MOODYS.COM

13 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2 » Uralkali’s Investment in Brazil Deepwater Terminal Is Credit

Positive » Sophos' Acquisition of Cyberoam Is Credit Positive » Genting's Bet on Jeju Island Resort and Casino Is Credit Positive

Infrastructure 7 » EDP - Energias do Brasil Divests Majority Stake in Sao Manoel

Power Plant, a Credit Positive

Banks 8 » Cypriot Banks' Nonperforming Loans Pressure Capital Buffers » Ghana's Monetary Tightening Is Credit Negative for Its Banks

Insurers 12 » Proposed Changes to Affordable Care Act Are Credit Negative for

Health Insurers » CNA Financial Agreement to Sell Life Insurance Subsidiary Is Credit

Positive

Asset Managers 15 » UK Regulatory Scrutiny Is Credit Negative for State Street

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Corporates

Uralkali’s Investment in Brazil Deepwater Terminal Is Credit Positive Last Friday, OJSC Uralkali (Baa3 negative), the world’s largest potash producer by capacity, announced that it had bought a 25% interest in Ponta do Felix marine terminal in Brazil with daily capacity of 2,000 tonnes. The stake acquisition is credit positive for Uralkali, which will benefit from priority rights to port services, which, in turn, will ensure supply stability and faster and cheaper delivery (by at least 10%), thereby helping the company gain market share in Brazil. The 25% stake cost less than $50 million, or less than 10% of Uralkali’s planned 2014 capex, and will not negatively affect credit metrics.

At 3.5%, Brazil’s fertiliser market was the world’s fastest growing in 2013 and will grow at around 5% in 2014, according to research company Fertecon Limited. Meanwhile, demand in other key potash-consuming regions such as China, the US and Europe will remain stable. Brazil’s market is underpinned by growth of arable land and agricultural production (see Exhibits 1 and 2), making the country a very important market for potash producers. In the first half of 2013, Brazil accounted for around 13% (or around 650,000 tonnes) of Uralkali’s sales volume.

EXHIBIT 1

Arable Land Growth

Source: Food and Agriculture Organization of the United Nations Outlook, 1999-2030

0.0%

0.1%

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Sub-Saharan Africa Brazil North Africa South Asia Industrial countries East Asia

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Sergei Grishunin Assistant Vice President - Analyst +7.495.228.6168 sergei.grishunin@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

EXHIBIT 2

Forecast Agricultural Production Growth

Source: Organization for Economic Co-Operation and Development - Food and Agriculture Organization of the United Nations Agricultural Outlook, 2013-22

Besides 10% lower port tariffs, the conditions of the deal allow Uralkali priority access to port facilities. This will shorten the wait time of ships reloading to four to five days, versus 20-30 days currently, and provide access to various port facilities, including storage. These logistics benefits will ensure supply stability and improve customer service and product availability in Brazil, which will help Uralkali justify its planned potash price increase in Brazil to $350-$360 per tonne on a cost-and-freight basis from the current rate of $320 per tonne.

Given the deficit of port facilities in Brazil, acquisition of the share in the deepwater terminal improves Uralkali’s competitiveness against its peers from North America’s Canpotex, a partnership between Potash Corporation of Saskatchewan Inc. (A3 stable), Agrium Inc (Baa2 stable) and Mosaic Company (Baa1 stable), because Canpotex does not have port facilities in the region. It will help Uralkali defend its regional market share, which we estimate was 17% in 2013, down from 20% in 2012 reflecting growing competition in global potash markets. It will also allow Uralkali to continue its expansion in Latin America while challenging Canpotex’s share (around 30% in 2013). In 2014, we expect Uralkali to restore its market share in the region back to its 20% historical average and increase its sales in Brazil to around 1.5 million tonnes.

If our forecasted increase in Uralkali’s sales volume and prices in Brazil (supported by acquisition of the share in the port) prove correct, it will bolster Uralkali’s efforts to fulfill its current strategy of maximizing volume, improving operational efficiency and restoring its adjusted debt/EBITDA to below 2.0x and retained cash flow/debt above 40% in 2014-15 after adjusted leverage deteriorated to more than 3.0x at the end of 2013. The latter was mainly driven by global potash prices being under pressure since fall 2013, after Uralkali’s decision to exit its marketing and distribution venture with Belaruskali1 (unrated) resulting in a reduction in global potash producers revenue and profitability.

