Fitch Affirms Reinsurance Group of America's Ratings; Outlook Stable

Mon Mar 31, 2014 4:59pm EDT

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(The following statement was released by the rating agency) CHICAGO, March 31 (Fitch) Fitch Ratings has affirmed Reinsurance Group of America, Inc.'s (RGA) 'A-' Issuer Default Rating (IDR) and the 'A+' Insurer Financial Strength (IFS) rating of RGA Reinsurance Company (RGA Reinsurance). The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. 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 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 increased financial leverage; and RGA Reinsurance's reliance on captives to finance excess statutory reserve requirements. Fitch views RGA's historical profitability as generally good and in line with rating expectations. However, the company's operating earnings in 2013 were below expectations due primarily to a $274 million pre-tax charge. The charge was related to group disability business in Australia, which is part of the company's Asia Pacific segment, a relatively small contributor to RGA's historical earnings. Claims incidence and reporting lags in the total and permanent disability (TPD) line were the main drivers of the loss. RGA believes the charge is very conservative and will cover all future claims related to this business, although Fitch believes some uncertainty remains. RGA's other segments reported results generally in line with expectations in 2013. The decline in earnings depressed the company's GAAP earnings-based interest coverage ratio in 2013. Fitch believes, however, that the group's ability to service its debt remains sound and that earnings and coverage metrics will improve in 2014. Fitch views the statutory capitalization of RGA Reinsurance as adequate, although the company relies on support from its parent to maintain targeted capital levels. RGA Reinsurance's reported risk-based capital (RBC) ratio was 365% at year-end 2013, a slight increase from 360% at year-end 2012. Fitch believes RGA's liquidity at the holding company level is strong. The holding company has committed to maintain cash and liquid assets of at least 1.5x interest expense. At year-end 2013, the holding company had $788 million in cash and invested assets, or over 6x projected 2014 interest expense. The next upcoming debt maturity is in 2017. Fitch's primary concern is 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, non-traditional business, including long-term care and group life and health, account for an increasing proportion of earnings in this segment, and that trend is expected to continue. Fitch views this non-traditional business as potentially riskier. Fitch is monitoring asset growth because of its 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) was 8x as of year-end 2013. Fitch views RGA's financial leverage as at the high end of its median guidelines for the current rating. The financial leverage ratio increased to 30% at year-end 2013 from 27% at the prior year-end. The company's total financing and commitments ratio of 1.1x is also considered high. 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. The ratings assigned to RGA 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 company. RATING SENSITIVITIES Key rating triggers that could result in a downgrade include: --Further deterioration in the Asia Pacific segment or a loss in another segment that prevents a recovery in GAAP earnings to 2012 levels within the next 12 to 18 months; --GAAP interest coverage maintained below 7x; --RBC of RGA Reinsurance drops well below 300% on a sustained basis; --Holding company financial leverage above 30%; --TFC maintained well 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 .6x or below on a sustained basis; --GAAP interest coverage of 10x or more; --GAAP 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+'; --4.70% senior notes due in 2023 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+'. Contact: Primary Analyst Tana M. Higman Director +1-312-368-3122 Fitch Ratings, Inc. 70 West Madison Chicago, Illinois 60602 Secondary Analyst Douglas L. Meyer, CFA Managing Director +1-312-368-2061 Committee Chairperson Brian C. Schneider Senior Director +1-312-606-2321 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (November 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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