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Fitch Affirms RGA Ratings

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Reinsurance Group of America Inc.’s, (RGA - Free Report) Issuer Default Rating (IDR) of ‘A-’ has been affirmed by Fitch Ratings. Concurrently, the rating agency reiterated the Insurer Financial Strength (IFS) of ‘A+’ of RGA Reinsurance Company (RGA Reinsurance), the company’s subsidiary. All the ratings carry a stable outlook.  

Fitch acknowledges the company’s overall strong position with respect to balance sheet as well as business operations.

Fitch views that the company’s financial leverage ratio of 27% as of Sept. 30, 2012 stands at higher than median level, but is reasonable when compared to the current ratings. The company also has significant financial commitments witnessed by total financing and commitments (TFC) ratio which stands at relatively high level of 1x.

Fitch also views favorably the level of capitalization at RGA Reinsurance. However, the dependence on the parent to maintain the capital dilutes the confidence. The rating agency expects Reinsurance's risk-based capital (RBC) ratio to lie in the range of 360% to 370% at year-end 2012, modestly up from 356% at year-end 2011.

RGA Reinsurance is also adequately poised with respect to servicing its debt liabilities, with interest expense remaining solid at 8x as of Sep 30, 2012. However, its cash coverage ratio stands at a low level of 3x. On the other hand, the rating agency is relieved to some extent, given committed cash as dividend and interest payments to be received by the holding company from consolidated subsidiaries.

On the operating side the rating agency is satisfied with the company’s performance. It, however, expects 2012 profitability will be flat to down primarily due to adverse individual mortality and group morbidity in its U.S. traditional segment. Moreover earnings will also suffer from low interest rates.

The company is witnessing strong competition in its niche U.S. life reinsurance market. Despite that the company has been able to maintain its number two position in the market place.

Recently the company has also expanded its asset intensive business, which might impart earrings volatility, given the company’s lack of competency in managing mortality risk. Fitch will continue to remain watchful of operations of this segment.
Going forward factors that might cause an adverse rating change are decline of RBC ratio below 300% and holding company financial leverage above 30%. TFC ratio increase above 1x; GAAP interest coverage below 5x and asset leverage more than 10x are also factors which could affect the adverse rating change.

A positive rating action may also come about if the company’s RBC increases beyond 400%; financial leverage (excluding collateral financing) stays below 15% range; TFC ratio remains .6x or below; GAAP interest coverage is 10x or more and asset leverage is below 6x.

Other insurers Assurant Inc. (AIZ - Free Report) , The Chubb Corp. (CB - Free Report) , Everest Re Group Ltd. (RE - Free Report) also carry an investment grade rating from Fitch.

The stock currently retains a Zacks Rank #3 (Hold). The company is expected to release fourth quarter earnings on Jan 31, 2013. The Zacks Consensus Estimate for fourth quarter earnings stands at $1.80 per share, down from $1.91 per share reported in the year ago quarter.

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