1 See Shake Up in Potash Industry Dents its Credit Fundamentals, 21 November 2013.

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World - Oilseeds World - Wheat Brazil - Oilseeds Brazil - Wheat

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Sophos’ Acquisition of Cyberoam Is Credit Positive Last Monday, Sophos, a unit of holding company Shield HoldCo Ltd. (B2 negative), announced that it had acquired Cyberoam Technologies (unrated), a leading united threat management company based in India. The approximately $60 million acquisition is credit positive for Sophos because it will reinforce the company’s position in the fast-growing network security segment focused on small and midsize companies.

Funded through Sophos’ cash balance, the acquisition will reduce pro forma cash as of September 2013 to $22 million. However, mitigating the company’s limited cash balance at closing is its undrawn $30 million revolving credit facility and our expectation of positive free cash flow generation.

We expect Sophos’ increasing exposure to the united threat management sector to be its main growth driver. The sector accounted for slightly less than 30% of billings in the 12 months to 30 September 2013 and we estimate pro forma for the acquisition of Cyberoam that it will exceed 35%. Sophos’ united threat management segment grew billings by 23% in the April to September 2013 period and by 27% in the fiscal year ended 31 March 2013.

The sector’s strong performance mitigated the decline of Classic Sophos product billings, including end-user and server protection, which we expect will continue declining. The Classic Sophos range of products recorded a billings decline of 4% in the first half of fiscal 2014 and 10% in fiscal 2013, reflecting the intense competition in this segment from larger security providers such as Symantec Corporation (Baa2 stable) and McAfee (unrated).

Market research firm International Data Corporation projects that the $2.5 billion united threat management market worldwide will continue growing at 15%-20% per year. Both Sophos’ and Cyberoam’s growth has outpaced the market in the past 18 months, with Sophos’ billings growing 20% and Cyberoam’s growing 30%.

In addition, the acquisition will increase Sophos’ presence in under-penetrated regions including India, the Middle East and Africa, where Cyberoam generates a significant portion of its billings. The combined group will have a significant research and development capability with more than 750 engineers, many of whom are dedicated to network security.

Although the acquisition’s positive effect on Sophos’ leverage will be limited initially owing to the small additional contribution of Cyberoam to group EBITDA, we expect that Cyberoam’s successful integration will accelerate the pace of the group’s deleveraging beginning next year. Importantly, Cyberoam should help Sophos achieve its target of 10% annual free cash flow to debt, which, among others factors, would stabilize its rating outlook as long as the company contains working capital and exceptional costs.

Free cash flow generation and the capacity to quickly build up its cash balance would support Sophos’ credit profile because it is likely to continue seeking external growth opportunities to reinforce its position in the small and mid-market enterprises market. Exceptional costs will partly depend on the length and required restructuring charges of integrating Cyberoam, which should benefit from both companies sharing a common core architecture, including hardened Linux operating systems and optimized Intel compatible server systems.

Based in Abingdon, England, Sophos is a leading IT provider, specialising in security software and data protection for businesses. The company operates in more than 150 countries, but generates more than 70% of its sales in Europe and North America.

Sebastien Cieniewski Vice President - Senior Analyst +44.20.7772.1964 sebastien.cieniewski@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Genting’s Bet on Jeju Island Resort and Casino Is Credit Positive Last Friday, Genting Singapore PLC (Baa1 stable) and Landing International Development Ltd. (unrated) announced a $2.2 billion joint venture to develop and operate a casino-based resort on Jeju Island, Korea. The project, which will open in stages beginning in 2017, will be Jeju Island’s largest tourism resort to date and includes luxury hotels, a shopping mall, a theme park, villas and apartments, and casinos and other leisure and entertainment facilities.

The venture is credit positive for Genting Singapore because once completed it will provide the company much-needed geographic diversification and reduce the revenue concentration arising from its flagship resort and sole gaming operation, Singapore-based Resorts World Sentosa, without significantly affecting its leverage and liquidity.

