Moody's stated that the affirmation of the three Aaa-rated insurers reflects their exceptional intrinsic strengths, including leading positions in their core markets, excellent distribution channels, strong underwriting skills and robust and resilient balance sheets. All three companies also have mutual or not-for-profit ownership structures that help to align the interests of policyholders/owners, creditors, and the company management.
The change in outlook is significantly influenced by Moody's view that (1) the linkages between the credit profiles of these insurers and the US government are very strong and (2) these insurers lack sufficient diversification or the resiliency to decouple, or absorb the fallout, from systemic risks that affect the US government's creditworthiness, and aligns their outlook with the negative outlook on the US government's Aaa rating.
The negative outlook for these three companies also reflects Moody's negative outlook on the US life insurance sector, driven by low interest rates and a weak economic recovery, factors that create pressures for the industry overall, but particularly for the ratings of those companies that carry the highest rating of Aaa.
LINKAGES BETWEEN RATING OF US SOVEREIGN AND US LIFE INSURERS
Very strong credit linkages exist between these US life insurers and the US government in factors that affect business prospects, investment portfolios, earnings and capital generation--including their significant direct investment in US government and government-guaranteed securities. These credit linkages support Moody's position that the ratings of these insurers should not be higher than the rating of the US, given that the companies' operations are almost exclusively in the US. Managing Director Robert Riegel added, "These insurers are exposed to many of the same macroeconomic pressures and financial market conditions that affect a sovereign's creditworthiness."
Moody's said these Aaa US life insurance companies' investments, businesses, revenues and reserves are predominantly domestic. Solvency and credit profiles are tied largely to their investment portfolios, given their high asset leverage model (assets-to-equity), and the securities these companies invest in, including corporate credits, which are typically correlated with the US government and/or economy. Credit problems, and dislocations in the markets for these securities under a material weakening of the credit quality of the US government would be major drivers of similar problems in the credit profiles of US life insurance companies. In addition, Moody's expects sales and revenues for these life insurers to be highly correlated with the domestic economy as insurance purchases, in many cases, are highly dependent upon discretionary income.
A key strength of all three of the Aaa life insurers is their ability to pass losses, including those from investments, in part or in full, onto policyholders through the dividend mechanism contained in their participating products. However, while this risk sharing is a strong credit positive, it does not insulate them sufficiently--in both amount and timing--from the strong linkages to the US government for them to carry a higher rating.
In its Rating Implementation Guidance, "How Sovereign Credit Quality May Affect Other Ratings," published in February 2012, Moody's outlined broad principles, which apply globally, to enhance transparency around corresponding rating actions likely to be taken when sovereign ratings change.
NEW YORK LIFE
Moody's Senior Credit Officer Ann Perry said, "The affirmation of the ratings for New York Life reflects the company's strong brand and franchise, well-diversified distribution channels, excellent capital base and high-quality and liquid investment portfolio." Perry adds, "New York Life's financial flexibility benefits from its large and stable block of participating life insurance business, for which it can adjust policyholder dividends."
These strengths are tempered by the challenges in growing NYL's more traditional business lines and its moderately-sized direct equity and limited partnership investment portfolio. In addition, NYL is exposed to industry-wide pressures on its capital and profitability from the low interest rate environment and weak economy.
Moody's said a downgrade of NYL's ratings could result from the following: 1) downgrade of the US government rating; 2) the company action level NAIC company action level Risk Based Capital (RBC) ratio falling below 400% for more than a short time period or a reduction in capital of more than 10% over a 12 month period; 3) adjusted financial leverage of 20% or more; or 4) earnings coverage consistently below mid single digits.
The outlook could be changed to stable from negative if the rating of the US government were affirmed at Aaa and its outlook returned to stable, and if there is improvement in the current and prospective profitability of the insurer.
The following ratings have been affirmed with the outlooks changed to negative from stable:
New York Life Insurance Company: insurance financial strength at Aaa; surplus note rating at Aa2(hyb);
New York Life Insurance and Annuity Corporation: insurance financial strength rating at Aaa;
New York Life Funding: funding agreement-backed senior debt at Aaa;
New York Life Global Funding: funding agreement-backed senior debt at Aaa.
The following ratings has been affirmed with a stable outlook:
New York Life Insurance Company: short-term insurance financial strength at Prime-1;
New York Life Capital Corporation: backed short-term debt rating for commercial paper at Prime-1.
