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Fitch Affirms TIAA's IFS at 'AAA'; Outlook Stable
November 7, 2017 / 5:08 PM / in 11 days

Fitch Affirms TIAA's IFS at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, November 07 (Fitch) Fitch Ratings has affirmed all ratings for Teachers Insurance and Annuity Association of America (TIAA), its wholly owned domestic insurance subsidiaries and affiliates. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release. The ratings were affirmed because statutory surplus has continued to grow, investment losses are lower than expected, capitalization continues to be extremely strong, and financial leverage remains within Fitch's tolerance for the rating level. There have been no adverse regulatory changes or changes in TIAA's ownership structure. KEY RATING DRIVERS TIAA's ratings reflect the company's extremely strong capitalization, very stable liability profile, strong earnings and very strong competitive position in the U.S. pension market. The company's financial leverage is on the high end of rating expectations but is expected to improve over the intermediate term. Fitch continues to believe the impact of ongoing low interest rates is manageable in the context of TIAA's earnings and capital. The ratings also consider TIAA's $2.5 billion acquisition of EverBank Financial Corp., which closed in June 2017. TIAA's financial leverage increased when TIAA sold $2 billion of surplus notes in May 2017. A portion of the proceeds was used to fund TIAA's acquisition of EverBank. The remainder was used to fund TIAA's tender offer for up to $950 million of its outstanding 6.85% surplus notes due 2039. The full $950 million in notes were redeemed under the tender offer at a cost to TIAA of approximately $1.3 billion. As a result, statutory leverage rose to almost 16% as of June 30, 2017. Leverage includes approximately $5 billion of TIAA surplus notes, $2 billion of senior unsecured notes issued out of Nuveen Finance, LLC, and a modest amount of existing EverBank debt. Under TIAA's accounting policy, the company maintains a higher level of reserves than would otherwise be required under NAIC statutory accounting. Fitch recalculates total adjusted capital (TAC) to be consistent with an NAIC basis. On a reported basis, excluding the effect of the excess reserves, statutory financial leverage rose to approximately 17% as of June 30, 2017. TIAA's statutory capitalization metrics continue to be extremely strong and in line with rating expectations. TIAA's reported TAC was $42.5 billion at June 30, 2017, which is approximately a 4% increase from year-end 2016. The increase was driven by an increase in surplus notes issued and retained earnings. Risk-based capital (RBC) as of June 30, 2017 was an estimated 513%, operating leverage was low at 5.2x, and TIAA's Prism capital model score was 'Extremely Strong'. Fitch's view of TIAA's statutory capitalization also considers the company's statutory reserves as a New York domiciled insurer which, as noted above, is more conservative relative to an NAIC basis. TIAA's profitability measures are within range of similarly rated mutual peers. Fitch considers the company's earnings to be good on a risk-adjusted basis given the low risk profile of the company's liabilities and large capital base. Excluding the one-time effect of the surplus note redemption premium, Fitch estimates statutory earnings interest coverage was approximately 7x through second-quarter 2017. TIAA's statutory earnings interest coverage is comparable to other highly rated mutual peers. TIAA's investment portfolio continues to perform within expectations as it has over the last few years. TIAA's credit-related investment losses have been favorable and on a generally improving trend over the last five years, as a decline in impairments from commercial mortgage-backed securities was partially offset by higher investment losses in corporates, particularly in the energy sector. Fitch expects credit impairments to increase somewhat in 2017, but remain manageable and consistent with long term expectations. To-date, impairments have been less than expected. Nuveen Finance's ratings are based on implicit support from TIAA and reflect notching based on Fitch's view that Nuveen is an 'important' subsidiary of TIAA. A subsidiary viewed as important will typically have ratings one, and in some cases two notches, lower than the parent. In the case of Nuveen Finance, a two-notch differential was used, as the additional notch differentiates the ratings of Nuveen Finance's senior unsecured notes from TIAA's surplus notes, which would have a higher priority. Fitch's view of Nuveen's strategic importance considers TIAA's full ownership and potential synergies providing products and services in markets that are strategically important to TIAA, including the mutual fund, asset management, and retirement services markets. RATING SENSITIVITIES Key rating sensitivities that could result in a downgrade to TIAA include: --Failure for TIAA to achieve ongoing positive surplus growth; --Investment losses significantly higher than expected; --A regulatory change that would have a negative impact on TIAA's core pension market; --A change in TIAA's ownership structure; --Reported RBC below 450%; --Statutory financial leverage exceeding 16%; Key rating sensitivities that could result in a downgrade of Nuveen Finance, LLC include: --Deterioration in Nuveen's stand-alone credit profile could change Fitch's view of Nuveen Finance, LLC's strategic importance. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Teachers Insurance and Annuity Association of America --Insurer Financial Strength (IFS) at 'AAA'; --Issuer Default Rating (IDR) at 'AA+'; --Surplus notes at 'AA'. TIAA-CREF Life Insurance Company --IFS at 'AAA'. Nuveen Finance, LLC (Formerly TIAA Asset Management Finance Company, LLC) --IDR at 'AA-'; --$1 billion 2.95% senior notes due 2019 at 'AA-'; --$1 billion 4.125% senior notes due 2024 at 'AA-'. Contact: Primary Analyst Donald F. Thorpe CPA, CFA Senior Director +1-312-606-2353 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Nelson Ma, CFA Director +1-212-908-0273 Committee Chairperson Martha M. Butler, CFA Senior Director +1-312-368-3191 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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