Teachers Insurance and Annuity Association of America

CREDIT ANALYSIS

Table of Contents:

SUMMARY RATING RATIONALE 1

GROUP OVERVIEW 1

ANALYSIS OF KEY RATING

CONSIDERATIONS 2

Discussion of Business Profile Drivers 2 Discussion of Financial Profile Drivers 5 Other Credit Considerations 9

ANNUAL STATISTICS 10

MOODY’S RELATED RESEARCH 12

Analyst Contacts:

NEW YORK 1.212.553.1653 Scott Robinson 1.212.553.3746 Senior Vice President

Scott.Robinson@moodys.com

Laura Bazer 1.212.553.7919 Vice President-Senior Credit Officer

Laura.Bazer@moodys.com

Manoj Jethani 1.212.553.1048 Associate Analyst

Manoj.Jethani@moodys.com

Joel Levine 1.212.553.3871 Senior Vice President

Joel.Levine@moodys.com

» contacts continued on the last page

This Credit Analysis provides an in-depth discussion of credit rating(s) for Teachers Insurance and Annuity Association of America and should be read in conjunction with Moody’s most recent Credit Opinion and rating information available on Moody's website.

Teachers Insurance and Annuity Association

of America

Summary Rating Rationale

Moody's Aaa insurance financial strength rating (stable outlook) of Teachers Insurance and Annuity Association of America (TIAA), and its wholly-owned subsidiary, TIAA-CREF Life Insurance Company, reflects the companies’ dominant position in the higher-education pension market, outstanding capital base, expense advantages, and uniquely stable liability structure.

These strengths are somewhat offset by increased competition from other financial service providers and an investment portfolio with a very sizable, albeit declining exposure to commercial real-estate and increased competition. While our outlook for stress losses in this asset class have moderated, it remains a material exposure for TIAA.

Group Overview

TIAA is part of the TIAA-CREF organization, one of the largest retirement systems in the U.S. based on assets under management. College Retirement Equities Fund (CREF) is the sister company to TIAA in TIAA-CREF. Both organizations are operated on a non-profit basis and specialize in the provision of retirement annuities for employees of not-for-profit organizations whose primary purpose is education and research. TIAA-CREF's primary business activity is the operation of these employer-sponsored retirement plans for the employees of participating institutions. Most TIAA-CREF participants are current or former employees of colleges and universities.

At December 31, 2010, TIAA reported net admitted statutory assets of $215 billion. TIAA and CREF combined reported $466 billion in assets under management as of March 31, 2011, making it one of the largest retirement plans in the U.S.

TIAA-CREF provides retirement annuities and insurance coverage to more than 3.7 million participating individuals at approximately 15,000 colleges, universities, and other non-profit institutions throughout the U.S. These retirement annuity related liabilities account for the vast majority of TIAA's total reserves.

TIAA-CREF also offers additional financial services such as mutual funds, trust services, and program management for state sponsored Section 529 college savings plans. These operations are still very small in size compared to the organization's core retirement services business.

In recent years the company has undergone significant changes including reorganizing into client centered business groups and installing a new senior management team. Operations were also

substantially reorganized, resulting in job cuts and some products were repriced or withdrawn from the marketplace. These changes also resulted in customer service and information technology issues that resulted in the loss of some clients. According to TIAA-CREF, these changes were implemented to make it more competitive and the organization has rededicated itself to providing superior products and services to its core customer group. As of December 31, 2010, the company had approximately 7,500 employees.

FIGURE 1

Simplified Organization Chart of TIAA

Analysis of Key Rating Considerations

Discussion of Business Profile Drivers

Market Position and Brand

» Dominant market presence in its core pension market for higher education institutions; subject to increasing competitive pressures

TIAA alone (excluding CREF) is the fourth largest life insurance company in the U.S. when ranked by assets, but it still captures a fairly small portion of the overall industry's premiums/deposits. However, TIAA focuses its attention and efforts on a very specialized market segment--the retirement savings of educators and non-profit research professionals. TIAA-CREF is, by a wide margin, the dominant provider of employer-sponsored savings plans in the higher education market (colleges and

universities) with a market share in this segment in excess of 50%. Because of this intense focus and LEGEND

Teachers Insurance and Annuity Association of America*

TIAA Board of Overseers

TIAA Global Markets, Inc TIAA-CREF Life Insurance

Company*

College Retirement Equity Fund

Life Insurer =*

dominance in this segment, we believe TIAA's market position and brand is consistent with Aaa-rated insurers.

