Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed its Form 10-K for the fiscal year ended December 31, 2017. RGA is a global provider of traditional life and health reinsurance and financial solutions, including longevity, asset-intensive and financial reinsurance, operating across the U.S., Latin America, Canada, Europe, the Middle East, Africa, Asia and Australia. The filing includes fourth-quarter and full-year information; the primary reporting period is fiscal year 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net premiums | $9.841 billion | $9.249 billion | +6.4% |
| Total revenues | $12.516 billion | $11.522 billion | +8.6% |
| Income before income taxes | $1.143 billion | $1.044 billion | +9.5% |
| Net income | $1.822 billion | $701.4 million | +159.8% |
| Diluted EPS | $27.71 | $10.79 | +157.0% |
| Net cash provided by operating activities | $1.982 billion | $1.466 billion | +35.3% |
| Total assets | $60.515 billion | $53.098 billion | +14.0% |
| Total stockholders’ equity | $9.570 billion | $7.093 billion | +34.9% |
| Long-term debt | $2.788 billion | $3.089 billion | -9.7% |
Reported pre-tax margin was approximately 9.1%, compared with 9.1% in 2016. Reported net margin was approximately 14.6%, compared with 6.1% in 2016, but the comparison was materially affected by tax reform. The 2017 effective tax rate was negative 59.4%, compared with 32.8% in 2016.
- U.S. and Latin America income before tax increased 18.4% to $775.0 million.
- Canada income before tax decreased 4.1% to $136.9 million.
- Europe, Middle East and Africa income before tax increased 15.4% to $194.0 million.
- Asia Pacific income before tax increased 37.2% to $161.9 million.
- Corporate and Other reported a $125.0 million pre-tax loss, compared with a $39.2 million loss in 2016.
- Assumed life reinsurance in force increased to $3.297 trillion from $3.063 trillion; new business production was $395.4 billion versus $404.8 billion.
- Average investment yield, excluding spread-related business, declined slightly to 4.55% from 4.57%.
Material Changes Versus the Prior Comparable Period
- Net income benefited from a provisional $1.034 billion net tax benefit, primarily from remeasurement of deferred tax liabilities after the U.S. corporate tax rate declined from 35% to 21%. Management stated that the amount could change as interpretations and calculations are refined.
- Investment income increased 12.7% to $2.155 billion, primarily from growth in average invested assets. Investment-related gains increased to $167.9 million from $94.2 million.
- Higher claims, interest credited, acquisition costs and operating expenses accompanied business growth. Claims and other policy benefits increased 6.6% to $8.519 billion, while interest credited increased 37.7% to $502.0 million.
- U.S. and Latin America Financial Solutions pre-tax income increased to $401.6 million from $283.4 million, supported by asset-intensive and financial reinsurance growth.
- Asia Pacific benefited from business growth, improved Australian claims experience and $57.9 million of recapture fees from three Australian treaties.
- Corporate and Other expenses increased materially, including a $22.5 million capital project write-off, higher incentive compensation and pension costs, and increased consulting expense.
- Cash and invested assets increased to $53.0 billion from $46.0 billion, while gross unrealized gains on available-for-sale securities rose to $3.0 billion from $2.2 billion and gross unrealized losses declined to $117.0 million from $374.9 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific numerical earnings or revenue guidance range in the filing. Management expects long-term demand for life reinsurance and financial solutions to continue, supported by insurer capital management needs, demographic trends, international market expansion, consolidation and regulatory developments. The company expects lower U.S. tax rates to reduce its future overall effective tax rate, although the effects of GILTI and BEAT were still under evaluation.
- Management stated that liquidity is sufficient for at least the next 12 months, including scenarios involving early recapture of treaties, market events and higher-than-expected claims. Liquidity consisted of approximately $1.397 billion of cash, cash equivalents and short-term investments at year-end, supplemented by committed facilities, secured borrowing capacity and potential asset sales.
- RGA had no cash borrowings under its $850 million syndicated revolving credit facility and had $96.6 million of issued but undrawn letters of credit under that facility. Total outstanding letters of credit backing affiliated reinsurance were approximately $1.5 billion.
- RGA reported $2.8 billion of long-term debt and $783.9 million of collateral finance and securitization notes. It was in compliance with debt covenants, including minimum consolidated net worth and maximum debt-to-capitalization requirements.
- Regulation XXX reserve financing, availability and cost of collateral, restrictions on captive reinsurers, principles-based reserving and potential group-capital requirements may affect statutory capital, liquidity, pricing and the ability to write or retain business.
- Key operating risks include adverse mortality, morbidity or lapse experience; reserve inadequacy; interest-rate and credit-spread changes; equity-market volatility affecting variable annuity guarantees; foreign currency movements; counterparty and retrocessionaire defaults; recapture activity; regulatory changes; and cybersecurity or business-continuity failures.
- The company’s ratings were generally stable at filing; RGA Reinsurance was rated A+ by A.M. Best, A1 by Moody’s and AA- by S&P. Downgrades could increase collateral requirements, permit treaty recapture or impair competitiveness.
- RGA reported no material litigation and no material unresolved SEC staff comments. Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective.
Important Facts for Investors to Verify
- Separate recurring operating performance from the approximately $1.0 billion provisional tax benefit and other tax-reform effects.
- Assess the sustainability of investment-related gains, embedded-derivative valuation changes and variable investment income.
- Review mortality, morbidity, lapse and claims trends by segment, particularly the higher U.S. Traditional loss ratio and unfavorable Canadian mortality experience.
- Evaluate statutory capital, RBC ratios, dividend capacity and collateral availability under Regulation XXX, captive-reinsurance and principles-based-reserving changes.
- Monitor debt maturities, letter-of-credit capacity, collateral requirements and the company’s reliance on subsidiary dividends for holding-company liquidity.
- Analyze exposure to interest rates, credit spreads, equity volatility, foreign exchange and the effectiveness of hedging programs.
- Reconcile cash-flow disclosures: the audited consolidated cash-flow statement reports 2016 operating cash flow of $1.466 billion, while one summary table in the filing shows $1.421 billion; the filing text does not explain the discrepancy.