Fitch Affirms TIAA's IFS at 'AAA'; Outlook Stable

Fitch Ratings has affirmed all ratings for Teachers Insurance and Annuity Association of America (TIAA), its wholly owned domestic insurance subsidiaries and affiliates. The Rating Outlook is Stable. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

TIAA's ratings reflect the company's extremely strong capitalization and very stable liability profile, good risk-adjusted earnings, and very strong competitive position in the U.S. pension market. The company's financial leverage and interest coverage metrics have deteriorated following the Nuveen acquisition but are expected to improve over the longer term. Fitch continues to believe the impact of ongoing low interest rates is manageable in the context of TIAA's earnings and capital.

TIAA's statutory capitalization metrics continue to be extremely strong and in line with rating expectations. At year-end 2015, TIAA's total adjusted capital (TAC) was $39.6 billion, which was relatively flat compared to prior year as growth in capital driven by statutory earnings was largely offset by realized and unrealized investment losses. The company's risk-based capital (RBC) ratio and statutory operating leverage was 556% and 5.2x at year-end 2015. Fitch's view of TIAA's statutory capitalization also considers the company's statutory reserves as a New York domiciled insurer, which are more conservative relative to a NAIC basis. Year-end 2015 RBC, adjusted to an NAIC equivalent basis, would exceed 600%.

Fitch's statutory financial leverage remained flat over 2015 at 15.1%, which includes $2 billion of surplus notes and $2 billion of senior unsecured notes issued out of TIAA Asset Management Finance Company, LLC (TAMF) to finance TIAA's acquisition of Nuveen Investments, Inc. in 2014. Statutory financial leverage including TAC on an NAIC equivalent basis would fall below 15% as of year-end 2015. Fitch expects statutory financial leverage to stay at approximately 15% and to decline modestly longer term due to growth in statutory capital.

TIAA's profitability measures are within range of similarly rated mutual peers. Pre-tax operating earnings were 24% higher for full-year 2015 compared to prior year due to higher positive net flows and strong performance from real estate and private equity, offsetting performance in fixed income. Fitch considers the company's earnings to be good on a risk adjusted basis given the low risk profile of the company's liabilities and large capital base. Statutory earnings interest coverage was as expected at 6.4x in 2015. Fitch expects interest coverage to remain around current levels in the medium term but to increase modestly over the longer term due to improved operating earnings.

Interest margins in the core pension segment have historically accounted for over 80% of TIAA's operating earnings. In the current low interest rate environment, the company's ability to lower the crediting rate on its pension liabilities could potentially support earnings. TIAA has most recently increased its crediting rates, as real estate and private equity performance have continued to support margins. Fitch's primary concern is the impact of the prolonged low interest rate environment on TIAA, given the 3% or lower minimum rate guarantee on most of it's in force pension contracts, and believes this is a longer term issue. Fitch believes TIAA has flexibility to adjust crediting rates lower if needed over the medium term.

Fitch expects TIAA to be able to manage through changes to its business model resulting from the Department of Labor (DOL) fiduciary rule. While company sales of small institutional retirement plans are potentially implicated by the new DOL rule, the company is well diversified with respect to the size of its institutional retirement plans and anticipates the rule will reduce outflows from its retirement plans. Additionally, TIAA sells a considerable amount of individual products through a captive/employee wealth advisor force whose incentives are generally consistent with the intent of the rule.

TIAA's investment portfolio continues to perform within expectations as it has over the last few years. Total impairments for 2015 were higher at $854 million, with the increase above expectations coming primarily from operating losses from certain subscale affiliate subsidiaries. Excluding affiliate losses, credit related losses were slightly higher than expected. The size and credit quality of TIAA's energy exposure relative to the investment portfolio is comparable to that of the life insurance industry.

The ratings on TAMF are based on implicit support from TIAA and reflect notching based on Fitch's view that Nuveen is a 'strategically important' subsidiary of TIAA. A subsidiary viewed as strategically important will typically have ratings one notch, and in some cases two, lower than the parent. In the case of TAMF, a two notch differential was used as the additional notch differentiates the ratings of the senior unsecured notes of TAMF from that of the surplus notes of TIAA, which would have a higher priority. Fitch's view of Nuveen's strategic importance considers TIAA's full ownership and potential synergies providing products and services in markets that are strategically important to TIAA, including the mutual fund, asset management, and retirement services markets.

In the first quarter of 2016, the company launched an effort to market all its products and services under the TIAA brand instead of TIAA-CREF. During this time, TIAA also integrated senior management lines, distribution, and operational capabilities of Nuveen and the TIAA asset management subsidiaries. No changes were made to the existing legal entity structure of the asset management subsidiaries. Going forward, TIAA's asset management capabilities will be marketed under one brand, TIAA Global Asset Management, with a goal to increase management of third party assets over the next few years.

The integration of senior management lines and branding of Nuveen within TIAA Global Asset Management increases the importance of Nuveen to the overall asset management strategy of TIAA. Fitch views these changes to be consistent with a 'strategically important' view of Nuveen to TIAA as the company's asset management segment is viewed as important, but not core, to the company to diversify earnings.

RATING SENSITIVITIES

Key rating triggers that could result in a downgrade include:

--Deterioration in Nuveen's stand-alone credit profile could change Fitch's view of TAMF's strategic importance, which could lead to a downgrade of TAMF.

--Failure for TIAA to achieve ongoing positive surplus growth;

--TIAA's investment losses significantly higher than expected;

--A regulatory change that would have a negative impact on TIAA's core pension market;

--A change in TIAA's ownership structure;

--TIAA's reported RBC below 450%;

--TIAA's statutory financial leverage exceeding 15%;

--A multi-notch downgrade of the current 'AAA' U.S. sovereign ratings below 'AA+'.

Fitch affirms the following ratings with a Stable Outlook:

Teachers Insurance and Annuity Association of America

--Insurer Financial Strength (IFS) at 'AAA';

--Issuer Default Rating (IDR) at 'AA+';

--Surplus note at 'AA'.

TIAA-CREF Life Insurance Company

--IFS at 'AAA'.

TIAA Asset Management Finance Company, LLC

--IDR at 'AA-';

--$1 billion 2.95% senior notes due 2019 at 'AA-';

--$1 billion 4.125% senior notes due 2024 at 'AA-'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005278

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005278

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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