Jeju is geographically located near Eastern and Northern China, and is strategically well-positioned to attract Chinese tourists, a key driver of Asia’s gaming market, and will provide an alternative to Macau for Chinese tourists seeking gaming entertainment. Chinese tourism to South Korea increased by 53% in 2013 from 2012, reflecting the potential of this project.

Genting Berhad (Baa1 stable), the holding company that owns 52% of Genting Singapore, will benefit from the expanded geographical footprint, although concurrent expansion plans at the holdco level as well as at its two gaming subsidiaries, Genting Singapore and Genting Malaysia (unrated), would pressure its consolidated credit metrics during the development stages. The holding company is currently developing a project in Las Vegas, while Genting Malaysia is looking to expand its operations in New York City and Miami, Florida.

The project provides some insight into Genting Singapore’s growth plan amid limited expansion opportunities over the past two years because of the long process of gaming deregulation in countries such as Japan and Korea. Genting Singapore preferred these developed nations given their lower geopolitical risk and the sizable investment required for its casino-based resorts.

At the same time, the acquisition allows better utilization of Genting Singapore’s huge cash balance: $3.2 billion of cash on hand at the end of September 2013, held in anticipation of expansion outside of Singapore. Genting Singapore experienced negative carry on the proceeds of two tranches of perpetual securities that it issued in 2012 and totaled SGD2.3 billion ($1.8 billion), which are part of its cash on hand.

Genting Singapore’s credit metrics will not be significantly affected during the project’s development phase. The company’s strong cash position and operating cash flow of about $600-$750 per year is more than sufficient to finance its share of the project. Genting Singapore’s joint venture partner will share the project’s financial burden equally, with each partner taking up about $1.1 billion of capex over a four-year horizon. We estimate Genting Singapore’s initial investment in the project will be about $200 million.

Subject to other expansion plans, we expect the company to remain in a net cash surplus position, but the cash balance will decline to about $2.5 billion over the four-year development period of the Jeju project. At the same time, we expect debt/EBITDA to decline to about 2.1x-2.5x over the next two years from around 3.0x in 2013 owing to the amortization of existing debts.

Development risk at Genting Singapore will increase with this project, but Genting group has a successful track record in developing large-scale gaming developments, such as Resorts World Genting in Malaysia,

Dylan Yeo Associate Analyst +65.6398.8317 dylan.yeo@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Resorts World Sentosa in Singapore, and Resorts World New York City (at the Aqueduct Raceway). The group’s healthy cash position, with $6.1 billion of consolidated cash at Genting Berhad as of 30 September 2013, also enhances its ability to complete projects, a strength that separates it from its global gaming peers.

With the development in Korea, Genting Berhad will increase its geographic coverage from its existing casinos in Malaysia, Singapore, the US, the UK, the Bahamas and the Philippines. Genting Berhad recorded adjusted debt/EBITDA of 2.9x for the 12 months ended 30 September 2013.

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Infrastructure

EDP - Energias do Brasil Divests Majority Stake in Sao Manoel Power Plant, a Credit Positive On 7 February, EDP - Energias do Brasil S.A. (EDB, Ba1 stable) said it had divested 50% of its 66.7% stake in the Sao Manoel hydropower plant project to CWEI Brasil (unrated), a subsidiary of China Three Gorges Corporation (A1 stable).

The divestiture is credit positive for EDB because it will save around BRL300 million in equity injections and reduce certain guarantees to creditors by around BRL600 million during the power plant’s construction phase over the next four years. The savings will not only reduce EDP’s need for cash, but will also create capacity for potential investments in other new power projects.

By reducing its participation in the Sao Manoel power project to 33.3% from 66.7%, EDB becomes an equal shareholder in the project with the other two shareholders, CWEI and Furnas Centrais Eletricas S.A (unrated), a subsidiary of Centrais Eletricas Brasileiras SA - Eletrobras (Baa3 negative). On 13 December 2013, the EDB and Furnas consortium Terra Nova won the auction to construct and operate the Sao Manoel 700-megawatt hydropower plant.

EDB’s management estimates that the Sao Manoel hydropower plant project will require around BRL2.7 billion in capital expenditures over the next four years, of which around 66% will be funded by long-term debt.

