Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed this unaudited Form 10-Q for the quarter ended March 31, 2021. RGA provides traditional life, health, disability and critical illness reinsurance, as well as financial solutions including longevity, asset-intensive, capital and financial reinsurance. The company reported $3.4 trillion of life reinsurance in force and $84.8 billion of assets at quarter-end.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $4.119 billion | $3.204 billion | +$915 million |
| Net premiums | $2.914 billion | $2.819 billion | +$95 million |
| Investment income, net | $812 million | $594 million | +$218 million |
| Investment-related gains, net | $302 million | $(285) million | +$587 million |
| Income before income taxes | $186 million | $(96) million | +$282 million |
| Net income | $139 million | $(88) million | +$227 million |
| Diluted EPS | $2.03 | $(1.41) | +$3.44 |
| Net margin | 3.4% | (2.7%) | Improved |
| Operating cash flow | $2.366 billion | $2.207 billion | +$159 million |
Claims and other policy benefits increased to $3.192 billion from $2.664 billion, while total benefits and expenses increased to $3.933 billion from $3.300 billion. The effective tax rate was 25.3%, compared with 8.9% in the prior-year quarter.
Cash and cash equivalents were $3.122 billion at March 31, 2021, compared with $3.408 billion at December 31, 2020. Net cash used in investing activities was $2.492 billion, primarily reflecting $5.293 billion of fixed-maturity security purchases. The company paid $48 million in dividends and repaid $42 million of collateral finance and securitization notes.
Total assets were $84.810 billion versus $84.656 billion at year-end 2020. Stockholders’ equity declined to $12.090 billion from $14.352 billion, primarily because of a $2.357 billion after-tax decline in accumulated other comprehensive income from unrealized investment losses. Long-term debt was $3.573 billion and total liabilities were $72.720 billion.
Liquidity, defined by the company as cash, cash equivalents and short-term investments, was approximately $3.3 billion at March 31, 2021. RGA had $829 million of available capacity under its $850 million revolving credit facility, $349 million available through collateralized Federal Home Loan Bank borrowings, and no cash borrowings outstanding under the revolving facility.
Material Changes Versus the Prior Comparable Period
- Net income improved by $227 million, reversing the prior-year quarterly loss.
- Results benefited from a $162 million pretax accounting correction related to certain limited partnerships. Approximately $92 million was recorded in investment income and $70 million in investment-related gains; the filing states these amounts should have been recognized in earlier periods.
- Portfolio repositioning generated approximately $144 million of pretax capital gains.
- Investment-related results also benefited from more favorable changes in embedded derivatives, which contributed $50 million in gains in Q1 2021 compared with a $230 million loss in Q1 2020.
- COVID-19-related life and health claims were estimated at approximately $485 million pretax, including $358 million in U.S. and Latin America Traditional operations.
- U.S. and Latin America Traditional income before taxes declined to a $338 million loss from a $62 million loss, with the loss ratio increasing to 122.6% from 99.6%.
- EMEA Traditional income before taxes declined to a $68 million loss from $17 million of income, with the loss ratio increasing to 107.1% from 85.6%.
- Asia Pacific income before taxes increased to $69 million from a $1 million loss, reflecting favorable claims experience and growth in financial solutions.
- Share repurchases under the company’s program remained suspended. No program repurchases occurred in Q1 2021, compared with $153 million of repurchases in Q1 2020.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that COVID-19 continues to increase mortality-related claims, but the ultimate impact remains uncertain and depends on variants, vaccination programs, geographic conditions and other factors. Management currently projects the overall COVID-19 financial impact to remain within prior estimates for comparable general-population mortality levels.
Management believes available cash flows and liquidity sources are sufficient for at least the next twelve months, including under scenarios involving early treaty recapture, market events and higher-than-expected pandemic claims. The company maintains elevated cash balances and performs liquidity stress testing.
- Primary business risks include adverse mortality, morbidity, lapsation and claims experience; inadequate underwriting; reserve adequacy; and dependence on cedents, retrocessionaires and other third parties.
- Investment risks include low interest rates, credit deterioration, unrealized losses, market volatility, commercial mortgage exposure and difficulty selling assets during market disruption.
- At March 31, 2021, fixed-maturity securities had $4.7 billion of unrealized gains and $490 million of unrealized losses. Approximately 93.7% of the portfolio was investment grade.
- The company reduced its commercial mortgage loan valuation allowance by approximately $17 million during the quarter and modified one commercial mortgage loan with a carrying value of approximately $10 million in response to COVID-19.
- Statutory reserve support commitments had maximum potential obligations totaling approximately $26.8 billion across stated commitment years, although management considered funding requirements remote.
- Treaty guarantees totaled $2.023 billion, or $1.092 billion net of assets in trust. The company reported no material litigation.
- RGA expects the pending long-duration insurance accounting standard, effective January 1, 2023, to have a potentially material impact, although the company had not completed its evaluation.
- The company’s debt agreements require minimum consolidated net worth of $5.3 billion and limit consolidated indebtedness to 35% of indebtedness plus adjusted consolidated equity. RGA was in compliance at quarter-end.
Investor Verification Priorities
- Determine how much of Q1 earnings reflects the $162 million prior-period accounting correction, $144 million of portfolio repositioning gains and other volatile investment or derivative results.
- Track COVID-19 mortality claims, especially U.S. and EMEA Traditional loss ratios and incurred-but-not-reported claims.
- Assess the sustainability of investment income, given that the reported 5.67% yield benefited from variable investment income and the accounting correction, while the yield excluding variable investment income declined to 3.79%.
- Monitor unrealized investment losses, credit quality, commercial mortgage performance and the effect of changing interest rates on accumulated other comprehensive income and capital.
- Review liquidity, collateral requirements, treaty recapture risk, guarantees and available borrowing capacity under stressed scenarios.
- Evaluate the eventual effect of the 2023 long-duration insurance accounting changes on reserves, equity, earnings and disclosures.