This material describes the investment strategy for the managed assets in Northwestern Mutual’s general account and the investment performance of these assets. Future dividends are not guaranteed, although Northwestern Mutual has paid a dividend every year since 1872. Third party ratings are subject to change. The Northwestern Mutual Life Insurance Company, Milwaukee, WI.
Fitch Ratings-Chicago-19 June 2009: Fitch Ratings affirms the 'AAA' insurer financial strength (IFS) rating of The Northwestern Mutual Life Insurance Co. (NM) and Northwestern Long Term Care Insurance Co. (NLTC). The Rating Outlook is Stable.
Fitch's ratings reflect NM's very strong competitive position in the U.S. life insurance market and exceptionally strong balance sheet fundamentals. Fitch considers NM's key competitive advantages to include its successful distribution system, large and stable block of traditional life insurance, and focus on expense control. NM's exposure to variable annuity risk is minimal due to the relatively small size of its variable annuity business and the lack of living benefit guarantees.
NM's extremely strong balance sheet fundamentals reflect the company's very strong capital position, as demonstrated in Fitch's PRISM capital model scores solidly in the 'AAA' level, no financial leverage and relatively low-risk liability profile. Total adjusted statutory capital (TAC) decreased to $14.9 billion or 18% in 2008 due to large net unrealized investment losses of $3.5 billion and net realized investment losses of $667 million, partially offset by good statutory operating earnings. The 2008 TAC is adjusted by Fitch to exclude $770 million in capital benefits from a permitted practice related to deferred tax assets. Fitch makes this adjustment across the industry for reasons of consistency. Based on this adjustment, Fitch estimates that risk based capital decreased to 438% in 2008 from 462% in 2007. Fitch believes that NM's mutual status and policyowner dividend enhances the company's ability to maintain a strong capital position and execute on its long-term investment and financial strategy. Fitch expects surplus will continue to be pressured over the near-term due to heightened investment losses.
While Fitch believes that NM's overall exposure to investment risk is reasonable considering the company's stable, long duration liabilities and manageable given its strong statutory capital position, it is a key area of concern factored into NM's rating. This risk includes NM's above-average investment exposure to equity securities and commercial mortgage loans. Fitch's concern with NM's equity investment portfolio is the exposure of surplus to volatility from capital gains and losses over shorter time horizons. In 2008, common and preferred stock investments experienced gross pre-tax realized losses of $1.3 billion ($569 million net of gains) and increased net pre-tax unrealized losses of $3.6 billion. These securities were the largest factor in the increase in both total net realized and net unrealized losses for 2008. Positively, commercial mortgage loans have continued to perform well with good demographic and diversification characteristics and no mortgages categorized as 'troubled' at year-end 2008. Exposure to mortgage related securities such as commercial mortgage backed securities (CMBS) and non-agency residential mortgage backed securities (RMBS) was low at about 5% of invested assets with almost no exposure to subprime securities, but had approximately $300 million of gross realized losses during 2008.
Another factor Fitch notes is the company's reported operating returns which tend to be lower than similarly rated peers. However, NM's reported operating returns are measured after payment of approximately $5 billion in policyowner dividends, one of the industry's leading rates and amounts.
Fitch believes NM enjoys significant flexibility in the amount of such dividends declared and paid if the need arises, which it demonstrated when it lowered the declared dividend scale in late 2008.
NLTC is a wholly owned stock subsidiary of NM, and its financial strength rating reflects the strength of the entire NM organization, as well as the explicit capital support agreement between NM and NLTC.
Fitch affirms the following ratings with a Stable Rating Outlook:
Northwestern Mutual Life Insurance Company
--IFS at 'AAA'.
Northwestern Long Term Care Insurance Company
--IFS at 'AAA'.
Contact: Bruce E. Cox, +1-312-606-2316 or Douglas L. Meyer, CFA, +1-312-368-2061, Chicago.
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