Moody’s Ratings (Moody’s) has affirmed the ratings of Reinsurance Group of America (RGA) and changed its outlook to negative from stable.
According to the agency, the negative outlook “reflects the company’s reduced financial flexibility and the financial strain on RGA’s capital adequacy to fund the transaction with Equitable and its new business pipeline”.
RGA entered into an agreement with Equitable Holdings, Inc. to reinsure a $32 billion diversified block of life insurance products.
Through this agreement RGA is reinsuring 75% of Equitable’s in-force life insurance liabilities, which includes approximately $18 billion of general account reserves and $14 billion of separate account reserves.
RGA said it expects to deploy $1.5 billion of capital at closing into this reinsurance transaction, based on the expected required capital to support the block. The acquisition is subject to customary closing conditions and regulatory approvals.
Commenting on RGA’s new outlook Moody’s stated: “The anticipated issuance of subordinated notes will increase RGA’s leverage ratios and place downward pressure on its prospective earnings coverage ratio.
“On a proforma basis, adjusted financial leverage (excluding AOCI) is expected to be elevated and remain higher than expected, and total leverage (excluding AOCI) is expected to remain above 35% in the near-term. RGA has deployed record amounts of capital into large transactions, $1.7 billion in 2024, and the increased pace of transactions could potentially strain RGA’s financial resources.”
The agency continued: “The announced reinsurance transaction with Equitable is sizable and will strain RGA’s capital adequacy in its operating companies in the near-term. However, it is consistent with RGA’s strategy of assuming flow business and in-force or large transactions in which it can earn good returns on capital and leverage its competitive advantages.”
RGA’s risk and asset-liability management is strong, due to its scale and expense management. However, low interest rates and high asset defaults would hurt profitability, Moody’s noted.
Additionally, RGA is expected to assume tail risk from Equitable’s life insurance business. Its corporate structure includes key operating companies in the US, Canada, Bermuda, and Barbados, and access to third-party capital through its reinsurance agreement with Ruby Re.
Statutory strain and large transactions can constrain growth, and RGA is expected to maintain strong regulatory capital, Moody’s added.
The rating agency has also affirmed the A1 insurance financial strength (IFS) rating of RGA’s US insurance subsidiary, RGA Reinsurance Company (RGA Re).
Additionally, the rating agency has assigned a Baa2 (hyb) rating to RGA’s anticipated issuance of fixed rate reset subordinated notes due in 2055. The net proceeds from the issuance will be used for general corporate purposes, which may include funding RGA’s obligations with respect to the reinsurance transaction.
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