Industry Economic And Ratings Outlook:

For U.S. Life Insurers, An Improving Economy Could Mean A Much-Needed Boost To Interest Rates
Primary Credit Analysts: Donald H Chu, CFA, Toronto (1) 416-507-2506; donald.chu@standardandpoors.com Robert A Hafner, FSA, New York (1) 415-371-5019; robert.hafner@standardandpoors.com Ferris Joanis, New York (1) 212-438-5552; ferris.joanis@standardandpoors.com Secondary Contact: Matthew T Carroll, CFA, New York (1) 212-438-3112; matthew.carroll@standardandpoors.com

Table Of Contents
Diminished Economic Headwinds Brighten Earnings Prospects Despite Stable Ratings, Low Interest Rates Remain A Drag On Results Recent Ratings Activity Related Criteria And Research

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Industry Economic And Ratings Outlook:

For U.S. Life Insurers, An Improving Economy Could Mean A Much-Needed Boost To Interest Rates
The credit outlook for the U.S. life insurance industry remains stable, reflecting insurers' strong credit characteristics and improving economic conditions. Although Standard & Poor's Ratings Services expects somewhat sluggish GDP growth of 2.6% in 2014, we believe some of the headwinds will subside. The U.S. economy is likely to continue gaining momentum through a resilient private sector, housing rebound, and strengthening job market. Low interest rates, which remain the primary impediment to life insurers' earnings, appear poised to increase. The average 10-year Treasury yield increased 50 basis points (bps) in third-quarter 2013, reflecting the Federal Reserve's indication that it would begin tapering its monetary stimulus program toward the end of 2013 and possibly end the program entirely by the middle of 2014. On Dec. 18, 2013, Federal Reserve policymakers voted to taper the Fed's bond purchases, but they also committed to keeping the Federal funds rate low for a while yet. A steady and measured rise in interest rates through 2014 and 2015 would do much to improve operating conditions for U.S. life insurers, but the impact of potential central bank actions remains uncertain. Overview U.S. life insurance industry credit quality remains stable and headwinds have been subsiding as the economy has gained steam. However, the global and U.S. domestic economic recovery is still vulnerable to a number of risks. But the risk from low interest rates is declining as conditions improve and rates rise gradually.

So far, U.S. life insurers have maintained acceptable net interest margins amid the current low interest rates primarily through premium increases and by cutting the interest they credit to policyholder accounts. Should low interest rates persist, such measures will become less effective because many blocks of business are already at or near their guaranteed minimum interest rates. Many life insurers have also looked to preserve investment yield by increasing allocations to less-liquid (and in some cases higher-risk) asset classes, including commercial mortgage loans, private placement bonds, asset-backed securities, and alternative investments. Although such investments add risk to insurers' credit profiles, the moves have been relatively modest to date and have not affected ratings. Strong capital, liquidity, and stable investment portfolios that are experiencing only modest credit losses continue to support insurer financial strength ratings that are solidly within the investment-grade category. The average financial strength rating in the North America life insurance sector is 'A+'. Equity market advances exceeded expectations in 2013, and we expect them to improve further in 2014, along with other economic indicators. This will continue to boost separate account balances (separate accounts are those established separate from the general account to comply with federal securities laws for investment-linked products such as variable annuities) and asset-based fees for some

