Reinsurance Group of America, Incorporated — 2020 Third-Quarter Form 10-Q
Business context and reporting period
RGA provides global life and health reinsurance and financial solutions, including longevity, asset-intensive, capital solutions, financial reinsurance, and stable value products. The filing covers the three and nine months ended September 30, 2020; results are unaudited and interim results are not necessarily indicative of full-year performance.
As of September 30, 2020, RGA reported $3.4 trillion of life reinsurance in force, $82.1 billion of total assets, and 67.9 million common shares outstanding.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net premiums | $2,825 million | $2,809 million | $8,434 million | $8,311 million |
| Total revenues | $3,643 million | $3,628 million | $10,453 million | $10,515 million |
| Income before taxes | $285 million | $347 million | $384 million | $824 million |
| Net income | $213 million | $263 million | $283 million | $635 million |
| Diluted EPS | $3.12 | $4.12 | $4.36 | $9.93 |
| Operating cash flow | Not separately reported | Not separately reported | $2,779 million | $1,764 million |
Calculated net profit margin was approximately 5.8% in Q3 2020 versus 7.2% in Q3 2019, and 2.7% for the first nine months versus 6.0% in the prior-year period. Pretax margin was approximately 7.8% in Q3 versus 9.6%, and 3.7% for nine months versus 7.8%.
- Investment income, net of expenses, was $654 million in Q3 and $1,893 million for nine months, compared with $679 million and $1,843 million, respectively.
- Investment-related gains were $66 million in Q3, compared with $49 million; for nine months, the company recorded a $138 million net loss versus a $69 million gain.
- Claims and other policy benefits increased to $2,530 million in Q3 and $7,894 million for nine months, versus $2,470 million and $7,494 million.
- Average investment yield excluding spread-related business declined to 3.66% in Q3 and 3.93% for nine months, from 4.83% and 4.57%.
- Total assets increased to $82,127 million from $76,731 million at December 31, 2019. Stockholders’ equity increased to $13,214 million from $11,601 million.
- Cash and cash equivalents increased to $3,256 million from $1,449 million. Total cash and invested assets were $73,411 million.
- Long-term debt was $3,573 million, compared with $2,981 million at year-end; collateral finance and securitization notes were $408 million versus $598 million.
- The fixed maturity portfolio was $54,652 million at fair value, with approximately 94.8% investment grade. Gross unrealized gains were $6,380 million and gross unrealized losses were $370 million.
Material changes versus the prior comparable period
- Net income declined 19.0% in Q3 and 55.4% for the first nine months; diluted EPS declined 24.3% and 56.1%, respectively.
- Premium growth remained modest: net premiums increased 0.6% in Q3 and 1.5% for nine months, primarily from growth in life reinsurance in force.
- COVID-19-related life and health claims were estimated at approximately $440 million through September 30, including approximately $340 million associated with U.S. individual mortality. Approximately $100 million was attributed to individual mortality excess claims in Q3.
- U.S. and Latin America pretax income declined to $88 million in Q3 from $232 million and was a $30 million loss for nine months versus $474 million of income, primarily due to unfavorable mortality experience and market-related effects.
- Canada pretax income declined to $36 million in Q3 from $46 million and to $110 million for nine months from $148 million, mainly due to less favorable mortality experience.
- EMEA pretax income increased to $99 million in Q3 from $86 million and to $260 million for nine months from $208 million, driven by favorable longevity results that more than offset weaker traditional mortality and morbidity experience.
- Asia Pacific pretax income increased to $88 million in Q3 from $24 million and to $160 million for nine months from $103 million, primarily due to favorable claims experience.
- The company issued $600 million of 3.15% senior notes due 2030, receiving approximately $593 million of net proceeds, and issued 6,172,840 common shares for approximately $481 million of net proceeds.
- RGA repurchased $153 million of common stock during the first nine months before suspending repurchases on May 6, 2020. It paid $134 million of dividends during the period.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that the ultimate COVID-19 impact cannot be reliably predicted. The company expects recurring premiums and other revenues to provide resilience, but new business volumes may temporarily slow.
- Management believed liquidity was sufficient for at least the next 12 months, including under scenarios involving early recapture, market events, and elevated pandemic claims.
- Liquidity resources included $3.3 billion of cash, approximately $850 million of committed syndicated credit capacity, approximately $544 million of FHLB collateralized borrowing capacity, and approximately $2 billion of annual investment cash flows. The revolving facility had $829 million of availability and no cash borrowings outstanding.
- RGA’s primary insurance subsidiaries were rated AA- by S&P; some also carried A1 Moody’s and A+ A.M. Best ratings. The company reported compliance with debt covenants.
- COVID-19 increased mortality and morbidity risk, investment impairment risk, mortgage loan credit risk, operational and cybersecurity risk, and potential collateral and liquidity requirements. The company increased its mortgage loan valuation allowance to $64 million from $12 million and modified approximately 50 commercial mortgage loans with a carrying value of approximately $620 million.
- Changes in fair value of embedded derivatives generated substantial volatility: the net effect on pretax income was favorable by $51 million in Q3 but unfavorable by $63 million for nine months for modco and funds-withheld treaties.
- Future results remain sensitive to mortality, morbidity, lapsation, interest rates, credit spreads, equity markets, foreign exchange, investment impairments, ratings, collateral requirements, regulation, and the financial condition of ceding companies and retrocessionaires.
- The company expects the new long-duration insurance accounting standard, currently anticipated for adoption in 2023, to have a potentially material effect on results and financial position; its impact remains under evaluation.
- No material litigation was reported. Statutory reserve-support commitments had maximum potential obligations totaling approximately $23.8 billion across stated commitment years, although management considered funding requirements remote.
Most important facts for investors to verify
- Whether COVID-19 mortality claims ultimately exceed the approximately $440 million incurred estimate through September 30, 2020.
- Subsequent development of U.S. individual mortality, Canada and EMEA claims, including reported-but-not-yet-processed claims.
- Credit performance of the fixed maturity and commercial mortgage loan portfolios, including the $370 million of unrealized fixed maturity losses and $64 million mortgage loan allowance.
- Future investment yields and spread performance in the continuing low-interest-rate environment.
- Availability and cost of collateral, potential treaty recaptures, ratings triggers, and the ability of subsidiaries to upstream dividends.
- Whether suspended share repurchases remain paused and whether the $0.70 quarterly dividend remains sustainable under regulatory and capital constraints.
- Expected balance-sheet and earnings effects of the long-duration insurance accounting standard and LIBOR transition.