Reinsurance Group of America, Incorporated — Form 10-Q Summary
Business context and reporting period
RGA is a global life reinsurer providing traditional life, health, disability and critical illness reinsurance, as well as financial solutions including longevity, asset-intensive and financial reinsurance. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net premiums | $2.490 billion | $2.252 billion | $7.336 billion | $6.756 billion |
| Total revenues | $3.145 billion | $2.901 billion | $9.283 billion | $8.452 billion |
| Income before taxes | $340.2 million | $287.6 million | $887.3 million | $748.4 million |
| Net income | $227.6 million | $198.7 million | $605.3 million | $511.3 million |
| Diluted EPS | $3.47 | $3.07 | $9.23 | $7.87 |
| Net margin | 7.2% | 6.9% | 6.5% | 6.0% |
| Dividends declared per share | $0.50 | $0.41 | $1.32 | $1.15 |
- Net premiums increased 10.6% in the quarter and 8.6% year to date, primarily from growth in life reinsurance in force. Assumed life insurance in force reached $3.298 trillion at September 30, 2017, compared with $3.083 trillion a year earlier.
- Net income increased 14.5% in the quarter and 18.4% year to date. Income before taxes increased 18.3% and 18.6%, respectively.
- Net investment income increased 13.7% in the quarter and 12.4% year to date. The average investment yield excluding spread-related business was 4.81% in Q3 and 4.61% year to date, compared with 4.43% and 4.53% in the prior-year periods.
- Operating cash flow was $1.104 billion for the first nine months of 2017, compared with $1.020 billion in 2016. Investing activities used $1.056 billion, producing a $3.9 million net increase in cash and cash equivalents to $1.205 billion.
- Total assets increased to $58.694 billion from $53.098 billion at December 31, 2016. Stockholders’ equity increased to $8.097 billion from $7.093 billion.
- Cash and invested assets totaled $50.882 billion, including $36.382 billion of available-for-sale fixed maturity securities, $4.322 billion of mortgage loans and $6.020 billion of funds withheld at interest.
- Long-term debt was $2.788 billion, down from $3.089 billion at year-end 2016. Collateral finance and securitization notes were $796.8 million. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Improved U.S. mortality experience, higher investment income, new business growth in EMEA and Asia Pacific, and lower third-quarter interest expense drove the overall earnings improvement.
- U.S. and Latin America income before taxes increased 38.8% in Q3 and 33.1% year to date, led by favorable U.S. mortality and higher variable investment income.
- Canada income before taxes declined 6.1% in Q3 and 8.0% year to date, primarily because traditional individual-life mortality was less favorable than in 2016.
- EMEA income before taxes declined 11.3% in Q3, reflecting lower payout-annuity income, but increased 19.5% year to date due to favorable mortality and longevity experience.
- Asia Pacific income before taxes declined 3.8% in Q3 because of higher lapses in a Japanese closed block, but increased 18.9% year to date due to business growth and improved Australian claims experience.
- Changes in fair values of embedded derivatives increased year-to-date pretax income materially, but reduced third-quarter pretax income by $8.9 million versus the prior-year period. Management characterizes these changes as unrealized and not affecting current cash flows, credited rates or underlying treaty spread performance.
- Gross unrealized losses on fixed maturity and equity securities declined to $163.2 million from $374.9 million at December 31, 2016, while gross unrealized gains increased to $2.652 billion from $2.247 billion.
- RGA repurchased 208,680 shares for $26.9 million during the first nine months under a $400 million authorization. The remaining authorization was approximately $373.1 million at September 30, 2017.
Guidance, outlook, commentary, risks and unusual items
- Management stated that liquidity and capital resources are sufficient for expected requirements over at least the next 12 months, including scenarios involving early recapture, market events and higher-than-expected claims.
- Available liquidity included $752.8 million under the revolving credit facility and approximately $1.1 billion of additional collateralized borrowing capacity through the Federal Home Loan Bank. The $850 million revolving facility had no cash borrowings outstanding and $97.2 million of issued but undrawn letters of credit.
- Management expects low interest rates to continue pressuring investment yields, although the average yield improved year over year. It stated that reserves and capital would remain adequate even if interest rates stayed at current levels for five years, assuming other factors remain constant.
- Key risks include mortality, morbidity, lapses and claims volatility; interest-rate, credit-spread, equity-market and foreign-currency movements; investment impairments; collateral requirements; counterparty and retrocessionaire default; regulatory and capital requirements; litigation; catastrophe, pandemic and operational-system risks.
- Variable-annuity guarantees remain sensitive to equity markets, interest rates, volatility and policyholder behavior. Dynamic hedging substantially mitigates, but does not eliminate, the risk of earnings, liquidity or capital volatility.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $12.946 billion through 2037, although management considered funding requirements remote. Treaty guarantees totaled $936.0 million, or $810.9 million net of assets in trust.
- The company reported no material litigation and no material changes to previously disclosed risk factors. Disclosure controls and procedures were determined to be effective.
- RGA adopted updated stock-compensation accounting on January 1, 2017, increasing retained earnings by approximately $17.7 million and providing $7.2 million of year-to-date tax benefit. New standards for financial instruments, leases, income taxes, credit losses and derivatives were pending or under evaluation.
Important facts for investors to verify
- Assess the sustainability of earnings excluding unrealized embedded-derivative and other investment-related valuation changes.
- Monitor mortality and claims trends, particularly the deterioration in Canada and the higher lapse experience in the Japanese closed block.
- Review investment portfolio credit quality, concentration, unrealized losses, impairment assumptions and the effects of prolonged low interest rates.
- Verify liquidity under stress, including collateral calls, early recaptures, policyholder withdrawals and access to revolving and secured borrowing facilities.
- Evaluate debt covenant compliance, rating-sensitive derivative provisions and the potential impact of credit-rating changes.
- Review the scale and terms of statutory reserve-support commitments, treaty guarantees, letters of credit and retrocession recoverables.
- Confirm the timing and expected effects of pending accounting standards, particularly current expected credit losses and financial-instrument fair-value changes.