Fitch Affirms Northwestern Mutual's IFS at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of The Northwestern Mutual Life Insurance Co. (NM) 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.
Fitch views Northwestern's extremely strong capitalization as a key ratings strength, evidenced by its year-end 2015 RBC ratio of 648%. Total adjusted statutory capital (TAC) increased 2.6% to $26 billion, driven by solid statutory earnings. The company reported low operating leverage of 7.2x and very low financial leverage, demonstrated by surplus notes-to-TAC of approximately 6.8%.
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 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.
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's earnings in the near term and could have a material negative effect on earnings and capital in a severe scenario.
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. Northwestern's pretax gain from operations increased over 42% in 2015 to $795 million, driven by strong investment results and excellent disability-income morbidity experience. The stability of Northwestern's earnings can be attributed to low expense levels and strong mortality, and persistency results of its life business.
Fitch views Northwestern's disintermediation risk as relatively modest given the company's conservative liability profile. Northwestern has flexibility to adjust policyholder dividend rates, which 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 long-term care (LTC) insurance (the results of which have been adversely impacted by low rates), the reserves associated with this product account for merely 1% of its total liabilities.
Northwestern manages a well-diversified, liquid investment portfolio, which performed relatively well in 2015 despite the continued low interest rates, with a net investment yield of 4.7%. Net investment income was boosted by increased security partnership distributions, which are expected to normalize in 2016. The company's risky asset ratio remained at 114% at year-end 2015, exceeding the industry average primarily due to its elevated below-investment-grade bond and unaffiliated common stock exposure.
Northwestern's energy exposure is in line with the industry, with nearly 13% of its corporate bonds energy-related at year-end 2015. Fitch expects an uptick in Northwestern's credit losses in 2016 driven by the energy sector. The company has partially mitigated this by proactively selling energy-sector investments, reducing its above-average below-investment-grade-bond energy exposure to 15% of corporate energy holdings as of year-end 2015 from 18% as of the prior year-end.
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%;
--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'.