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insurers. Sustained low interest rates or equity market declines at this point in the credit cycle, however, could slightly weaken ratings. These could reduce earnings, lead to accelerated amortization of deferred acquisition costs or a strengthening of reserves, both of which could ultimately hurt capital. One key threat that could cause these conditions is the possibility that lawmakers in Washington will cling to "austerity-by-default" (rather than long-term fiscal reform), hurting private-sector confidence and worsening economic stagnation in the U.S., especially with economic slumps in Europe and China forecasted in our economists' downside scenario. Although a spike in interest rates is unlikely, we are mindful of the potential and the resulting consequences for life insurers, which could be significant. We believe if interest rates were to spike by an improbable several hundred basis points, surrenders on products like fixed annuities and universal life insurance (UL) would likely increase as policyholders seek competing products with higher new money rates. Particularly likely to react rapidly to a spike in interest rates are sophisticated institutional clients holding guaranteed investment contract (GIC), bank-owned life insurance (BOLI), or corporate-owned life insurance (COLI) policies that no longer have surrender restrictions or penalties. Furthermore, mortality could deteriorate on some products, such as UL, because healthier policyholders are better positioned to be re-underwritten on new policies, leaving behind the less-healthy policyholders. If insurers have to sell investments at depressed values to meet demand for policy surrenders, they could incur significant capital losses. In addition, prepayments on residential mortgages would likely slow, causing residential mortgage-backed securities to extend and delay insurers' ability to deploy principal into higher-yielding assets. The potential benefits of a sharp rise in interest rates include the opportunity for higher new money rates, particularly for long-tailed in-force lines such as long-term care and long-term disability insurance. In addition, higher discount rates could reduce the net present value of pension obligations. Overall, these potential benefits are limited, and the risks outweigh them.

Diminished Economic Headwinds Brighten Earnings Prospects

Every month we publish our economists' best estimate of where the U.S. economy could be heading (see U.S. Economic Forecast: Two Economies Diverged In A Wood, published Dec. 5, 2013, on RatingsDirect). We call this forecast our baseline scenario, and it helps to guide our credit analysis and current ratings in the life insurance industry. December's forecast also included two additional scenarios, a downside case with slower growth than the baseline and an upside case with faster growth. We use these alternative scenarios to estimate the credit impact of a better or worse economic outlook.

Baseline scenario
In analyzing the life insurance industry, we consider the general macroeconomic environment--specifically interest rates, equity market performance, and corporate bond default rates. Baseline scenario assumptions that contribute to our view of the U.S. life insurance industry include: Real GDP growth of about 2.6% in 2014 and 3.1% in 2015, An average 10-year Treasury yield of about 2.9% in 2014 and 3.2% in 2015,

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates 'AAA' bond yields of about 4.6% in 2014 and 4.9% in 2015, An average S&P 500 level of 1,836 in 2014 and 1,910 in 2015, and A U.S. corporate trailing-12-month speculative-grade default rate of 3.1% by June 2014, up from 1.9% as of November 2013. Under our baseline economic assumptions, we expect life insurers to maintain their strong balance sheets and show higher earnings by late 2014 due to rising equity markets and higher bond yields. Life insurers' earnings are largely a function of the performance of policies-in-force and assets under management, with new business contributing only modestly to earnings. We view U.S. life insurance as a mature industry that should grow at a pace similar to GDP, though demographics suggest sales of retirement savings products are likely to grow faster than those for traditional life insurance. Although underwriting margins from life insurance should produce earnings that minimally correlate with economic growth, interest margins and asset-based fees are important contributors to earnings on many products and are more sensitive to economic conditions. We expect under our baseline economic forecast that investment portfolio yields will stabilize and could begin to increase later in 2014 as bond yields climb. The industry's practice of matching asset and liability durations has helped to preserve interest margins. However, we believe that some liabilities, such as fixed annuities with higher minimum guarantees than are available on alternative products and investments, are persisting longer than insurers expected, resulting in spread compression because they have to reinvest maturing assets at lower yields. Rising equity markets have boosted fee-based income for insurers with significant separate account offerings, such as variable annuities, variable life insurance, and other savings and retirement businesses. An added benefit of higher equity markets is the reduced reserve requirements for variable annuity guaranteed benefit riders. However, these favorable effects could reverse if the markets pull back sharply. The projected baseline speculative-grade ('BB+' or lower) default rate is lower than the long-term (1981-2012) average of 4.5% (see The U.S. Speculative-Grade Corporate Default Rate Breaks Below The 2% Threshold For The First Time Since September 2011 , published Dec. 2, 2013). Although life insurers typically limit speculative-grade bonds to less than 10% of fixed-income holdings, we consider this to be a good sign for investment portfolios. The combination of moderate credit losses with rising equity markets has allowed the industry to generate sufficient organic earnings to fund growth and maintain strong capital adequacy.
Table 1

