Fitch Affirms Thrivent Financial for Lutherans' IFS Rating at 'AA'; Outlook Positive
KEY RATING DRIVERS
Fitch's ratings for Thrivent reflect the organization's extremely strong capitalization, consistently strong profitability, high-quality investment portfolio and favorable market franchise within the Lutheran market, where it shares a strong faith-based affiliation with its membership that has led to customer loyalty and high policy persistency. In addition, Thrivent has a conservative liability profile with limited exposure to variable annuities with living benefit guarantees.
The Positive Outlook reflects Fitch's view that Thrivent's ability to sustain favorable operating and balance sheet fundamentals would likely lead to an upgrade over the next 12 months. Thrivent's balance sheet fundamentals and earnings profile exceeded Fitch's rating expectations in 2014. Further, Fitch believes that pressure on profitability and capital, driven by an extended low interest rate scenario, is manageable in the context of the company's capital position and liability profile, which benefits from a large block of life insurance business.
Key rating concerns include the challenge for intermediate term growth due to competitive pressures in the company's core life and annuity market and execution risk tied to Thrivent's 2014 expansion of its fraternal common bond membership to include other Christians from solely Lutherans. If this effort is well-executed over time, more members and scale-related advantages would be positive for the franchise.
Fitch views Thrivent's capitalization as extremely strong and of high quality. Total adjusted capital (TAC) increased 5.2% to $8 billion through the first six months of 2015, following an increase of 10.6% in 2014. The company's estimated risk-based capital (RBC) ratio, which is among the highest in Fitch's rating universe, increased to 733% at June 30, 2015 from 715% at year-end 2014. Thrivent has not issued surplus notes to support its capital and has no reliance on capital markets and reinsurance to finance its product reserves and capital. Capital strength is also aided by moderate operating leverage, a relatively low-risk liability profile, and strong policy persistency.
Thrivent's earnings declined modestly through the first six months of 2015 primarily due to increased fraternal spending, as well as increased interest crediting expense as part of a strategy to return excess surplus to members. Thrivent's statutory operating return on capital was 11.3% for 2014 and adjusted return on assets (ROA) was 1.27% for the year, exceeding most of its mutual peers. This strong performance reflects moderate growth in life and annuity premiums, favorable persistency and mortality, higher fee income related to a growing separate account asset base, and good expense management.
Fitch considers Thrivent to have an average exposure to interest rates due mainly to its large block of fixed annuities and legacy block of long term care business. This risk is partially offset by its block of individual participating whole life. Additionally, Fitch believes that Thrivent's exposure to withdrawal risk in a spike up interest rate scenario is manageable. Thrivent's consistent generation of strong operating cash flow and a very large portfolio of marketable securities with a strong market-to-book value ratio partially mitigate the risk suggested by the high percentage (71%) of the company's $18.8 billion of general account annuity liabilities that are subject to discretionary withdrawals without penalty or market value adjustments at year-end 2014.
Thrivent maintains a well-diversified, liquid investment portfolio that has performed well in terms of credit and return over the last three years in line with rating expectations. Realized credit-related losses were very low in 2014 and Fitch expects continued modest losses for 2015. At year-end 2014, Thrivent's increased below investment-grade exposure led to a risky asset ratio slightly above the life industry average, but the ratio remained low when compared to other highly rated mutual life peers.
With a membership of nearly 2.4 million, Thrivent is the largest fraternal benefit society in the U.S. Thrivent reported assets under management/administration of over $105 billion and adjusted surplus of $8 billion as of June 30, 2015.
Factors that could trigger a positive rating action:
--Sustained profitability with an adjusted ROA exceeding 1.20% and profitable growth in fraternal membership;
--A sustained RBC above 480%;
-- Continued successful expansion of its common bond membership into the broader Christian community.
Factors that could trigger a negative rating action:
--A decrease in estimated RBC below 390%;
--A material increase in realized gross investment losses and impairments;
--Material negative trends in earnings and/or fraternal membership.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Positive Outlook:
Thrivent Financial for Lutherans
--Long-term Issuer Default Rating (IDR) at 'AA-';
--Short-term IDR at 'F1+';
--IFS at 'AA'.
Thrivent Life Insurance Company
--IFS at 'AA'.