New York Life, a mutual insurance company domiciled in New York, is based in New York City. As of September 30, 2012, New York Life reported statutory assets of approximately $135 billion and statutory total adjusted capital of approximately $19 billion.
Moody's Senior Credit Officer Neil Strauss said, "Northwestern Mutual Life's Aaa IFS rating reflects its excellent insurance franchise, highly productive and cost efficient career agency force, and excellent capitalization and liquidity." Strauss continues, "It is the dominant leader in sales of participating traditional fixed life insurance such as whole life insurance, a product whose features are highly supportive of insurer creditworthiness." Other strengths include a liability profile dominated by low-risk, participating insurance reserves, inherent earnings stability, and a well-diversified investment portfolio. The company's ability to adjust crediting rates on its participating insurance provides strong protection in the event of a stressful economic environment.
These strengths are tempered by the challenges of maintaining growth in the company's distribution force, the possibility of a long-term shift in consumer product preferences toward investment-oriented products over time, its large exposure to commercial real estate-related investments, and industry-wide pressures on its capital and profitability from the low interest rate environment and weak economy.
Moody's said that a downgrade of NML's ratings could result from: 1) downgrade of the US government rating; 2) NAIC RBC ratio below 400% for more than a short time period or a reduction in capital of more than 10% over a 12 month period; 3) a significant decline in the percentage of individual life premiums relative to total premiums and deposits; 4) adjusted financial leverage of 20% or more; or 5) earnings coverage consistently below mid single digits.
The outlook could be changed to stable from negative if the rating of the US government were affirmed at Aaa and its outlook returned to stable, and if there is sustained improvement in the prospective profitability of the insurer.
The following ratings have been affirmed with the outlooks changed to negative from stable:
Northwestern Mutual Life Insurance Company: insurance financial strength rating at Aaa, surplus note rating at Aa2(hyb);
Northwestern Mutual Long Term Care Insurance Company: insurance financial strength rating at Aaa.
Northwestern Mutual, a mutual insurance company domiciled in Wisconsin, is based in Milwaukee. As of September 30, 2012, Northwestern Mutual reported statutory assets of approximately $198 billion and statutory total adjusted capital of approximately $22 billion.
Moody's Senior Vice President, Scott Robinson said, "TIAA's Aaa IFS rating is driven by the company's outstanding business profile, expense advantages, excellent capitalization, and robust financial flexibility." TIAA is the dominant provider of annuities in the higher-education pension market with a uniquely stable liability structure. The company's ability to adjust crediting rates to plan participants on its pension products provides strong protection in the event of a stressful economic environment.
These strengths are somewhat offset by increased competition from other financial service providers in the higher education pension market, as well as the potential for investment losses and earnings volatility in a stress scenario, and industry-wide pressures on its capital and profitability from the low interest rate environment and weak economy.
Moody's said that a downgrade of TIAA's ratings could result from the following: 1) downgrade of the US government rating; 2) NAIC RBC ratio declining below 400% for more than a short time period or a reduction in capital of more than 10% over a 12 month period; 3) significant expansion into non-core businesses; 4) adjusted financial leverage of 20%; or 5) earnings coverage consistently below mid single digits.
Moody's could change the outlook to stable from negative if the US government's rating were affirmed at Aaa and its outlook returned to stable, and if there is sustained improvement in the prospective profitability of the insurer.
The following ratings have been affirmed with the outlooks changed to negative from stable:
Teachers Insurance and Annuity Association of America: insurance financial strength rating at Aaa, long-term issuer rating at Aa1, and surplus note rating at Aa2(hyb);
TIAA-CREF Life Insurance Company: insurance financial strength rating at Aaa;
TIAA Global Markets, Inc.: guaranteed senior debt rating at Aa1.
Teachers Insurance & Annuity Association of America, an insurance company domiciled in New York, is based in New York City. As of September 30, 2012, Teachers Insurance & Annuity Association of America reported statutory assets of approximately $235 billion and statutory total adjusted capital of approximately $33 billion.
The principal methodology used in these ratings was Moody's Global Rating Methodology for Life Insurers published in May 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Ann G. Perry VP - Senior Credit Officer Financial Institutions Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Robert Riegel MD - Insurance Financial Institutions Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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