As a 33.3% shareholder, EDB will recognize its participation in the project through the equity method rather than consolidating the project’s financials. This accounting procedure is in accordance with the Brazilian general accepted accounting principles under the International Financial Reporting Standard.

The application of this accounting procedure will materially reduce EDB’s consolidated debt position over the next four years in comparison with its previous ownership position. As a majority shareholder, the company would have been forced to recognize 100% of the project’s total assets and liabilities, including all interest-bearing debt.

The exhibit below shows on a pro forma basis some of EDB’s financial highlights before and after the divestiture.

EDP - Energias do Brasil Pro Forma Financial Highlights, January 2014 to April 2018

Previous (66.7% of Sao Manoel Hydropower Plant)

Current (33.3% of Sao Manoel Hydropower Plant)

Total Consolidated Debt as of April 2018 BRL1.8 billion BRL0

Accumulated Equity Contribution – Cash Flow BRL600 million BRL300 million

Guarantee Provided to Creditors During Construction Phase BRL1.2 billion BRL600 million

Note: Reflects January 2014 currency rate. Source: Moody’s Investors Service estimates

Jose Soares Vice President - Senior Credit Officer +55.11.3043.7339 jose.soares@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Banks

Cypriot Banks’ Nonperforming Loans Pressure Capital Buffers Last Friday, the Central Bank of Cyprus published updated data on Cyprus’ banking sector (comprising commercial banks and cooperative credit institutions), which show that the aggregate nonperforming loan (NPL) ratio increased to 40% in November 2013 from 31% in June 2013. For the first time, the data also show restructured loans in the system’s performing portfolio, an additional 12% of gross loans.

The rapid increase of problematic exposures to 52% of gross loans (NPLs and restructured loans combined) is credit negative and is likely to generate additional capital needs for certain Cypriot banks. The deterioration in Cyprus’ operating environment since the March 2013 bail-in of uninsured bank depositors, particularly the contracting economic growth and rising unemployment, is driving the increase in problem loans. The bail-in preceded the recapitalization of Bank of Cyprus Public Company Limited (BOC, Ca negative, E/ca2) and the resolution of Cyprus Popular Bank Public Co. Ltd. (unrated).

In addition, Cypriot banks’ very high concentrations of loans to the severely stressed construction and real estate development sectors, which we estimate at more than 25% of total loans, and substantial single-borrower concentrations are problematic in Cyprus’ weak economy. We forecast Cyprus’ economy contracting by 4.4% in 2014 (GDP contracted 5.5% in the first three quarters of 2013) and unemployment climbing to 19.1% in 2014 from 17.9% in 2013, exacerbating the adverse operating environment.

Accordingly, we expect banks’ NPLs to continue increasing this year, which will negatively pressure profitability and solvency and increase some banks’ recapitalization needs. Cypriot banks’ current profitability buffers will be insufficient to absorb high credit losses. Pre-provision income of 2.4% of risk-weighted assets as of September 2013 is not low compared with other banking systems, but is low given asset-quality pressures and provisioning requirements. Therefore, we expect further stress on Cypriot banks’ already weak profitability to result in losses. Moreover, given that we estimate the loan-loss reserve coverage remains a fairly low 28%-31%, the banks may need additional provisions against existing problem loans.

Cypriot banks’ core capital levels have been significantly strengthened since March 2013 and had an aggregate core Tier 1 ratio of around 12% as of September 2013, up from around 6% as of December 2012, but we expect losses to pressure their capital adequacy.

We expect the greatest capital needs from cooperative credit institutions. Their core Tier 1 ratio was 10.6% in September 2013, while their NPL ratio rose to 44% in November with provisioning coverage that we estimate was 15%-18% of NPLs, which suggests higher provisioning needs. However, their capital levels will likely be significantly strengthened in the next six months through a €1.5 billion recapitalization out of the €2.5 billion funds earmarked for the banking sector in the Cypriot government’s agreed package with the European Commission, European Central Bank and International Monetary Fund.3 This will leave around €1 billion of those funds available for the capital needs of the rest of the banking system.

2 The bank ratings shown in this report are the banks’ deposit ratings, their standalone bank financial strength ratings/baseline credit

assessments and the corresponding rating outlooks. 3 The recapitalization of the cooperative credit institutions will be completed once their restructuring plan is approved by the

European Commission’s Directorate General for Competition.

