in thestable value market through sales of guaranteed separate account GIC products. As of December 31, 1999,MassMutual had $815 million in stable value liabilities outstanding distributed approximately 57% GICsand 43% funding agreements.

In line with its opportunistic business strategy, MassMutual will limit its GIC and funding agreementissuance to modest amounts when the market offers particularly attractive opportunities for doing so.Moody’s believes that MassMutual offerings will attract considerable market interest given the company’sexcellent credit quality and small level of outstandings.

The company’s financial management is strong. The company is very well capitalized, has goodprofitability and carefully matches the duration, convexity, and cash flows of its assets and liabilities.MassMutual is highly liquid with $1.6 billion of cash, short-term instruments, and U. S. Treasuries asof December 31, 1998, which is further supplemented by $14 billion of investment-grade public bondholdings.


Massachusetts Mutual Life Insurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 43,086 40,831 39,783 29,203 28,666Total assets 62,675 57,635 53,347 38,033 35,174Surplus 3,189 2,873 2,639 2,073 1,929Investment reserve 1,029 945 865 487 44350% of dividend reserve liab. 505 472 438 264 266Capital 4,723 4,291 3,942 2,823 2,638Insurance revenues 7,482 6,765 6,329 4,266 4,590Net investment income 2,915 2,836 2,781 2,157 2,040Total revenues 10,605 9,679 9,190 6,444 6,701Gain fr ops pre - tax & div 1,522 1,504 1,361 893 892Gain Before Real Capital Gains 340 300 224 215 224Real Cap Gains bef IMR transfer 224 59 122 75 -287Real Cap Gains after IMR transfer 25 -43 40 -54 -135Net Income 366 257 265 160 89Segment Analysis (as % policy reserves & liabilities)Individual life 60.6 60.1 57.9 48.0 45.3Individual health 4.6 4.4 4.1 2.7 2.3Individual annuities 6.2 6.7 7.1 8.4 8.3Group life & health 8.7 6.7 5.9 4.0 3.4Group pension 19.9 22.0 25.0 36.9 40.6Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 37.1 41.1 43.4 43.2 38.4Individual health 3.9 4.2 4.5 3.4 3.1Individual annuities 11.0 14.5 16.0 13.3 9.8Group life & health 9.7 4.3 4.5 3.2 6.8Group pension 38.3 36.5 32.3 37.5 28.5Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 60.4 60.2 65.5 63.1 63.5Common & preferred stock 3.9 3.7 3.5 3.3 2.6Mortgage loans 14.2 12.3 10.1 10.5 10.7Real estate 4.2 4.3 4.8 4.6 4.8Policy loans 12.5 12.5 12.3 10.1 9.7Cash & short term investment 2.7 4.9 2.8 7.6 7.9Other invested assets 2.2 2.2 1.0 0.8 0.8Asset QualityBelow Inv Grade Bonds as % of Invested Assets 5.6 5.8 5.9 5.7 5.5Bonds in or near default as % of Invested Assets 0.1 0.1 0.1 0.1 0.1Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 3.1 7.7 15.5 16.0 21.2Underperf Mtgs+Fclsd RE as % of Invested Assets 0.4 1.0 1.6 1.8 2.5Profitability ROA (%) 0.61 0.46 0.58 0.44 0.26ROE (%) 8.12 6.25 7.82 5.87 3.46Ordinary life lapse ratio (%) 5.8 6.2 6.1 5.5 5.8Net investment yield 7.32 7.42 8.55 7.87 7.55Total investment return 7.53 7.70 8.75 7.90 7.30Commissions/Premiums 4.17 4.80 5.30 5.68 5.70Total general expenses/Premiums 9.27 9.40 9.74 10.24 10.82Total general expenses/Avg assets 1.15 1.15 1.35 1.19 1.43Gain (loss) from operations ($mil)Individual life 213 195 154 126 103Individual health -7 10 4 2 -2Individual annuities 29 16 0 15 6Group life & health 0 7 6 8 10Group pension 107 73 59 65 74Other 0 0 0 0 0Capitalization (%)Capital/Assets 11.0 10.5 9.9 9.7 9.2Moody's Risk adjusted capital ratio 177.5 179.5 169.9 171.9 166.7NAIC Risk based capital ratio 290.4 286.1 269.3 272.2 269.6Surplus Notes/Capital 6.9 7.5 8.1 11.2 11.9Below inv grade bonds/Capital 49.1 53.8 57.9 56.9 58.1CMO's and Loan-Backed Bonds/Capital — 150.1 187.5 238.5 232.5Mortgages + RE/Capital 162.1 152.9 145.6 151.7 163.9Total Underperforming Assets/Capital 4.7 9.7 16.9 18.7 26.9Total Affiliated Inv/Capital 50.1 41.1 30.7 23.7 19.8



Metropolitan Life Insurance Company

Company Overview

Metropolitan Life’s (MetLife) Aa2 rating is based on its leading market positions in both individual andgroup businesses, its large captive agent sales force, and its high-quality bond portfolio. MetLife also has astrong position in the large-case group life and non-medical health market, particularly in the profitablegroup life insurance line. MetLife has shown stronger sales in its individual life products, improved agentretention rates, greater productivity among the career agents, and has made recent changes that more fullyintegrate the management of MetLife’s and New England’s individual business operations.

However, these strengths are somewhat offset by the slow industry growth outlook for individual lifeproducts, MetLife’s shift of business toward lower-margined products, sizeable exposure to commercialreal estate, and relatively weak profitability in recent years. Although MetLife has implemented an in-depth plan of action to reduce its high cost structure and improve its earnings, its expense structure is stillrelatively high. In addition, MetLife’s planned demutualization may shift management attention to issuesof shareholder returns and may cause management to increase operational and financial risk.

In January 2000, MetLife acquired GenAmerica Corporation and its operating subsidiaries. MetLifeplans to demutualize and expects to conduct an IPO early in the second quarter of 2000.


MetLife is one of the largest insurance company pension-fund managers. General account GIC reservesof approximately $6.4 billion at September 30, 1999 have been declining, and the pension closeout liabili-ties have stabilized as the closeout market has become inactive. Although MetLife has a block of guaran-teed investment contracts, it has also focused on its separate account pension offerings, which include aMetLife-managed separate account GIC contract. The split between investment management and guar-anteed products has shifted over the last few years, with investment management products now accountingfor a growing share of overall sales. GIC deposits for both traditional and “Met-Managed” products havedecreased significantly from the levels reached in the early 1990s.

We view the general account GIC product as a commodity type of business – extremely competitiveand highly rate sensitive – and essentially a spread based borrowing operation. The decrease in GIC salesfrom the early 1990s level represents a combination of changing market preferences and company pricingdiscipline. MetLife also has about $2.4 billion in funding agreements including the $600 million of shortterm funding agreements it assumed as part of its acquisition of General American Life. The company hasadequate liquidity in its investment portfolio to meet surrenders and maturities in its pension and fundingagreement business.


Metropolitan Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 126,201 124,726 127,097 123,356 110,425Total assets 183,917 178,136 172,444 162,475 142,132Surplus 7,630 7,388 7,378 7,151 6,564Investment reserve 3,109 3,323 3,814 2,635 1,86050% of dividend reserve liab. 816 780 826 782 686Capital 11,555 11,490 12,017 10,568 9,110Insurance revenues 28,834 27,169 24,357 24,162 23,024Net investment income 8,595 8,959 8,264 8,018 7,753Total revenues 38,354 36,551 32,823 32,389 30,932Gain fr ops pre - tax & div 3,309 1,560 2,217 2,247 2,119Gain Before Real Capital Gains 1,005 184 394 743 201Real Cap Gains bef IMR transfer -487 1,441 336 -149 -534Real Cap Gains after IMR transfer -216 691 195 -283 -873Net Income 789 875 589 459 -672Segment Analysis (as % policy reserves & liabilities)Individual life 41.5 45.4 40.7 39.1 34.4Individual health 0.9 0.4 0.3 0.1 0.1Individual annuities 14.2 15.9 15.4 15.7 16.7Group life & health 9.3 9.6 7.6 7.4 7.6Group pension 31.5 25.9 33.2 35.4 38.7Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 16.6 18.2 21.7 21.4 19.7Individual health 0.3 0.2 0.1 0.1 0.2Individual annuities 10.7 9.1 9.5 10.1 8.3Group life & health 28.2 30.4 30.3 28.7 28.5Group pension 36.1 34.2 29.0 30.9 33.3Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 66.6 69.1 65.7 65.8 66.5Common & preferred stock 4.6 4.2 5.9 4.7 3.4Mortgage loans 15.9 13.8 14.6 14.3 13.3Real estate 4.8 5.1 5.8 7.1 8.9Policy loans 4.1 4.2 4.3 4.5 3.7Cash & short term investment 2.3 1.8 1.7 1.4 1.8Other invested assets 1.8 1.8 2.1 2.2 2.3Asset QualityBelow Inv Grade Bonds as % of Invested Assets 7.2 6.2 3.7 2.2 1.0Bonds in or near default as % of Invested Assets 0.1 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 5.4 6.3 8.3 14.8 15.2Underperf Mtgs+Fclsd RE as % of Invested Assets 0.9 0.9 1.2 2.2 2.1Profitability ROA (%) 0.44 0.50 0.35 0.30 -0.49ROE (%) 6.85 7.45 5.22 4.67 -7.43Ordinary life lapse ratio (%) 5.6 5.9 6.1 6.1 5.7Net investment yield 7.46 7.67 6.99 7.25 7.58Total investment return 6.99 7.48 8.22 7.55 7.23Commissions/Premiums 1.59 1.54 1.67 1.89 2.28Total general expenses/Premiums 9.65 12.13 13.92 12.79 12.43Total general expenses/Avg assets 1.54 1.88 2.02 2.03 2.09Gain (loss) from operations ($mil)Individual life 66 -322 36 308 -166Individual health -55 8 -17 11 6Individual annuities 187 190 102 172 16Group life & health 295 74 250 200 -74Group pension 410 278 97 88 40Other 4 0 4 4 1Capitalization (%)Capital/Assets 9.2 9.2 9.5 8.6 8.2Moody's Risk adjusted capital ratio 124.6 128.7 120.6 114.1 117.4NAIC Risk based capital ratio 210.1 215.7 209.0 193.5 204.5Surplus Notes/Capital 13.4 13.5 12.9 14.6 15.4Below inv grade bonds/Capital 75.2 65.3 38.1 24.4 11.2CMO's and Loan-Backed Bonds/Capital — — 115.7 135.8 231.4Mortgages + RE/Capital 217.7 198.8 209.1 242.3 260.0Total Underperforming Assets/Capital 9.6 9.3 12.5 24.6 24.5Total Affiliated Inv/Capital 53.0 36.3 62.8 63.8 54.0



