Fitch Affirms Northwestern Mutual's IFS at 'AAA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'AAA' Insurer Financial Strength (IFS) ratings of The Northwestern Mutual Life Insurance Co. (NM) and Northwestern Long Term Care Insurance Co. (NLTC), collectively referred to as Northwestern. Fitch also affirms NM's 'AA+' Issuer Default Rating (IDR) and 'AA' surplus note rating. The Rating Outlook is Stable.

Fitch's ratings reflect Northwestern's very strong competitive position in the U.S. individual life insurance market, exceptionally strong balance sheet fundamentals, and stable earnings profile. Fitch considers Northwestern's key competitive advantages to include its successful distribution system, large and stable block of traditional life insurance, and focus on expense control.

Northwestern's extremely strong balance sheet fundamentals reflect the company's very strong risk-based capital position, modest financial leverage, excellent liquidity, and relatively low-risk liability profile. Total adjusted statutory capital (TAC) increased to $22.2 billion or 7% at Sept. 30, 2012 due to strong positive statutory operating earnings, and positive contributions from both net unrealized and realized investment gains. Fitch estimates Northwestern's risk based capital was approximately 506% at Sept. 30, 2012. NM had surplus notes to TAC of approximately 7.9% and a total financial commitment ratio (TFC) of less than 0.2 times (x) at Sept. 30, 2012.

Northwestern's business concentration in the sale of traditional cash value life insurance through a career distribution system gives the company very favorable credit characteristics (e.g. long-duration liabilities, limited guarantees, predictable earnings performance) that enhance NM's risk profile and earnings. At the same time, this same concentration exposes NM to changes in the regulatory, legal, economic, and tax environment that may affect demand for cash value life insurance.

Fitch believes Northwestern's stable, long-duration participating liabilities, very strong statutory capital position, and flexibility in adjusting policyowner dividend rates provide cushion to withstand changes in its asset risks and the negative credit market effects of a less severe change in the sovereign ratings of the U.S. government. However, a more material change in sovereign ratings could lead to ratings changes.

Northwestern's net realized after-tax investment gains were $377 million in the first nine months of 2012 compared to losses of $30 million in 2011 and $188 million in 2010. The improvement reflects gross realized gains from the sale of the Russell Investment Center in Seattle and equity investments. Fitch believes the continuing low interest rate environment has the potential to affect Northwestern's earnings and capital but it is less of a concern than for other insurers given Northwestern's smaller exposure to interest sensitive insurance and annuity products.

NLTC is a wholly owned stock subsidiary of NM, and its financial strength rating reflects the strength of the entire Northwestern organization, as well as the explicit capital support agreement between NM and NLTC.

Key rating drivers that could lead to a downgrade include gross investment losses exceeding $1 billion for 2012 or in 2013, a decline to a sustained RBC ratio less than 400%, an increase in financial leverage above 15%, and a downgrade of the current 'AAA' U.S. sovereign ratings below 'AA+'.

Fitch affirms the following ratings with a Stable Outlook:

Northwestern Mutual Life Insurance Company
--Long-term IDR at 'AA+';
--6.063% surplus note due 2040 at 'AA';
--IFS at 'AAA'.

Northwestern Long Term Care Insurance Company
--IFS at 'AAA'.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).

Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=692293

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Contacts

Fitch Ratings
Primary Analyst:
Bruce Cox, +1-312-606-2316
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Douglas Meyer, +1-312-368-2061
Managing Director
or
Committee Chairperson:
Brian Schneider, +1-312-606-2321
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Bruce Cox, +1-312-606-2316
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Douglas Meyer, +1-312-368-2061
Managing Director
or
Committee Chairperson:
Brian Schneider, +1-312-606-2321
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com