Fitch Affirms Global Atlantic Financial Life Limited's IDR at 'BBB'; Outlook Revised to Positive
KEY RATING DRIVERS
GAFLL's ratings reflect the company's strong risk-adjusted capitalization, strong operating performance, and high credit quality investment portfolio. The rating also reflects the company's rapid growth in recent years, the relatively short operating history under the larger organization, challenging operating environment, and somewhat limited access to external equity capital given its status as a privately held company.
The revision of the Rating Outlook to Positive from Stable reflects Fitch's improved business profile given the company's successful execution on the Forethought and Accordia acquisitions and view that continued strong capitalization and strong operating performance could result in an upgrade of the company's rating over the next 24 months.
GAFG began as a niche provider of block-type reinsurance in 2004 and has grown quickly primarily through acquisitions of Forethought Financial Group and the former Aviva USA's life insurance business in 2013 and 2014. GAFG has had a relatively short operating history under the larger organization but the company has been able to build a strong retail operation with strong direct sales of annuities and life in addition to its block reinsurance business. The retail annuities and life businesses have provided revenue and earnings diversity and consistency to the institutional block reinsurance business, where flows can be lumpy.
Fitch views GAFG's capitalization as strong and in line with rating expectations. RBC for Commonwealth Annuity and Life Insurance Co. (CALIC), one of GAFG's main subsidiaries, was 458% at year-end 2015. GAFG targets a consolidated RBC of 400% under a stressed scenario. GAFG's PRISM capital model score is 'Strong', which is consistent with insurance companies rated in the 'A' category. Global Atlantic Re (GA Re) had Bermuda statutory capital of $573 million at year-end 2015, which is well in excess of statutory requirements.
GAFG's financial leverage was moderate at 18% and 17% as of year-end 2015 and Q2 2016 respectively. The company's total financing and commitments (TFC) ratio is considered above average at 1.1x as of year-end 2015, driven primarily by funding arrangements for universal life excess reserves.
GAFG generated strong profitability as measured by return on equity (ROE) and assets. Operating ROE was 15% at both year-end 2015 and first-half 2016. Strong sales in annuities and good results in life insurance and reinsurance, along with stable performance of the in-force business, have contributed to strong operating performance of the company.
Profitability is still expected to be strong for the rating with GAAP ROE expected in the 12% to 15% range for 2016 as GAFG continues to benefit from stable in-force business, greater economies of scale, and focus on growth in certain distribution channels. Fitch will continue to monitor operating results to ensure that new sales profitability is maintained and commensurate with growth.
Fitch views GAFG's debt service capabilities as strong for its rating given the company's GAAP interest coverage of 14x in 2015. The majority of GAFG's debt is attributed to the company's revolving bank facility and, as such, the debt is shorter-term relative to peers. GAFG's primary sources for debt service are cash at the holding company, which was approximately $134 million at year-end 2015, interest from intercompany surplus notes, and dividends from Bermuda-based subsidiary GA Re and CALIC.
GAFG's investment portfolio is considered to be of high quality as the company invests primarily in investment-grade bonds, with moderate exposure to commercial mortgages and limited exposure to common stock and alternative assets. GAFG's risky asset ratio increased to 43% as of year-end 2015 compared to 18% in the prior year due to an increase in below-investment grade bonds as well as an increase in lower rated commercial mortgage loans. The company's risky asset ratio remains well below the life industry average of 80% as of year-end 2015. GAFG's credit-related impairments for 2015 have been low.
The key rating triggers that could result in a rating upgrade include:
--An improved business profile of the company as evidenced by further seasoning of the business and strong sustained profitability;
--Maintain strong capitalization and leverage which includes RBC above 400%, a PRISM capital model score of 'Strong', or financial leverage below 25%;
--GAAP based interest coverage above 10x on an operating income basis;
--Continued low credit related investment losses.
The key rating triggers that could result in a downgrade include:
--A decline in capitalization and leverage which includes RBC below 350%, a PRISM capital model score below 'Strong', or financial leverage above 30%;
--ROE declining to below 10% for four consecutive quarters;
--Decline in GAAP interest coverage ratio to below 8x on an operating income basis.
FULL LIST OF RATING ACTIONS
Fitch affirms the following rating:
Global Atlantic Financial Life Limited
--IDR at 'BBB'.