Ilias Avgeris, CFA Associate Analyst +357.2569.3002 ilias.avgeris@moodys.com

Christos Theofilou, CFA Assistant Vice President - Analyst +357.2569.3004 christos.theofilou@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

BOC, the country’s largest lender, is also likely to need additional capital because it has had the most acute deterioration in asset quality to date, with its NPL ratio rising to 48% as of September 2013 from 36% in June and low provision coverage of 37% of NPLs. As a result, BOC has recorded losses of €1.9 billion in the nine-month period to September 2013. Despite BOC’s 2013 recapitalisation through the bail-in of uninsured depositors, its pro forma core equity Tier 1 ratio was 9.9% as of September 2013, adjusting for the sale of the bank’s Ukrainian operations, which affords minimal additional capital buffer to absorb further asset quality losses compared with the regulatory minimum of 9%.

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Ghana’s Monetary Tightening Is Credit Negative for Its Banks Last Thursday, the Bank of Ghana, the country’s central bank, raised its main policy rate by 200 basis points to 18% from 16%. The rate hike followed an emergency meeting of Ghana’s (B1 negative) monetary policy committee, and is an effort to curb the cedi’s depreciation and dampen rising inflation pressures. The cedi depreciated 7.8% against the dollar in January alone.

The rate hike is credit negative for Ghanaian banks because higher lending rates in conjunction with the nation’s slowing economic growth and rising inflation will lead to a deterioration in asset quality metrics. Consequently, we expect problem loans to increase to more than 14% of gross loans from 12.5% as of September 2013.

Following the rise in interest rates, we expect average lending rates to increase to more than 30% in the next 12 months from 27.4% in September 2013. Lending rates in Ghana remain materially higher than the policy rate because lenders price in their high operating costs and loan-loss charges. In addition, inflation was 13.5% in 2013, up from 8.8% in 2012. Rising lending rates, combined with higher import costs (in addition to the cedi’s 7.8% depreciation against the dollar in January, it depreciated 14.6% in 2013 and 17.5% in 2012), will compromise consumer affordability and increase production costs for local corporates, leading to higher nonperforming loans.

Asset quality pressure is accentuated by slowing economic growth rates. Real GDP for the third quarter of 2013 grew by 0.3% year on year, compared with the 6.1% in the second quarter. According to the International Monetary Fund, non-oil sector real GDP (where most bank lending is directed) will likely decelerate to around 6% during 2013 and 2014 from an average of 8.6% during 2011 and 2012, as a result of energy disruptions and high interest rates. We expect that decelerating economic growth rates will further pressure the repayment capacity of domestic borrowers and affect the credit quality of the banks’ loan portfolios.

Although we expect most Ghanaian banks will face weakening asset quality, banks that will be most affected by recent developments will be those that have experienced the highest loan growth over the past two years. These include Ecobank Ghana Limited (unrated), whose 2012 asset growth was 58%, and Stanbic Bank Ghana (unrated), whose 2012 asset growth was 50%. Banking system credit grew by a compound average growth rate (CAGR) of 39% between September 2011 and September 2013, significantly outpacing the 27% CAGR of nominal GDP between 2010 and 2012. The rapid growth in credit can be partly linked to lenders easing their underwriting standards, as indicated by problem loans increasing at a 23% CAGR between September 2011 and September 2013. Hence, we expect the banks that have experienced the highest loan growth over the past two years will be more vulnerable to a deterioration in their asset quality metrics.

George Korniliou, CFA Associate Analyst +357.25.693.033 george.korniliou@moodys.com

Christos Theofilou, CFA Assistant Vice President - Analyst +357.25.693.004 christos.theofilou@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Average Ghanaian Bank Lending Rates and Problem Loans Higher lending rates have been a leading indicator for higher problem loans

Source: Bank of Ghana

Ghana Commercial Bank Ltd. (B2 negative, E+/b2 stable4), the only rated bank in the country, also remains exposed to a deterioration in asset quality because of its high lending concentrations. High credit concentrations expose the bank to a few large borrowers’ potential weakening financial performance, which in turn will trigger an abrupt deterioration in asset quality. However, we expect that solvency risks will be mitigated by the bank’s strong buffers to absorb increased credit-related losses amid healthy capitalization levels and robust profits.

