Fitch Affirms Reinsurance Group of America's Ratings; Outlook Stable
KEY RATING DRIVERS
RGA's ratings reflect its strong market position as the largest provider of individual and group life reinsurance in North America and as one of the leading life and health reinsurers in the world; solid long-term financial performance and earnings; adequate risk adjusted capitalization; and ample liquidity. Offsetting these positives are the rapid growth of asset intensive business; the company's elevated financial leverage; and RGA Reinsurance's reliance on captives to finance excess statutory reserve requirements.
Fitch views RGA's run-rate profitability as generally good and in line with rating expectations. During the first half of 2015, the company reported net operating income of $252 million, down 6.6% from the same period in 2014. Fitch anticipates that profitability over the medium term will be constrained by competitive challenges in the company's core U.S. traditional business, higher mortality and morbidity in select markets, and ongoing low interest rates.
Fitch is also concerned about the potential for increased earnings volatility due to a change in RGA's operating profile. RGA's current ratings are based in part on the company's historical focus on traditional individual life mortality risk in the U.S. and Canada, where results have been stable. Fitch notes that, while individual mortality experience is still the dominant driver of operating earnings in the U.S. traditional segment, RGA's other business, including long-term care, longevity risk and group life and health, account for an increasing proportion of earnings, and that trend is expected to continue. Fitch views this newer business as potentially riskier.
Fitch is monitoring asset growth because of the concern that contraction in RGA's core U.S. traditional market will cause it to look for growth in riskier asset-intensive businesses and increase its exposure to interest rate risk. Asset leverage (GAAP assets in relation to adjusted equity) increased to 9.0x at June 30, 2015 from 8.3x as of year-end 2014. The increase was due in part to RGA's acquisition of Aurora National Life Assurance Company in April 2015. The acquired business was approximately two-thirds annuity and one-third interest sensitive life products.
Fitch views RGA's financial leverage as at the high end of its median guidelines for the current rating. The financial leverage ratio was 30.5% at June 30, 2015. The company's total financing and commitments ratio of 1.1x is also considered high. Fitch believes, however, that the group's ability to service its debt remains sound. GAAP operating earnings-based interest coverage was 7.1x in the first half of 2015.
Fitch believes RGA's liquidity at the holding company level is strong. The holding company has committed to maintain cash and liquid assets of approximately $300 million. At June 30, 2015, the holding company had $587 million in cash and invested assets, or over 4x projected 2015 interest expense. The next upcoming debt maturity is in 2017.
Fitch views the statutory capitalization of RGA Reinsurance as adequate, although the company relies on affiliated captive reinsurance to maintain target capital levels. RGA Reinsurance's reported risk-based capital (RBC) ratio was 366% at year-end 2014.
RGA uses affiliated captive reinsurers primarily to manage the excess statutory reserves associated primarily with its term-life book of business. Fitch views RGA's above-average reliance on captive reinsurance as a unique risk, given the current regulatory scrutiny of captive arrangements used by life insurers. A change in the regulatory approach to affiliated reserve financing arrangements could have a negative impact on RGA's financial flexibility and capital management strategies.
Key rating triggers that could result in a downgrade include:
--A decline in GAAP earnings as evidenced by deterioration in GAAP interest coverage to below 7x;
--RBC of RGA Reinsurance drops well below 325% on a sustained basis;
--Holding company financial leverage above 30%;
--Total financing and commitments (TFC) ratio maintained materially above 1x;
--GAAP asset leverage of 10x or higher.
Key rating triggers that could result in an upgrade include:
--RBC of RGA Reinsurance of 400% or more on a sustained basis;
--Financial leverage maintained in the 15% range;
--A TFC ratio of 0.6x or below on a sustained basis;
--GAAP interest coverage of 10x or more;
--GAAP asset leverage below 6x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Reinsurance Group of America, Inc.
--IDR at 'A-;
--5.625% senior notes due March 15, 2017 at 'BBB+';
--6.45% senior notes due Nov. 15, 2019 at 'BBB+';
--5.00% senior notes due June 1, 2021 at 'BBB+';
--4.70% senior notes due in 2023 at 'BBB+';
--6.75% junior subordinated debentures due Dec. 15, 2065 at 'BB+';
--6.20% subordinated debt due 2042 at 'BBB-'.
RGA Reinsurance Company
--IFS at 'A+'.