OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of A++ (Superior) and the issuer credit ratings of “aaa” of Teachers Insurance and Annuity Association of America (TIAA) and its wholly owned insurance subsidiary, TIAA-CREF Life Insurance Company (TIAA-CREF Life). TIAA and TIAA-CREF Life are collectively referred to as the TIAA Group. A.M. Best also has affirmed the debt rating of “aa” on TIAA’s $2 billion 6.85% surplus notes due Dec. 16, 2039, $1.65 billion 4.9% surplus notes due Sept. 15, 2044 and $350 million 4.375% fixed to floating rate surplus notes due Sept. 15, 2054. The outlook for all ratings is stable. TIAA and TIAA-CREF Life are both domiciled in New York, NY.
The affirmation of the ratings acknowledges TIAA’s market leading position in the higher education and not-for-profit pension marketplaces. TIAA, together with its companion organization, College Retirement Equities Fund (CREF), enjoys significant economies of scale, and the TIAA-CREF combination forms one of the largest retirement systems in the United States with combined assets under administration of $897 billion as of 2014. TIAA-CREF Life’s primary products are life insurance, individual annuities, funding agreements and separate account guaranteed interest contracts. Individual life and annuity products are marketed to existing customers of TIAA as well as to the general public.
These rating actions also reflect TIAA’s solid net operating performance enhanced by a cost-effective operating structure that is an extension of its significant economies of scale. A.M. Best notes that TIAA’s low expense structure, coupled with its effective distribution networks, offers competitive advantages in its core pension markets. These positive operating trends have enabled TIAA to grow its absolute capital and maintain strong risk-adjusted capitalization. TIAA’s current adjusted financial leverage is prudent and operating leverage is minimal. A.M. Best notes that TIAA maintains significant statutory accounting flexibility to manage its risk-adjusted capital position with the ability to adjust crediting rates on its large in-force block of general account retirement annuities. In addition, TIAA utilizes a conservative approach to valuing certain statutory reserves, and as a result, its balance sheet contains a considerable amount of hidden capital.
Additionally, A.M. Best views favorably TIAA’s unique liability structure where approximately three-quarters of its general account reserves are not cashable and can only be received as a death benefit or in the form of a periodic annuity payout. Contract holders may transfer funds from TIAA to CREF or to another employer-approved funding vehicle, but typically in the form of a 10-year annuity payout. TIAA’s long insurance liability structure, coupled with its low liquidity needs, allows it to take advantage of typically higher yields offered by investments that are less liquid and of longer duration. TIAA does not provide living benefit guarantees on its variable annuities, and its exposure to guaranteed minimum death benefits is limited.
Net operating performance remains acceptable, though earnings declined in 2014 due in part to higher dividends to policyholders and higher net operating expenses related to compensation expenses and consulting fees. A.M. Best notes that the majority of TIAA’s earnings are derived through active spread management of its core pension businesses. However, with the majority of its pension businesses having 3% minimum interest rate guarantees, A.M. Best believes TIAA may be challenged to sustain and improve its historical net operating performance as it continues to navigate through this persistent low interest rate environment. In order to mitigate its exposure to these relatively high minimum interest rate guarantees over the long term, TIAA now utilizes an indexed minimum interest rate guarantee for new institutional and individual retirement accounts.
A.M. Best considers TIAA’s investment management capabilities to be extremely strong and notes that the overall investment portfolio has generated moderate levels of investment losses over the past four year period, following the higher losses following the financial crisis. Although A.M. Best believes any near-term asset impairments for the group will be more than offset by net operating gains, it remains concerned regarding the group’s sizeable exposure to real estate assets (although down considerably since before the economic downturn) and Schedule BA assets. A.M. Best believes the potential for material credit losses from TIAA’s real estate holdings remains should the global economic recovery stall or deteriorate.
While TIAA continues to hold its dominant position in the U.S. higher education pension market niche, its dominance has been challenged in recent years by strong brand name low-cost mutual fund firms that offer a wide array of non-guaranteed investment options. Although A.M. Best does not believe TIAA’s existing customer relationships would be affected significantly, it does believe TIAA could be challenged to attract new customers in this highly competitive market. In response, TIAA has engaged in marketing strategies focused on strengthening its brand awareness and customer reach.
In 2014, TIAA acquired Nuveen Investments, Inc. (Nuveen), a diversified investment management company with assets under management exceeding $220 billion. TIAA acquired Nuveen for an enterprise value of $6.25 billion. Nuveen operates as a subsidiary of TIAA, retaining its current multi-boutique business model and continuing to support its investment affiliates through scaled distribution, marketing and administrative services. A.M. Best believes this acquisition adds further scale to TIAA’s existing asset management business, expands the products and services available to its customers, and adds diversification to its current investment and distribution platforms.
Key factors that could result in negative rating actions include a significant and sustained decline in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio model (BCAR), a material increase in investment losses, net operating performance that does not meet A.M. Best’s expectations and/or a regulatory change that adversely impacts TIAA’s core pension business.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- A.M. Best's Liquidity Model for U.S. Life Insurers
- A.M. Best's Perspective on Operating Leverage
- Evaluating U.S. Surplus Notes
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for U.S. and Canadian Life/Health Insurers
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.