Macroeconomic Indicators For U.S. Life Insurance

--FORECAST---Upside---Baseline---Downside---Estimate-Baseline impact on sector Neutral

2014 Real GDP (% change) 4.1

2015 4.0

2014 2.6

2015 3.1

2014 0.6

2015 1.8

Comment/outlook on baseline 2013 forecast 1.7 GDP was affected in 2013 by sequestration-related cuts in federal spending and the government shut-down.

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

Table 1

Macroeconomic Indicators For U.S. Life Insurance (cont.)

10-year Treasury note yield (%) 4.2 4.8 2.9 3.2 2.0 2.4 2.3 A moderately higher but still-low Treasury note yield is beneficial to capital-market funding but detrimental to fixed-income portfolio returns. 4.2 1,638 Anticipated price appreciation should benefit insurer fee-based earnings and reduce market risk capital requirements. 7.4 Modestly lower unemployment should benefit consumer income and confidence and lead to increased economic productivity. 135.9 A slow increase in payrolls is likely to benefit workers' compensation, health, and group benefits writers. 1.4 Inflation likely to remain subdued for the next two years. 1.8 Core CPI remains tame. Unfavorable

AAA' corporate bond yield (%) S&P 500 Common Stock Index

5.7 1,988

6.3 2,102

4.6 1,836

4.9 1,910

4.0 1,589

4.4 1,659

Unfavorable Favorable

Unemployment rate (%)

6.0

5.0

6.9

6.3

7.6

7.7

Somewhat favorable

Payroll employment (mil.) CPI (% change) Core CPI (% change)

139.3

142.9

138.2

140.6

136.9

138.0

Somewhat favorable Neutral Neutral

2.1 2.4

1.6 2.4

1.4 1.9

1.8 2.0

0.8 1.5

2.0 1.8

Source: U.S. Economic Forecast: Two Economies Diverged In A Wood, published Dec. 5, 2013. The 10-year Treasury note yield, 'AAA' bond yield, and S&P 500 common stock index reflect average levels (not Dec. 31 point estimates).

Downside scenario: Probability 15% to 20%

Our ratings do not factor in a recession in the U.S. in 2014 or 2015. If a "low growth" recession in line with our economists' downside scenario were to occur, we believe the credit quality of the U.S. life insurance industry could weaken slightly. In this downside scenario, we assume that the U.S. economy essentially stagnates, resulting in a period of low real GDP growth. Our downside case incorporates the following assumptions: Real GDP growth of about 0.6% in 2014 and 1.8% in 2015, An average 10-year Treasury yield of about 2.0% in 2014 and 2.4% in 2015, A 'AAA' bond yield of about 4% in 2014 and 4.4% in 2015, Average S&P 500 levels of 1,589 in 2014 and 1,659 in 2015, and A U.S. corporate trailing-12-month speculative-grade default rate of 4.9% by March 2014, which is higher than the long-term (1981-2012) average of 4.5%.

Under these assumptions, the life insurance industry remains financially secure, though one-notch downgrades would be likely for some companies. Investment portfolio losses could result in lower ratings for insurers with a weaker capital adequacy position relative to the ratings. A recession would likely lead to investment losses across asset classes beyond corporate bonds, including commercial mortgage loans, non-agency residential and commercial mortgage-backed securities, and other asset-backed securities. Moreover, the decline in bond yields would further compress interest spreads. Issuers of variable annuities with guaranteed living and death benefits would face higher reserve and capital requirements when equity markets decline. We have calibrated our risk-based insurance capital adequacy model for stressed credit and equity market conditions that may occur in a more severe recession scenario than what our downside scenario contemplates. For example, the common stock capital factor we use for targeted capital levels ranges from 27% at the 'BBB' level to 47% at the 'AAA' level, and the speculative-grade bond capital

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

factors generally are greater than 10%.