TIAA-CREF has lost some market share as competitive providers' retirement plans have been added to the retirement plan options by some plan sponsors. The primary driver of this lost market share is TIAA-CREF's relatively modest name recognition among the general community and/or the company's low cost distribution system that cannot support the costly one-on-one sales force used by many major competitors. TIAA-CREF has been addressing both of these issues while attempting to protect its strongest competitive advantage, a cost structure unmatched in the industry.

Aside from enhanced marketing and offering individuals additional retirement services and products in an attempt to retain assets, Moody's expects TIAA to expand into other markets such as healthcare and eventually, the state’s public retirement system, if such an opportunity develops. Both of these markets offer ample opportunities for growth and fit within TIAA’s strategy.

FIGURE 2

Net Premiums and Deposit Funds (millions of $)

Distribution

» High degree of control of its salaried distribution force works well in target market

TIAA markets its primary products directly to employee plan participants through their employers via full-time TIAA salaried staff. TIAA products are often, but not always, the only retirement savings vehicle offered by the employer. In recent years, the company has rapidly expanded a series of regional offices with 75 open as of year-end 2010. The centers are designed to better serve key institutional and individual customers and to improve the relationship with plan participants. Because of the high degree of control of TIAA's salaried distribution force and the strong and long-standing relationship with sponsoring employers as well as the individual participants, Moody's believes that TIAA's distribution control is consistent with a score of Aa.

The regional office network has been expanded in an effort to promote a closer relationship between TIAA and covered plan participants. This is especially important with participants with large account balances who are near or in retirement since these are the assets most at risk to loss to competitors that have historically offered more hands on participant counseling. The regional offices have been opened in areas that have heavy concentration of higher education institutions and, therefore, participants.

10,492 9,663 13,599 10,511 11,840 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 2006 2007 2008 2009 2010

FIGURE 3

Number of Regional Offices

Product Focus & Diversification

» Low risk product focus maintained with minimal product guarantees

TIAA's primary products are participating annuities sold through employer-sponsored retirement savings plans. The crediting rates on these annuities, while generally considerably in excess of those offered by competitors, are not guaranteed, and still continue to have substantial dividend margins. Crediting rates can be adjusted downward if the company is subject to financial stress. Most of these liabilities are also subject to extensive withdrawal restrictions, to an extent that is unique in the

industry. Because of the combination of these two factors, we consider TIAA's overall product risk and diversification to be within the Aaa range.

In recent years, TIAA-CREF has broadened its product line to offer additional financial services from which its participants can benefit. For example, it has substantially broadened the wealth management and protection related products offered participants and other customers. Moody's expects that TIAA-CREF is likely to introduce new products and services as it endeavors to become a more

comprehensive financial service provider to its participants.

Product expansions into new product areas in which TIAA-CREF has less experience and faces a greater degree of competition than the dominant position it holds in its core retirement business exposes the company to new and heightened risks in unfamiliar markets. If undertaken to a significant extent, these expansions could adversely affect the organization's overall financial strength. However, Moody's believes that overall such efforts in moderation serve to complement TIAA-CREF's core franchise by strengthening its relationship with its core clients and it will take many years before the size of these products will be a meaningful portion of the overall organization.

49 61 62 70 75 0 10 20 30 40 50 60 70 80 2006 2007 2008 2009 2010

FIGURE 4

2010 Policy Reserves & Liabilities by Line

Discussion of Financial Profile Drivers

Asset Quality

» Good quality, broadly diversified investment portfolio supports competitive crediting rates; however, exposure to CML losses evident in downside scenario

The risk profile for TIAA's investment portfolio is good. TIAA did absorb substantial investment losses, albeit declining, during 2008-2010 due to the harsh economic environment. We believe that these losses are partly due to a proactive and aggressive loss recognition process that did not attempt to defer losses into later periods. We expect that the company will face modest pressure in its commercial real estate (CRE) investments in 2011.

