Fitch Downgrades RGA's IFS Rating to 'A'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Reinsurance Group of America, Inc.'s (RGA) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and the Insurer Financial Strength (IFS) rating of RGA Reinsurance Company (RGA Reinsurance) to 'A' from 'A+'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.

At the same time, Fitch has assigned a 'BBB' rating to RGA's recently issued $400 million of 3.95% senior notes due 2026 and a 'BB+' rating to RGA's recently issued $400 million of 5.75% fixed to floating rate subordinated debt due 2056. Proceeds were used for general corporate purposes and to pre-fund the March 2017 maturity of $300 million of senior debt. Under Fitch's methodology, a baseline recovery assumption of 'Poor' and non-performance risk assessment of 'Minimal' was applied to the subordinated notes. Therefore, the notes were notched down three rating levels from the holding company's Long-Term IDR. These securities receive no equity credit in Fitch's financial leverage ratio.

The downgrade reflects the impact of the recent issuance on financial leverage. Pro forma financial leverage following the June 2016 issuance and the March 2017 maturity is 35%, the highest in Fitch's rated universe of North American life insurance companies. The downgrade also considers operating challenges in its core traditional life reinsurance business in the U.S., which has been subject to competitive pricing and declining cession rates and has caused the company to look for growth in riskier asset-intensive businesses and increase its exposure to interest rate risk. As a result, RGA's asset leverage (GAAP assets in relation to adjusted equity) has increased materially over the past several years and stood at 10x at March 31, 2016.

KEY RATING DRIVERS

Fitch views RGA's run-rate profitability as generally good, although down from historical levels. During the first quarter of 2016, the company reported net operating income of $121 million, down 0.8% from the same period in 2015. 2016 results were adversely impacted by net foreign currency movements, the impact of sustained low interest rates and somewhat elevated claims activity in Canada and the U.K. Fitch anticipates that profitability over the medium term will be constrained by competitive challenges in the company's core U.S. traditional business, ongoing low interest rates, higher interest expenses and the impact of weak foreign currencies. Fitch believes that the group's ability to service its debt remains sound. GAAP operating earnings-based interest coverage was 6.4x in the first quarter of 2016, down modestly from 6.5x in the first quarter of 2015.

Fitch is concerned about the potential for increased earnings volatility due to a change in RGA's operating profile. RGA's 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 March 31, 2016, the holding company had $674 million in cash and invested assets, or 4.5x projected 2016 interest expense.

RGA Reinsurance's reported risk-based capital (RBC) ratio was 374% at year-end 2015. Fitch views the statutory capitalization of RGA Reinsurance as adequate, although the company relies on affiliated captive reinsurance to manage the excess statutory reserves associated primarily with its term-life book of business and to maintain target capital levels. At year-end 2015, RGA Reinsurance Company recognized $12.9 billion in reserve credit, or 733% of year-end surplus, for reserves ceded to special-purpose captive reinsurers. 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.

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 assigned the following ratings:

--$400 million 3.95% senior notes due Sept. 15, 2026 'BBB';

--$400 million 5.75% fixed to floating subordinated debentures due June 15, 2056 'BB+'.

Fitch has downgraded the following ratings with a Stable Outlook:

Reinsurance Group of America, Inc.

--Long-Term IDR to 'BBB+' from 'A-';

--$300 million 5.625% senior notes due March 15, 2017 to 'BBB' from 'BBB+';

--$400 million 6.45% senior notes due Nov. 15, 2019 to 'BBB' from 'BBB+';

--$400 million 5.00% senior notes due June 1, 2021 to 'BBB' from 'BBB+';

--$400 million 4.70% senior notes due in 2023 to 'BBB' from 'BBB+';

--$400 million 6.20% subordinated debt due 2042 to 'BB+' from 'BBB-';

--$400 million variable-rate junior subordinated debentures due Dec. 15, 2065 to 'BB' from 'BB+'.

RGA Reinsurance Company

--IFS to 'A' from 'A+'.

Additional information is available on www.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

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008356

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008356

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160701005727/en/

Fitch Ratings
Primary Analyst
Tana M. Higman
Director
+1-312-368-3122
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Nelson Ma
Director
+1-212-908-0273
or
Committee Chairperson
Brian C. Schneider
Senior Director
+1-312-606-2321
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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