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Fitch Affirms RGA Reinsurance Co IFS at 'A'; Outlook Stable
June 8, 2017 / 4:05 PM / 6 months ago

Fitch Affirms RGA Reinsurance Co IFS at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, June 08 (Fitch) Fitch Ratings has affirmed the 'A' ('Strong') Insurer Financial Strength (IFS) rating of RGA Reinsurance Company (RGA Reinsurance). Fitch has also affirmed the senior debt ratings of Reinsurance Group of America, Inc. (RGA) at 'BBB'. The Rating Outlook is Stable. A complete list of rating actions is provided at the end of this release. The ratings were affirmed because RGA continues to maintain its strong business profile 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 reflect the company's very strong long-term financial performance and earnings, strong risk-adjusted capitalization, and strong liquidity. RGA's ratings also consider its relatively high financial and operating leverage. Fitch believes RGA faces operating challenges in its core traditional life reinsurance business in the U.S., which has been subject to competitive pricing and declining cession rates. KEY RATING DRIVERS Fitch considers RGA's business profile to be strong. RGA has built upon its historical strength in the North American mortality market by diversifying geographically and by product. Offsetting these positives, diversification has increased the company's exposure to interest rate risk due to growth in asset-intensive businesses. RGA's capitalization and leverage are strong. However, Fitch considers RGA's financial leverage to be high for a life insurer. The financial leverage ratio was 35% at year-end 2016, and declined to 32.2% following the repayment of $300 million of senior notes in March 2017. 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 strong. Operating earnings-based interest coverage was 7.2x in 2016. Fitch views the statutory capitalization of RGA Reinsurance as strong, although the company relies on affiliated captive reinsurance to maintain target capital levels. RGA Reinsurance's reported risk-based capital (RBC) ratio was 365% at year-end 2016. RGA uses affiliated captive reinsurers primarily to manage the excess statutory reserves associated 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. Fitch views RGA's run-rate profitability as very strong and in line with rating expectations. The company reported operating income of $633 million for 2016, up 11.6% from 2015. The improvement in 2016 results was primarily due to an increase in investment-related gains, higher investment income and improved mortality experience in the U.S. operations. Fitch anticipates competitive challenges in the company's core U.S. traditional business, higher mortality and morbidity in select non-U.S. markets, ongoing low interest rates, and the impact of weak foreign currencies will constrain profits over the medium term. Fitch has noted an increase in earnings volatility due to changes in RGA's operating profile. RGA's ratings consider the company's historical focus on traditional individual life mortality risk in the U.S. and Canada, where results have been relatively stable. The ratings also recognize that RGA's other business, including long-term care, longevity risk and group life and health, account for an increasing proportion of earnings. While individual mortality experience is still the dominant driver of operating earnings in the U.S. traditional segment, Fitch expects the trend towards potentially riskier financial solutions to continue. 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 2016, the holding company had $1.4 billion in cash and invested assets, or 9x projected 2017 interest expense. The next material upcoming debt maturity is in 2019. RATING SENSITIVITIES 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 6x; --RBC of RGA Reinsurance drops below 300% on a sustained basis; --GAAP asset leverage of 12x 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 28% range; --GAAP interest coverage of 9x or more; --GAAP asset leverage below 10x. Key rating triggers that could result in widened notching between the holding company and IFS rating include: --Holding company financial leverage maintained above 35%. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Reinsurance Group of America, Inc. --Long-Term IDR 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 3.95% senior notes due Sept. 15, 2026 at 'BBB'; --$400 million 6.20% subordinated debt due 2042 at 'BB+'; --$400 million 5.75% fixed to floating subordinated debentures due June 15, 2056 at 'BB+'; --$400 million variable-rate junior subordinated debentures due Dec. 15, 2065 at 'BB'. RGA Reinsurance Company --IFS at 'A'. Contact: Primary Analyst Donald F. Thorpe, CPA, CFA Senior Director +1 312 606-2353 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Douglas L. Meyer, CFA Managing Director +1 312 368-2061 Committee Chairperson Brian C. Schneider, CPA, CPCU, ARe Senior Director +1 312 606-2321 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. The following issuer(s) did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: Reinsurance Group of America, Incorporated, RGA Reinsurance Company. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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