RGA 2019 Second-Quarter Form 10-Q Summary
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 and stable-value products. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
- Life reinsurance in force was $3.4 trillion at June 30, 2019; total assets were $72.0 billion.
- Assumed life insurance in force increased to $3,377.2 billion from $3,340.6 billion at June 30, 2018.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net premiums | $2.764 billion, up 6.5% | $5.502 billion, up 6.3% |
| Total revenues | $3.467 billion, up 8.5% | $6.887 billion, up 8.1% |
| Income before taxes | $260.1 million, up 5.2% | $476.6 million, up 23.7% |
| Net income | $202.7 million, down 0.8% | $372.2 million, up 22.2% |
| Diluted EPS | $3.18, versus $3.13 | $5.83, versus $4.65 |
| Net margin | Approximately 5.8% | Approximately 5.4% |
- Net investment income increased 10.6% in the quarter and 11.4% year to date, to $584.1 million and $1.164 billion, respectively.
- Investment-related gains were $12.5 million in the quarter and $20.3 million year to date, compared with losses of $10.6 million and $11.0 million in the prior-year periods.
- There were no fixed-maturity security impairments in the second quarter; year-to-date impairments were $9.5 million, primarily related to a U.S. utility company. Total investment impairments and mortgage-loan provision expense were $16.9 million year to date.
- Net cash provided by operating activities was $970.3 million, compared with $583.6 million in the first half of 2018. Cash and cash equivalents increased to $2.288 billion from $1.890 billion at year-end 2018.
- Cash and invested assets were $63.3 billion, including $46.2 billion of fixed-maturity securities, $5.4 billion of mortgage loans and $5.7 billion of funds withheld at interest.
- Stockholders’ equity was $10.7 billion, compared with $8.5 billion at December 31, 2018, substantially reflecting $2.005 billion of other comprehensive income from investment gains.
- Long-term debt was $3.381 billion, compared with $2.788 billion at year-end 2018. The company issued $600 million of 3.9% senior notes due 2029 in May 2019.
- Liquidity was $2.446 billion, consisting of cash, cash equivalents and short-term investments. The company reported $830.4 million of revolving-facility availability and $865.9 million of additional FHLB collateralized borrowing capacity.
Material changes versus the prior comparable period
- First-half earnings growth was driven by higher premiums, increased investment income, improved investment-related results and favorable claims experience, particularly in Canada.
- Second-quarter net income was slightly lower despite higher pre-tax income because the effective tax rate increased to 22.1% from 17.4%.
- Canada pre-tax income increased 97.5% in the quarter and 94.7% year to date, primarily from improved individual-life mortality experience.
- U.S. and Latin America pre-tax income decreased 4.6% in the quarter but increased 7.8% year to date. Second-quarter results were affected by lower U.S. traditional results, lower variable investment income and higher incentive compensation, partly offset by newer asset-intensive transactions and favorable longevity experience.
- EMEA pre-tax income declined 5.4% in the quarter and 3.7% year to date, primarily because favorable 2018 longevity performance normalized.
- Asia Pacific pre-tax income declined 41.8% in the quarter and 11.7% year to date, reflecting less favorable claims experience in Asia and Australia, despite strong premium growth.
- New business production declined to $70.4 billion in the second quarter and $149.7 billion year to date, compared with $99.7 billion and $196.4 billion in the prior-year periods.
Guidance, outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management states that liquidity and capital are sufficient for at least the next twelve months under scenarios including early recapture, market events and higher-than-expected claims.
- Management expects the low-interest-rate environment to continue pressuring investment yields. The six-month investment yield, excluding spread-related business, was 4.43%, only 4 basis points above the prior-year period.
- Derivative and embedded-derivative fair-value changes can create substantial period-to-period earnings volatility but generally do not affect current cash flows, credited rates or underlying spread performance.
- Gross unrealized gains on fixed-maturity securities were $3.828 billion versus $96.4 million of gross unrealized losses at June 30, 2019. Management stated that it did not intend, and did not expect, to be required, to sell securities with unrealized losses.
- Key risks include mortality, morbidity, lapses, claims volatility, underwriting, interest rates, credit spreads, investment impairments, foreign exchange, collateral requirements, counterparty and retrocessionaire performance, regulatory restrictions, catastrophe exposure, litigation, technology and data-security risks.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $15.8 billion across maturities from 2023 through 2039, although management considered the need for funding remote.
- The company reported no material litigation and no material changes to previously disclosed risk factors. It was in compliance with debt covenants at June 30, 2019.
- The company anticipates a potentially material impact from the new long-duration insurance accounting standard expected to apply beginning January 1, 2022. It expects the 2020 credit-loss standard to result in an immaterial retained-earnings adjustment, subject to final models and economic conditions.
Most important facts for investors to verify
- Whether claims experience in Asia Pacific and U.S. traditional business normalizes or deteriorates further.
- The sustainability of Canada’s unusually favorable mortality results and the normalization of EMEA longevity performance.
- The effect of interest rates, credit spreads, equity markets and policyholder behavior on embedded-derivative valuations and reported earnings.
- Exposure concentration in funds withheld at interest, including approximately $3.6 billion associated with one client.
- Debt refinancing and liquidity following the planned November 2019 maturity of $400 million of 6.45% senior notes.
- The adequacy of reserves, collateral capacity, retrocession recoverables and statutory capital under stressed claims and market scenarios.
- Progress toward implementation of the long-duration insurance and credit-loss accounting standards.