Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed its Form 10-K for the fiscal year ended December 31, 2021. RGA is a global provider of traditional life and health reinsurance and financial solutions, including longevity, asset-intensive, capital solutions and stable-value products. Operations are organized across U.S. and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other.
At year-end, RGA reported $3.5 trillion of life reinsurance in force, $92.2 billion of assets and approximately 3,500 employees. The filing is annual rather than a standalone fourth-quarter filing, although quarterly results are disclosed.
Financial Performance and Position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net premiums | $12.513 billion | $11.694 billion | +$819 million |
| Total revenues | $16.658 billion | $14.596 billion | +$2.062 billion |
| Income before income taxes | $691 million | $553 million | +$138 million |
| Net income | $617 million | $415 million | +$202 million |
| Diluted EPS | $9.04 | $6.31 | +$2.73 |
| Net cash from operating activities | $4.182 billion | $3.322 billion | +$860 million |
- Net income margin was approximately 3.7% of revenue; pretax margin was approximately 4.1%.
- Investment income, net of related expenses, increased to $3.138 billion from $2.575 billion. The average investment yield excluding spread-related business was 4.99%, compared with 4.00% in 2020, largely reflecting higher variable investment income.
- Investment-related gains were $560 million, compared with a $33 million loss in 2020.
- Total assets increased to $92.175 billion from $84.656 billion. Total stockholders’ equity declined to $13.014 billion from $14.352 billion, primarily because of a $1.717 billion after-tax decline in other comprehensive income from unrealized investment losses.
- Cash and cash equivalents were $2.948 billion; total investments were $78.528 billion. Total cash and invested assets were $81.476 billion.
- Long-term debt was $3.667 billion, and collateral finance and securitization notes were $180 million. The company reported compliance with debt covenants, including a minimum consolidated net worth requirement of $5.3 billion and a maximum debt-to-capitalization ratio of 35%.
- RGA had no cash borrowings under its $850 million syndicated revolving facility and had $829 million of availability, along with $755 million of potential collateralized borrowing capacity from the Federal Home Loan Bank of Des Moines.
- RGA paid $194 million of dividends and repurchased $99 million of common stock in 2021. The declared dividend totaled $2.86 per share.
Material Changes Versus the Prior Comparable Period
- Premium growth reflected new business production of $412.1 billion of face amount, compared with $389.6 billion in 2020. Reported life insurance in force declined modestly to $3.467 trillion from $3.481 trillion because mortality, lapses and foreign exchange effects exceeded new business additions.
- Claims and other policy benefits increased to $12.776 billion from $11.075 billion. RGA estimated approximately $1.4 billion of COVID-19-related life and health claim costs in 2021, including approximately $850 million in U.S. and Latin America Traditional.
- U.S. and Latin America Traditional generated a $540 million pretax loss, compared with a $298 million loss, and its loss ratio increased to 107.6% from 101.2%.
- EMEA pretax income fell to $64 million from $285 million, principally because of unfavorable mortality and morbidity experience. EMEA Traditional had a $239 million pretax loss, compared with $27 million of income.
- Asia Pacific pretax income declined to $88 million from $233 million; Asia Pacific Traditional moved to a $10 million loss, primarily due to COVID-19-related claims in India.
- Financial Solutions performed better in several areas. U.S. and Latin America Financial Solutions pretax income increased to $515 million from $295 million, while EMEA Financial Solutions increased to $303 million from $258 million and Asia Pacific Financial Solutions increased to $98 million from $59 million.
- Corporate and Other produced $421 million of pretax income, compared with a $117 million loss, driven by investment gains, a prior-period accounting correction and lower interest expense.
Outlook, Commentary, Risks and Unusual Items
- Management stated that it expects operating cash flows and available liquidity to be sufficient for at least the next twelve months under scenarios including early recapture, market events and higher-than-expected COVID-19 claims. The filing provides no formal earnings or revenue guidance.
- RGA recorded a one-time pretax accounting correction of approximately $162 million in 2021: $92 million related to equity-method limited partnership gains and $70 million related to the fair-value carrying value of certain limited partnerships.
- Portfolio repositioning generated approximately $234 million of pretax capital gains. Changes in embedded derivatives increased pretax income by $39 million after related hedging and deferred acquisition cost effects, compared with a $42 million reduction in 2020.
- The effective tax rate declined to 10.6% from 24.9%, primarily because $124 million of uncertain tax positions were released following expiration of statutes of limitation and because of valuation allowance releases.
- The principal risks are mortality and morbidity volatility, COVID-19 developments, reserve adequacy, investment and interest-rate risk, counterparty and retrocessionaire performance, ratings downgrades, collateral availability, regulatory capital requirements, foreign currency exposure, cybersecurity and operational disruption.
- RGA’s available-for-sale fixed maturity portfolio was $60.749 billion, with approximately 94% investment grade. Gross unrealized losses increased to $349 million from $197 million as interest rates rose, while gross unrealized gains remained substantial at $5.3 billion.
- Collateral requirements are significant: approximately $28.7 billion of securities were held in trust for third-party reinsurance obligations and $1.4 billion of undrawn letters of credit supported intercompany reinsurance.
- The company expects adoption of the long-duration insurance accounting standard on January 1, 2023. Management anticipates potentially material effects on retained earnings, accumulated other comprehensive income, profitability, financial position and ratios, but the final impact was not yet clear.
- RGA reported no material litigation, no material cybersecurity breach identified to date, and effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether COVID-19 mortality and morbidity claims normalize, particularly in U.S. and Latin America Traditional, EMEA Traditional and Asia Pacific Traditional.
- The adequacy of future policy benefit reserves, deferred acquisition costs and actuarial assumptions for mortality, longevity, lapses and policyholder behavior.
- The amount and cost of collateral required for Regulation XXX, principles-based reserves and intercompany retrocession arrangements.
- Liquidity and capital availability if claims, recaptures, collateral calls or market volatility increase; also verify compliance with debt covenants and ratings triggers.
- The sustainability of investment income and gains, given the contribution from variable investment income, portfolio repositioning and fair-value changes.
- The eventual impact of the 2023 long-duration insurance accounting standard on equity, earnings, OCI and financial ratios.
- The concentration of funds withheld at interest, including approximately $4.6 billion associated primarily with two clients, and the related ceding-company credit and asset-performance exposure.
- The terms and execution of the new $400 million share repurchase authorization approved February 25, 2022, and the balance between buybacks, dividends, acquisitions and capital support.