Mutual of Omaha Insurance Company/United of Omaha Life Insurance Company

Company Overview

Moody’s Aa3 insurance financial strength ratings of Mutual of Omaha Insurance Company (Mutual ofOmaha) and United of Omaha Life Insurance Company (United of Omaha) reflect the companies’ estab-lished positions in the individual and group health markets, their growing presence in life insurance andannuities, and their good asset quality and capitalization. These strengths are tempered, however, by thecompanies’ concentration in indemnity health insurance— a market threatened by the continuing growthof managed health care services and health care reform, and by growing emphasis on narrow-margin,interest-sensitive asset accumulation products. In addition, Mutual of Omaha’s own expansion into man-aged care has produced poor operating results, and the company has disposed of certain HMO sub-sidiaries. Management is striving to reduce its dependence on indemnity health, but it will be challengedto replace its earnings, especially in the annuity market, which is fiercely competitive. A recent cost-cut-ting program should help overall profitability. The ratings outlook for Mutual of Omaha and United ofOmaha are negative, given the decline of the indemnity health sector, their historical core strength.


In group retirement plans, United of Omaha has about $2.5 billion of reserves, about 50% GICs, 35%payout annuities, and the rest non-guaranteed and deposit administration. Annual deposits run at about$400 to $600 million, the majority of which are GICs sold through GIC brokers or through direct contactwith pension plan sponsors. Group pension products are sold by United of Omaha and amounted to 33%of the company’s $8 billion in policyholder reserves and liabilities. GICs and other deposit funds wereabout 22% of policyholder reserves and liabilities. Putable funding agreements amounted to $238 millionas of September 30, 1999. Most of these contracts have short term put options of 30 days, which exposesthe company to some liquidity risk. We expect the aggregate amount of GICs, funding agreements, andother deposit funds to approximate 20% of insurance reserves for United of Omaha.


United of Omaha Life Insurance Company (Mutual of Omaha)1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 9,284 8,894 8,359 8,038 7,387Total assets 10,748 10,023 9,287 8,537 7,543Surplus 687 620 588 535 513Investment reserve 123 99 94 114 10650% of dividend reserve liab. 0 0 0 0 0Capital 809 719 682 649 619Insurance revenues 1,416 1,322 1,480 1,546 1,360Net investment income 608 576 584 542 522Total revenues 2,089 1,946 2,093 2,113 1,912Gain fr ops pre - tax & div 88 88 80 72 77Gain Before Real Capital Gains 43 41 42 31 47Real Cap Gains bef IMR transfer 15 21 47 29 18Real Cap Gains after IMR transfer 12 9 52 23 14Net Income 55 50 93 55 61Segment Analysis (as % policy reserves & liabilities)Individual life 22.0 21.2 21.1 20.2 20.3Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 42.7 43.9 45.8 43.8 40.3Group life & health 2.0 2.1 2.2 2.4 2.5Group pension 33.1 32.7 30.9 33.6 36.8Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 34.5 35.0 28.8 24.7 24.6Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 32.5 37.4 50.6 58.4 48.6Group life & health 12.2 13.2 10.6 9.1 9.6Group pension 20.8 14.4 10.1 7.8 17.2Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 86.5 85.5 86.1 79.7 75.4Common & preferred stock 1.2 1.3 1.3 2.7 3.1Mortgage loans 7.4 7.1 7.3 11.8 14.6Real estate 0.9 1.1 1.4 1.8 2.2Policy loans 1.6 1.6 1.6 1.5 1.6Cash & short term investment 0.9 2.5 1.4 1.5 2.5Other invested assets 1.5 1.1 0.9 0.9 0.7Asset Quality[1]Below Inv Grade Bonds as % of Invested Assets 4.9 3.1 3.1 3.0 2.6Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.1 0.1[2] Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.9 1.3 5.1 7.2 7.3[2] Underperf Mtgs+Fclsd RE as % of Invested Assets 0.1 0.1 0.4 0.9 1.1Profitability ROA (%) 0.53 0.51 1.05 0.68 0.87ROE (%) 7.19 7.07 14.03 8.61 10.47Ordinary life lapse ratio (%) 11.1 11.8 13.4 13.3 13.4Net investment yield 7.18 7.15 7.59 7.49 8.08Total investment return 7.68 7.28 7.72 7.56 8.46Commissions/Premiums 8.40 8.97 8.80 8.19 7.21Total general expenses/Premiums 13.90 15.50 12.93 11.44 13.56Total general expenses/Avg assets 1.90 2.12 2.15 2.20 2.61Gain (loss) from operations ($mil)Individual life 36 47 26 8 0Individual health 0 0 0 0 0Individual annuities 18 13 15 -1 11Group life & health 23 13 15 9 7Group pension 8 12 16 18 24Other -17 -26 -19 0 0Capitalization (%)Capital/Assets 8.7 8.1 8.2 8.1 8.4Moody's Risk adjusted capital ratio 141.9 135.0 136.8 128.4 130.6NAIC Risk based capital ratio 307.1 312.4 313.2 257.9 260.2Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0[1]Below inv grade bonds/Capital 53.8 37.0 36.9 36.2 30.2CMO's and Loan-Backed Bonds/Capital — — 238.0 250.0 272.7Mortgages + RE/Capital 91.3 95.8 102.1 162.9 193.2[3]Total Underperforming Assets/Capital 0.8 1.5 4.9 11.4 13.8Total Affiliated Inv/Capital 11.8 12.6 11.8 11.5 11.3



Nationwide Life Insurance Company

Company Overview

Moody’s Aa2 insurance financial strength ratings of Nationwide Life Insurance Company (NationwideLife) and Nationwide Life and Annuity Insurance Company are based on their strong position and diver-sified distribution channels in the annuity and pension markets, high quality investment portfolio, andnational presence in the market for public-employee deferred compensation. Offsetting these strengths isthe companies’ increasing focus on lower-margin, asset accumulation products. The rating reflects thesubstantial linkage remaining between Nationwide Life and its property/casualty parent, NationwideMutual Insurance Company (Nationwide). The rating also incorporates the financial leverage ofNationwide Financial Services (A1 senior unsecured debt rating), which places dividend demands onNationwide Life.

Nationwide Life has a strong distribution network and administrative capabilities in the qualified andnon-qualified annuity markets. It also benefits from a stable block of traditional insurance and a large vol-ume of separate account products that provide fee-based revenue to offset some of the investment risks ofguaranteed products. The rating was placed on review for possible downgrade in March 2000 primarilybecause of continued weak performance by the parent company.

Moody’s expects that profitability in Nationwide’s core business of auto and homeowners insurance islikely to lag its high performance peers over the near to medium term.


Nationwide’s funding agreements, including contracts backing European Medium Term Notes (EMTN),and GIC business amounted to approximately $580 million as of December 31, 1999. Nationwidelaunched funding agreement-backed EMTN issues in October of 1999 for $260 million and January of2000 for $160 million. Nationwide has not issued any putable funding agreements.

In July 1999, Nationwide Financial Services established a $2 billion EMTN program. Notes under theprogram can be in any currency and maturity, and with fixed or floating interest rates. Issuance under theprogram is supported by funding agreements issued by Nationwide Life. The program size currentlyamounts to less than 10% of the general account. ALM for Nationwide’s EMTN program is managed on aprogram level basis. We note that Nationwide acquires a substantial portion of the assets prior to funding.

Liquidity risk is somewhat mitigated as the issues do not contain any put provisions, this is offset tosome extent as the asset portfolio has a significant share invested in commercial mortgages. Additionally,since the supporting assets range in maturities from 3 to ten years, Nationwide must actively manage itsEMTN portfolio to meet maturity payments. Currency risk associated with foreign-denominated issues ismanaged by fully swapping into US dollars and interest rate risk is managed by matching asset and liabili-ty durations and swapping fixed rate liabilities and assets to floating.

Nationwide Life manages its asset/liability risk through a process by which premiums and deposits areused to “purchase” units of internally constructed investment pools, each with specific duration ranges andcash flow characteristics. In addition, interest rate risk is minimized through contractual features, such asmarket value adjustment clauses and frequent resets on credited rates. The annuity payout obligations aremanaged with assets in an immunized pool, while the company attempts to duration match the remainingliabilities with a target mismatch of not more than three months. Nationwide’s significant investment inmortgage-backed securities presents challenges to the duration-matching approach because of the model-ing difficulties associated with these assets. However, the company does limit its exposure to prepaymentsby purchasing less volatile types of mortgage backed securities. We believe that the company’s investmentportfolio generally has adequate liquidity to protect itself from disintermediation risk. We also note thatthe company has alternative sources of liquidity through its operating cash flows and access to a $600 mil-lion revolving credit facility.


