On November 10, Moody’s Investors Service affirmed the U.S. sovereign rating at Aaa, the company’s highest rating. However, it lowered its ratings outlook from “stable” to “negative.” A negative ratings outlook indicates a higher likelihood of a potential downgrade over the next 12 to 18 months.
The main reasons for Moody’s lowering the U.S. ratings outlook are well known: declining financial strength from higher interest rates driving up the cost of maintaining the $1.7 trillion deficit in 2023, and political risk. Moody’s cited its expectation of continued U.S. fiscal strength declines, absent any “effective fiscal policy measures to reduce government spending or increase revenues,” and that “continued political polarization within U.S. Congress,” raises the risk that fiscal policymaking will fail to slow the U.S.’s deteriorating debt affordability trend.
Moody’s Investors Service, Fitch Ratings, S&P Global Ratings and A.M. Best Company are the big four rating agencies widely relied upon for their regular evaluations of the strength of companies across industries. Moody’s is the second major rating agency to take action on its U.S. rating this year, following Fitch Ratings downgrading the U.S. in August. Similar to Fitch’s move in August, this news understandably raises questions about how Moody’s lower outlook for the U.S. impacts Northwestern Mutual.
Does Northwestern Mutual maintain its Aaa (highest) rating?
Yes. On November 14, Moody’s affirmed NM’s Aaa (highest) rating and changed our ratings outlook from “stable” to “negative.” This change follows the same U.S. rating action taken by Moody’s on November 10.
With this action, we still maintain the highest available ratings from Moody’s, since the agency effectively “caps” both its ratings and outlooks for all U.S. insurers at the U.S. sovereign rating. This means the only other U.S. life insurer with Moody’s Aaa rating and stable outlook also saw its outlook lowered to negative on November 14.
Why the cap? Moody’s views Northwestern Mutual’s largely domestic investments and business revenues to be highly correlated to the U.S. government and economy. Therefore, any material weakening of the U.S. credit profile is likely be a major driver of similar declines in NM’s credit quality.
Moody’s cap is shared by S&P, which famously downgraded its U.S. sovereign rating back in 2011 in response to that year’s debt ceiling crisis. This is why NM continues to receive an AA+ (second highest) rating from S&P, which the agency accounts for with this language in each of its NM rating reports:
Northwestern's exceptionally strong credit characteristics compare favorably with peers, though the rating is capped by our 'AA+' sovereign rating on the U.S. We have a favorable view of Northwestern's large mutual status, its low-risk product profile dominated by its participating whole life policies, and the stability of its earnings. This results in a group credit profile of 'aaa'. However, we limit the rating to 'AA+' owing to the U.S. sovereign rating.
A third major rating agency, Fitch Ratings, made news just this past August by also downgrading the U.S. sovereign rating from AAA (highest) to AA+ (second highest). But since Northwestern Mutual’s Fitch rating is not capped at the rating of the U.S. government, our rating was unaffected, remaining AAA, with a stable ratings outlook from Fitch.
Clearly, Northwestern Mutual's Moody’s outlook change is the result of factors external to the company, which we cannot control, and not the result of any weakness in our credit profile. Northwestern Mutual continues to have the highest available ratings for life insurance companies from all four major rating agencies, including top ratings from Moody’s, Fitch, and the A.M. Best Company.
How does Moody’s lower rating outlook affect the company?
Since the Moody’s change to our ratings outlook was automatic—the result of their U.S. sovereign cap, not an NM evaluation—the short answer is it doesn’t. Our exceptional financial strength has not changed. All four rating agencies have reaffirmed our highest available ratings available for life insurance companies in 2023. In fact, Moody’s November 14 rating action is the third time they’ve reaffirmed NM’s Aaa rating this year, preceded by affirmations in June (biennial review) and August (assignment of short-term ratings).
Moody’s affirming NM’s highest rating three times in 2023 strongly signals that the lower ratings outlook is solely due to the U.S. sovereign ratings cap, not a perceived change in our financial strength. Moody’s noted the following in its November 14 press release:
Moody’s credit view of Northwestern Mutual “reflects its exceptional intrinsic strengths, including leading positions in its core markets, excellent distribution channels, and a significant focus on participating products, which leads to a resilient balance sheet.”
Further, “Moody's views the outlook change not to be reflective of any recent decline in credit fundamentals and we still believe that the company exhibits business and financial profiles consistent with the highest rating (Aaa). However, the insurer is susceptible to deterioration in the credit quality of the US government, given its related operating and investment exposure, and the deterioration in the US sovereign's rating outlook increases that as a current rating factor. Moreover, Moody's maintains a stable outlook on the US life insurance sector, driven by higher investment income from rising interest rates, and strong capital positions to help navigate the current economic environment.”
While holding the highest rating with a stable outlook is naturally preferable and simpler, the institutions NM does business with will be fully aware of Moody’s U.S. sovereign cap, just as they’ve been for over a decade with S&P’s. They have no impact on NM’s financial health.
Will the other rating agencies follow Moody’s with U.S. rating actions that could impact NM?
Each rating agency has its own distinct, objective methodology. It’s what defines each agency’s brand and establishes its value. So, each gauges the financial strength of the entities they rate using their own independent lens. This year, in addition to the recent Moody’s U.S. rating action, S&P maintained its U.S. sovereign rating with stable outlooks in March, and (as already mentioned) Fitch downgraded its U.S. credit rating from AAA (highest) to AA+ (second highest) in August.
Will the U.S. outlook change impact NM’s general account performance or strategy?
The company’s highly diversified general account asset allocation includes only a small position in U.S. government securities, so the direct impact of the U.S. downgrade will be minimal.
What about clients’ portfolios?
The broader financial consequences of the U.S. government shutdown are seen by most to be limited and reversable.
Also, Fitch’s August U.S. credit rating downgrade to AA+ had a very modest impact on the economy and markets, and we expect Moody’s move to a negative outlook will be much the same.
While the August Fitch downgrade didn't have a large, immediate impact to global investment markets’ view of U.S. Treasurys, remember that the country’s annual interest costs on servicing its debt are rising. With interest payments taking up more resources in the budget, it’s likely borrowing costs will become an issue that restricts future government spending. This could mean that we may see an erosion of the ultra-favorable backdrop for investor risk-taking that has existed over much of the prior decade. While declines in U.S. Treasury credit ratings rightfully cause investor worries, Treasury yields now offer real yields above two percent, a level we feel compensates investors for both credit and inflation concerns.
For an in-depth look at Moody’s action and its effect on global markets, see Brent Schutte and the NM Wealth team’s latest market commentary and analysis.