If the likelihood of a double dip recessionary environment were to surface, we expect TIAA to realize relatively more losses than some if its highly-rated peers, largely based on its exposure to certain investments seeking long term appreciation at the expense of some shorter term volatility. However, we expect the company would remain well capitalized after a stress scenario. The stress losses could occur in TIAA's $12.8 billion non-agency RMBS portfolio (as of December 31, 2010), the company’s alternative investment portfolio (over $10 billion), CMBS investments ($13.4 billion) and to a lesser degree, the company's direct commercial mortgage lending ($13.7 billion). Moody's notes that since December 2009, TIAA has reduced the CMBS portfolio by $5.1 billion, or approximately 28%, and the commercial mortgage portfolio by $4.5 billion, or about 25%.

The potential losses in the investment portfolio need to be analyzed in the context of the company’s strong operating earnings and capital levels in addition to its very stable liability structure. Moody's believes that the long-term nature of the company's liabilities, limited guarantees and limited surrender options permit the company to invest for maximum long-run returns without adversely affecting the company's creditworthiness. In the event of a remote stress scenario, TIAA has the ability to cut dividends by over $2.5 billion.

The portfolio's investment management process and wide diversification also help partially offset other risk characteristics such as a a heavy commitment to various forms of structured finance instruments (36% of invested assets). The company’s commercial mortgage portfolio is large and well diversified, and we believe losses from the (CRE) portfolio will be manageable given TIAA’s strong operating earnings supplemented by exceptional capital level as measured by its Risk Based Capital Ratio.

Individual life 0.4% Individual annuities 84.3% Supplementary Contracts 1.5% Group pension 13.5% Deposit-type contracts 0.3%

TIAA has been actively managing down its exposure to commercial mortgage loans and CMBS securities in recent years. Although TIAA still has significant exposure to residential mortgage-backed and asset-backed securities, its combined structured finance portfolio has been declining and

performed reasonably well in aggregate. In addition, the interest rate and disintermediation risks inherent in investments with prepayment rates sensitive to interest rates are moderated by the company's flexibility in setting annuity contract crediting rates. Moody's believes that while TIAA's heavy reliance on structured securities investments is not without risks, these risks are, in aggregate, carefully managed and diversified so that unforeseen circumstances will have a manageable effect on the overall organization.

FIGURE 5

TIAA Historical breakdown of investments 2006-2010

Capital Adequacy

» Capitalization is outstanding; generated by retained earnings plus recent capital raise and reserve release

TIAA has strong capital adequacy based on shareholder’s equity as a percentage of total assets (11.2% as of year-end 2010), which is in line with our expectation for a Aa rated company. However, for U.S firms, we consider the NAIC risk-based capital ratio to be a more reliable measure of capital adequacy. TIAA’s NAIC RBC ratio at December 31, 2010 was 565%. We note that the $2 billion surplus note issuance in December 2009 as well as several regulatory and reserving changes (e.g., de-strengthening of certain payout annuities) helped improve the company’s statutory capital since year-end 2008. TIAA's statutory capital is consistent with Aaa life insurers - i.e. more than 400% NAIC RBC, and Moody's expects that TIAA's capital position will remain at the Aaa level (especially given its mutual-like structure and limited use for excess capital besides acquisitions), barring a severe worsening of the economy.

The TIAA-CREF combined reserve liability distribution has been shifting longer-term to a heavier weighting in CREF equity accounts. This change has important ramifications regarding the

organization's long-term capital needs. Moody's believes that the long-term implications of such a shift is favorable to TIAA-CREF since it reduces TIAA's capital requirements and shifts investment risk to plan participants. Participant balances at CREF do not need capital to support them since there are no material guarantees associated with these funds.