Nationwide Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 21,528 19,527 18,762 18,723 17,318Total assets 86,556 68,953 55,616 45,168 35,657Surplus 1,350 1,315 1,135 1,001 1,363Investment reserve 193 189 181 192 16450% of dividend reserve liab. 20 19 21 21 21Capital 1,563 1,523 1,336 1,213 1,548Insurance revenues 14,338 12,565 10,180 8,666 7,038Net investment income 1,434 1,423 1,364 1,343 1,295Total revenues 16,610 14,632 12,119 11,130 8,452Gain fr ops pre - tax & div 379 339 274 227 207Gain Before Real Capital Gains 295 169 132 92 88Real Cap Gains bef IMR transfer -17 20 -1 -15 8Real Cap Gains after IMR transfer -18 2 -20 -18 -2Net Income 276 171 112 73 87Segment Analysis (as % policy reserves & liabilities)Individual life 16.2 16.5 14.8 13.6 14.1Individual health 0.6 0.7 0.7 0.8 0.8Individual annuities 18.9 19.0 20.6 22.9 19.9Group life & health 0.8 0.8 0.5 0.2 0.2Group pension 63.2 62.7 63.0 62.1 64.5Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 7.3 8.6 6.1 5.2 5.2Individual health 0.0 0.0 0.0 0.0 1.1Individual annuities 27.1 26.8 47.3 45.8 45.1Group life & health 0.1 0.6 0.6 0.1 0.4Group pension 65.5 64.2 46.0 48.9 45.0Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 67.7 67.3 65.2 64.2 66.6Common & preferred stock 0.6 1.1 0.9 2.9 2.9Mortgage loans 25.8 26.4 27.0 28.9 26.5Real estate 0.7 0.8 1.2 1.2 1.3Policy loans 2.5 2.4 2.3 2.1 2.0Cash & short term investment 1.8 1.3 2.8 0.2 0.2Other invested assets 0.8 0.8 0.6 0.5 0.4Asset QualityBelow Inv Grade Bonds as % of Invested Assets 2.4 1.9 1.5 1.2 1.6Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.9 1.5 2.4 2.8 3.5Underperf Mtgs+Fclsd RE as % of Invested Assets 0.2 0.4 0.7 0.8 0.9Profitability ROA (%) 0.36 0.27 0.22 0.18 0.27ROE (%) 17.90 11.96 8.76 5.30 5.84Ordinary life lapse ratio (%) 7.2 7.4 8.2 8.6 8.7Net investment yield 7.32 7.83 7.81 7.98 8.27Total investment return 7.14 7.94 7.88 7.94 8.37Commissions/Premiums 4.04 4.14 4.59 4.82 4.46Total general expenses/Premiums 3.19 3.71 4.32 4.68 5.09Total general expenses/Avg assets 0.59 0.75 0.87 1.00 1.14Gain (loss) from operations ($mil)Individual life -27 -58 -18 -7 -5Individual health 0 0 0 0 0Individual annuities 172 17 0 -35 -9Group life & health -19 -4 -3 1 -1Group pension 23 90 54 35 19Other 145 124 99 99 86Capitalization (%)Capital/Assets 7.3 7.8 7.1 6.5 8.9Moody's Risk adjusted capital ratio 122.7 130.3 121.2 90.7 120.3NAIC Risk based capital ratio 326.3 332.8 328.7 306.1 374.8Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 32.3 23.2 20.4 18.1 17.4CMO's and Loan-Backed Bonds/Capital — — 253.7 280.5 221.0Mortgages + RE/Capital 358.7 340.4 386.5 437.7 305.5Total Underperforming Assets/Capital 3.3 5.1 9.2 12.1 10.5Total Affiliated Inv/Capital 4.6 8.2 9.5 39.1 31.2



New York Life Insurance Company

Company Overview

Moody’s rates the New York Life Insurance Company and its wholly-owned subsidiary, New York LifeInsurance and Annuity Corporation (collectively, New York Life), Aa1 for insurance financial strength.This strong rating is based upon the companies’ established position in the individual life insurance, annu-ities, and group pensions markets, as well as its large block of stable individual life insurance policies thathave significant embedded profits. The rating also reflects New York Life’s good quality investment port-folios, sound capitalization and liquidity, strong asset liability management expertise and establishedcareer agency distribution force. These strengths are tempered by the company’s growing reliance oninterest-sensitive products and low margin variable annuities, slow growth in its core individual life insur-ance operation, and an overall modest and slow growing level of earnings.

New York Life remains a substantial force within the life insurance industry and ended 1998 with amarket share of approximately 5% (excluding large case BOLI/COLI sales). Also in 1998, the companyled the U.S. market in individual life insurance sales. The productivity of New York Life’s large careeragency sales force (about 6,500 full time agents at year-end 1998) has recently improved, and the companyenjoys strong name recognition. In addition, the company has growing variable annuity and mutual fundbusinesses.


The earnings driver in New York Life’s asset management operation is the general account guaranteedinvestment contract (GIC) product, a business in which NYL is a leading provider. Approximately 90% ofthe business is medium term, benefit-responsive products sold to 401(k) pension plans; the other 10% isshort-term floating rate contracts (funding agreements) distributed primarily to money market funds.NYL has built its position in the marketplace by leveraging off of its high credit rating and providing agood level of service.

Due to the maturity of the market, Moody’s believes that the GIC business is unlikely to grow signifi-cantly from its present level in the near term, but should continue to remain a strong source of earningsfor the company. In recent years, in an attempt to maintain its asset base and grow the profitability of thisline of business, New York Life undertook a number of initiatives. They included development of a syn-thetic GIC product, and the receipt of approval for entry into the muni-GIC market. In addition, thecompany has grown its funding agreement business, and as of September 30, 1999 had $1.8 billion offunding agreements outstanding.

Of the $1.8 billion in total funding agreements, $1.1 billion had embedded put options, including $300million of paper with a 7-day put and $200 million with a 30-day put. To manage this risk, NYL has anactive asset-liability (ALM) management program. NYL’s ALM program restricts the type of assets thatcan be used to back GICs and funding agreements to only highly liquid assets. This ALM program is inte-grated into a comprehensive liquidity-monitoring program undertaken by NYL on a company-wide basis.Moody’s believes that NYL’s appropriately manages the risk associated with its institutional investmentproducts and that the company maintains appropriate liquidity.


New York Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 67,505 67,387 63,621 60,943 56,979Total assets 68,812 68,852 65,275 62,727 59,415Surplus 6,398 5,576 4,622 4,008 3,756Investment reserve 2,102 1,965 1,588 1,399 1,26850% of dividend reserve liab. 695 655 619 579 593Capital 9,195 8,195 6,829 5,985 5,618Insurance revenues 10,314 9,390 9,174 10,756 10,181Net investment income 4,151 4,337 4,010 3,855 3,811Total revenues 14,867 13,535 13,591 15,408 14,277Gain fr ops pre - tax & div 2,214 2,375 1,828 1,697 1,748Gain Before Real Capital Gains 487 812 320 212 279Real Cap Gains bef IMR transfer 65 121 577 339 420Real Cap Gains after IMR transfer 12 -59 212 228 252Net Income 499 752 532 439 530Segment Analysis (as % policy reserves & liabilities)Individual life 57.9 55.9 53.8 52.0 52.4Individual health 1.5 1.3 1.2 1.0 1.0Individual annuities 7.8 7.4 6.7 5.9 5.5Group life & health 0.9 0.8 0.9 0.7 0.7Group pension 31.4 34.2 36.4 39.6 39.8Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 40.7 43.3 44.0 37.7 39.4Individual health 1.5 1.6 1.7 1.3 1.3Individual annuities 10.0 10.9 12.1 9.2 9.9Group life & health 4.9 4.4 4.6 3.3 3.5Group pension 40.7 35.9 34.8 46.4 39.7Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 62.8 64.9 65.8 68.1 68.7Common & preferred stock 9.1 9.2 8.0 6.4 6.0Mortgage loans 10.9 9.9 9.4 9.2 9.6Real estate 0.9 1.0 1.3 1.2 1.9Policy loans 8.0 7.9 8.3 8.5 9.1Cash & short term investment 6.3 5.9 6.2 4.9 2.9Other invested assets 2.0 1.2 1.2 1.6 1.8Asset QualityBelow Inv Grade Bonds as % of Invested Assets 4.8 4.3 4.7 4.5 4.2Bonds in or near default as % of Invested Assets 0.0 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 1.6 2.0 4.7 8.4 11.4Underperf Mtgs+Fclsd RE as % of Invested Assets 0.2 0.2 0.4 0.8 1.2Profitability ROA (%) 0.73 1.12 0.83 0.72 0.92ROE (%) 5.74 10.01 8.30 7.57 9.80Ordinary life lapse ratio (%) 6.9 7.0 6.6 6.6 7.9Net investment yield 6.75 7.29 6.97 7.02 7.45Total investment return 8.01 8.74 8.32 7.50 8.41Commissions/Premiums 2.13 2.50 2.91 2.40 2.74Total general expenses/Premiums 9.78 10.66 12.72 11.42 11.01Total general expenses/Avg assets 1.47 1.49 1.82 2.01 1.95Gain (loss) from operations ($mil)Individual life 383 650 177 118 171Individual health -15 -10 -11 -1 -4Individual annuities 17 31 23 21 20Group life & health 6 18 11 -4 -5Group pension 83 97 121 71 82Other 1 1 2 0 0Capitalization (%)Capital/Assets 13.6 12.2 10.7 9.8 9.9Moody's Risk adjusted capital ratio 196.1 178.3 159.2 151.1 144.7NAIC Risk based capital ratio 318.3 294.4 276.8 278.4 269.2Surplus Notes/Capital 4.9 5.5 6.6 7.5 8.0Below inv grade bonds/Capital 33.8 33.7 41.8 44.4 40.8CMO's and Loan-Backed Bonds/Capital — — 165.6 214.0 233.2Mortgages + RE/Capital 82.9 85.9 95.2 102.5 112.2Total Underperforming Assets/Capital 1.4 1.7 3.9 7.8 11.2Total Affiliated Inv/Capital 22.9 26.2 30.4 33.8 36.4



Ohio National Life Insurance Company

Company Overview

Moody’s A1 insurance financial strength rating of Ohio National Life Insurance Company (ONLIC) isbased on the company’s regional strength in the individual life markets, tight expense controls, stableblock of individual life insurance, and good asset/liability management. The company has been able togrow its earnings and capital base while maintaining its low expense structure. These factors are offset bythe high degree of competition in the individual life insurance marketplace and by the significant portionof the company’s liabilities concentrated in interest-sensitive products.

While individual life sales have grown since 1989, they remain modest relative to total revenues.ONLIC continues to have a large proportion of reserves represented by guaranteed investment contracts(GICs), lottery annuities, and fixed annuities, markets in which ONLIC will face increasing competitionwith larger life insurers and other financial services companies. Ohio National is well positioned in its cur-rent rating category. The ratings outlook is stable.


As of year-end 1998, Ohio National maintained GIC reserves of roughly $1 billion. The company has notissued short-term putable funding agreements, but does maintain some one-year put business. In additionto the GIC reserves, ONLIC has also distributed lottery annuities, which are non-surrenderable.

In Moody’s opinion, while collectively the GIC and lottery annuity businesses are profitable andaccount for a significant portion of the company’s total earnings, they are largely commodity-like innature and, in the aggregate, ONLIC does not have a strong competitive position. We do not expectONLIC to grow the GIC/FA business much beyond its current size.

