TIAA Ratings Affirmed by Fitch Amid EverBank (EVER) Acquisition
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Fitch Ratings has affirmed the 'AAA' Insurer Financial Strength (IFS) ratings of Teachers Insurance and Annuity Association of America (TIAA). The rating action follows TIAA's announcement of their purchase of Everbank Financial Corp (Everbank) and its subsidiaries. At the same time, Fitch has affirmed all ratings of TIAA's wholly owned domestic insurance subsidiaries and affiliates. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS
Fitch's rating opinion weighs the longer-term strategic and financial benefits of TIAA's acquisition of Everbank balanced against near-term concerns over integration and financing. Fitch believes that TIAA's 'AAA' credit profile remains intact under a range of financing options.
The scale of the transaction is relatively small and execution risk appears manageable in relationship to TIAA's credit and business profile. The $2.5 billion purchase price of Everbank represents less than 1% of general account assets and less than 7% of total adjusted capital (TAC) at year-end 2015. The transaction is expected to close in the first half of 2017.
Financing for the transaction is expected to be sourced largely from TIAA's general account, but could include the issuance of surplus notes. TIAA's adjusted statutory financial leverage could increase to just over 15% on a pro forma basis, which exceeds current rating expectations. In the event that TIAA does issue surplus notes, Fitch expects adjusted statutory financial leverage to be reduced below 15% within 12-18 months due to growth in statutory capital from retained earnings.
Adjusted statutory financial leverage includes outstanding surplus notes issued by TIAA, senior unsecured notes issued out of TIAA Asset Management Finance Company, LLC (TAMF) to finance TIAA's 2014 acquisition of Nuveen Investments, Inc. (Nuveen), and also reflects a capital adjustment for Prescribed Practices as a NY-domiciled insurer.
The acquisition of Everbank represents the second multi-billion dollar transaction for TIAA over the last two years. Today's rating action incorporates an expectation that TIAA will keep a lower M&A profile and does not expect any additional large acquisitions in excess of $1 billion over the intermediate term as TIAA continues to absorb the impact of this transaction as well as the Nuveen purchase.
Fitch believes the acquisition of Everbank would bring TIAA's banking business to scale and offer opportunities to cross-sell TIAA products to Everbank's deposit customers and more readily allow TIAA to offer banking products to existing customers. Everbank bolsters TIAA's retail services offering by adding direct product capabilities such as residential mortgages to provide to retail customers. Additionally, Everbank's residential mortgage origination capabilities allow TIAA direct access to add residential mortgages to its general account.
Everbank is a mid-tier bank with $27.4 billion in assets as of 2Q16 with an online presence, full-service branches in Florida, and a nationwide network of retail lending branch offices. Fitch expects that Everbank will merge with TIAA's existing federal savings bank and will be held by a bank holding company as a direct subsidiary of TIAA.
Fitch believes a successful integration of Everbank could provide positive diversification of TIAA's revenue and earnings, allow TIAA to offer a larger suite of retail products, and provide TIAA opportunities to cross-sell products to TIAA customers and to Everbank deposit customers.
TIAA's existing ratings are based on its extremely strong capitalization and very stable liability profile, strong and predictable operating earnings, and very strong competitive position in the U.S. pension market. Key rating concerns include the impact of ongoing low interest rates on the company's spread-based annuities and higher financial leverage resulting from acquisition related debt. TIAA's considerable room to lower crediting rates afford the company significant financial flexibility and is a mitigant to the company's higher financial leverage.
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 of 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 risk-based capital below 450%;
--TIAA's adjusted 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 notes 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-'.
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