0% 20% 40% 60% 80% 100% 2006 2007 2008 2009 2010

Public bonds Private bonds Affiliated common stock Unaffiliated common stock Preferred stock Total mortgage loans Real estate Policy loans

FIGURE 6

TIAA's Capital Position

(Millions of $) 2010 2009 2008 2007 2006 2005

Surplus 25,156 22,844 17,754 17,827 15,282 13,547

Investment reserve (AVR) 2,031 606 333 4,446 3,754 3,064

Total Capital 27,187 23,450 18,087 22,273 19,036 16,611

NAIC Risk based capital ratio (%) 565 539 442 448 469 468

Capital/assets (%) 12.5 11.5 9.1 11.2 10.2 9.3

Growth of statutory surplus (%) 10.1 28.7 -0.4 16.7 12.8 18.0

Profitability

» Modest profitability due to very high capital level and policyholder value orientation

Based on recent statutory financial results, TIAA's profitability metrics are generally low compared to pre-crisis years and other similarly rated peers. This is in part due to TIAA's very strong capital position (which depresses reported return on capital measures) and an emphasis on superior customer value and crediting rates, which have been maintained at the highest competitive level in the higher education market, and which also depresses the company's reported profitability. The company also experienced significant net income volatility during 2008-2010 given the substantial volatility in TIAA's investment portfolio, a byproduct of the company's long-term, total-return investment strategy. This has been especially true in 2008 and 2009 when the company reported a net loss due to $4.5 billion and $3.3 billion in net realized capital losses, respectively. It is TIAA’s policy to blend these investment gains and losses in over time into the crediting rates paid on TIAA's policies. In fact, TIAA has indeed adjusted its crediting rates in recognition of these investment losses.

Aside from management of the credit rates, key profit drivers include low operating expenses and very high product persistency. Although there may be volatility in investment returns, the company is well positioned to deliver long term value to its contract holders.

Pre-tax gain from operations in 2010 were $2.8 billion, relatively flat as compared to $2.9 billion in 2009 and a marked improvement as compared to $1.2 billion in 2008. For the full year ended December 31, 2010, TIAA reported $1.4 billion in net income versus a loss of $459 million in 2009 and a loss of $3.3 billion in 2008. The improvement in net income in 2010 was a result of lower net realized capital losses of $1.4 billion in 2010 as compared to $3.3 billion 2009 and $4.5 billion in 2008. We expect net earnings to stabilize in 2011 and be more in line with pre-crisis levels in the future.

As a result of the anticipated improvement and the aforementioned factors, we view TIAA's profitability to be consistent with Aa-rated companies.

FIGURE 7

TIAA Profitability (millions of $)

Liquidity and Asset Liability Management (ALM)

» Liquidity profile is amongst the best in the industry

TIAA has an outstanding liquidity position, and it is consistent with its Aaa overall rating. TIAA had approximately $170 billion in general account policyholder liabilities as of December 31, 2010. Only 23% of that amount is withdrawable upon demand by participants. Approximately 14% is in payout mode and is not subject to surrender by participants. Another 63% is in accumulation mode and can only be withdrawn by participants ratably over a ten-year period. This liability structure and the lack of disintermediation and other optionality risks give TIAA one of the best liquidity profiles in the industry.

TIAA Global Markets, Inc.: TIAA Global Markets (TGM) is a self-funding spread arbitrage program

similar to the funding agreement note issuance programs operated by numerous other insurers. TGM normally funds itself by issuing term debt in the bond markets. TGM's debt is fully guaranteed by TIAA and is currently in run-off. TGM's debt maturity schedule as of December 31, 2010 is as follows:

FIGURE 8

TIAA Global Markets Debt Maturity Schedule (millions of $)

Issuance Date Issuance Amount Maturity

Jan-06 $250 Jan-11 Jan-06 $250 Jan-11 Oct-07 $1,000 Oct-12 Jan-08 $500 Jan-11 Jul-08 $500 Jul-13 $2,500 -20% -15% -10% -5% 0% 5% 10% 15% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 2005 2006 2007 2008 2009 2010

Financial Flexibility

» Financial flexibility is strong with limited adjusted financial leverage, strong earnings coverage; supported by a policyholder orientation

TIAA issued its first debt obligation of US $2 billion in surplus notes in December 2009. Although TIAA Global Markets, Inc. has issued debt, we regard that as operating debt funding an institutional spread business. Other components of financial leverage (such as pensions and leases) are very modest in relation to the size of the company. At year-end 2010 adjusted financial leverage stood at 6.4%, higher than prior years (due to its recent surplus note issuance). Total financial leverage was 17.7%, including the debt obligation at TIAA Global Markets, which is currently in run-off.