ONLIC’s asset/liability management appears to be well conceived. However, the company has consid-erable asset/liability risk because of its concentration in interest-sensitive products such as GICs, otherfixed rate group pension products, and individual annuities. ON Financial manages this risk by employingsimulation testing and “stress” tests, along with the required asset adequacy analysis. Asset/liability risk isalso managed by product design. For example, GICs, although they may be discontinued, provide disin-termediation protection through an onerous market value adjustment.


Ohio National Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 4,441 4,325 4,216 4,124 3,824Total assets 6,018 5,376 5,057 4,733 4,244Surplus 431 409 363 314 243Investment reserve 78 96 86 70 6150% of dividend reserve liab. 15 14 13 13 12Capital 524 519 462 396 317Insurance revenues 985 795 765 806 751Net investment income 339 331 336 318 301Total revenues 1,342 1,145 1,112 1,130 1,057Gain fr ops pre - tax & div 108 106 108 91 72Gain Before Real Capital Gains 53 56 56 42 28Real Cap Gains bef IMR transfer 26 3 2 6 -1Real Cap Gains after IMR transfer 23 -5 -2 2 -3Net Income 76 51 54 45 24Segment Analysis (as % policy reserves & liabilities)Individual life 18.5 18.1 17.6 17.1 17.5Individual health 1.2 1.2 1.2 1.2 1.3Individual annuities 27.9 28.9 29.4 29.7 30.1Group life & health 1.0 1.0 0.9 0.9 0.8Group pension 51.3 50.8 50.9 51.0 50.2Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 10.2 12.2 11.7 10.5 10.8Individual health 1.0 1.2 1.2 1.1 1.2Individual annuities 39.1 27.8 26.7 22.8 23.9Group life & health 3.1 3.8 3.4 3.1 3.0Group pension 45.8 54.0 56.0 61.4 60.1Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 66.1 64.5 65.7 67.5 69.4Common & preferred stock 4.6 5.1 4.6 3.9 4.0Mortgage loans 23.5 24.2 24.8 22.8 19.9Real estate 0.2 0.2 0.4 1.0 1.1Policy loans 2.7 2.8 2.8 2.9 3.1Cash & short term investment 1.6 2.3 0.6 0.8 1.4Other invested assets 1.3 1.0 1.1 1.1 1.1Asset QualityBelow Inv Grade Bonds as % of Invested Assets 5.3 4.5 4.5 3.8 4.1Bonds in or near default as % of Invested Assets 0.1 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 1.0 1.4 1.9 3.0 4.3Underperf Mtgs+Fclsd RE as % of Invested Assets 0.2 0.3 0.5 0.7 0.9Profitability ROA (%) 1.33 0.97 1.10 0.99 0.61ROE (%) 14.54 10.37 12.52 12.49 8.17Ordinary life lapse ratio (%) 2.7 4.7 6.8 7.7 6.9Net investment yield 8.13 8.16 8.48 8.42 8.70Total investment return 8.37 8.35 8.89 8.68 9.08Commissions/Premiums 2.21 2.83 3.08 2.84 3.27Total general expenses/Premiums 7.52 8.13 7.06 6.19 5.96Total general expenses/Avg assets 1.30 1.24 1.10 1.11 1.12Gain (loss) from operations ($mil)Individual life 9 11 12 10 8Individual health 1 3 4 1 0Individual annuities 26 30 23 16 11Group life & health 0 -1 0 1 0Group pension 17 15 16 14 9Other 0 -4 0 0 0Capitalization (%)Capital/Assets 11.8 12.0 11.0 9.6 8.3Moody's Risk adjusted capital ratio 156.3 159.5 149.6 138.1 121.6NAIC Risk based capital ratio 355.1 350.3 343.8 318.4 283.9Surplus Notes/Capital 16.2 16.4 18.4 21.5 15.8Below inv grade bonds/Capital 44.1 36.4 39.8 38.8 48.6CMO's and Loan-Backed Bonds/Capital — — 61.6 90.7 112.5Mortgages + RE/Capital 196.3 198.7 225.4 241.8 247.8Total Underperforming Assets/Capital 3.2 3.1 4.3 7.2 10.4Total Affiliated Inv/Capital 23.8 23.4 22.6 22.8 24.9



Pacific Life Insurance Company

Company Overview

Moody’s Aa3 insurance financial strength rating and P-1 short-term insurance financial strength rating ofPacific Life Insurance Company (Pacific Life) is based on Pacific Life’s established market position invariable and universal life, annuities, and group pensions and institutional products, as well as its strongasset management capabilities, prudent asset/liability management and good capitalization. The rating ofPacific Life has a positive outlook.

These strengths are somewhat offset by potential liquidity and other business risks to Pacific Life aris-ing from its issuance of guaranteed interest contracts (GICs) and funding agreements, a separate accountbusiness that earns a lower return on assets, and the susceptibility of its rapidly expanding variable annuitybusiness to equity market fluctuations.

Pacific has $350 million in committed bank facilities and a $450 million commercial paper programavailable should the company require liquidity in addition to that provided from its operations.


Pacific Life’s Institutional Products Group (IPG) offers traditional, separate account and synthetic GICs;funding agreements; and guaranteed separate account products. These products are marketed to corpora-tions and organizations in the U.S. and abroad.

In recent years, Pacific Life has been diverting its attention from the slow growth traditional GICmarket to focus on the new and faster growing alternative markets such as funding agreements andFANIP programs. More than three-quarters of Pacific Life’s 1999 IPG sales were made to non- pensionfund markets.

FANIP programs are issued for fixed rates and for longer time periods than are available in the domes-tic GIC market. Pacific Life is also exposed to a limited amount of liquidity risk by issuing a small numberof short-term funding agreements containing short-term put options, but Moody’s believes that PacificLife appropriately manages this risk through its careful asset/liability management.

As of December 31, 1998 year-end assets under management for IPG were $16.8 billion. IPG had1998 premiums and deposits of $2.7 billion, up 50% from 1997. Pacific Life’s business strategy is to com-pete on the basis of investment performance and innovative product design targeted at meeting the needsof large institutional investors such as public and private pension funds, short-term and other institutionalinvestors.

The products are managed in an individually managed, dedicated investment segment that alsoincludes payout annuities. This helps limit the company’s liquidity risk exposure and permits Pacific Lifeto better balance the overall asset/liability risk assumed.


Pacific Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 24,621 21,741 20,231 13,238 12,068Total assets 48,234 37,585 31,836 21,205 17,589Surplus 1,219 1,157 945 815 723Investment reserve 232 299 252 209 19150% of dividend reserve liab. 13 12 11 12 11Capital 1,464 1,468 1,209 1,037 926Insurance revenues 8,641 6,133 4,579 3,810 2,710Net investment income 1,737 1,565 1,272 997 935Total revenues 10,627 7,841 6,053 4,961 3,871Gain fr ops pre - tax & div 277 339 193 208 155Gain Before Real Capital Gains 174 241 112 98 79Real Cap Gains bef IMR transfer -27 -6 27 32 29Real Cap Gains after IMR transfer -6 -53 10 15 6Net Income 168 188 122 113 85Segment Analysis (as % policy reserves & liabilities)Individual life 48.3 53.5 55.9 53.2 53.3Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 14.0 7.3 10.3 3.0 3.1Group life & health 0.4 0.6 0.4 0.8 0.8Group pension 37.1 38.6 33.4 43.0 42.7Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 16.2 20.3 21.3 22.7 24.8Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 53.2 36.1 41.7 32.8 22.3Group life & health 0.0 0.0 0.0 0.1 0.1Group pension 29.4 43.6 37.1 44.4 52.9Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 62.0 60.1 65.2 58.5 56.6Common & preferred stock 2.6 2.8 2.1 3.1 3.3Mortgage loans 12.3 13.2 9.7 11.4 11.7Real estate 1.0 1.0 1.2 2.1 1.6Policy loans 17.7 18.8 19.5 23.3 22.8Cash & short term investment 1.3 0.9 0.5 0.3 2.2Other invested assets 3.3 3.1 1.8 1.2 1.8Asset QualityBelow Inv Grade Bonds as % of Invested Assets 4.9 5.1 4.7 4.6 3.6Bonds in or near default as % of Invested Assets 0.0 0.1 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.4 1.7 3.7 6.9 6.5Underperf Mtgs+Fclsd RE as % of Invested Assets 0.1 0.2 0.4 0.8 0.8Profitability ROA (%) 0.39 0.54 0.46 0.58 0.53ROE (%) 11.49 14.02 10.83 11.53 9.76Ordinary life lapse ratio (%) 6.0 3.9 3.6 3.3 3.3Net investment yield 7.92 7.86 7.94 8.25 8.37Total investment return 7.44 8.12 8.45 8.46 8.72Commissions/Premiums 5.40 5.06 3.74 3.88 4.82Total general expenses/Premiums 4.87 5.29 5.93 5.38 6.66Total general expenses/Avg assets 0.98 0.93 1.02 1.06 1.12Gain (loss) from operations ($mil)Individual life 62 54 27 21 25Individual health 0 0 0 0 0Individual annuities -48 6 -25 -24 -15Group life & health 1 0 0 0 0Group pension 48 92 61 50 48Other 119 89 49 52 21Capitalization (%)Capital/Assets 5.9 6.8 6.0 7.8 7.7Moody's Risk adjusted capital ratio 109.9 139.1 133.7 161.5 160.5NAIC Risk based capital ratio 238.1 237.0 237.6 283.1 290.9Surplus Notes/Capital 10.2 10.2 12.4 14.4 16.2Below inv grade bonds/Capital 80.2 73.4 77.6 57.7 45.9CMO's and Loan-Backed Bonds/Capital — — 151.1 80.2 83.4Mortgages + RE/Capital 217.6 206.3 178.9 169.7 170.9Total Underperforming Assets/Capital 1.6 4.6 6.0 10.4 10.2Total Affiliated Inv/Capital 38.0 12.2 14.3 18.3 19.7



Principal Life Insurance Company

Company Overview

Moody’s Aa2 insurance financial strength rating of Principal Life Insurance Company (Principal Life) isprimarily based on its strong, broad-based position in the markets for group pensions, group life andhealth insurance, and individual life insurance. It also reflects the company’s extensive, largely captive dis-tribution channels, its efficient, technology-based operations, and its disciplined financial and investmentmanagement. Principal Life’s potential access to the equity market through its mutual holding companystructure is an additional corporate strength.

