RGA 2018 First-Quarter Form 10-Q Summary
Business context and reporting period
Reinsurance Group of America, Incorporated (RGA) reported unaudited consolidated results for the three months ended March 31, 2018, compared with the three months ended March 31, 2017. RGA is a global provider of life reinsurance and financial solutions, with $3.4 trillion of life reinsurance in force at March 31, 2018. Operations include traditional and financial solutions businesses across the U.S. and Latin America, Canada, Europe, the Middle East and Africa, and Asia Pacific.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $3.174 billion | $3.009 billion | +5.5% |
| Net premiums | $2.583 billion | $2.366 billion | +9.2% |
| Net investment income | $516.3 million | $514.4 million | +0.4% |
| Income before taxes | $137.9 million | $207.8 million | -33.6% |
| Net income | $100.2 million | $145.5 million | -31.1% |
| Diluted EPS | $1.52 | $2.22 | -31.5% |
| Net margin | 3.2% | 4.8% | Down approximately 170 bps |
| Effective tax rate | 27.3% | 30.0% | Down 270 bps |
| Operating cash flow | $223.7 million | $417.4 million | -46.4% |
Cash and cash equivalents were $1.510 billion at March 31, 2018, compared with $1.304 billion at December 31, 2017. Total liquidity, defined by the company as cash and cash equivalents plus short-term investments, was $1.641 billion. Total assets were $60.955 billion and stockholders’ equity was $9.008 billion at quarter-end.
Long-term debt was $2.788 billion and collateral finance and securitization notes were $753.4 million. RGA reported compliance with its debt covenants. The company had no cash borrowings under its $850 million revolving credit facility, $80.9 million of issued but undrawn letters of credit, and approximately $769.1 million of available revolving credit capacity.
Fixed maturity securities available for sale totaled $37.945 billion, or 71.6% of cash and invested assets. Approximately 95.5% of the fixed maturity portfolio was investment grade. Gross unrealized gains declined to $2.413 billion from $2.983 billion at December 31, 2017, while gross unrealized losses increased to $381.5 million from $113.3 million.
Material changes versus the prior comparable period
- Net premiums increased $216.9 million, reflecting growth in life reinsurance in force and favorable foreign currency effects. Assumed life insurance in force rose to $3.384 trillion from $3.137 trillion at March 31, 2017.
- Income declined primarily because of unfavorable claims experience in the U.S. and Asia Pacific and lower investment-related gains associated with fair-value changes on modified coinsurance and funds-withheld treaties.
- Claims and other policy benefits increased to $2.362 billion from $2.106 billion. The U.S. and Latin America Traditional loss ratio increased to 96.6% from 94.0%, which management attributed partly to influenza-related mortality and disability volatility. Asia Pacific’s loss ratio increased to 84.0% from 73.5%.
- Investment-related gains declined to a $0.5 million loss from a $60.5 million gain. The 2017 period included $17.2 million of fixed-maturity impairments, while 2018 had no fixed-maturity impairments.
- Fair-value changes in embedded derivatives increased pretax income by $40.9 million in Q1 2018 versus $95.6 million in Q1 2017. Management characterized these effects as unrealized and not affecting current cash flows, crediting rates, or underlying spread performance.
- Operating cash flow decreased $193.6 million, primarily reflecting higher premiums receivable and other working-capital movements and lower net income.
- RGA acquired LOGiQ3 Inc. in January 2018 for net cash consideration of $24.9 million. The acquisition contributed $2.9 million of other revenues and $4.7 million of other operating expenses in the quarter.
- Dividends declared increased to $0.50 per share from $0.41. No shares were repurchased under the $400 million authorization; treasury share activity was primarily related to equity-award tax withholding.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific earnings or revenue guidance. Management stated that cash flows and available liquidity are expected to satisfy obligations for at least the next 12 months, including potential claims, early treaty recaptures and market stresses. The company maintains liquidity alternatives including asset sales, secured borrowings, committed credit facilities, debt or equity issuance, and approximately $1.1 billion of FHLB collateralized borrowing capacity.
Management expects the low-interest-rate environment to continue pressuring investment yields. The average investment yield excluding spread-related business was 4.46%, compared with 4.41% in the prior-year quarter. Management also noted that claims experience can be volatile over short periods and that financial solutions earnings are sensitive to interest rates, credit spreads, equity markets, volatility, policyholder behavior and derivative valuations.
- Key insurance risks include adverse mortality, morbidity, lapsation, claims experience, underwriting errors, catastrophe exposure and inadequate reserves.
- Key investment and market risks include interest rates, credit spreads, unrealized losses, defaults, foreign exchange, real estate and equity-market volatility.
- Counterparty and retrocession risk remains relevant. Reinsurance ceded receivables were $810.6 million, including $17.6 million more than 90 days past due; no allowance was deemed necessary.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $13.75 billion across maturities from 2023 through 2038, although management considered required funding remote.
- The company reported no material litigation and no material changes to previously disclosed risk factors.
- Accounting for the 2017 U.S. Tax Reform remained provisional. The quarter included an estimated GILTI impact, and the company had not completed its accounting for all tax effects.
- Accumulated other comprehensive income declined to $1.428 billion from $2.064 billion, principally due to a $633.6 million after-tax net unrealized investment loss.
Most important facts for investors to verify
- Whether elevated U.S. and Asia Pacific claims experience was temporary, including the impact of influenza and new-business mix.
- The sensitivity of future earnings, capital and liquidity to interest rates, credit spreads, equity markets and embedded-derivative fair values.
- The recoverability and concentration of funds withheld at interest, including approximately $4.0 billion associated with one client.
- The trend in unrealized investment losses and the potential for future impairments if credit conditions deteriorate or securities must be sold.
- The provisional tax accounting under the Tax Cuts and Jobs Act, including GILTI and foreign tax credit valuation allowances.
- Debt covenants, credit ratings and potential collateral or termination requirements under derivative agreements.
- Future dividend and share-repurchase decisions, which remain subject to earnings, capital needs, regulatory conditions and board discretion.