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

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

KEY RATING DRIVERS

Fitch's ratings reflect Northwestern's leading competitive position in the U.S. individual life insurance market, extremely 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 expense advantage relative to peers.

Northwestern's extremely strong balance sheet fundamentals reflect the company's extremely strong risk-based capital (RBC) position, modest financial leverage, excellent liquidity, and relatively low-risk liability profile.

Northwestern's extremely strong capitalization is exhibited by June 30, 2015 total adjusted statutory capital (TAC) of $26 billion and an RBC ratio estimated at an extremely strong 651%. TAC increased $517 million or 2.0% in the first six months of 2015 due to positive contributions from statutory operating earnings, which were partially offset by unrealized capital losses. Northwestern reported low operating leverage of 7.2x, very low financial leverage metrics including surplus notes-to-TAC of approximately 6.8%, and a total financing and commitment ratio (TFC) of roughly 0.1x.

Northwestern's business concentration in the sale of traditional cash value life insurance through a strong career distribution system gives the company very favorable credit characteristics (e.g. long-duration liabilities, limited guarantees, predictable earnings performance) that enhance Northwestern's risk profile and earnings. However, this same concentration exposes Northwestern to unexpected changes in the regulatory, legal, economic, and tax environment that could affect demand for cash-value life insurance, although Fitch is not aware of any imminent disruptions.

Fitch views Northwestern's results as favorable on a risk-adjusted basis, though profitability measures appear modest in absolute terms when compared with the industry. Pre-dividend earnings increased to $3.34 billion in first-half 2015, an increase of 2% over the prior year period, following 6% growth in 2014. Northwestern's life operations account for nearly 90% of its total pre-dividend earnings. The strength of Northwestern's earnings can be attributed to low expense levels and strong mortality and persistency results of its individual life business. The modest increase in 2014 pre-dividend earnings reflects favorable claims experience as well as the lack of additional LTC reserve strengthening in 2014, which were partially offset by lower investment yields and additional annuity reserve strengthening.

Key concerns include macroeconomic headwinds in the form of low interest rates, financial market volatility and a weak economic recovery in the U.S. and abroad. These conditions are expected to constrain Northwestern earnings in the near term and could have a material negative effect on Northwestern's earnings and capital in a severe, albeit unexpected, scenario.

Fitch views Northwestern's exposure to interest rate risk as relatively modest given the company's liability profile, which largely consists of participating whole life insurance reserves that incorporate limited guarantees. The flexibility to adjust policyholder dividend rates provides significant cushion to mitigate the impact of low interest rates and unexpected losses in its investment portfolio. While Northwestern is a leading provider of individual LTC insurance, the results of which have been adversely impacted by low rates, the reserves associated with this business account for approximately 1% of Northwestern's total liabilities.

Northwestern manages a well-diversified, liquid investment portfolio that has performed relatively well in terms of credit and return over the last three years compared to peers. Realized credit-related investment losses have been better than expected at $13 million for the first six months of 2015 versus $43 million for the same period 2014. Northwestern's investment strategy takes a long-term view of its portfolio and its product liabilities. Under this strategy, the company maintains a risky assets ratio greater than the industry average as a percent of TAC driven by exposures to below investment-grade bonds, and private and public equity related investments. Northwestern's risky assets ratio increased moderately to 114% of TAC at year-end 2014, exceeding the year-end 2014 life industry average of 82%. However, Fitch considers Northwestern's investment risk level adequate, as the company is able to pass on its investment experience to policyholders over time by adjusting the dividend rates on its participating whole life policies.

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

RATING SENSITIVITIES

Northwestern's IFS ratings are currently at Fitch's highest level. Key rating drivers that could lead to a downgrade include:

--A decline to a sustained RBC ratio less than 400%;

--An increase in financial leverage above 15%;

--An unexpected shift in tax, regulatory or market dynamics that impacts Northwestern's competitive strengths.

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 on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991026

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Contacts

Fitch Ratings
Primary Analyst
Jamie Tucker, CPA, +1-212-612-7856
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson
Brian Schneider, CPA, +1-312-606-2321
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jamie Tucker, CPA, +1-212-612-7856
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson
Brian Schneider, CPA, +1-312-606-2321
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com