These strengths are tempered by the mounting competitive pressures and narrowing margins facingPrincipal Life’s key group pension segment; by its increasing emphasis on, and already sizable exposure tocommercial mortgages, real estate, and mortgage banking activities, which have higher risk and volatilitythan the company’s core life insurance business; and by its exposure to the troubled health care industry.In addition, the Principal Group’s acquisition of the asset management operations of Bankers TrustAustralia Group and its continuing international expansion present it with significant execution, integra-tion and financial risks, while significantly increasing its consolidated financial leverage.


Principal Life is a major U.S. pension provider, and its pension segment is its single largest business,accounting for over 70% of its 1998 statutory premiums and 35% of its statutory earnings. Within thissegment, the company offers full-service qualified pension plans primarily to small and medium-sizedemployers for their 401(a-k), 403(b), and similar full-service plans, as well as single-premium investment-only GICs, funding agreements, and other related products. Pension assets are primarily managed byPrincipal Life itself, which offers plan participants a wide selection of proprietary equity and fixed-incomeinvestment options. In line with market trends, a growing proportion of its pension business has moved tothe separate account.

In terms of general account business, at September 30, 1999, Principal Life had $17.6 of GICs, ofwhich $5.7 billion were full-service plans, and $11.9 billion were investment-only GIC liabilities. We aresomewhat concerned about the preponderance of investment-only GICs, because they tend to be less per-sistent than full-service plans.

Of the investment-only portfolio, approximately $2 billion were short-term GICs and funding agree-ments, most of which have 30-, 90-, and 360-day put options. These contracts, which are primarily sold tolarge institutional investors and money market funds, are highly credit- and market-sensitive, and couldconstrain company liquidity if the puts are exercised en masse. However, some contracts include supple-mental surrender restrictions and market-value adjustments.

We note Principal Life’s entry into the Euro-GIC market in 1999. At December 31, 1999, the compa-ny had sold over $1.2 billion of medium-term notes to European institutional investors, supported by itsgeneral account funding agreements. These funding agreements are not surrenderable, and have longmaturities that match those of the debt instruments they support. Similar to funding agreements, howev-er, EuroGICs are a credit-sensitive spread business, and they expose the company to rollover risk at thetime the notes mature. We believe that Principal Life’s strong investment discipline and asset-liabilitymanagement mitigate these risks to a large extent.


Principal Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 42,415 41,039 40,330 39,619 38,311Total assets 76,018 70,096 63,957 56,837 51,268Surplus 3,152 3,032 2,811 2,504 2,208Investment reserve 980 991 1,125 1,048 1,07750% of dividend reserve liab. 150 159 161 158 160Capital 4,281 4,182 4,097 3,709 3,445Insurance revenues 15,781 14,276 12,851 12,311 11,940Net investment income 2,981 2,749 2,799 2,696 2,651Total revenues 19,247 17,443 15,827 15,052 14,616Gain fr ops pre - tax & div 937 697 854 778 710Gain Before Real Capital Gains 539 350 349 259 261Real Cap Gains bef IMR transfer 160 220 119 194 79Real Cap Gains after IMR transfer 174 161 83 156 2Net Income 714 511 432 415 263Segment Analysis (as % policy reserves & liabilities)Individual life 17.0 16.9 16.2 15.5 15.1Individual health 0.6 0.5 0.5 0.5 0.4Individual annuities 7.3 8.0 8.5 8.5 8.7Group life & health 0.9 2.2 2.4 2.5 2.6Group pension 72.0 70.4 70.4 70.8 70.7Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 6.0 6.8 6.9 7.0 7.3Individual health 0.4 0.4 0.4 0.4 0.4Individual annuities 3.8 4.8 5.4 7.7 7.5Group life & health 1.8 2.5 3.0 3.1 3.2Group pension 75.0 72.0 66.9 59.4 55.5Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 57.9 56.6 54.9 58.1 58.4Common & preferred stock 3.7 4.3 4.7 4.0 5.3Mortgage loans 27.3 28.7 30.3 28.7 26.9Real estate 1.9 3.4 4.0 4.1 4.1Policy loans 1.9 1.9 1.9 1.9 1.9Cash & short term investment 4.3 3.6 3.0 2.1 2.4Other invested assets 3.1 1.4 1.2 1.1 1.0Asset QualityBelow Inv Grade Bonds as % of Invested Assets 5.6 5.1 4.8 4.7 5.7Bonds in or near default as % of Invested Assets 0.2 0.2 0.2 0.1 0.1Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 4.0 7.2 8.7 10.1 11.7Underperf Mtgs+Fclsd RE as % of Invested Assets 1.1 2.2 2.8 3.2 3.5Profitability ROA (%) 0.98 0.76 0.72 0.77 0.55ROE (%) 16.87 12.35 11.07 11.60 8.25Ordinary life lapse ratio (%) 6.5 6.4 6.2 5.3 4.9Net investment yield 7.51 7.12 7.38 7.27 7.61Total investment return 7.63 6.84 7.80 7.43 8.61Commissions/Premiums 1.65 1.67 1.91 2.16 2.33Total general expenses/Premiums 6.69 7.57 7.46 7.48 7.54Total general expenses/Avg assets 1.45 1.61 1.59 1.70 1.89Gain (loss) from operations ($mil)Individual life 78 49 34 42 36Individual health -1 -4 -10 -6 -12Individual annuities 38 36 32 29 26Group life & health 42 26 32 25 21Group pension 231 122 146 116 101Other 211 228 90 11 82Capitalization (%)Capital/Assets 10.1 10.2 10.2 9.4 9.0Moody's Risk adjusted capital ratio 132.2 134.1 131.5 122.9 114.1NAIC Risk based capital ratio 256.1 245.4 245.5 237.0 222.1Surplus Notes/Capital 7.0 7.1 7.3 8.0 8.6Below inv grade bonds/Capital 54.0 48.8 46.5 49.5 61.2CMO's and Loan-Backed Bonds/Capital — — 100.3 116.3 104.4Mortgages + RE/Capital 283.2 308.3 329.5 342.4 335.1Total Underperforming Assets/Capital 12.8 23.2 28.9 34.2 38.8Total Affiliated Inv/Capital 84.4 76.0 73.5 72.6 78.8



Protective Life Insurance Company

Company Overview

Protective Life Insurance Company’s A1 insurance financial strength rating is based on its strong prof-itability, diverse sources of revenues and earnings, and low-cost operations, as well as its good qualityinvestment portfolio. These strengths are somewhat offset by its balance sheet concentration in commodi-ty-like, interest-sensitive investment and annuity products, asset/liability management risks, below averagestatutory capitalization, and moderate financial leverage at its holding company, Protective LifeCorporation.

Protective’s rapid growth in premiums and earnings has been driven by the company’s presence in theGIC market, and by its opportunistic and successful acquisition strategy. Protective also has profitableoperations in individual life, individual annuities, credit insurance, and group dental insurance, althoughsome of these segments generate rather modest earnings.

Protective has a good quality investment portfolio, consisting predominantly of bonds and mortgageloans. The company’s mortgages are predominantly high quality, credit-tenant loans with low levels ofproblems and net historical loss experience. The high proportion of mortgages and mortgage-backedsecurities supporting guaranteed interest products present some risk to the company’s asset/liability man-agement process. In addition, Protective Life Corporation’s financial leverage has increased in recentyears as the company has actively grown its GIC, individual life, and acquisition businesses. ProtectiveLife Corporation’s financial leverage remains moderately high.


The company’s Stable Value Products division has grown modestly in recent years, and had reserves of$2.85 billion as of December 31, 1999, consisting of $2.7 billion in GICs and about $150 million of lot-tery annuities. GIC sales totaled $970 million in 1999, its highest level ever. The company continues toemphasize guaranteed investment-only GICs, marketed to 401(k) defined contribution plans (typicallytwo to five year contracts) and non-surrenderable funding agreements.

Protective diversified its customer base by offering guaranteed funding agreements (GFAs) to mutualfunds, banks, asset management companies, and state and local governments. About 40% of the GICdivision’s 1999 sales were of GFAs. Most of these GFAs had a long-term duration, although short dura-tion contracts are sold on an opportunistic basis. In addition, in 1997 Protective sold $300 million ofmedium-term note funding agreements through an off-shore trust to European debt investors. With lessthan 8% of GIC and GFA liabilities with termination provisions of less than one year, Protective’s fund-ing agreements are manageable from a liquidity perspective; roughly 4% have termination provisions of30 days or less.

The Stable Value Products division has grown faster than any of the company’s other divisions, exceptfor the Acquisitions division. The company limits its GIC and annuity liabilities to not exceed 70% of itsconsolidated statutory balance sheet (including separate account liabilities). However, as the balance sheethas grown through acquisitions, these liabilities have dropped to less than 60%. The percentage is likelyto stay in this range in the near term, partly because of the high capital requirements of the GIC business,and partly because buyer preferences in the qualified GIC market have been changing from traditionalcontracts to synthetic GICs. In the future, we expect GIC and GFA account balances to increase onlymodestly as maturing liabilities offset new GIC deposits.


