Fitch Affirms TIAA’s IFS at ‘AAA’; Outlook Revised to Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AAA' Insurer Financial Strength (IFS) ratings of Teachers Insurance and Annuity Association of America (TIAA) and its wholly owned subsidiary, TIAA-CREF Life Insurance Company (TIAA-CREF Life). At the same time, Fitch has affirmed TIAA's 'AA+' Issuer Default Rating (IDR) and its 'AA' surplus note rating. Fitch has also withdrawn TIAA's 'F1+' commercial paper rating, since TIAA has closed down that program. The Rating Outlook has been revised to Stable from Negative following Fitch's updated review of TIAA's capitalization, liquidity, financial flexibility and operating results.

The Outlook revision is based on Fitch's view that the company's balance sheet fundamentals continue to be consistent with ratings expectations, and that strong and stable statutory operating earnings will be sufficient to offset expected investment losses over the near term.

Based on a detailed analysis of TIAA's investment portfolio using Fitch's stress testing methodology and further discussion with management, Fitch projects investment losses realized in 2010 in the range of $2.3 billion to $2.9 billion. This projection has been factored into Fitch's expectations for the current rating.

Fitch expects realized investment losses over the near term to be driven primarily by commercial mortgage-backed securities (CMBS). Fitch's projected loss for all of TIAA's structured investments, net of impairments already taken, is roughly $4.3 billion over the life of the investment. Of that amount, $2.7 billion is attributed to CMBS, while the remainder is driven by non-agency residential mortgage-backed securities (RMBS) and other non-mortgage related asset-backed securities (ABS). Fitch expects TIAA's run-rate statutory pre-tax operating earnings to remain in the $2.8 billion range over the near term, offsetting expected annual losses and providing stability to statutory capitalization. Fitch notes that TIAA was aggressive in taking impairments in its investment portfolio in 2008 and 2009, including in the commercial whole loan area, and investments other than structured securities are not expected to add significantly to losses going forward.

Fitch believes that TIAA continues to maintain 'AAA' level risk-based capital despite significant investment losses taken over the past two years. At year-end 2009, the company's Fitch-adjusted NAIC-basis total adjusted capital and risk-based capital ratio were $27.8 billion and 617% respectively. Fitch notes that in 2009 TIAA's statutory capital benefited from a $2.3 billion reserve release on inforce annuities and a $2 billion surplus note issuance. Capital also benefited from recognition of an additional $811 million of deferred tax assets (DTA) as an admitted asset in line with National Association of Insurance Commissioner (NAIC) guidelines.

TIAA has demonstrated its ability to generate strong and stable statutory operating earnings, which have helped to offset investment losses over the past two years. The company's ability to earn an investment spread over a crediting rate on its pension liabilities is the primary earnings driver. Fitch views TIAA's ability to adjust its crediting rate annually as an important part of its financial flexibility. TIAA's stable earnings have benefited from the company's limited exposure to variable annuity guarantees, which have negatively impacted results of many peer companies.

TIAA's rating also reflects Fitch's view that the company's liability structure is extremely stable and relatively low risk. Close to 80% of the company's general account annuity liabilities are non-surrenderable. TIAA also does not offer guaranteed living benefits on its variable annuity business, and it has guaranteed death benefits on only about $3 billion of account values. Leverage within the organization is relatively low. Surplus notes represent about 7% of TAC, and the company's Total Financing Commitments (TFC) ratio, including the TGM debt, is low relative to peers. Leverage is expected to go lower as the TGM debt runs off by the end of 2013. TIAA has no securities lending, securitization programs or other short-term dependence on the capital markets.

Factors which could put pressure on the ratings are:

-- If investment losses develop significantly higher than expected;
-- If statutory earnings and capital results are significantly lower than expected.

Fitch affirms the following ratings with a Stable Outlook:

Teachers Insurance and Annuity Association of America

-- IFS at 'AAA';
-- IDR at 'AA+';
-- Surplus notes at 'AA'.

TIAA-CREF Life Insurance Company

-- IFS at 'AAA'.

TIAA Global Markets, Inc. (Guaranteed by TIAA)

-- $1 billion 5.125% notes due Oct. 10, 2012 at 'AA+';
-- $500 million 4.95% notes due July 15, 2013 at 'AA+';
-- $500 million floating-rate notes due Jan. 14, 2011 at 'AA+';
-- $250 million 4.875% notes due Jan. 12, 2011 at 'AA+';
-- $250 million floating-rate notes due Jan. 12, 2011 at 'AA+';
-- $250 million floating-rate notes due Oct. 8, 2010 at 'AA+'.

Fitch withdraws the following ratings:

Teachers Insurance and Annuity Company of America

-- Short-Term IDR 'F1+';
-- Commercial Paper 'F1+'.

These rating actions reflect the application of Fitch's current criteria which is available at 'www.fitchratings.com' and specifically include the following reports:

-- 'Insurance Rating Methodology, Global Master Criteria' (Dec. 29, 2009);
-- 'Life Insurance Rating Criteria (Global)' (March 24, 2010).

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Brian Bertsch, +1-212-908-0549 (New York)
[email protected]
Cynthia J. Crosson, +1-212-908-0863 (New York)
R. Andrew Davidson, CFA, +1-312-368-3144 (Chicago)

Source: Fitch Ratings