4 The bank ratings shown in this article are the banks’ currency deposit ratings, standalone financial strength rating/baseline credit

assessments, and the corresponding rating outlooks.

5%

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Average Lending Rates - left axis Problem Loans to Gross Loans - right axis

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Insurers

Proposed Changes to Affordable Care Act Are Credit Negative for Health Insurers Last Thursday, the Obama administration proposed two changes to provisions of the Affordable Care Act (ACA). The changes would require expanded provider networks and extend the time that individuals can maintain non-compliant health insurance policies. These changes would be further credit negatives for health insurers selling policies on the health care exchanges. In addition, the recently announced delay in the employer mandate for another year will add more complications for insurers in marketing plans to the small employer market.

These developments followed announcements from Aetna Inc. (Baa2 stable), Cigna Corporation (Baa2 positive) and Humana Inc. (Baa3 stable) that they expect to earn negative margins on their exchange business in 2014.

The first announcement is a proposal from federal regulators to implement a tougher review process for insurance plans with respect to the number of doctors and hospitals that they include in their provider networks. In our view, forcing insurers to expand their networks will result in higher premiums that will further discourage enrollment by the younger and healthier population; if the trend were to continue, these products would eventually become unsustainable. The narrow networks designed by insurers were developed as a tool to manage healthcare costs and lower premiums in two ways: by negotiating lower fees with providers willing to accept lower payments in exchange for more volume and being able to oversee and manage care more effectively over a smaller network.

The proposal is in response to the complaints from enrollees, medical professionals and elected officials that the insurance plans sold on the exchanges have limited provider choice and do not include the premier medical centers in most regions. It is also in addition to recent proposals from state insurance regulators and state legislatures to force insurers to expand their networks.

The second proposed change the Obama administration is considering extends its “administrative fix” allowing people to maintain non-ACA compliant insurance policies until the end of 2016 versus 2014. The original accommodation, as we noted in the 2 December Moody’s Credit Outlook and insurers have since confirmed, has had a negative effect on the risk profile of the exchange pool as healthier younger members took advantage of this waiver. We believe that continuing the waiver for another two years will exacerbate the issue and will likely result in higher premiums for exchange policies with an insured population that will be less healthy and less profitable for insurers.

Finally, the delay of the employer mandate until 2016 will cause complications for insurers and confusion for employers and employees. Insurers have already begun to develop and sell small group compliant policies to employers. Now that these employers are no longer required to meet the requirements of the ACA for 2015, they may want to retain their existing policies for another year, forcing insurers to resurrect plans they had intended to discontinue. Complicating the decision process further for employers, by not providing ACA-compliant policies to their employees, they still expose themselves to penalties should any of their employees obtain a subsidized plan from the exchanges. What was going to be a challenging selling season for insurers in the small group market just became more challenging.

Steve Zaharuk Senior Vice President +1.212.553.1634 stephen.zaharuk@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

CNA Financial Agreement to Sell Life Insurance Subsidiary Is Credit Positive On Monday, CNA Financial Corporation (CNA, Baa2 stable) announced that it had agreed to sell its Continental Assurance Company (CAC, unrated) life insurance subsidiary to Wilton Re Holdings Limited (unrated) for net proceeds of approximately $615 million. The sale is credit positive for CNA because it will reduce earnings and capital volatility associated with the company’s long-duration runoff structured settlement and group annuities businesses.

CNA expects to receive total consideration, including tax benefits, of $615 million, which is a slight premium to CAC’s statutory capital and surplus of $597 million as of 31 December 2013. However, the company expects to record an after-tax GAAP charge of approximately $220 million during the first quarter, primarily reflecting different statutory and GAAP reserve valuations bases. CNA expects the sale to close in the second quarter, subject to a regulatory review.

As illustrated in Exhibit 1, CNA’s Life & Group non-core segment includes the structured settlement and group annuities businesses of CAC and the larger runoff long term care portfolio at Continental Casualty Company (financial strength A3 stable), which is not part of the sale. Over the past five years, the segment has been a persistent drag on operating results, dampening CNA’s earnings by 15% on average, and by as much as 26% in 2011.