Upside scenario: Probability 15% to 20%

Our current ratings also do not factor in our economists' forecast of stronger economic outcomes in the upside scenario in the U.S. in 2014 or 2015. If the upside scenario were to occur, we believe the U.S. life insurance industry's credit quality would strengthen slightly. In this scenario, the U.S. experiences a period of higher growth, with our upside case incorporating the following assumptions: Real GDP growth of about 4.1% in 2014 and 4% in 2014, An average 10-year Treasury yield of about 4.2% in 2014 and 4.8% in 2015, A 'AAA' bond yield of about 5.7% in 2014 and 6.3% in 2015, Average S&P 500 levels of 1,988 in 2014 and 2,102 in 2015, and A U.S. corporate trailing-12-month speculative-grade default rate of 2.5% by March 2014.

Under these assumptions, the U.S. life insurance industry's business and financial risk profile would likely begin to improve, with potential one-notch upgrades in the financial strength ratings on some companies toward the end of 2014 or in 2015. Continued low investment losses in conjunction with higher bond yields would help companies improve their earnings and capital adequacy relative to the ratings. However, competitive behavior that resulted in life insurers increasing product risks or returning more capital to shareholders would diminish the potential for improved capitalization and higher ratings.

Despite Stable Ratings, Low Interest Rates Remain A Drag On Results

U.S. macroeconomics
Our stable outlook on the U.S. life insurance industry reflects slow but continued macroeconomic improvement. The private-sector economy has shown strength in the housing market, consumer spending, expanding domestic energy production, and a resurgent manufacturing sector. We believe the U.S. private sector will continue to bolster growth in 2014 because companies have stored away enough capital after four years of building financial reserves to weather a few Washington winter storms. Overall, we expect the effects of additional cuts in government spending to have a minimal impact on life insurance ratings. Although the industry remains competitive in its range of insurance, savings, and retirement products, it continues to face low interest rates, potential equity market volatility, a soft domestic economy, and significant regulatory requirements. Although we expect the industry's growth largely to mirror overall GDP growth, we believe sales may contract for some insurers as they look to redeploy capital more effectively or reevaluate their strategic options. Low interest rates will continue to make products such as fixed-rate deferred annuities and universal life insurance less attractive for both consumers and insurers. Those whose product portfolios include fewer spread- or interest-sensitive life insurance and retirement products and more fee-type products are likely to fare better under our economic forecasts.

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

Trend in outlooks and CreditWatch placements:

During the next 12 months, we expect the North American life insurers we rate to maintain stable credit profiles, and the outlooks we currently have on the 82 life insurance groups we rate interactively largely reflect this. As of Nov. 30, 2013, 88% of groups within the life sector had stable outlooks, 1% had developing outlooks, 4% had positive outlooks, and only 7% had negative outlooks. No companies had CreditWatch-negative placements. This is in contrast to the picture from one year ago when 27% of the life sector had negative outlooks or CreditWatch -negative placements, and only 67% of outlooks were stable. The strength in the U.S. private-sector economy and the rise in the S&P 500 have supported this improvement.

Key rating factors for the life insurance industry under our revised criteria
The key factors supporting the ratings on the North American life insurance sector in general would include strong to very strong business risk profiles, which the insurance industry and country risk assessment (IICRA) scores of low risk for the U.S. and very low risk for Canada anchor and favorable geographic diversification supports. However, the North America life insurance sector remains a highly competitive and fragmented market place with hundreds of players and various types of sales and distribution networks. In general, the life sector's very strong capital and earnings help to balance the intermediate risk that the risk position score under our ratings criteria indicates. (See Around The World Of Insurance: A Global Review Of Ratings, published Dec. 18, 2013.) Since the financial crisis, companies have scaled back product features and benefits in an effort to improve their risk-adjusted returns in a low-interest-rate environment. The migration to fee type from spread businesses continues as the growth prospects for retirement savings businesses remain more favorable than protection businesses given the demographic impact of aging baby boomers. Continued expense management and the evolution into these less capital-intensive businesses has helped drive earnings and improve returns on capital.

