REINSURANCE GROUP OF AMERICA INC annual report, FY2020

Reinsurance Group of America, Incorporated — 2020 Form 10-K Summary

Business context and reporting period

RGA is a global provider of traditional life and health reinsurance and financial solutions, operating across the U.S. and Latin America, Canada, EMEA, Asia Pacific, and Corporate and Other. The filing reports the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. The filing is an annual report, not a standalone fourth-quarter filing, although fourth-quarter results are disclosed.

Life reinsurance in force was approximately $3.5 trillion.
Operations covered more than 25 countries and approximately 3,600 employees.
Principal businesses included mortality and health reinsurance, longevity, asset-intensive reinsurance, capital solutions, financial reinsurance, and stable value products.

Financial performance and key metrics

Metric	2020	2019	Change
Net premiums	$11.694 billion	$11.297 billion	+$397 million
Total revenues	$14.596 billion	$14.300 billion	+$296 million
Income before income taxes	$553 million	$1.132 billion	-$579 million
Net income	$415 million	$870 million	-$455 million
Diluted EPS	$6.31	$13.62	Down $7.31
Operating cash flow	$3.322 billion	$2.307 billion	+$1.015 billion
Total assets	$84.656 billion	$76.731 billion	+$7.925 billion
Stockholders’ equity	$14.352 billion	$11.601 billion	+$2.751 billion

Net income margin was approximately 2.8%, compared with approximately 6.1% in 2019; pre-tax margin was approximately 3.8%, compared with approximately 7.9%.
Claims and other policy benefits increased to $11.075 billion from $10.197 billion, primarily reflecting COVID-19-related mortality claims.
Net investment income increased to $2.575 billion from $2.520 billion, despite lower yields. Average investment yield excluding spread-related business declined to 4.00% from 4.56%.
Investment-related gains and losses declined to a $33 million loss from a $91 million gain. Total investment impairments and credit-related losses were approximately $77 million.
The effective tax rate increased to 24.9% from 23.1%.
Cash and invested assets totaled $75.808 billion, including $3.408 billion of cash and cash equivalents. Reported liquidity, including cash and short-term investments, was approximately $3.6 billion.
Long-term debt was $3.573 billion, compared with $2.981 billion, and collateral finance and securitization notes were $388 million, compared with $598 million.
RGA issued $600 million of 3.15% senior notes due 2030 and received approximately $481 million of net proceeds from a common stock offering.
RGA paid $182 million of common dividends and declared dividends of $2.80 per share. The company suspended share repurchases in May 2020; 2020 treasury stock purchases of $163 million primarily reflected previously authorized activity and equity award settlements.

Material changes versus the prior comparable period

Management estimated approximately $720 million of COVID-19-related life and health claim costs in 2020, including incurred-but-not-reported claims; approximately $590 million related to the U.S. and Latin America segment.
U.S. and Latin America reported a $3 million pre-tax loss, compared with $663 million of pre-tax income in 2019. U.S. and Latin America Traditional reported a $298 million loss, with its loss ratio rising to 101.2% from 91.8%.
Canada pre-tax income declined to $155 million from $183 million, and EMEA pre-tax income declined to $285 million from $303 million, largely because of unfavorable mortality and COVID-19-related claims.
Asia Pacific pre-tax income increased to $233 million from $128 million, supported by favorable claims experience and growth in financial solutions.
Financial solutions remained profitable but U.S. and Latin America Financial Solutions pre-tax income declined to $295 million from $398 million, partly due to lower investment-related gains and derivative valuation effects.
Assumed new business production increased to $389.6 billion from $376.5 billion, while life reinsurance in force was broadly flat at $3.481 trillion.
Stockholders’ equity increased substantially, primarily from the common stock offering and a $2.222 billion after-tax increase in other comprehensive income, including unrealized investment gains.
The company adopted the current expected credit loss standard in 2020, producing an approximately $15 million pre-tax increase in credit-loss allowances at adoption.

Guidance, outlook, management commentary, risks and unusual items

The filing does not provide a specific earnings or revenue forecast. Management stated that the ultimate effect of COVID-19 cannot be reliably predicted and that COVID-19 scenario analyses are not forecasts or financial guidance.
Management expects recurring premiums from existing treaties to provide resilience, while acknowledging potential reductions in new business, fee income, market-related revenues, and client reporting or payment timeliness.
Management identified mortality and morbidity risk as the company’s most significant risk. Other major risks include lapse and surrender behavior, investment spreads, interest rates, credit losses, collateral availability, ratings downgrades, foreign currency movements, regulatory capital requirements, retrocessionaire performance, and cybersecurity.
RGA stated that its operating subsidiaries exceeded applicable regulatory capital requirements and that it believed its capital and liquidity were sufficient under adverse scenarios. However, statutory capital and dividend capacity can be constrained by regulators, collateral requirements, ratings triggers, and subsidiary-level restrictions.
Available liquidity resources included $850 million under a syndicated revolving facility, approximately $509 million of potential FHLB borrowing capacity, approximately $3.4 billion of cash and cash equivalents, and approximately $2.4 billion of annual investment cash flows. The revolving facility had no cash borrowings and $21 million of issued but undrawn letters of credit at year-end.
The company held approximately $27.7 billion of securities in trust for third-party reinsurance collateral and approximately $1.5 billion of undrawn letters of credit backing intercompany reinsurance.
Potential statutory reserve-support commitments had maximum potential obligations totaling approximately $24.0 billion across periods from 2034 through 2039, although management considered funding events remote.
The company had no material litigation reported at year-end and received unqualified audit opinions on its financial statements and internal control over financial reporting.
The company expects the 2023 adoption of the long-duration insurance accounting standard to have a potentially material effect on results of operations, financial position, and reported ratios; the impact was still under evaluation.

Important facts an investor should verify

Reconcile the estimated $720 million of COVID-19-related claims to reported claims, incurred-but-not-reported reserves, and subsequent claims development.
Assess whether mortality, morbidity, lapse, surrender, and longevity experience remains consistent with pricing and reserve assumptions.
Review the sustainability of investment income as yields decline and evaluate exposure to credit losses, commercial mortgages, emerging-market debt, and other pandemic-sensitive assets.
Monitor statutory capital, RBC ratios, collateral availability, letters of credit, ratings triggers, and restrictions on dividends from subsidiaries.
Review the maturity and refinancing profile of the $3.573 billion of long-term debt, including the $400 million senior notes due in 2021.
Evaluate the sensitivity of asset-intensive and variable-annuity results to interest rates, equity markets, volatility, credit spreads, policyholder behavior, and hedge effectiveness.
Assess concentration risk: the five largest clients generated approximately 21.1% of consolidated gross premiums and other revenues, while approximately $3.2 billion of funds withheld at interest was associated with one client.
Track implementation effects of the long-duration insurance accounting standard, LIBOR transition, principles-based reserving, and evolving international capital regulations.