Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) is a global life and health reinsurer providing traditional reinsurance and financial solutions, including longevity, asset-intensive, financial reinsurance, capital solutions, and stable value products. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
RGA reported $3.4 trillion of life reinsurance in force and $75.7 billion of total assets at March 31, 2020. The quarter was materially affected by the COVID-19 pandemic, market volatility, widening credit spreads, lower interest rates, and unfavorable mortality and morbidity experience.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net premiums | $2,819 million | $2,738 million | +3.0% |
| Investment income, net | $594 million | $580 million | +2.4% |
| Investment-related gains (losses), net | $(285) million | $8 million | $(293) million |
| Total revenues | $3,204 million | $3,420 million | $(216) million |
| Income (loss) before taxes | $(96) million | $217 million | $(313) million |
| Net income (loss) | $(88) million | $170 million | $(258) million |
| Diluted EPS | $(1.41) | $2.65 | $(4.06) |
| Operating cash flow | $2,207 million | $340 million | +$1,867 million |
| Total assets | $75,654 million | Not comparable in provided income statement | Down from $76,731 million at Dec. 31, 2019 |
Net loss margin was approximately negative 2.7% of revenue in Q1 2020, compared with a net income margin of approximately 5.0% in Q1 2019. Total benefits and expenses increased to $3,300 million from $3,203 million, despite lower revenue.
- Claims and other policy benefits increased to $2,664 million from $2,508 million.
- Investment yield excluding spread-related business declined to 4.08% from 4.49%, while average invested assets increased 5.8% to $29.7 billion.
- Fixed maturity securities available for sale totaled $48.6 billion at fair value; approximately 95.4% were investment grade.
- Gross unrealized losses on fixed maturity securities increased to $1.5 billion from $110 million at December 31, 2019; gross unrealized gains were $3.4 billion.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents increased to $2.8 billion from $1.4 billion at December 31, 2019, primarily reflecting strong operating cash flow and increased liquidity positioning.
- Stockholders’ equity declined to $9.3 billion from $11.6 billion, primarily because of a $2.0 billion after-tax loss in other comprehensive income, including $1.9 billion of net unrealized investment losses.
- Long-term debt was $3.0 billion and collateral finance and securitization notes were $569 million. The company was in compliance with its debt covenants.
- RGA had an $850 million revolving credit facility, with approximately $830 million available for borrowing, and approximately $503 million of additional borrowing capacity through the Federal Home Loan Bank.
- Management stated that available liquidity and cash flows should be sufficient for at least the next 12 months, including under scenarios involving early recapture, market stress, and higher pandemic-related claims.
Material Changes Versus the Prior Comparable Period
- Net premiums increased $81 million, supported by new business production, but foreign exchange reduced reported premiums by $33 million.
- Investment-related results deteriorated sharply, primarily because of unfavorable changes in fair values of embedded derivatives on modified coinsurance and funds-withheld treaties, equity market weakness, credit spread widening, and derivative losses.
- COVID-19-related uncertainty contributed to $34 million of fixed-maturity impairment losses and credit-loss allowances and a $13 million increase in the mortgage-loan valuation allowance.
- U.S. and Latin America income before taxes declined to a $77 million loss from $95 million of income, reflecting adverse mortality and derivative valuation losses.
- Canada income before taxes declined to $26 million from $52 million, primarily because of investment-related losses and less favorable mortality experience.
- EMEA income before taxes declined to $47 million from $54 million, mainly due to investment losses supporting payout annuity business.
- Asia Pacific shifted to a $1 million loss from $43 million of income, driven by unfavorable claims experience and derivative losses.
- The company repurchased approximately 1.1 million shares for $153 million and paid $44 million in dividends during the quarter.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings guidance. Management expects higher-than-normal investment impairments during the remainder of 2020 but cannot predict the amount. Management also expects COVID-19 to pressure claims, investment performance, liquidity, collateral requirements, premiums, fee income, new business volumes, and operating performance, although the ultimate impact remains uncertain.
- RGA had not received a material amount of claims specifically identified as COVID-19-related by quarter-end, but it observed higher older-age death claims in the United States and warned that subsequent client reporting could increase recognized pandemic impacts.
- Key risks include adverse mortality or morbidity, policy lapses and withdrawals, credit deterioration, investment-market declines, low interest rates, collateral requirements, ratings downgrades, recapture rights, regulatory actions, counterparty and retrocessionaire risk, and operational and cybersecurity risks from remote work.
- Reinsurance treaties may permit recapture or require additional collateral following specified declines in risk-based capital ratios or financial strength ratings.
- 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 and increased allowances for investments and loans.
- Long-duration insurance accounting changes effective January 1, 2022 are expected by management to have a potentially material impact on results and financial position; the company was still evaluating the effect.
- The company reported no material litigation and stated that disclosure controls and internal control over financial reporting remained effective.
Investor Verification Priorities
- Verify the subsequent development of COVID-19 mortality and morbidity claims, including any revisions from ceding companies.
- Assess whether the $1.5 billion of unrealized fixed-maturity losses, investment impairments, and mortgage-loan allowances result in additional realized losses or credit losses.
- Monitor liquidity, collateral demands, treaty recapture activity, credit ratings, and compliance with debt covenants.
- Review the valuation sensitivity of embedded derivatives and other Level 3 assets and liabilities to interest rates, credit spreads, equity markets, lapse rates, and mortality assumptions.
- Evaluate the sustainability of premiums and new business volumes, particularly under prolonged economic contraction and reduced client activity.
- Track capital deployment, including the continuation of share repurchases and the ability of subsidiaries to pay dividends to the holding company.