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FOR IMMEDIATE RELEASE
OLDWICK, N.J. - MAY 08, 2013 12:00 AM (EDT)
A.M. Best Co. has affirmed the financial strength rating of A++ (Superior) and issuer credit ratings of “aaa” of Teachers Insurance and Annuity Association of America (TIAA) and its wholly owned insurance operating 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 ratings of “aaa” on the outstanding senior unsecured medium-term notes issued by TIAA Global Markets, Inc., and the debt rating of “aa” on the $2 billion 6.85% surplus note due December 16, 2039. The outlook for all ratings is stable. All companies are domiciled in New York, NY.
The affirmation of the ratings recognizes TIAA’s market leading position in the higher education and not-for-profit pension market. TIAA, together with its companion organization, College Retirement Equities Fund (CREF), enjoys significant economies of scale, and their combination forms one of the largest retirement systems in the United States with combined total assets under administration in excess of $525 billion. TIAA-CREF Life’s primary products are individual annuities, life insurance, 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. A.M. Best notes that TIAA possesses some statutory accounting flexibility to manage its risk-based capital position with its 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 also views positively TIAA’s unique liability structure. More than three-quarters of TIAA’s general account reserves are not cashable and can only be received as a death benefit or in the form of an annuity payout. Contract holders may transfer funds from TIAA to CREF or to another employee-approved funding vehicle, but only in the form of a 10-year annuity payout. TIAA’s long insurance liability structure, coupled with is low liquidity needs, allows it to take advantage of 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.
Despite favorable operating performance trends, 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 operating performance as it navigates through this persistent low interest rate environment. In order to mitigate its exposure to these 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.
While A.M. Best considers TIAA’s investment management capabilities to be extremely strong, it notes that the investment portfolio has generated significant—albeit declining—investment losses over the past five years. Although A.M. Best believes any near-term asset impairments for the group will be more than offset by operating gains, it remains concerned regarding the group’s sizeable exposure to real estate-related assets, which in the aggregate (excluding agency-backed securities), represent slightly less than one and half times total capital and surplus. A.M. Best notes that the group continues to voluntarily reduce the size of its commercial mortgage-backed securities and direct commercial mortgage loan portfolios. Nevertheless, the potential for material credit losses from the existing portfolios remains should the current global economic recovery stall or deteriorate.
Finally, 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 initiated marketing strategies aimed at strengthening its brand awareness and customer reach.
Key factors that could result in a negative rating action include a significant and sustained decline in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio, a material increase in investment losses, net operating performance that does not meet A.M. Best’s expectations, 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.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.