We believe that TIAA has available substantial potential access to the debt capital markets as evidenced by the $2 billion surplus notes issuance during a difficult credit environment. In addition, as of December 31, 2010, TIAA had almost $2.5 billion global notes outstanding under a program operated by its guaranteed subsidiary, TIAA Global Markets, Inc.

TIAA’s earnings coverage metric was 9.0x as of year-end 2010, significantly improved as compared to 2008 and 2009 when the company had negative earnings. As mentioned, we expect earnings to continue to stabilize and return to pre-credit crisis levels in the future.

Moody's believes that TIAA’s financial flexibility is further enhanced by its low guaranteed interest rates, which act to minimize the impact of interest rate fluctuations on its earnings. If earned portfolio returns change, TIAA can and has adjusted its crediting rates over time to maintain the stability of the company's overall financial results. However, somewhat offsetting this benefit, we note that given its mutual-like structure, TIAA does not have access to the equity markets.

Other Credit Considerations

Favorable Governance Structure

TIAA-CREF is managed with a strong focus on the best interests of policyholders/creditors. Moody's rating of TIAA recognizes the favorable impact of this governance structure on the interests of creditors.

TIAA-CREF has a unique and complicated governance structure. Moody's considers TIAA-CREF ownership structure (which is similar to that of a mutual insurer) as a credit positive in terms of supporting long-term decision-making. However, unlike a typical insurer, TIAA-CREF has numerous governing bodies, each with their own nuances. This complex governance structure promotes a high level of board independence, at all levels. However, in our view the structure can also make it difficult to clearly delineate the roles of the various participants.

Overall, governance within TIAA-CREF is strong. In April 2008 TIAA-CREF appointed an external candidate, Mr. Roger W. Ferguson, Jr. as the new President and Chief Executive Officer of both TIAA and CREF. Consistent with the corporate governance principles espoused by the organizations, Mr. Ferguson is Chairman of neither organization, both of which have independent, non-executive Chairmen.

Annual Statistics

2010 2009 2008 2007 2006

Company Fundamentals ($mil)

General account assets 203,987 194,652 184,887 179,476 170,618

Total assets 217,745 204,694 197,874 199,192 186,566

Surplus 25,156 22,844 17,754 17,827 15,282

Investment reserve (AVR) 2,031 606 333 4,446 3,754

Total capital 27,187 23,450 18,087 22,273 19,036

Insurance revenues 11,773 10,467 13,552 9,634 10,437

Net investment income 10,587 10,402 10,620 10,834 10,318

Total revenues 25,541 24,212 28,975 24,537 24,332

Gain from operations pre - tax & div. 5,550 5,486 5,712 6,535 6,264

Gain before realized capital gains 2,837 2,887 1,179 1,584 1,744

Net Income 1,406 (459) (3,345) 1,439 2,351

Segment analysis (as % of policy res. & liabs)

Individual life 0.4% 0.4% 0.4% 0.4% 0.4% Individual health 0.0% 0.0% 0.0% 0.0% 0.0% Individual annuities 85.3% 86.1% 87.2% 88.2% 88.7% Group life 0.0% 0.0% 0.0% 0.0% 0.0% Group health 0.0% 0.0% 0.0% 0.0% 0.0% Group pension 13.3% 12.6% 11.6% 10.6% 9.9% Deposit-type contracts 0.9% 0.9% 0.9% 0.9% 0.9%

Segment analysis (as % of premiums & deposits)

Individual life 3.3% 3.8% 2.9% 4.0% 3.7% Individual health 0.0% 0.0% 0.0% 0.0% 0.0% Individual annuities 61.7% 60.7% 66.5% 64.2% 66.7% Group life 0.0% 0.0% 0.0% 0.0% 0.0% Group health 0.0% 0.0% 0.0% 0.0% 0.0% Group pension 30.8% 30.8% 27.7% 28.7% 26.0% Deposit-type contracts 4.2% 4.7% 2.9% 3.3% 3.4%

Investment Profile (as % of cash & inv. assets)

