Fitch Affirms Reinsurance Group of America's Ratings; Outlook Stable
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. The ratings also reflect the company's solid long-term financial performance and earnings, adequate risk adjusted capitalization, and ample liquidity.
RGA's ratings also consider operating challenges in its core traditional life reinsurance business in the U.S., which has been subject to competitive pricing and declining cession rates. Further, RGA's key capitalization metrics, including financial and operating leverage, have increased over the past several years and are at the high end of rating expectations. Continued deterioration in the company's balance sheet metrics could lead to a negative rating action in the near to intermediate term.
KEY RATING DRIVERS
Fitch views RGA's financial leverage as at the high end of its median guidelines for the current rating. The financial leverage ratio was 30.6% at year-end 2015. The company's total financing and commitments ratio of 1.0x 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 7.4x in 2015.
Fitch is monitoring asset growth because of the concern that contraction in RGA's core U.S. traditional market has caused the company 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 9.7x at year-end 2015 from 8.3x at the prior year-end. 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 run-rate profitability as generally good and in line with rating expectations. During 2015, the company reported net operating income of \\$567 million, down 11.1% from 2014. 2015 results were adversely impacted by net foreign currency movements, the impact of sustained low interest rates and adverse mortality in the U.S. segment. 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, ongoing low interest rates and the impact of weak foreign currencies.
Fitch is 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 relatively stable. 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 non-traditional business as potentially riskier.
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 year-end 2015, the holding company had \\$720 million in cash and invested assets, or 5.5x projected 2016 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 374% at year-end 2015.
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. New NAIC requirements regarding the use of captive reinsurers have been introduced that will allow RGA's current captive arrangements to remain in place but will place limitations on its ability to utilize captives to finance reserve growth related to future business.
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.
--Long-term IDR at 'A-;
--\\$300 million 5.625% senior notes due March 15, 2017 at 'BBB+';
--\\$400 million 6.45% senior notes due Nov. 15, 2019 at 'BBB+';
--\\$400 million 5.00% senior notes due June 1, 2021 at 'BBB+';
--\\$400 million 4.70% senior notes due in 2023 at 'BBB+';
--\\$400 million 6.20% subordinated debt due 2042 at 'BBB-';
--\\$400 million variable-rate junior subordinated debentures due Dec. 15, 2065 at 'BB+'.
RGA Reinsurance Company
--IFS at 'A+'.