The impact of low interest rates on the life insurance sector

If low interest rates persist, we expect net interest margin compression to become more pronounced because insurers cannot further reduce crediting rates (the interest rates insurers pay on investment/savings type policies) for many blocks of business and because investment portfolio yields will continue to decline as low new-money rates weigh on investment portfolio yields. In fourth-quarter 2013, we conducted a portfolio review assessing the interest rate sensitivity of North American insurers. The review considered insurers' prospective creditworthiness under our base-case macroeconomic assumptions as well as upside and downside interest rate scenarios using our economists' forecasts and holding all other macroeconomic assumptions constant. Under these assumptions, we concluded that North American life insurers are well prepared to withstand a range of interest rate scenarios. However, the results suggest the potential for negative outlooks on a small percentage of life insurers a year or two into the downside interest rate scenario, which we view as having less than a 20% probability. To some degree, this lower level of sensitivity to interest rates is a reflection of the disciplined asset-liability management (ALM) practices most insurers maintain and the book value-type approach to liabilities under U.S. generally accepted accounting principles (GAAP), which mutes the impact of interest rate changes by allowing the use of long-term interest rate assumptions and other mechanisms.

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The fixed-income maturity and investment yield profile

The drag on earnings and interest coverage ratios will increase if low long-term interest rates linger, placing greater pressure on life insurer ratings, though this will build gradually. Among the life insurers we rate, about 63% of bonds these companies hold have five or more years to maturity, while about 34% have 10 or more years to maturity. Thus, it would take several years for portfolio earned rates and investment spreads to fully reflect low new-money rates. The average statutory net investment yield declined approximately 100 bps to about 4.8% in 2012 from about 5.75% in 2007. Under our baseline economic forecast we anticipate further declines of about 15-20 bps in 2013 and a leveling-off or slight increase in 2014.

The impact of rising or falling interest rates

Although we don't expect a sudden rise in interest rates, this would present a potentially more acute risk of disintermediation (that is, customers surrendering policies for their cash values and transferring the funds to higher interest-paying products). We believe the industry has maintained disciplined matching of asset cash flows with potential liability cash flows, which we view as an important risk control. Despite the recent bump up in U.S. Treasury yields, they remain close to their all-time lows. Based on the low long-term interest rates, the sector is enjoying significant unrealized gains in U.S. GAAP accumulated other comprehensive income (AOCI). In an environment of rapidly rising rates, these unrealized gains would quickly turn into unrealized losses. For the most part, we would look through these changes in AOCI if the company's ALM is tight and surrenders are not likely to be material. On the other hand, if a life insurer has a significant ALM mismatch, it could develop into a substantial problem or benefit depending on whether asset duration is longer or shorter than the liability duration. In a rising rate environment, companies short on asset duration would be winners as they could reinvest maturing assets at higher yields--a nice trade if one could reliably predict interest rates. In a sustained low or declining interest rate environment, these same companies would be vulnerable because they would have to invest maturing short-term and long-term assets at lower new money rates--which could accelerate margin compression, deferred asset cost (DAC) unlocking, reserve increases, and other potential problems.

Equity market risk

A sharp decline in the equity markets would hurt the capital adequacy of insurers that hold equities in their investment portfolios, as well as issuers of variable annuities with guaranteed minimum living and death benefits. Although we believe variable annuity writers have improved hedging and reduced risks in products sold after the financial crisis, hedge programs are not completely effective because of basis risk, the disconnect between accounting and economic hedges, and challenges managing dynamic hedging programs in stressed market conditions.

Capital and liquidity

Life insurers' balance sheets have been resilient despite the sluggish economic recovery and extraordinarily low interest rates since the financial crisis. We believe companies' capital adequacy is generally strong to very strong and liquidity is ample at both the operating and holding company levels. Investment portfolio losses have been modest, and we expect credit losses to remain within insurers' pricing expectations. The U.S. trailing-12-month speculative-grade corporate default rate remains below long-term averages, a good sign for investment portfolios.

