Reinsurance Group of America, Incorporated: 2019 Q3 Form 10-Q Summary
Business context and reporting period
RGA is a global provider of traditional life, health, disability and critical illness reinsurance, as well as financial solutions including longevity, financial reinsurance, stable value and asset-intensive products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the same periods in 2018.
As of September 30, 2019, RGA reported approximately $3.4 trillion of life reinsurance in force, $75.8 billion of assets and $67.1 billion of cash and invested assets.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net premiums | $2.810 billion | $2.562 billion | $8.311 billion | $7.739 billion |
| Investment income, net | $678.8 million | $572.7 million | $1.843 billion | $1.617 billion |
| Investment-related gains, net | $48.8 million | $(20.0) million | $69.0 million | $(31.1) million |
| Total revenues | $3.628 billion | $3.228 billion | $10.515 billion | $9.597 billion |
| Income before taxes | $347.1 million | $322.7 million | $823.7 million | $707.9 million |
| Net income | $262.8 million | $301.2 million | $635.0 million | $605.8 million |
| Diluted EPS | $4.12 | $4.68 | $9.93 | $9.30 |
| Effective tax rate | 24.3% | 6.7% | 22.9% | 14.4% |
Total revenue increased 12.4% in the third quarter and 9.6% for the first nine months. Pre-tax income increased 7.6% and 16.4%, respectively. Net income decreased 12.8% in the third quarter but increased 4.8% for the first nine months, primarily because of the significantly higher effective tax rate in 2019. Approximate net margins were 7.2% in Q3 2019 versus 9.3% in Q3 2018, and 6.0% for the first nine months of 2019 versus 6.3% in 2018.
- Net premiums grew 9.7% in Q3 and 7.4% for the first nine months, primarily from growth in life reinsurance in force. Foreign currency movements reduced reported premium growth.
- Net investment income rose 18.5% in Q3 and 14.0% for the first nine months, reflecting a larger average invested asset base and higher variable investment income from joint ventures and limited partnerships.
- Investment-related gains improved substantially from the prior-year losses. Nine-month gains included $17.992 million of fixed-maturity other-than-temporary impairments and $11.013 million of other impairment losses.
- Claims and other policy benefits increased 11.8% in Q3 and 9.4% for the first nine months. Interest credited increased 57.9% and 55.3%, respectively, largely reflecting growth in asset-intensive business.
- Investment yield excluding spread-related business was 4.83% in Q3 and 4.57% for the first nine months, compared with 4.57% and 4.45% in the comparable 2018 periods.
Balance sheet, capital and liquidity
| Balance-sheet metric | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $75.774 billion | $64.535 billion |
| Total investments | $64.490 billion | $54.205 billion |
| Cash and cash equivalents | $2.636 billion | $1.890 billion |
| Total liabilities | $64.250 billion | $56.085 billion |
| Long-term debt | $3.381 billion | $2.788 billion |
| Stockholders’ equity | $11.524 billion | $8.451 billion |
- Fixed-maturity securities increased to $49.481 billion from $39.992 billion. Gross unrealized gains increased to $4.723 billion from $1.859 billion, while gross unrealized losses declined to $102.2 million from $748.5 million.
- Approximately 95.6% of fixed-maturity securities were investment grade. Corporate securities represented 61.3% of the fixed-maturity portfolio.
- Liquidity, defined as cash and cash equivalents plus short-term investments, was $2.743 billion versus $2.032 billion at December 31, 2018.
- Operating cash flow was $1.763 billion, compared with $1.100 billion in the prior-year period. Investing activities used $980.2 million, while financing activities used $19.6 million. Cash increased by $745.9 million to $2.636 billion.
- RGA issued $600 million of 3.9% senior notes due in 2029, generating approximately $593.8 million of net proceeds. Proceeds were intended partly to repay $400 million of 6.45% senior notes maturing in November 2019.
- RGA had no cash borrowings under its $850 million revolving credit facility and had $830.5 million of availability, after outstanding letters of credit. Management stated that liquidity was sufficient for at least the next 12 months, including under scenarios involving higher claims and early recapture.
Material changes versus the prior comparable period
- Canada pre-tax income increased 105.3% in Q3 and 97.9% for the first nine months, primarily because of favorable individual mortality experience.
- EMEA pre-tax income increased 16.1% in Q3 and 3.6% for the first nine months, supported by improved mortality and morbidity experience, closed-block longevity performance and increased business volumes.
- Asia Pacific pre-tax income declined 62.5% in Q3 and 32.5% for the first nine months. Management cited higher losses in Australia, unfavorable claims experience and assumption updates in Asia.
- U.S. and Latin America Financial Solutions income increased 13.8% in Q3 and 10.6% for the first nine months, helped by asset-intensive transactions executed since Q3 2018 and investment gains from portfolio repositioning.
- U.S. and Latin America Traditional income declined 3.3% in Q3 and 6.2% for the first nine months, primarily because of unfavorable individual mortality experience and changes in embedded-derivative values.
- Management identified significant earnings volatility from embedded derivatives associated with modified coinsurance, funds-withheld treaties, equity-indexed annuities and variable annuity guaranteed minimum benefit riders. The net effect after related freestanding derivatives reduced pre-tax income by $22.8 million in Q3 and $35.4 million for the first nine months.
- Share repurchases totaled $79.8 million for the first nine months of 2019, compared with $258.5 million in 2018. The January 2019 authorization permits up to $400 million of repurchases; approximately $320.2 million remained available at September 30, 2019.
Guidance, outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects low interest rates to continue pressuring investment yields, although 2019 yields benefited from higher limited-partnership and joint-venture income.
- Management stated that reserves and capital were expected to remain adequate even if interest rates stayed at current levels for five years, assuming other factors remained constant.
- The company expects adoption of the 2020 current expected credit loss standard to increase credit-loss allowances by approximately $15 million to $25 million, with the after-tax effect reducing opening retained earnings. The estimate remains subject to economic conditions, loan composition and fourth-quarter activity.
- The long-duration insurance accounting standard expected in 2022 is anticipated to have a material effect on results and financial position; RGA was still evaluating the impact.
- Key risks include mortality, morbidity, lapse and claims volatility; inadequate underwriting or reserves; interest-rate, credit-spread, equity and currency movements; investment impairments; collateral and liquidity requirements; counterparty and retrocessionaire failures; regulatory restrictions; debt-rating downgrades; operational and cybersecurity failures; litigation; catastrophes; and changes in laws or accounting standards.
- RGA reported no material litigation and no material changes to the risk factors disclosed in its 2018 Form 10-K. It also reported compliance with debt covenants and effective disclosure controls.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $15.8 billion across 2023 through 2039, although management considered required funding remote. Treaty guarantees totaled $1.764 billion, or $902.0 million net of assets in trust.
Most important facts for investors to verify
- Whether growth in asset-intensive and longevity transactions produces sustainable spread income after separating unrealized derivative volatility.
- Whether unfavorable Asia Pacific and U.S. individual mortality experience normalizes or requires reserve strengthening.
- The durability of investment income from limited partnerships, joint ventures and other variable sources in a low-rate environment.
- The effect of future interest-rate and credit-spread movements on embedded derivatives, unrealized investment gains, capital and earnings.
- The final impact of CECL adoption in 2020 and the long-duration insurance standard expected in 2022.
- Liquidity and capital adequacy after the November 2019 debt maturity, dividends, share repurchases, collateral requirements and potential early recapture of treaties.
- Concentration risks, including $3.6 billion of funds-withheld assets associated with one client and significant reliance on ceding companies, retrocessionaires and investment counterparties.