Overview of the Rating Upgrade
S&P Global Ratings has elevated the financial strength and issuer credit ratings of Global Atlantic Financial Group’s (GAFG) operating insurance entities to an ‘A’ from ‘A-‘, assigning a stable outlook. Simultaneously, the credit rating agency has also improved the holding company’s rating to ‘BBB’ from ‘BBB-‘.
The key driver behind this upgrade is GAFG’s bolstered capital adequacy over the past few years, a crucial factor influencing S&P’s decision to enhance the company’s ratings.
Capital Adequacy and Business Diversification
S&P remarked: “[GAFG] has consistently maintained strong capital—with capital redundancy above the required level at the 99.80% confidence level per our capital model—while expanding its business profitably and diversifying its product and risk profile.” The increased diversification, along with the backing of its parent, KKR & Co. Inc. (A/Stable), and access to third-party capital via the Ivy sidecars, has played a pivotal role in stabilizing GAFG’s capital and earnings.
Primarily a block reinsurer with fluctuating capital, GAFG has diversified its business since KKR acquired it in 2021. Its foray into various annuity and insurance sectors, including retail annuities, flow reinsurance, FABNs, PRT, and pre-need life, has helped stabilize the company’s earnings. Block reinsurance, which constituted about 61% of GAFG’s new business volume in 2020, decreased to roughly 28% in 2024.
Support from KKR and Ivy Sidecars
S&P acknowledged KKR’s capital support, which has infused over $3 billion into GAFG in recent years, mitigating the capital and earnings volatility linked with reinsurance and PRT transactions. Furthermore, access to on-demand third-party capital through its Ivy sidecars has been instrumental in executing 13 block deals and 47 PRT transactions since Ivy’s inception in April 2020. Notable transactions include significant deals with MetLife (GAFG’s largest block reinsurance deal at $19.2 billion) and Manulife Financial Corp. (approximately $10 billion).
“In our view, GAFG’s contracts with Ivy provide it substantial influence over Ivy’s strategy, particularly in acquiring new business, capital and investment management, and enterprise risk management,” S&P declared. Consequently, Ivy’s and future Ivy vehicles’ growth plans and capital strength, based on S&P’s risk-based capital model, are integral to the overall assessment of GAFG.
Risks and Future Outlook
While the Ivy relationship has bolstered GAFG’s capital and propelled its growth, it also introduces significant counterparty risk. As GAFG reinsures more business to Ivy, its reliance on Ivy’s financial strength increases. Despite GAFG’s considerable influence over Ivy, it does not own any of Ivy’s equity or debt; hence, Ivy is not consolidated into GAFG’s financials. S&P incorporates an analysis of Ivy’s capitalization and the counterparty risk it presents into its evaluation of GAFG’s capital adequacy.
The stable outlook reflects S&P’s anticipation that GAFG will sustain its robust operational performance, continue profitable growth in its institutional, retail annuity, and life insurance lines, maintain a high-quality investment portfolio, and consistently manage a strong capital and earnings position, with healthy redundancy at the 99.80% confidence level per S&P’s capital model. The outlook also presumes the continued advantages of GAFG’s partnerships with KKR and Ivy, with no significant deterioration in their financial health.
S&P cautioned that a potential downgrade could occur if GAFG’s capital adequacy falls below the 99.80% level due to heightened investment portfolio risk or other factors. The agency also noted: “We may lower our ratings if the company’s operating performance weakens to a point where we no longer view its business risk profile as strong. We would also likely downgrade GAFG if KKR was downgraded or if there was a material decline in Ivy’s capitalization.”
Given GAFG’s relative focus on spread-based businesses, S&P analysts indicated that it is unlikely that they would elevate the company’s financial strength rating within the next two years.
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