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

Recent strategic actions taken by industry participants

U.S. life insurers have taken a number of steps in response to low interest rates, volatile equity markets, and intense competition. Low interest rates have prompted issuers of protection products, such as life and long-term care insurance, to raise prices or discontinue certain product types. There have been significant exits from long-term care insurance and a trend of increasing exits from UL products with secondary guarantees. Equity market volatility has prompted variable annuity issuers to develop volatility-managed investment options, reduce benefits, and increase rider fees. Notable exits from the U.S. individual life insurance and annuities market include Hartford Financial Services Group Inc. (closed January 2013), Sun Life Financial Inc. (closed August 2013), and Aviva plc (closed October 2013). Sun Life and Hartford continue to operate group benefits businesses, which remain attractive to many life insurers because earnings come primarily from mortality and morbidity margins, which depend more on underwriting prowess and are less asset- and capital-intensive than most individual products. Thus, the capital and earnings on group products tend to be less sensitive to market risks.

Recent Ratings Activity

As we expected, we changed few ratings between January 2013 and November 2013, with eight upgrades and only four downgrades on life insurance groups during this period (see chart 1), continuing a trend of relatively limited downward ratings changes. In addition, in May 2013, we raised the ratings on one life insurance holding company, Manulife Financial Corp.

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

Chart 1

Downgrades have substantially outpaced upgrades during the past decade. Although the downgrades have clustered in periods of economic and equity market declines, we believe that additional, more subtle fundamental factors have contributed to a secular decline in financial strength ratings across much of the industry. These factors include the wave of demutualizations that began in the late 1990s, as well as shifting demographics and consumer preferences that have increasingly driven the mix of new business to retirement savings products from traditional life insurance. The primary differences between the often higher-rated life insurance (mortality) business and typically lower-rated retirement-oriented and wealth-management businesses that have a higher propensity for earnings volatility and calls on capital (see More Than Meets The Eye: What Is Behind The Long-Term Credit Erosion In The North American Life-Insurance Sector? published May 25, 2012). Overall, the life insurance industry remains solidly placed within the investment-grade category, with 38% of our financial strength ratings in the 'AA' category and 52% in the 'A' category (see chart 2).

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

Chart 2

As of Nov. 30, 2013, we had stable outlooks on 88% of the 82 life insurance groups we rate, negative outlooks on 7%, developing outlooks on 1%, and positive outlooks on 4% (see chart 3). Part of reduction in negative outlooks followed the revision of the outlook on the of U.S. to stable from negative on June 10, 2013. With this outlook change, we revised the outlooks on five life insurance groups to stable: Knights of Columbus, Massachusetts Mutual Life Insurance Co., New York Life Insurance Co., Northwestern Mutual Life Insurance Co., and Teachers Insurance & Annuity Association of America.

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates

Chart 3

Rating activity recap: January 2013 to November 2013

We've raised our financial strength rating on seven life insurance groups (twice on Bankers Life & Casualty Co.) during this period (see table 2).
Table 2

Insurance FSR Upgrades

Lead operating company Bankers Life & Casualty Co. Co-operators Life Insurance Co. American Memorial Life Insurance Co. Fidelity & Guaranty Life Insurance Co. Kanawha Insurance Co. Bankers Life & Casualty Co. To BBBAA BBBABBB From BB+ BBB+ ABB+ BBB+ BBBRating action date Summary rationale 5/3/2013 The upgrade reflects the groups continued improvement in operating performance and statutory capitalization in the past two years. 6/17/2013 The upgrade reflects its very strong capital and earnings and strong competitive position. 6/24/2013 The upgrade reflects Assurants strong earnings capability based on its well-diversified competitive position, very strong capital adequacy, and strong financial flexibility. 7/17/2013 The upgrade reflects improved operating performance and reduced investment risk profile. 7/17/2013 The upgrade reflects a revision of its group status to highly strategic from strategically important under our revised group rating methodology. 7/24/2013 The upgrade reflects our view of the groups further improvement of earnings and capitalization (second upgrade in calendar 2013).