Public bonds 65.1% 62.6% 57.2% 55.5% 53.6%

Private bonds 17.0% 18.8% 18.2% 20.4% 20.4%

Affiliated common stock 0.0% 0.0% 0.0% 0.3% 0.3%

Unaffiliated common stock 0.3% 0.5% 0.5% 0.8% 0.8%

Preferred stock 0.0% 0.1% 1.8% 2.5% 2.7%

Total Mortgage loans 6.9% 9.6% 10.9% 11.6% 14.2%

Real estate 2.7% 3.0% 3.6% 3.3% 3.0%

TIAA Group

2010 2009 2008 2007 2006

Cash & short term investment 0.9% 0.3% 3.1% 0.9% 1.5%

Other invested assets 6.5% 4.6% 4.5% 4.4% 3.2%

Asset Quality

High risk assets/invested assets 15.7% 13.7% 11.4% 12.3% 11.1%

High risk assets/capital 112.1% 105.7% 107.1% 92.5% 107.7%

Below investment grade bonds/Invested assets 6.5% 5.8% 3.7% 3.9% 4.1%

Residential MBS/inv. Assets 24.6% 23.4% 22.0% 19.4% 19.2%

Commercial MBS and ABS/inv. assets 11.6% 14.2% 15.8% 16.9% 16.6%

Capital Adequacy/Capital Growth

Capital/Assets 12.5% 11.5% 9.1% 11.2% 10.2%

Capital/general account assets 13.3% 12.0% 9.8% 12.4% 11.2%

Growth of capital (%) 15.9% 29.6% -18.8% 17.0% 14.6%

Change in capital % Net Income 265.8% -1168.1% 125.1% 225.0% 103.1%

Profitability

Net income/average assets 0.7% -0.2% -1.5% 0.7% 1.3%

Net income/average capital 5.6% -2.2% -16.6% 7.0% 13.2%

Operating return on average assets 1.3% 1.4% 0.6% 0.8% 1.0%

Operating return on average capital 11.2% 13.9% 5.8% 7.7% 9.8%

Renewal premium persistency 94.5% 98.4% 97.3% 99.7% 100.4%

Individual annuity persistency ratio 94.3% 95.6% 94.0% 93.2% 95.4%

Net investment yield 5.6% 5.7% 6.1% 6.5% 6.4%

General exp & commissions/Premiums & Dept-type

funds 8.9% 10.6% 8.4% 10.7% 8.7%

Total general expenses/Average assets 0.5% 0.6% 0.6% 0.6% 0.5%

Gain ( loss ) from operations ($mil)

Individual life 31 32 17 68 11 Individual health 2 2 2 1 (0) Individual annuities 1,144 1,432 44 540 848 Group life (0) (0) (0) (0) 1 Group health (0) 23 (0) (0) 9 Group pension 324 252 11 14 100 Other 1,336 1,145 1,105 962 776

Liquidity and ALM:

Moody’s Related Research

Credit Opinion:

» Teachers Ins. and Annuity Assoc. of America, June 2011

Corporate Governance Assessment:

» Teachers Ins. and Annuity Assoc. of America, December 2006 (101222)

Industry Outlook:

» U.S. Life Insurance: Outlook Returns to Stable, May 2010 (125085)

Insurance Statistical Supplement:

» Teachers Ins. and Annuity Assoc. of America, July 2010

Special Comment:

» Solid Capital Levels for U.S. Life Insurers at YE 2010; Pressure to Redeploy “Excess” Capital,

March 2011 (131727)

» U.S. Life Insurers’ 4Q10 Results Mixed, but Continue to Stabilize, March 2011 (131317)

» Moody’s Global Liquidity Stress Test for Life Insurance Operating Companies, March 2010

(121220)

Rating Methodology:

» Moody’s Global Rating Methodology for Life Insurers, May 2010 (123502)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

» contacts continued from page 1 Analyst Contacts: NEW YORK 1.212.553.1653 Robert Riegel 1.212.553.4663 Managing Director-Insurance Robert.Riegel@moodys.com Report Number: 133635 Authors Scott Robinson Manoj Jethani

Senior Production Associate Shubhra Bhatnagar

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