Fitch Ratings – New York – 26 Nov 2024: Fitch Ratings has affirmed Fortitude Reinsurance Company Ltd. (FRL) and Fortitude Life Insurance and Annuity Company’s (FLIAC) Insurer Financial Strength (IFS) ratings at ‘BBB+’. Fitch has also affirmed the ‘BBB’ Issuer Default Ratings (IDRs) for FRL’s holding companies: Fortitude Group Holdings, LLC (FGH) and FGH Parent, L.P. (collectively, Fortitude). The Rating Outlook was revised to Positive from Stable.
The Positive Outlook reflects Fitch’s view of Fortitude’s improving company profile supported by growth and enhanced diversification across liabilities and geographies while maintaining its strong balance sheet. Further, Fitch expects earnings improvement, benefitting from higher reinvestment rates through portfolio repositioning.
Key Rating Drivers
Growth and Diversification: Fitch’s view of Fortitude has historically been constrained by its company profile. Fortitude continues to expand through acquisitions, including FRL’s 4Q23 assumption of $28 billion of life insurance and annuity reserves from The Lincoln National Life Insurance Company. To-date, the performance of the block has been in line with pricing assumptions.
Fortitude continues to expand in Japan, having completed five reinsurance transactions, including two flow deals to-date. Fitch would view further profitable growth favorably, along with deal performance aligning closely with pricing expectations.
Developing Track Record: American International Group, Inc. completed the sale of Fortitude in 2020 to an investor group led by The Carlyle Group and T&D Holdings. Fortitude has since completed 14 transactions, acquiring more than $100 billion in total reserves. In 2022, Fortitude completed its largest deal since inception, assuming $31 billion of legacy variable annuities (VA) from Prudential Financial, Inc. Fortitude revised its hedging strategy for the block, which has reduced potential volatility but also potential upside for the deal.
Block and FlowTransactions: Fortitude has material scale, including a mix of life insurance, annuities and property/casualty (P/C) business inherited from AIG. Fitch expects the company to continue to grow including through block acquisitions focused on life insurance and annuities in the U.S. and Japan. However, the market is highly competitive, and block transactions are episodic by nature.
Fitch also expects Fortitude to continue growing through flow reinsurance transactions, which add more predictability to flows. Fitch would view favorably continued generation of sustainable growth through profitable transactions while successfully running off existing liabilities.
Private Equity Partner: Carlyle and its limited partnership investors hold a controlling interest in Fortitude, with Carlyle owning approximately 11% directly. Carlyle has shown an appetite to support growth at Fortitude, including participating in a $2 billion capital raise in 2022. Fortitude has asset management and strategic advisory relationships with Carlyle. Carlyle manages a portion of invested assets currently, which Fitch expects to increase over time, leveraging its ability to source assets and generate above-average investment returns in private equities and direct credit investments.
Strong Capitalization: Fortitude’s capital position is viewed as strong, factoring in results under the Prism model, along with the company’s non-risk-based capital metrics. Following the Lincoln transaction, the company’s excess capital declined, with its Prism score declining to ‘Strong’, which aligns with rating expectations. Fitch expects FRL’s Bermuda enhanced capital ratio to remain above 150%.
FRL benefits as a composite insurer due to the Bermuda capital diversification benefit, compared with peers competing for the acquisition of runoff blocks. Financial leverage increased to 22% as of 3Q24, consisting of $1.5 billion in term loans, and is expected to be in the 20%-25% range over the longer term.
Repositioning Investment Portfolio: Fortitude’s risky asset ratio declined YoY to 91% on a GAAP basis, which trails the aggregate industry, driven by growth in capital, though Fitch expects the ratio to increase back towards historic norms. Fitch expects Fortitude to continue to increase its allocation to less liquid asset classes, with an emphasis on residential mortgages, private credit and alternatives, which combined to represent 26% of invested assets as of 2Q24.
Effective Hedging: Fortitude utilizes swaps and options to offset interest rate risk and protect capital from tail risk. The interest rate hedge is managed by targeting a net asset value change of plus or minus $1 million for every 1bp change in interest rates. Favorably, the illiquid nature of Fortitude’s liabilities minimizes disintermediation risk. For the $31 billion VA block acquired from Prudential, Fortitude has a 100% equity delta and 100% interest rate rho hedge targets.
