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Investing.com -- On February 25, 2025, Moody’s Ratings confirmed the ratings for Reinsurance Group of America, Incorporated (NYSE:RGA), including its senior unsecured rating at Baa1 and the A1 insurance financial strength (IFS) rating for RGA’s US insurance subsidiary, RGA Reinsurance Company (RGA Re). However, the outlook for all of RGA’s ratings has been revised from stable to negative.
This rating adjustment follows the recent announcement of a reinsurance agreement between RGA and Equitable Holdings (NYSE:EQH), Inc. In this agreement, Equitable will cede approximately $32 billion of in-force life insurance reserves to RGA Re. The completion of this agreement is subject to customary closing conditions and regulatory approvals.
Moody’s has also assigned a Baa2 (hyb) rating to RGA’s anticipated issuance of fixed rate reset subordinated notes due in 2055. The net proceeds from this issuance will be used for general corporate purposes, potentially including funding RGA’s obligations related to the reinsurance transaction with Equitable.
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. The anticipated issuance of subordinated notes will increase RGA’s leverage ratios and put downward pressure on its prospective earnings coverage ratio. 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 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 has strong risk and asset-liability management capabilities and benefits from its large scale and good expense management.
The affirmation of RGA’s ratings reflects the company’s strong market position, geographic diversification, and favorable operating fundamentals. RGA has also reported good topline growth the last 2 years in its key markets. RGA benefits from being able to deliver internationally bespoke solutions to its target markets and cedants that includes a strong reputation in facultative underwriting.
These strengths are offset by a substantial concentration in mortality risk, which could lead to volatility in earnings, and subject the company to severe capital pressure in the event of a significant increase in excess mortality claims, and the severity from pandemic risk in its key markets. The company has also increased its leverage in recent quarters and the higher interest expense has placed downward pressure on earnings coverage ratio.
Given the significant capital volatility associated with the company’s exposure to pandemic risk, a ratings upgrade is unlikely. However, the outlook could change back to stable under certain conditions. Conversely, several factors could lead to a downgrade of RGA’s ratings.
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