A.M. Best Revises Outlook to Negative for Issuer Credit Ratings of TIAA and Its Subsidiary; Affirms Financial Strength Rating

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has revised the outlook to negative from stable and affirmed the issuer credit ratings (ICR) of “aaa” of Teachers Insurance and Annuity Associationof America (TIAA) and its insurance operating subsidiary, TIAA-CREF Life Insurance Company (TIAA-CREF Life). A.M. Best also has revised the outlook to negative and affirmed the debt ratings of “aaa” on senior unsecured notes issued by TIAA Global Markets, Inc. (TGM).

Concurrently, A.M. Best has affirmed the financial strength rating (FSR) of A++ (Superior) of TIAA and TIAA-CREF Life. The outlook for the FSR is stable. Additionally, A.M. Best has affirmed the AMB-1+ commercial paper rating and assigned a debt rating of “aa” to the recently issued $2 billion, 6.85% 30-year surplus notes of TIAA. The outlook assigned to the surplus notes is negative. All companies are headquartered in New York, NY. (See below for a detailed listing of the companies and ratings.)

The revised outlook for the ICRs and debt ratings recognizes the decline in TIAA’s capitalization and financial performance as a result of significant investment losses. For the previous 21 months ending September 30, 2009, net realized capital losses from sales and other than temporary impairments have totaled nearly $7.2 billion. In addition, A.M. Best notes the potential for additional material credit losses as TIAA maintains significant holdings in commercial mortgage-backed securities and direct commercial mortgage loans as well as in non-agency residential mortgage-backed and asset-backed securities. Although A.M. Best believes TIAA’s investment management capabilities are extremely strong, the fact that commercial mortgage delinquencies are beginning to materialize across the industry is a key concern in the near to medium term. A.M. Best expects that TIAA’s total adjusted capital will increase substantially at year-end 2009 due to the recent surplus note issuance along with other capital initiatives and regulatory capital relief. However, A.M. Best believes that the likelihood of additional—and possibly significant—investment losses given the current economic environment will continue to pressure TIAA’s capital position.

The affirmation of TIAA’s FSR recognizes its continued strong capitalization, well established position in the higher education pension market, stable liability profile and excellent earnings capacity. TIAA, together with its companion organization, the College Retirement Equities Fund (CREF), possess significant scale and forms one of the largest retirement systems in the United States, with combined assets under management of approximately $402 billion at September 30, 2009. TIAA also benefits from a lean operating structure, which is an outgrowth of its significant economies of scale. The group’s low expense structure and effective distribution offer competitive advantages in its core pension market.

TIAA has a unique liability structure in that approximately 80% of its general account reserves are not cashable and can be received only as a death benefit or in the form of an annuity payout. Policyholders may transfer funds from TIAA to CREF or to another employer-approved funding vehicle, but only in the form of a 10-year annuity payout. TIAA's long liability structure and low liquidity needs allow it to take advantage of higher yields offered by investments that are less liquid and of longer duration. TIAA also does not provide living benefit guarantees on its variable annuities and has only a limited exposure to guaranteed minimum death benefits.

A.M. Best also notes that TIAA possesses some statutory flexibility to manage its risk-based capital position with its ability to adjust policyholder crediting rates. In addition, TIAA utilizes a conservative approach to valuing certain of its statutory reserves and, as a result, its balance sheet contains a considerable amount of hidden capital. In response to recent investment losses, TIAA will release a portion of its payout annuity reserves into surplus by year end. Additionally, the dividend rate paid on its accumulation annuities was reduced in 2009. These two initiatives together will add over $3.5 billion to TIAA’s statutory surplus by year-end 2009.

The following debt ratings have been affirmed:

TIAA Global Markets, Inc.—“aaa” program rating
-- “aaa” on all outstanding notes issued under the program

The following debt rating has been affirmed:

Teachers Insurance and Annuity Association of America—
-- AMB-1+ on $2 billion commercial paper program

The following debt rating has been assigned

Teachers Insurance and Annuity Association of America—
-- "aa" on $2 billion 6.85% surplus notes, due 2039

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

A.M. Best Company
Analysts
Darian Hala, 908-439-2200, ext. 5802
darian.hala@ambest.com
or
Thomas Rosendale, 908-439-2200, ext. 5201
thomas.rosendale@ambest.com
or
Public Relations
Jim Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
rachelle.morrow@ambest.com

Source: A.M. Best Company