Protective Life Insurance Company1998 1997 1996 1995 1994

Fundamentals ($mil)General account assets 5,671 5,697 5,167 4,671 4,615Total assets 7,753 7,542 6,581 5,724 5,409Surplus 538 577 454 322 305Investment reserve 50 53 66 101 2150% of dividend reserve liab. 2 2 2 1 1Capital 590 632 522 424 327Insurance revenues 758 918 886 800 936Net investment income 392 431 385 363 323Total revenues 1,298 1,458 1,353 1,249 1,284Gain fr ops pre - tax & div 164 194 123 158 69Gain Before Real Capital Gains 139 154 98 113 47Real Cap Gains bef IMR transfer -3 -14 4 3 2Real Cap Gains after IMR transfer -9 -7 0 -8 8Net Income 130 147 98 106 55Segment Analysis (as % policy reserves & liabilities)Individual life 27.4 26.7 27.5 25.0 23.6Individual health 1.0 1.0 1.0 1.0 0.9Individual annuities 21.4 22.7 21.3 19.2 23.5Group life & health 0.8 0.8 0.9 1.0 1.0Group pension 48.4 47.1 47.5 52.5 48.5Other 0.8 1.6 1.4 0.9 2.1Segment Analysis (as % of total net premiums)Individual life 17.2 17.7 17.6 16.2 12.5Individual health 2.4 2.4 2.4 2.9 2.5Individual annuities 16.0 21.9 22.7 22.4 21.2Group life & health 1.3 1.6 1.7 1.7 1.6Group pension 54.4 47.9 49.2 51.9 53.7Other 0.2 2.8 -0.1 -0.3 4.6Investment Profile (as % of cash and invested assets)Bonds 65.3 72.0 64.6 57.2 59.1Common & preferred stock 8.1 7.0 6.0 2.9 3.1Mortgage loans 21.5 16.5 22.2 29.7 26.5Real estate 0.6 0.6 0.7 0.9 0.9Policy loans 2.4 2.5 2.8 2.5 2.6Cash & short term investment 1.1 0.9 3.0 5.7 6.5Other invested assets 0.9 0.6 0.7 1.1 1.2Asset QualityBelow Inv Grade Bonds as % of Invested Assets 2.7 1.8 2.5 6.1 5.8Bonds in or near default as % of Invested Assets 0.1 0.4 0.3 0.0 0.4Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.8 1.8 2.1 2.0 2.1Underperf Mtgs+Fclsd RE as % of Invested Assets 0.2 0.3 0.5 0.6 0.6Profitability ROA (%) 1.70 2.09 1.59 1.90 1.10ROE (%) 21.27 25.52 20.67 28.14 17.36Ordinary life lapse ratio (%) 8.3 9.3 9.0 9.8 9.2Net investment yield 7.40 8.50 8.33 8.28 7.88Total investment return 5.42 6.48 7.87 8.21 8.06Commissions/Premiums 27.14 19.18 17.58 20.74 15.08Total general expenses/Premiums 24.49 17.57 16.41 15.79 11.77Total general expenses/Avg assets 2.43 2.28 2.36 2.27 2.22Gain (loss) from operations ($mil)Individual life 88 86 50 39 21Individual health 1 3 -4 3 2Individual annuities -8 2 -5 16 2Group life & health 3 3 0 -1 1Group pension 29 42 30 35 19Other 27 14 24 20 -1Capitalization (%)Capital/Assets 9.1 9.6 8.7 7.9 6.2Moody's Risk adjusted capital ratio 104.5 116.4 120.6 105.2 85.0NAIC Risk based capital ratio 314.4 374.6 306.8 260.2 222.1Surplus Notes/Capital 3.1 3.2 4.7 8.2 12.1Below inv grade bonds/Capital 25.1 15.5 23.6 65.6 79.1CMO's and Loan-Backed Bonds/Capital — 289.7 279.2 341.6 495.9Mortgages + RE/Capital 202.2 147.3 219.4 326.7 377.2Total Underperforming Assets/Capital 2.5 5.7 6.9 6.6 13.0Total Affiliated Inv/Capital 74.1 59.6 52.8 25.9 32.4



Prudential Insurance Company of America

Company Overview

Moody’s A1 insurance financial strength ratings of The Prudential Insurance Company of America(Prudential) and Pruco Life Insurance Company (Pruco Life) are based primarily on Prudential’s improv-ing strategic profile, its good earnings capacity, its opportunities for growth in the international arena, itsimproved capitalization relative to balance sheet and operational risks, and its well-known brand name.These strengths are offset primarily by the challenges of restoring market share in the company’s individ-ual life insurance unit and building scale in its property/casualty, asset management and retail securitiesoperations, as well as its relative high expense structure, its greater use of asset-based financing atPrudential Securities, and the increasingly heightened competition among financial services companies.The rating outlook of Prudential is stable.

In August 1999, Prudential closed the sale of its health care business to Aetna Inc. Exiting the healthcare market allows Prudential to concentrate additional capital and resources on growing its core opera-tions. In January 1999, the Supreme Court left intact the multi-billion dollar class action settlementbetween Prudential and policyholders that had sued the company for allegedly fraudulent sales practices.This decision clears the way for Prudential to complete its remediation plan to compensate policyholders.

In February 1998, Prudential’s board of directors authorized management to take preliminary stepsnecessary to become a publicly traded company. Full demutualization could provide the company with anumber of tangible and intangible benefits, including greater access to capital markets, an acquisition cur-rency in the form of common stock and more focused operations.


We understand that Prudential intends to maintain a presence in the institutional marketplace. However,we believe that assets under management in this arena will more likely shrink over the near to mediumterm. This will result from the reduction of the company’s GIC business and the limited new creation ofdefined benefit pension plans, though existing plans continue to grow because of the strength of thestrong equity investment markets.

Prudential’s sales of guaranteed products have leveled off and, as a result, the associated assetsunder management for these products have declined steadily over the last several years. We anticipate thatthe assets backing these products will continue to decrease over time as the company shifts its emphasis toasset management for retail customers and de-emphasizes spread-based products for institutionalinvestors. The company has moderate exposure to funding agreements with about $885 million atSeptember 30, 1999. However, only $305 million have short-term (7-day) put provisions.

In 1997, Prudential began augmenting its GIC operations by borrowing funds and using its GICasset/liability management skills to earn additional spread income on the borrowed funds as if they werecustomer deposits. Asset/liability analysis is done on a segment basis, with mismatch risks managed totolerant levels and hedged with derivative instruments. The company’s GIC and pension close-outblocks are duration matched, but on a cash flow basis inflows fell short of liability maturities in 1998.Over the medium term, however, we expect cash inflows to exceed projected liability flows. Prudentialalso uses its commercial paper program for cash shortfalls to supplement asset sales to fund liability out-flows where it may choose to for asset management reasons. At year end 1998, Prudential borrowed $5billion for these purposes.

We believe Prudential has adequate sources of liquidity to meet the maturities of its shrinkinggroup pension business in an orderly liquidation. It continues to benefit from a large pool of liquid assetsinvested in high-quality public bonds, additional borrowing capacity in the form of unsecured lines ofcredit and from the capacity at Prudential Securities Lending Group, Prudential Funding Corporationand other affiliates.


Prudential Insurance Company of America1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 124,443 125,620 128,035 120,823 125,831Total assets 191,536 195,863 193,987 178,620 179,734Surplus 9,249 8,536 9,242 9,375 8,668Investment reserve 3,334 3,387 3,046 2,682 2,70550% of dividend reserve liab. 1,239 1,219 1,190 887 885Capital 13,822 13,142 13,478 12,944 12,257Insurance revenues 14,600 16,747 19,567 20,674 21,088Net investment income 8,246 8,290 8,468 8,551 8,554Total revenues 24,672 26,393 28,846 29,922 30,088Gain fr ops pre - tax & div 3,715 3,348 3,264 3,565 3,578Gain Before Real Capital Gains 379 586 829 549 661Real Cap Gains bef IMR transfer 180 1,299 1,063 784 583Real Cap Gains after IMR transfer -46 661 642 457 -183Net Income 333 1,247 1,471 1,006 478Segment Analysis (as % policy reserves & liabilities)Individual life 58.3 56.8 53.7 50.3 47.6Individual health 0.1 0.2 0.1 0.1 0.2Individual annuities 7.9 8.2 8.7 9.5 11.0Group life & health 4.6 4.4 3.3 3.0 2.8Group pension 27.3 28.4 30.9 33.8 35.1Other 0.1 0.1 0.2 0.2 0.2Segment Analysis (as % of total net premiums)Individual life 41.0 32.8 29.4 30.9 30.9Individual health -0.2 0.3 0.3 0.4 0.5Individual annuities 3.5 3.3 3.7 6.9 8.7Group life & health 19.7 14.4 9.1 9.0 9.2Group pension 29.5 33.9 25.4 21.0 21.5Other 0.0 -0.1 0.5 0.3 0.3Investment Profile (as % of cash and invested assets)Bonds 62.3 67.1 65.0 64.6 64.0Common & preferred stock 7.3 6.7 6.4 6.3 5.4Mortgage loans 13.0 13.1 13.2 14.7 16.7Real estate 0.6 0.7 1.1 1.8 2.1Policy loans 5.5 5.5 4.9 5.2 5.1Cash & short term investment 8.3 3.3 7.0 5.2 4.0Other invested assets 2.9 3.6 2.3 2.2 2.7Asset QualityBelow Inv Grade Bonds as % of Invested Assets 8.0 8.9 7.2 5.9 4.6Bonds in or near default as % of Invested Assets 0.1 0.0 0.0 0.1 0.1Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 3.1 3.7 4.9 8.5 8.5Underperf Mtgs+Fclsd RE as % of Invested Assets 0.4 0.5 0.7 1.3 1.5Profitability ROA (%) 0.17 0.64 0.79 0.56 0.28ROE (%) 2.47 9.37 11.13 7.99 4.24Ordinary life lapse ratio (%) 7.4 8.0 9.0 7.5 8.2Net investment yield 7.09 7.02 7.30 7.42 7.37Total investment return 7.60 7.39 7.86 8.09 7.85Commissions/Premiums 2.42 2.38 2.18 2.31 2.54Total general expenses/Premiums 23.68 20.34 21.33 18.25 18.66Total general expenses/Avg assets 1.78 1.75 2.24 2.11 2.27Gain (loss) from operations ($mil)Individual life 657 795 752 213 368Individual health -21 -32 -6 -18 -2Individual annuities 39 54 197 106 159Group life & health 170 0 110 149 148Group pension 261 240 338 585 217Other 13 52 45 -26 -18Capitalization (%)Capital/Assets 11.1 10.5 10.5 10.7 9.7Moody's Risk adjusted capital ratio 133.9 128.4 133.2 131.0 125.0NAIC Risk based capital ratio 269.0 253.2 272.0 256.6 235.2Surplus Notes/Capital 7.1 7.5 7.3 7.6 8.0Below inv grade bonds/Capital 69.9 82.0 65.7 53.2 45.2CMO's and Loan-Backed Bonds/Capital — — 61.6 50.7 37.4Mortgages + RE/Capital 118.7 127.2 130.5 147.8 185.7Total Underperforming Assets/Capital 4.1 4.7 6.2 12.0 15.2Total Affiliated Inv/Capital 53.8 51.9 42.9 41.4 42.8



Security Benefit Life Insurance Company

Company Overview

Moody’s A2 insurance financial strength rating on Security Benefit Life Insurance Company (SecurityBenefit) is based on its established position in the 403(b) Tax Sheltered Annuity retirement marketplace,solid capitalization, favorable cost structure and good administrative capabilities. The company also enjoysa good quality investment portfolio, anchored by a high quality bond portfolio, and has a growing moneymanagement operation. These strengths are tempered by the company’s historical decline in annuity salesmomentum and a high percentage of general account liabilities outside of surrender period. In addition,Security Benefit faces heightened market competition for investment management assets, and has minimaloverall product diversity, with 99% of general account reserves attributable to fixed annuities, fixedoptions within variable annuities, and funding agreements.

