RGA 10-Q Summary: Second Quarter and Six Months Ended June 30, 2020
Business context and reporting period
Reinsurance Group of America, Incorporated provides traditional life, health, disability and critical illness reinsurance, as well as financial solutions including longevity, asset-intensive, financial reinsurance, capital solutions and stable value products. The unaudited filing covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Net premiums | $2.790 billion | $2.764 billion | $5.609 billion | $5.502 billion |
| Total revenues | $3.606 billion | $3.467 billion | $6.810 billion | $6.887 billion |
| Income before taxes | $195 million | $260 million | $99 million | $477 million |
| Net income | $158 million | $202 million | $70 million | $372 million |
| Diluted EPS | $2.48 | $3.18 | $1.11 | $5.83 |
| Net margin | 4.4% | 5.8% | 1.0% | 5.4% |
- Six-month operating performance deteriorated materially: net income declined 81% and income before taxes declined 79% year over year. Second-quarter net income declined 22%.
- Investment income, net of related expenses, increased 10.4% in the second quarter and 6.4% for the six months, primarily from a larger invested-asset base. Investment yield excluding spread-related business declined to 4.07% from 4.38% in the second quarter and to 4.07% from 4.43% for the six months.
- Investment-related gains were $81 million in the second quarter versus $12 million in the prior year, but were a $204 million loss for the six months versus a $20 million gain in 2019. The six-month result included $229 million of losses from embedded derivatives on modified coinsurance and funds-withheld treaties.
- Operating cash flow was $2.579 billion for the first six months, compared with $970 million in 2019. Investing activities used $1.024 billion and financing activities provided $1.333 billion.
- Cash and cash equivalents increased to $4.313 billion at June 30, 2020, from $1.449 billion at December 31, 2019. Total assets were $80.729 billion and stockholders’ equity was $12.553 billion.
- Long-term debt was $3.573 billion at June 30, 2020, compared with $2.981 billion at year-end 2019. Collateral finance and securitization notes were $433 million.
- Fixed maturity securities available for sale totaled $52.346 billion at fair value; approximately 95.1% were investment grade. Gross unrealized losses increased to $448 million from $110 million at December 31, 2019, while gross unrealized gains were $5.924 billion.
Material changes versus the prior comparable period
- COVID-19-related mortality claims were a principal adverse factor. Management estimated $300 million of COVID-19-related life and health claim costs in the second quarter, including incurred-but-not-reported claims; approximately $240 million related to U.S. individual mortality.
- The U.S. and Latin America Traditional segment reported a $158 million pretax loss in the second quarter and a $220 million loss for the six months, versus pretax income of $55 million and $67 million, respectively, in 2019. Its loss ratio increased to 107.2% from 91.7% in the second quarter and to 103.5% from 93.7% for the six months.
- EMEA pretax income increased to $114 million from $68 million in the second quarter and to $161 million from $122 million for the six months, primarily due to favorable closed-block longevity performance.
- Asia Pacific pretax income increased to $73 million from $36 million in the second quarter but declined to $72 million from $79 million for the six months, reflecting derivative valuation changes and earlier unfavorable claims experience.
- The company increased its mortgage-loan valuation allowance by $30 million for the six months to $56 million. Approximately 40 loans with a carrying value of $540 million received COVID-19-related payment modifications under the CARES Act and were not treated as troubled debt restructurings.
- RGA issued 6.17 million common shares for net proceeds of approximately $481 million and issued $600 million of 3.15% senior notes due 2030, generating approximately $593 million of net proceeds. The debt proceeds are intended partly to repay $400 million of 5.00% senior notes due in 2021.
- Share repurchases were suspended on May 6, 2020. The company had repurchased $153 million of stock during the first six months before the suspension and paid $87 million of dividends.
Guidance, outlook, commentary and risks
- Management stated that the ultimate impact of COVID-19 cannot be reliably predicted. Using an updated mortality model and specified additional general-population deaths beginning in the third quarter, management estimated an additional $400 million to $600 million of pretax mortality claim costs. This scenario is not presented as financial guidance or a forecast.
- The company expects a higher-than-normal level of investment impairments during the remainder of 2020, but did not quantify the expected amount. Six-month impairments and credit-loss allowance changes on fixed maturities were $34 million.
- Management expects low interest rates to continue pressuring investment yields and noted potential short-term cash-flow reductions from commercial mortgage borrowers.
- Liquidity resources included $4.3 billion of cash and cash equivalents, approximately $2 billion of annual investment cash flows, an $850 million committed syndicated credit facility, and more than $500 million of potential Federal Home Loan Bank funding. No cash borrowings were outstanding under the revolving facility at June 30, 2020.
- Management believed liquidity was sufficient for at least the next 12 months under scenarios including higher claims, market disruption and early treaty recapture. The company reported compliance with debt covenants and no material litigation.
- Principal risks include additional mortality and morbidity claims, policy lapses and withdrawals, investment losses and credit deterioration, rating downgrades, collateral calls, treaty recapture, regulatory action, foreign-exchange and interest-rate volatility, counterparty risk, cybersecurity and remote-work disruptions.
- The company adopted the current expected credit loss standard on January 1, 2020, resulting in an approximately $15 million after-tax reduction to opening retained earnings. It expects the forthcoming long-duration insurance accounting standard to have a potentially material effect, but the filing does not provide a quantified estimate.
Most important facts for investors to verify
- Whether COVID-19 mortality claims ultimately exceed the $300 million incurred estimate for the second quarter and the modeled additional $400 million to $600 million scenario.
- Changes in U.S. individual mortality, loss ratios and incurred-but-not-reported claim reserves.
- Future impairment charges, mortgage-loan performance and the effect of widening credit spreads or downgrades on the investment portfolio.
- Volatility from embedded-derivative valuations, particularly the $229 million six-month loss on modco and funds-withheld treaties.
- Capital and liquidity after the equity and debt offerings, including repayment of the $400 million notes due in 2021 and continued suspension of repurchases.
- Potential treaty recapture, collateral requirements and rating-trigger consequences if RGA or its operating subsidiaries are downgraded.