Fitch Affirms Thrivent Financial for Lutherans' IFS Rating at 'AA'; Outlook Positive

CHICAGO--()--Fitch Ratings has affirmed the 'AA' Insurer Financial Strength (IFS) ratings of Thrivent Financial for Lutherans (Thrivent Financial) and its subsidiary, Thrivent Life Insurance Company (Thrivent Life), collectively referred to as Thrivent. The Rating Outlook is Positive. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fitch's ratings for Thrivent reflect the organization's extremely strong capitalization, consistent, strong profitability, favorable market franchise within the Lutheran market and high-quality investment portfolio. In addition, Thrivent has a conservative liability profile with limited exposure to variable annuities with living benefit guarantees.

The Positive Outlook reflects Fitch's view that Thrivent's ability to sustain favorable operating and balance sheet fundamentals would likely lead to an upgrade over the next six to 18 months. Thrivent's balance sheet fundamentals and earnings profile exceeded Fitch's rating expectations in 2014. Further, Fitch believes that the pressure on profitability and capital, driven by an extended low interest rate scenario, is manageable in the context of the company's capital position and liability profile with a large life insurance block of business.

Key rating concerns include the challenge for intermediate term growth due to competitive pressures in the company's core life and annuity market and execution risk tied to Thrivent's 2014 expansion of its fraternal common bond membership to include other Christians from solely Lutherans.

Fitch views Thrivent's capitalization as extremely strong and of high quality. Total adjusted capital (TAC) increased 11.2% to $7.6 billion at year-end 2014, following an increase of 12.7% in 2013. The company's risk-based capital (RBC) ratio increased to 715% at Dec. 31, 2014 from 680% at year-end 2013. The company has not issued surplus notes to support its capital, and Thrivent's reliance on capital markets and reinsurance to finance its product reserves and capital base is very low. Capital strength is also aided by moderate operating leverage and a relatively low-risk liability profile.

Thrivent reported strong levels of earnings and profitability in 2014 with an 11.3% statutory operating return on capital and 1.27% pre-tax, post dividend return on assets exceeding most peer mutual companies. This strong performance reflects moderate growth in life and annuity premiums, favorable persistency and mortality, higher fee income related to a growing separate account asset base, and good expense management. Fitch expects 2015 net income to decline moderately due to increased policyholder dividends, greater fraternal spend and modest spread compression.

Thrivent is a strong competitor in the Lutheran insurance market niche, where it shares a strong faith-based affiliation with its membership that has led to customer loyalty and high policy persistency. Fitch believes Thrivent's measured pace at expansion reduces execution risk tied to Thrivent's expansion of its fraternal common bond membership to include other Christians. If well executed over time, more members and scale-related advantages would be positive for the franchise.

Fitch considers Thrivent to have an average exposure to interest rates due mainly to its large block of fixed annuities and legacy block of long term care business. This risk is partially offset by its block of individual participating whole life. Fitch believes that Thrivent exposure to withdrawal risk in a spike up interest rate scenario is manageable. Thrivent's consistent generation of strong operating cash flow and a very large portfolio of marketable securities with a strong market-to-book value ratio partially mitigate the risk caused by the high percentage (58%) of the company's $18.3 billion of general account annuity liabilities being subject to discretionary withdrawals without penalty or market value adjustments at year-end 2014.

Thrivent maintains a well-diversified, liquid investment portfolio that has performed well in terms of credit and return over the last three years in line with rating expectations. Realized credit-related losses were very low in 2014 and Fitch expects modest losses for 2015. Despite an increase in below investment-grade (BIG) bonds in 2014, Thrivent's risky assets ratio was about average compared to life industry levels at year-end 2014 but low when compared to other highly rated mutual life peers.

With a membership of nearly 2.4 million, Thrivent is the largest fraternal benefit society in the U.S. Thrivent reported assets under management/administration of over $105 billion and adjusted surplus of $7.6 billion at year-end 2014.

RATING SENSITIVITIES

Factors that could trigger a positive rating action:

--Sustained profitability with pre-tax, pre-dividend returns on assets exceeding 1.20% and profitable growth in fraternal membership;

--A sustained RBC above 480%;

--No evidence of deterioration in financial profile related to common bond expansion over next 12 to 18 months.

Factors that could trigger a negative rating action:

--A decrease in estimated RBC below 390%;

--A material increase in realized gross investment losses and impairments;

--Material negative trends in earnings and/or fraternal membership.

Fitch has affirmed the following ratings with a Positive Outlook:

Thrivent Financial for Lutherans

--Long-term IDR at 'AA-';

--Short-term IDR at 'F1+';

--IFS at 'AA'.

Thrivent Life Insurance Company

--IFS at 'AA'.

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

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983310

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Contacts

Fitch Ratings
Primary Analyst
Andrew Davidson, CFA
Senior Director
+1-312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dafina Dunmore, CFA
Director
+1-312-368-3136
or
Committee Chairperson
Brian Schneider, CPA
Senior Director
+1-312-606-2321
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, New York, Tel: +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Davidson, CFA
Senior Director
+1-312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dafina Dunmore, CFA
Director
+1-312-368-3136
or
Committee Chairperson
Brian Schneider, CPA
Senior Director
+1-312-606-2321
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, New York, Tel: +1-212-908-0526
elizabeth.fogerty@fitchratings.com