Security Benefit’s increases in assets under management and earnings have been driven by goodgrowth in the non-qualified market, and its success in the 403(b) marketplace, primarily with K-12 gradeeducators. The company also has a growing mutual fund operation, and benefits from managing over 80%of the assets it accumulates in its annuity and mutual fund businesses. Approximately two-thirds ofSecurity Benefits’ annuity revenue is fee-based, with the balance coming from interest rate spreads. Otherbusinesses include providing an insurance wrapper for a large mutual fund company’s variable annuityproduct.


In mid-year 1998, Security Benefit announced that it would opportunistically enter the funding agree-ment market, writing up to $500 million over the next 12 months. The company followed through, andas of June 30,1999 had issued $475 million of putable funding agreements of varying terms. By July 31,1999, this number had increased to $525 million, or 102% of the company’s 1999 mid-year capital andsurplus, of which $275 million was putable upon 7- and 30-day notice periods. During June, the compa-ny communicated with its Board of Directors its strategy to evolve away from short putable clients, whileworking to complete a $294 million 10-year, non-putable funding agreement that closed on July 29,1999. Proceeds were to be used for orderly liquidation of short putable contracts, depending on renego-tiated terms with clients.

With the funding agreement market disruption of August 1999, Security Benefit experienced $200million of puts of various durations, but had ample liquidity on hand to handle the withdrawals. SecurityBenefit employs a comprehensive liquidity management process with a set policy and guidelines.Additionally, they have incorporated backstop liquidity resources with terms advantageous to negotiatedcommercial alternatives. In view of present market conditions, the company has scaled back any efforts forfunding agreements with puts of under 90-days. Moody’s views this most recent action positively, as wecontinue to see significant shock liquidity risk inherent in short-dated puts, especially those with 7- and30-day put features.


Security Benefit Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 3,110 2,779 2,458 2,726 2,631Total assets 8,142 7,177 6,161 5,522 4,697Surplus 470 427 382 287 208Investment reserve 82 54 44 42 3350% of dividend reserve liab. 0 0 0 1 1Capital 553 482 426 330 242Insurance revenues 1,404 995 728 734 494Net investment income 221 194 200 202 186Total revenues 1,699 1,254 980 978 709Gain fr ops pre - tax & div 71 66 58 51 40Gain Before Real Capital Gains 53 51 42 38 30Real Cap Gains bef IMR transfer 4 3 -1 3 7Real Cap Gains after IMR transfer 2 -1 1 0 -1Net Income 55 50 43 38 29Segment Analysis (as % policy reserves & liabilities)Individual life 0.1 0.1 0.2 12.8 12.7Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 89.6 87.6 85.0 73.2 72.8Group life & health 0.8 0.9 1.0 1.1 1.1Group pension 9.5 11.3 13.7 12.8 13.4Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 0.1 0.2 3.0 4.4 -2.8Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 87.4 93.9 89.3 88.2 90.9Group life & health 1.2 1.6 2.1 2.3 3.4Group pension 11.2 4.1 5.3 4.8 8.0Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 83.0 85.8 85.5 87.7 88.8Common & preferred stock 10.7 6.1 5.4 3.9 1.6Mortgage loans 0.6 1.9 2.5 2.4 2.7Real estate 0.0 0.6 0.8 0.7 0.8Policy loans 3.0 3.2 3.6 4.0 3.9Cash & short term investment 1.0 0.8 0.7 0.0 0.5Other invested assets 1.8 1.6 1.5 1.4 1.6Asset QualityBelow Inv Grade Bonds as % of Invested Assets 7.6 8.3 7.8 7.4 6.7Bonds in or near default as % of Invested Assets 0.1 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 0.0 6.1 6.5 7.1 7.6Underperf Mtgs+Fclsd RE as % of Invested Assets 0.0 0.1 0.2 0.2 0.2Profitability ROA (%) 0.72 0.76 0.74 0.74 0.66ROE (%) 10.66 11.11 11.36 13.25 13.62Ordinary life lapse ratio (%) 6.5 8.2 7.1 5.7 7.0Net investment yield 7.86 7.79 8.14 7.93 7.51Total investment return 8.65 7.97 8.33 8.08 7.63Commissions/Premiums 3.54 4.46 5.88 5.51 7.13Total general expenses/Premiums 3.77 4.49 5.89 5.09 6.97Total general expenses/Avg assets 0.69 0.67 0.73 0.73 0.79Gain (loss) from operations ($mil)Individual life 0 -1 -1 2 5Individual health 0 0 0 0 0Individual annuities 50 48 39 31 20Group life & health 1 1 1 1 1Group pension 3 3 4 5 4Other 0 0 0 0 0Capitalization (%)Capital/Assets 17.8 17.3 17.3 12.1 9.2Moody's Risk adjusted capital ratio 162.2 193.1 200.6 162.9 152.6NAIC Risk based capital ratio 365.0 414.1 422.8 313.3 302.6Surplus Notes/Capital 9.0 10.4 11.8 15.1 0.0Below inv grade bonds/Capital 41.7 47.2 44.0 60.1 71.7CMO's and Loan-Backed Bonds/Capital — — 131.4 223.2 421.9Mortgages + RE/Capital 3.4 14.4 18.4 25.1 38.1Total Underperforming Assets/Capital 0.6 0.8 0.9 1.4 2.3Total Affiliated Inv/Capital 37.7 26.7 25.6 28.9 19.2



SunAmerica Life Insurance Company

Company Overview

Moody’s Aaa insurance financial strength ratings and P-1 short-term insurance financial strength ratingsof SunAmerica Life Insurance Company (SunAmerica Life) and its wholly owned subsidiaries, AnchorNational Life Insurance Company (Anchor National) and First SunAmerica Life Insurance Company(First SunAmerica), have a stable outlook and are based on the explicit support provided by AmericanInternational Group, Inc. (AIG), the ultimate parent company. The ratings also incorporate the compa-nies’ strong positions in the markets for individual annuities and guaranteed investment contracts (GICs),their expanding, partly-captive distribution network, advanced processing technology, solid profitability,and increasing brand awareness. These strengths are tempered by the companies’ narrow focus on lowmargin, interest-sensitive accumulation products; by their dependence on GICs for a significant percent-age of their profits; by their high tolerance for risk assets (including below-investment-grade and unratedsecurities, and partnership assets).


SunAmerica’s stable value business, including European medium term notes, amounted to $12.4 billion asof September 30, 1999. GICs continue to play a key role in SunAmerica’s product mix. These generallylonger-duration products are used by SunAmerica to enhance the relatively narrow returns on fixed andvariable annuities because they can be invested in longer-term, higher-yielding assets. GICs are sold pri-marily by SunAmerica Life, which is one of the largest GIC providers in the U.S. GICs have also beensold by SunAmerica National, a special-purpose GIC subsidiary, which was assumed by SunAmerica Lifein an assumptive reinsurance transaction effective October 31, 1999, and also by Anchor National. To fur-ther broaden product distribution, a credit-enhanced separate account facility was introduced in 1995.

The majority of the company’s GICs are fixed rate and non-putable with five to twelve year maturities,almost half of which were sold to off-shore investment vehicles to support debt securities issued toEuropean investors. We expect significant growth of this business as evidenced by SunAmerica’s $7.5 bil-lion European medium-term note (EMTN) program. The company is also diversifying its fundingsources to include non-European markets. About 30% of the company’s GICs are floating rate instru-ments that are sold to money market managers and banks. The level of GICs with put options amountedto $1 billion as of September 30, 1999. Company policy dictates that putable GICs be limited to less than10% of total GICs. Although SunAmerica’s GIC reserves have grown significantly in the past few years,the group’s GIC exposure continues to be well managed.

The SunAmerica companies use dynamic cash-flow sensitivity testing in their asset/liability manage-ment. Swaps are primarily used to hedge foreign exchange risk associated with non-dollar denominatedGIC liabilities. The company’s policy requires perfect hedging of any foreign currency risk. In addition,swaps may be used to hedge interest rate risk associated with floating-rate assets and liabilities, as well asother derivative-based immunization procedures, and their usage seems appropriate. With an ALMapproach somewhat unique for the industry, particularly for GIC providers, the company does not seg-ment assets and liabilities but instead uses a total portfolio approach.

Approximately 86% of SunAmerica’s $21 billion fixed annuity and GIC reserves are protected by sur-render charges or other withdrawal restrictions. However, liquidity risk is heightened by early surrenderclauses in a segment of the GIC portfolio (including 90-, and 180-day put options and ratings-linked with-drawal options). SunAmerica’s capable asset/liability management — complemented by a sizable portfolioof publicly traded investment-grade bonds and operating cashflow — offset some of these risks.SunAmerica also has access to the commercial paper market through AIG’s program. We expect thatadditional liquidity would be available from AIG if necessary through the terms of its explicit supportagreement with SunAmerica Life, Anchor National, and First SunAmerica.


