Business Context and Reporting Period
Reinsurance Group of America, Incorporated and subsidiaries filed an unaudited Form 10-Q for the quarter ended March 31, 2023. RGA provides traditional life, health, disability and critical illness reinsurance and financial solutions, including longevity, asset-intensive, capital and financial reinsurance. The company reported approximately $3.4 trillion of life reinsurance in force and $89.1 billion of assets at quarter-end.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $4,251 million | $3,917 million | +$334 million |
| Income before income taxes | $351 million | $267 million | +$84 million |
| Net income | $253 million | $197 million | +$56 million |
| Net income available to shareholders | $252 million | $197 million | +$55 million |
| Diluted earnings per share | $3.72 | $2.91 | +$0.81 |
| Operating cash flow | $1,574 million | $163 million | +$1,411 million |
- Net premiums were $3,385 million, up $230 million, primarily reflecting a single-premium pension risk transfer transaction, organic growth and new business.
- Net investment income increased to $856 million from $810 million. Investment-related losses improved to $77 million from $139 million of losses in the prior-year quarter.
- Approximate consolidated pre-tax margin was 8.3%, compared with 6.8% in Q1 2022; approximate net margin was 6.0%, compared with 5.0%.
- The effective tax rate was 28.0%, compared with 26.3%.
- Total assets were $89.1 billion, compared with $84.9 billion at December 31, 2022. Total equity was $7.7 billion, compared with $7.2 billion.
- Cash and cash equivalents were $3.3 billion. The company reported a liquidity position, including short-term investments, of approximately $3.5 billion.
- Long-term debt was $4.5 billion, compared with $4.0 billion at year-end. Average interest rate on long-term debt was 4.98%.
- Net cash used in investing activities was $1,705 million, while financing activities provided $497 million, including $500 million of new debt issuance.
Material Changes Versus the Prior Comparable Period
- Results benefited from favorable claims experience, particularly in U.S. and Latin America Traditional, compared with COVID-19-related adverse claims experience in Q1 2022.
- U.S. and Latin America pre-tax income increased to $235 million from $117 million. Canada increased to $39 million from $24 million, while EMEA declined to $86 million from $101 million and Asia Pacific increased to $66 million from $52 million.
- Traditional reinsurance loss ratios improved in U.S. and Latin America to 90.0% from 100.6% and in Canada to 92.5% from 94.7%. Asia Pacific worsened to 83.7% from 75.7%; EMEA worsened to 87.2% from 85.4%.
- Financial Solutions benefited from a $37 million gain in the fair value of embedded derivatives associated with modco and funds-withheld treaties, versus a $33 million loss in Q1 2022.
- Net investment income increased despite lower variable investment income. Average investment yield excluding spread-related business declined to 4.71% from 5.29%, primarily because of lower variable investment income from real estate joint ventures, partly offset by higher reinvestment yields.
- The company adopted ASU 2018-12, materially changing long-duration contract accounting. The adoption reduced January 1, 2021 retained earnings by $1.245 billion after tax and increased accumulated other comprehensive income by $6.268 billion after tax; prior periods were revised.
- Gross unrealized losses on available-for-sale fixed maturity securities declined to $6.1 billion from $7.3 billion at year-end, while fair value increased to $56.1 billion from $52.9 billion.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a formal earnings or revenue outlook. Management stated that available sources of liquidity are expected to satisfy requirements for at least the next 12 months, including under scenarios involving higher claims, market events and potential early recapture of treaties.
- On March 23, 2023, a subsidiary issued $500 million of 7.125% surplus notes due 2043. The company also entered into a new five-year, $850 million revolving credit facility maturing in March 2028; no cash borrowings were outstanding and $1 million of letters of credit had been issued but undrawn under the facility at March 31.
- RGA reported compliance with debt covenants. Its debt agreements include minimum consolidated net worth and maximum debt-to-capitalization requirements, and a material covenant default could accelerate repayment obligations.
- Outstanding third-party letters of credit were approximately $128 million, with an additional $740 million of undrawn intercompany letters of credit supporting reinsurance arrangements.
- Investment risks include interest-rate, credit-spread, equity, foreign-exchange, real-estate and liquidity volatility. Fixed maturity securities were 94.5% investment grade by fair value, but the portfolio had $6.1 billion of gross unrealized losses.
- RGA recorded $43 million of impairments and changes in allowances for credit losses on fixed maturity securities, primarily related to securities of banks that collapsed in March 2023. One $17 million mortgage loan was converted to an owned property through a deed in lieu of foreclosure.
- Two major reinsurers represented approximately 76% of reinsurance ceded receivables and other. Management reported no allowance was necessary, but retrocessionaire failure could expose RGA to losses.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $26.9 billion across commitment periods from 2034 through 2046. Management considered funding events remote.
- Management identified mortality and morbidity risk as the company’s most significant risk. Other material risks include lapsation, inadequate underwriting, collateral requirements, counterparty defaults, regulatory actions, capital-market conditions, litigation, catastrophe and pandemic events, and operational or cybersecurity failures.
- Pending litigation and regulatory matters were not expected by management to have a material adverse effect, although an adverse outcome in a particular period could be material.
Most Important Facts for Investors to Verify
- Confirm the effect of ASU 2018-12 on year-over-year comparability, retained earnings, AOCI, reserves and segment results.
- Assess whether the Q1 premium increase from the single-premium pension risk transfer transaction was economically offset by reserve growth and whether it is repeatable.
- Evaluate sustainability of favorable mortality and claims experience, particularly the improvement from COVID-19-affected Q1 2022 results.
- Review sensitivity to interest rates, credit spreads, equity markets and derivative valuations, including the $32 million net favorable effect from certain derivatives and market risk benefits.
- Monitor the $4.5 billion debt balance, covenant thresholds, surplus-note terms, credit ratings and available revolving and collateralized borrowing capacity.
- Review the quality, duration and liquidity of the investment portfolio, including $6.1 billion of unrealized fixed-maturity losses and exposure to corporate, structured and mortgage assets.
- Assess concentration and collectability risks involving retrocessionaires, funds-withheld assets and major cedants.
- Verify future capital deployment, including the $50 million of share repurchases and $0.80-per-share quarterly dividend declared in April 2023.