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

NEW YORK--()--Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of The Northwestern Mutual Life Insurance Co. and Northwestern Long Term Care Insurance Co., 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

Northwestern's ratings reflect its leading competitive position in the U.S. individual life insurance market, extremely strong balance sheet fundamentals and stable earnings profile. Fitch views Northwestern's successful distribution system, large and stable block of traditional life insurance, and expense advantage relative to peers as key competitive advantages.

Northwestern's extremely strong capitalization continues to underpin its ratings, demonstrated by its estimated RBC ratio of 620% as of second quarter 2016 (2Q16) and Prism capital model score of 'Extremely Strong'. Total adjusted statutory capital (TAC) declined modestly from year-end 2015 to $25.9 billion as of 2Q16. The company reported low operating leverage of 7.5x and very low financial leverage, with a surplus notes to TAC ratio of 6.7%.

Northwestern's business concentration in the sale of traditional cash-value life insurance through a strong career distribution system provides very favorable credit characteristics that enhance its 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. Fitch notes that return measures are suppressed by Northwestern's excess capital position and outsized dividend payments. The historical stability of Northwestern's earnings can be attributed to low expense levels and favorable mortality, and persistency results of its life business. However, the protracted low interest rate environment remains a headwind and is expected to constrain Northwestern's earnings over the near term.

Through 2Q16, Northwestern's pretax gain from operations was $503 million, a 19% increase compared with the prior year period. However, reported results reflect increased subsidiary distributions, which were offset by lower reinvestment rates, less favorable mortality experience and higher expenses in support of strategic initiatives.

Fitch views Northwestern's disintermediation risk as modest given the company's conservative liability profile. Northwestern has used its flexibility to adjust policyholder dividend rates over recent years, mitigating the impact of low interest rates. While Northwestern is a leading provider of individual long-term care insurance (the results of which have been adversely impacted by low rates), the reserves associated with this product account for only 2% of its general account liabilities.

Northwestern manages a well-diversified, liquid investment portfolio. The company maintains an above-average risky asset ratio, which Fitch views as reasonable given its product mix. As of year-end 2015, the company's risky asset ratio was 113%, driven primarily by its above-average exposure to Schedule BA assets. Impairments have declined year-to-date, largely due to the recovery in the energy sector.

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 450% or a Prism score below 'Extremely Strong';

--An increase in financial leverage above 15%;

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

--A multi-notch 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 on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

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Contacts

Fitch Ratings
Primary Analyst:
Jamie R. Tucker, CPA, +1-212-612-7856
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson:
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Senior Director
or
Media Relations:
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Jamie R. Tucker, CPA, +1-212-612-7856
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson:
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Senior Director
or
Media Relations:
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com