SunAmerica Life Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 20,765 15,502 15,633 11,755 7,473Total assets 22,801 16,923 16,211 12,037 7,524Surplus 1,803 1,265 1,431 1,187 944Investment reserve 199 165 149 158 16450% of dividend reserve liab. 0 0 0 0 0Capital 2,003 1,430 1,580 1,345 1,108Insurance revenues 5,990 3,282 2,131 1,429 1,826Net investment income 1,477 1,091 1,404 964 607Total revenues 7,470 4,381 3,545 2,385 2,437Gain fr ops pre - tax & div 479 182 389 263 154Gain Before Real Capital Gains 426 148 376 212 124Real Cap Gains bef IMR transfer -24 -109 57 -30 -35Real Cap Gains after IMR transfer -8 -122 23 -14 -37Net Income 417 25 399 198 87Segment Analysis (as % policy reserves & liabilities)Individual life 1.3 1.8 1.8 2.6 4.3Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 34.2 50.2 58.1 53.5 30.7Group life & health 0.0 0.0 0.0 0.0 0.0Group pension 64.5 47.9 40.1 43.9 65.0Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 0.0 -0.1 -0.1 -0.2 -0.1Individual health 0.0 0.0 0.0 0.0 0.0Individual annuities 4.2 5.3 10.8 15.5 36.4Group life & health 0.0 0.0 0.0 0.0 0.0Group pension 95.8 94.8 89.3 84.7 63.7Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 72.4 73.2 72.4 74.2 63.9Common & preferred stock 4.3 4.4 6.0 5.0 5.5Mortgage loans 15.8 17.3 16.6 13.4 19.7Real estate 0.2 0.1 0.1 0.3 0.6Policy loans 0.3 0.3 0.3 0.3 0.5Cash & short term investment 5.4 1.7 3.5 3.4 3.6Other invested assets 1.6 2.9 1.1 3.4 6.4Asset QualityBelow Inv Grade Bonds as % of Invested Assets 6.6 7.8 6.8 7.2 6.9Bonds in or near default as % of Invested Assets 0.0 0.1 0.0 0.2 0.3Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 2.1 2.2 2.1 3.9 4.7Underperf Mtgs+Fclsd RE as % of Invested Assets 0.3 0.4 0.4 0.5 0.9Profitability ROA (%) 2.10 0.15 2.82 2.03 1.24ROE (%) 24.31 1.68 27.27 16.18 9.07Ordinary life lapse ratio (%) 8.9 8.2 22.6 7.9 12.8Net investment yield 8.55 7.32 10.83 10.58 9.13Total investment return 8.51 6.73 9.74 11.91 9.53Commissions/Premiums 0.14 0.24 6.16 2.14 1.44Total general expenses/Premiums 1.02 1.88 4.02 4.69 2.88Total general expenses/Avg assets 0.31 0.37 0.61 0.69 0.75Gain (loss) from operations ($mil)Individual life 5 3 9 4 5Individual health 0 0 0 0 0Individual annuities 165 57 143 46 9Group life & health 0 0 0 0 0Group pension 256 87 224 110 110Other 0 0 0 52 0Capitalization (%)Capital/Assets 9.6 9.2 10.1 11.4 14.8Moody's Risk adjusted capital ratio 120.3 109.4 106.8 133.0 163.7NAIC Risk based capital ratio 273.9 210.0 290.4 266.4 265.3Surplus Notes/Capital 0.0 11.9 0.0 0.0 0.0Below inv grade bonds/Capital 67.6 82.8 66.4 62.5 45.7CMO's and Loan-Backed Bonds/Capital — — 221.0 267.7 313.6Mortgages + RE/Capital 163.7 185.2 163.2 118.6 135.0Total Underperforming Assets/Capital 4.0 4.8 3.7 6.0 8.4Total Affiliated Inv/Capital 49.5 42.6 73.7 38.0 42.9



Travelers Insurance Company

Company Overview

Moody’s Aa3 insurance financial strength rating and P-1 short-term insurance financial strength rating ofThe Travelers Insurance Company (TIC), and the Aa3 insurance financial strength ratings of its whollyowned subsidiaries — The Travelers Life & Annuity Company (TLAC) and Primerica Life InsuranceCompany (Primerica Life) — are based on the companies’ ownership by Citigroup (senior debt at Aa2),with the attendant brand, distribution, and numerous other benefits of this ownership. The ratings arealso based on the established position of TIC and TLAC in the markets for individual annuities and quali-fied group pension products, and on the leading position of Primerica Life in the market for term lifeinsurance. The companies’ broad captive and quasi-captive distribution channels, their superior capitaliza-tion, and minimal direct exposure to the commercial mortgage and real estate markets are also positiverating factors.

These strengths are mitigated by the increasing focus of TIC and TLAC on highly competitive, inter-est-sensitive annuity products, and short-term putable GICs, and on the limited premium growth and lackof earnings diversification at Primerica Life. Oversight risks related to Primerica Life’s large, part-timeagency force, and its aggressive agent-led recruitment program also mitigate corporate strengths. In addi-tion, TIC and Primerica Life are exposed to the cross-ownership risks associated with its substantial hold-ing of Citigroup preferred stock.


Group pension products, sold by TIC, consist of group pension annuities, GICs, fixed- and floating-ratefunding agreements, and payout annuities, and they are marketed directly by TIC employees, or areplaced through independent consultants and advisors to plan sponsors. Although this product line hadbeen de-emphasized in recent years because of poor margins on an old block of GICs, new sales effortshave resumed, with TIC’s expansion of its funding agreement (FA) business in 1997, and its entry intothe GIC-supported Euro MTN market in 1998. Euro MTNs stood at approximately $1 billion at year-end 1999.

We are somewhat concerned about the renewed emphasis on FAs and GIC-related products, which, in1998, accounted for 51% of TIC’s statutory premiums, and, in total stood at close to $6 billion atSeptember 30, 1999 (including GICs in the separate account). Short-term FA sales alone rose by over50% to $2.1 billion in 1998, and amounted to $2.5 billion at September 1999. Most of the company’s FAsare sold to money market mutual funds and banks, and contain highly credit- and market-sensitive short-term put options (i.e., 7-, 30-, 90-day puts). Traditional, structured GICs and Euro MTNs are longer-term liabilities with a fixed maturity, but they, too, can expose the company to liquidity risk and asset-lia-bility difficulties, if not appropriately laddered and cash-matched. Internally, TIC appears to have ade-quate liquidity and asset-management discipline to support an unexpected exercise of its puttable FAs. Inaddition, as a member of Citigroup, it has potential access to substantial intercompany sources of alterna-tive liquidity. However, uncapped growth of FAs and other non-traditional GICs relative to other insur-ance products will ultimately increase TIC’s risk profile.


Travelers Insurance Company1999 1998 1997 1996 1995

Fundamentals ($mil)General account assets 29,077 28,097 25,350 23,824 24,965Total assets 46,403 41,244 35,976 31,774 31,196Surplus 5,027 4,954 4,117 3,442 3,198Investment reserve 657 384 416 397 44550% of dividend reserve liab. 0 0 0 0 0Capital 5,684 5,338 4,534 3,839 3,642Insurance revenues 4,500 3,350 3,110 2,639 2,854Net investment income 2,228 1,810 1,878 1,778 1,939Total revenues 6,979 5,388 5,019 4,442 5,072Gain fr ops pre - tax & div 860 686 751 628 863Gain Before Real Capital Gains 679 505 551 507 806Real Cap Gains bef IMR transfer 73 76 88 24 -573Real Cap Gains after IMR transfer 96 -21 40 29 -552Net Income 775 483 591 536 254Segment Analysis (as % policy reserves & liabilities)Individual life 12.3 14.5 13.1 13.7 13.0Individual health 3.7 2.9 2.4 1.8 1.2Individual annuities 34.4 35.1 38.4 39.8 38.1Group life & health 1.4 2.8 5.6 5.6 5.1Group pension 48.2 44.7 40.4 39.0 42.2Other 0.0 0.0 0.0 0.0 0.0Segment Analysis (as % of total net premiums)Individual life 6.1 6.8 7.6 10.5 10.1Individual health 5.6 6.8 6.4 5.8 4.1Individual annuities 62.4 68.0 63.2 65.3 57.8Group life & health 0.0 0.2 0.2 0.3 -11.5Group pension 26.0 18.3 25.3 19.2 18.7Other 0.0 0.0 0.0 0.0 0.0Investment Profile (as % of cash and invested assets)Bonds 67.0 64.9 64.6 65.8 63.4Common & preferred stock 11.0 10.4 9.4 6.6 5.0Mortgage loans 7.8 9.4 11.5 12.6 15.5Real estate 1.1 0.9 1.0 1.9 1.6Policy loans 4.1 6.4 7.2 7.8 7.4Cash & short term investment 3.4 4.1 2.8 3.1 6.0Other invested assets 5.5 4.0 3.5 2.3 1.2Asset QualityBelow Inv Grade Bonds as % of Invested Assets 7.2 7.2 5.4 4.4 3.7Bonds in or near default as % of Invested Assets 0.1 0.0 0.0 0.0 0.0Underperf Mtgs+Fclsd RE as % of Total Mtgs+Fclsd RE 11.7 16.8 11.1 21.0 24.2Underperf Mtgs+Fclsd RE as % of Invested Assets 1.0 1.6 1.3 2.9 4.0Profitability ROA (%) 1.77 1.25 1.74 1.70 0.81ROE (%) 14.06 9.79 14.11 14.33 7.76Ordinary life lapse ratio (%) 8.3 9.0 9.3 9.7 10.0Net investment yield 8.17 7.07 8.05 7.74 7.94Total investment return 8.96 4.71 10.94 8.71 7.15Commissions/Premiums 4.64 5.51 5.54 6.39 9.04Total general expenses/Premiums 6.72 8.65 8.74 9.72 14.44Total general expenses/Avg assets 0.69 0.75 0.80 0.81 1.31Gain (loss) from operations ($mil)Individual life 70 62 83 59 64Individual health -30 -34 -28 -15 -8Individual annuities 78 85 115 97 45Group life & health 12 16 9 15 149Group pension 101 180 123 97 188Other 448 183 229 207 209Capitalization (%)Capital/Assets 19.5 19.0 17.9 16.1 14.6Moody's Risk adjusted capital ratio 196.6 198.1 172.2 182.0 176.4NAIC Risk based capital ratio 305.2 350.0 365.3 350.3 331.1Surplus Notes/Capital 0.0 0.0 0.0 0.0 0.0Below inv grade bonds/Capital 36.1 37.0 29.8 26.6 24.6CMO's and Loan-Backed Bonds/Capital — — 54.8 67.9 86.8Mortgages + RE/Capital 45.0 52.8 68.7 87.1 112.9Total Underperforming Assets/Capital 5.6 8.6 7.4 17.7 26.5Total Affiliated Inv/Capital 53.0 66.7 54.5 34.8 33.1


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