EXHIBIT 1

CNA Financial’s Historical Net Income by Segment

Source: Company fourth-quarter 2013 earnings release and 10-K filings

In addition to reducing earnings volatility, the sale also reduces CNA’s non-core Life & Group GAAP reserves by approximately $2.6 billion, or 20%. Lower reserves and the associated investments supporting those reserves will reduce the company’s exposure to tail volatility associated with interest and discount rate movements and fluctuations in policyholder mortality and persistency. As illustrated in Exhibit 2, CNA’s runoff Life and Group non-core operations in total account for approximately 35% of consolidated fixed maturity investments for the group, but these investments have a much longer duration (11.3 years) than those supporting the core property and casualty and corporate portfolios (4.4 years) and therefore more risk in terms of interest rate movements.

-$400

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P&C and Corporate Net Income Life & Group Non-Core Net Income

Alan G. Murray Senior Vice President +1.212.553.7787 alan.murray@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

EXHIBIT 2

CNA Financial’s Fixed Income Investment Portfolio Supporting Reserves, by Segment

Source: Company fourth-quarter 2013 results

In its 31 December 2012 annual report, CNA disclosed in its market risk “sensitivity analysis” that a hypothetical decline in the discount rate associated with its payout annuity reserves (consisting primarily of single premium group and structured settlement annuities) of 50 basis points would reduce pre-tax income by $131 million, or about 15% of CNA’s 2012 pre-tax income from continuing operations, while a decline of 100 basis points would reduce pre-tax income by $277 million, or 32%.

Following the sale, CNA will still have the long term care business, which accounts for nearly all of the remaining Life & Group non-core reserves, and which we expect will be more challenging to exit, in part reflecting contractual commitments and the significant healthcare cost (morbidity) risk component for that business. Nevertheless, the announced CAC transaction is further evidence of management’s commitment and sustained efforts to refocus CNA’s operations on its flagship specialty and commercial property and casualty insurance businesses.

P&C/Corporate65%Life & Group Non-core -

CAC6%

Other Life & Group Non-core - Remaining29%

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

Asset Managers

UK Regulatory Scrutiny Is Credit Negative for State Street Last Friday, the Irish National Pensions Reserve Fund (NPRF)5 terminated its investment mandates of assets worth more than £500 million with State Street Global Advisors (SSGA, unrated), the asset management business of State Street Corporation (A1 stable) with £1.4 trillion of assets under management (AUM). The termination follows the UK Financial Conduct Authority’s (FCA) £22.9 million fine on State Street’s custodial bank State Street UK6 for deliberately overcharging its custody clients, including NPRF, a total of £12.3 million. NPRF withdrew its €4.7 billion of assets from State Street UK in 2012 after the Irish Office of the Comptroller and Auditor General found that NPRF had been overcharged. NPRF waited for the report from the UK regulator before deciding its relationship with other affiliates of State Street.

Based on the FCA’s report and fine imposed on State Street UK on 31 January 2014, NPRF took away an investment mandate from SSGA. This is credit negative for SSGA because misconduct in a separate area of State Street has translated into loss of AUM, hurting profitability.

The FCA found that between June 2010 and September 2011, State Street UK charged six clients undisclosed fees without their consent in addition to the agreed management fee or commission. The hidden fees were part of a transition management service that State Street UK provided to large investment management firms and pension funds implementing structural changes to their asset portfolios for purposes of portfolio liquidation, portfolio rebalancing, benchmarking or facilitating manager changes. The overcharging accounted for over one quarter of State Street UK’s transition management revenue. More than £165 billion of assets invested in pensions and other large funds are transferred between investment managers, markets and products every year, according to the FCA. On a consolidated basis, State Street Corporation’s brokerage and other fees decreased 5.5% to $103 million in the fourth quarter of 2013 from the third quarter, primarily reflecting lower transition management revenue.

State Street UK charged NPRF €2.65 million in non-contractual fees, when placing trades on its behalf, as part of a €4.7 billion programme of disposals. State Street UK’s overcharge reduced the sales proceeds of a number of trades by seven basis points. The FCA’s investigation concluded that State Street UK breached three of the FCA’s principles of business: “it failed to 1) treat its customers fairly; 2) communicate with clients in a way that was clear, fair and not misleading; and 3) take reasonable care to organise and control its affairs responsibly, with adequate risk systems.”7

The £22.9 million fine is part of the UK regulator’s enhanced vigilance and increased fines because of operation irregularities or violation of regulatory rules since the collapse of Lehman Brothers in 2008 (see exhibit).