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Table 2

Insurance FSR Upgrades (cont.)

Reliance Standard Life Insurance Co. A+ A 7/24/2013 The upgrade reflects our view of the group's strong business and very strong financial risk profiles, which are based on its very strong capitalization and strong competitive positions in its chosen niches, as well as the extraordinary support Delphi might receive from its parent. 10/11/2103 The upgrade reflects our equalizing the rating with that on its new parent company SCOR SE.

Generali USA Life Reassurance

A+

We narrowed the notching by raising our counterparty credit ratings on one nonoperating life insurance holding company (see table 3).
Table 3

Insurance CCR Upgrades

Lead operating company Manulife Financial Corp. To A From ADate of rating action Summary rationale 5/22/2013 The notching between the Canadian insurance holding company and the group credit profile was narrowed to two notches from three. The narrower notching reflects the less-onerous restrictions on dividends to the holding company, and the Canadian regulators' prudential practice of regulating and supervising both the life insurance operating and holding companies.

We also lowered our financial strength rating on three life insurance groups (see table 4).
Table 4

Insurance FSR Downgrades

Lead operating company Hartford Life Insurance Co. To BBB+ Date of From rating action Summary rationale A6/17/13 The downgrade reflects our expectation that this company will be put into run-off following the New York state licensing of Hartford Life & Accident Insurance Co., as well as our view of the company's satisfactory business risk profile and strong financial risk profile. 7/11/13 The downgrade reflects our view of the groups business risk profile and financial risk profile under our revised insurance criteria. 7/11/13 The downgrade reflectsour view of the groups competitive position and business risk profile under our revised insurance criteria. 7/24/13 The downgrade reflectsits weakened capital adequacy in 2012 due to statutory strain from new business and AXXX/XXX reserve requirements.

Ohio National Life Insurance Co. Western and Southern Life Insurance Co. Penn Mutual Life Insurance Co.

AAAA

AA AA+

A+

AA-

Related Criteria And Research

Interest Rate Risk Will Likely Have Only A Limited Effect On North American Insurer Ratings, Jan. 3, 2014 Around The World Of Insurance: A Global Review Of Ratings, Dec. 18, 2013 Canada Life Insurance Sector Carries A Very Low Industry And Country Risk Assessment, Dec. 9, 2013 Credit Conditions: North America's Credit Conditions Remain Favorable Despite The U.S. Government Shutdown, Dec. 9, 2013 Economic Research: U.S. Economic Forecast: Two Economies Diverged In A Wood, Dec. 5, 2013 U.S. Life Insurance Sector Assigned Low-Risk Insurance Industry And Country Risk Assessment, Dec. 3, 2013 The U.S. Speculative-Grade Corporate Default Rate Breaks Below The 2% Threshold For The First Time Since September 2011, Dec. 2, 2013

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Industry Economic And Ratings Outlook: For U.S. Life Insurers, An Improving Economy Could Mean A MuchNeeded Boost To Interest Rates U.S. Insurers Maintain Risk Discipline In The Hunt For Higher Yield, Nov. 19, 2013 U.S. Insurance Companies' Preference For "Bolt-On" Acquisitions Is Likely To Continue Through 2014, Nov. 12, 2013 The Dodd-Frank Act: Title VII Swap-Clearing Requirements Could Lower U.S. Insurers' Counterparty Exposures, Nov. 11, 2013 Canadas Economic Recovery Is Likely To Keep Sputtering In 2014, Sept. 26, 2013 The U.S. Corporate Default Rate Is Forecasted To Rise To 3.1% By June 2014, Aug. 13, 2013 Industry Economic And Ratings Outlook: U.S. Life Insurer Balance Sheets Stay Strong Amid Improving Conditions, May 24, 2013

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