Fitch Affirms RGA's Ratings; Outlook Stable
NEW YORK -- January 23, 2013
Fitch Ratings has affirmed Reinsurance Group of America's (RGA) 'A-' Issuer
Default Rating (IDR) rating and the 'A+' Insurer Financial Strength (IFS)
rating of RGA Reinsurance Company (RGA Reinsurance). The Rating Outlook for
all ratings is Stable. A complete list of ratings follows at the end of this
The affirmation reflects Fitch's view that RGA's balance sheet fundamentals
and operating performance remain within expectations for the rating.
Key rating concerns include challenges in RGA's core U.S. life reinsurance
market, macroeconomic concerns associated with the low interest rate
environment, and rapid growth in the company's asset intensive business lines.
RGA's financial leverage ratio (FLR) of 27% as of Sept. 30, 2012 is at the
high end of median levels for the current rating but within expectations. The
total financing and commitments (TFC) ratio is also relatively high at 1x due
in large part to collateral financing arrangements to support XXX reserve
Fitch views the statutory capitalization of RGA Reinsurance as adequate,
although the company relies on support from its parent to maintain target
capital levels. Capitalization at the holding company level is viewed as
relatively fungible, and available to support growth and meet regulatory
capital, collateral, and liquidity needs throughout the organization. RGA
Reinsurance's risk-based capital ratio is expected to be in the 360% to 370%
range at year-end 2012, a slight increase from 356% at year-end 2011.
Coverage of adjusted interest expense remains solid at 8x as of Sept. 30, 2012
based on pre-tax operating earnings. Earnings coverage is expected to be in
the same range at year end. Cash coverage, which includes RGA Reinsurance's
maximum dividend capacity and committed cash at the holding company, is about
3x, which is below rating expectations. Fitch's concern is somewhat mitigated
by the committed cash as well as dividend and interest payments to the holding
company by consolidated subsidiaries.
Fitch continues to view RGA's profitability as good and generally in line with
rating expectations. Fitch anticipates, however, that RGA's full-year 2012
profitability will be flat to down due mainly to higher individual mortality
and group morbidity in its U.S. traditional segment. Ongoing low interest
rates are also keeping pressure on investment yields, as with the industry as
a whole. Pre-tax operating earnings were down about 4% through the first nine
months of 2012.
RGA has maintained its number two position in the life reinsurance market in
terms of ordinary life inforce despite declines in new business assumed. The
decline is part of an industry trend in the U.S., as direct writers retain
more mortality risk in response to higher reinsurance costs. Fitch is
concerned about limited growth opportunities in this important market for RGA.
Fitch notes that RGA has rapidly expanded its presence in asset intensive
business lines, which has caused the company's consolidated GAAP invested
assets to double over the past five years and increase 30% through the first
nine months of 2012. The reinsurance of about $5.4 billion of deferred fixed
annuities in the second quarter drove the 2012 growth. Asset leverage (total
GAAP assets in relation to adjusted GAAP equity) was 8.3x at Sept. 30, 2012
compared to 6.8x at year-end 2011. The increase reflects the combined impact
of the growth in assets and new DAC accounting rules, which reduced 2012
equity. Fitch views asset intensive businesses as generally riskier and
outside RGA's core competency of managing mortality risk. Fitch will closely
monitor growth in this area.
The ratings assigned to RGA, Inc. reflect 'non-standard' notching relative to
the IFS rating assigned to RGA Reinsurance. Based on Fitch's notching
guidelines for reinsurers, standard notching between the subsidiary IFS rating
and parent company's IDR rating is one notch. The current two notch difference
between RGA Reinsurance's 'A+' IFS rating and RGA's 'A-' IDR reflects Fitch's
view that RGA Reinsurance has not been a consistent source of cash flow to the
parent. RGA's ratings could be upgraded one notch to 'standard' notching if
RGA Reinsurance became a consistent source of cash flow to the holding
Key rating triggers that could result in a downgrade include: RBC of RGA
Reinsurance drops well below 300% on a sustained basis; holding company
financial leverage above 30%; TFC well above 1x; GAAP interest coverage below
5x and 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
(excluding collateral financing) maintained in the 15% range; a total
financing and commitments (TFC) ratio of .6x or below on a sustained basis;
GAAP interest coverage of 10x or more and asset leverage below 6x.
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+';
--6.75% junior subordinated debentures due Dec. 15, 2065 at 'BBB-'
--6.20% subordinated debt due 2042 at 'BBB-'
RGA Reinsurance Company
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
investors. The issuer did not participate in the rating process, or provide
additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (October 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
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Cynthia J. Crosson, +1-212-908-0863
One State Street Plaza
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Tana M. Higman, +1-312-368-3122
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