5 The National Pensions Reserve Fund was established in April 2001 to meet as much as possible of the costs of Ireland's social

welfare and public service pensions from 2025 onward. 6 State Street UK includes State Street Bank Europe and State Street Global Markets International Limited. 7 See FCA decision, 31 January 2014.

Vanessa Robert Vice President - Senior Credit Officer +33.1.53.30.10.23 vanessa.robert@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

EXHIBIT 1

UK Regulators’ Fines on Investment Firms Have Increased Substantially Since 2008

Source: UK Financial Services Authority and UK Financial Conduct Authority

Although these violations point to investment firms’ persistently weak operational controls and have detrimental effects on investors’ confidence, as the NRPF decision demonstrated, such actions ultimately protect investors’ interests. However, the willingness of a regulatory watchdog such as the FCA to aggressively impose fines is credit negative for financial services firms falling short of regulatory standards. The fines negatively pressure their profitability when the persistent low interest rate environment is already straining investment managers, and operational and compliance controls entail additional costs to avoid future violations.

The FCA’s 2014 business plan calls for a focus on the transparency offered to investors via various financial services industry participants. The effort aims to establish whether investors are being disadvantaged or charged excessively. As a result, we expect the overall fee structures in the asset management sector to continue to be scrutinised.

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RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s Credit Outlook on moodys.com

17 MOODY’S CREDIT OUTLOOK 13 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2

» CVS Caremark to Halt Cigarette Sales, Walking Away from $2 Billion of Annual Revenue

» Coca-Cola Partnership with Green Mountain Is Credit Positive for Both

» Australian Building Approvals Are Credit Positive for Boral and Lend Lease

Infrastructure 6

» New England’s Electricity Capacity Auction Will Benefit the Region’s Energy Companies

» Tata Power’s Divestment of Arutmin Coal Is Credit Positive

Banks 10

» BATS’s Post-Merger Leveraged Dividend Is Credit Negative » Narrower Commercial Loan Spreads Are Yet Another

Revenue Challenge for US Banks » Looser Underwriting Accompanies Auto Loan Growth, a

Credit Negative for Eight US Banks » Brazil’s Largest Private Banks’ Asset Quality Improves, a

Credit Positive » An Investec Sale of Kensington Would Be Credit Positive » Commerzbank’s Latest Asset Sale Reduces the Group’s Risk » Philippine Bank Capital Raises Following Basel III

Implementation Are Credit Positive

Insurers 23 » US Farm Bill Is Credit Positive for Crop Insurers » Genworth’s $400 Million Capital Contribution to Mortgage

Units Is Credit Positive

RATINGS & RESEARCH Rating Changes 27

Last week we downgraded KT Corporation, LG Electronics, ONEOK, Thermo Fisher Scientific, 12 Ukrainian banks, Kyiv and Kharkiv Ukraine, Puerto Rico, 13 student loan ABS tranches and $1.2 billion of synthetic collateralized debt obligations, and upgraded Delphi Corporation, Brooklyn Union Gas, KeySpan Gas East, BTA Bank, Genworth Mortgage Insurance, Genworth Residential Mortgage Insurance of North Carolina, Mexico, Paraguay, Black Sea Trade and Development Bank and Athens Greece, among other rating actions.

Research Highlights 35

Last week we published on South African mobile phone, US speculative-grade liquidity, US and Canadian broadband, US corporate refunding risk, Indian oil and gas, US tobacco, Brazilian airlines, Asian liquidity, UK auto retailers, North American solid waste, Japanese shippers, US homebuilders, US utilities, global banks, Australian mutual financial institutions, French specialized financial institutions, US health insurers, Paraguay, emerging markets, Ukraine, Russian sub-sovereigns, US local governments, US state spending, Spanish covered bonds, Banco Santander and European asset-backed commercial paper, among other reports.

MOODYS.COM

Report: 164434

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr and Jay Sherman Alisa Llorens