RGA 2018 Second-Quarter Form 10-Q Summary
Business context and reporting period
Reinsurance Group of America, Incorporated is a global provider of life reinsurance and financial solutions, with $3.3 trillion of life reinsurance in force. The filing covers the three and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods. Results are unaudited and interim.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $3.196 billion | $3.129 billion | $6.370 billion | $6.138 billion |
| Net premiums | $2.594 billion | $2.480 billion | $5.177 billion | $4.846 billion |
| Net investment income | $528.1 million | $518.5 million | $1.044 billion | $1.033 billion |
| Income before taxes | $247.3 million | $339.3 million | $385.2 million | $547.2 million |
| Net income | $204.4 million | $232.2 million | $304.6 million | $377.7 million |
| Diluted EPS | $3.13 | $3.54 | $4.65 | $5.76 |
| Dividends declared per share | $0.50 | $0.41 | $1.00 | $0.82 |
Net income declined 12.0% in the second quarter and 19.4% for the first six months. Approximate net margins were 6.4% and 7.4% for the second quarters of 2018 and 2017, and 4.8% and 6.2% for the respective six-month periods.
- Claims and other policy benefits increased 5.3% in the quarter and 8.7% year to date.
- Other operating expenses increased 26.3% in the quarter and 23.5% year to date, reflecting strategic initiatives, acquisitions, compliance costs, consulting and compensation.
- Investment-related gains declined to a $10.6 million loss in the quarter and an $11.0 million loss year to date, versus gains of $56.3 million and $116.8 million in the comparable 2017 periods.
- The effective tax rate was 17.4% for the quarter and 20.9% year to date, compared with 31.6% and 31.0% in 2017, primarily reflecting the Tax Cuts and Jobs Act and other tax benefits.
Balance sheet, cash flow, debt and liquidity
- Total assets were $59.8 billion at June 30, 2018, compared with $60.5 billion at December 31, 2017. Stockholders’ equity decreased to $8.6 billion from $9.6 billion, largely due to a $1.1 billion after-tax decline in accumulated other comprehensive income from unrealized investment losses and currency effects.
- Cash and cash equivalents were $1.398 billion; cash and short-term investments totaled approximately $1.521 billion.
- Net cash provided by operating activities was $583.6 million, down from $656.0 million in the first six months of 2017. Cash increased $94.2 million during the period.
- Long-term debt was $2.788 billion and collateral finance and securitization notes were $725.0 million. The company reported compliance with all debt covenants and an average net interest rate on long-term debt of 5.24%.
- The $850.0 million revolving credit facility had no cash borrowings and $80.4 million of issued, undrawn letters of credit. Availability was approximately $769.6 million. Additional FHLB collateralized borrowing capacity was approximately $1.1 billion.
- RGA repurchased approximately 991,477 shares for $150.0 million during the first six months and paid $64.4 million of dividends. The remaining authorization at June 30 was approximately $223.1 million.
Material changes versus the prior comparable period
- Premium growth remained positive: net premiums rose 4.6% in the quarter and 6.8% year to date, driven by growth in life reinsurance in force, new business and foreign exchange.
- Income declined primarily because of unfavorable U.S. group and individual mortality claims, including effects from a severe influenza season, higher operating expenses and lower investment-related gains.
- U.S. and Latin America income before taxes fell 21.9% in the quarter and 32.1% year to date. Canada income fell 32.0% and 13.2%, respectively, mainly from unfavorable mortality experience.
- EMEA income increased 78.4% in the quarter and 46.7% year to date, led by favorable closed-block longevity and payout-annuity performance.
- Asia Pacific income increased 7.3% in the quarter but declined 15.4% year to date because of unfavorable claims experience, particularly in Australia, and business mix.
- The January 2018 acquisition of LOGiQ3 contributed $10.0 million of other revenue and $13.9 million of operating expenses in the first six months.
- Average investment yield, excluding spread-related business, declined to 4.32% in the quarter and 4.39% year to date, from 4.60% and 4.50%, respectively.
Outlook, commentary, risks and unusual items
Management stated that available liquidity and expected operating cash flows should satisfy obligations for at least the next 12 months, including potential higher claims and early treaty recapture. No formal earnings guidance was provided in the filing.
- Rising risk-free rates reduced gross unrealized gains on fixed maturity securities to $2.143 billion from $2.983 billion at year-end 2017, while gross unrealized losses increased to $592.2 million from $113.3 million. Management stated it has no current intention or expectation of being required to sell affected securities.
- Interest rates, credit spreads, equity markets, foreign exchange, policyholder behavior and derivative valuations can materially affect earnings, capital and liquidity. Embedded derivative changes are generally unrealized and do not affect current cash flows, crediting rates or underlying spread performance.
- Insurance risks include adverse mortality, morbidity, lapse, surrender and claims experience; reserve inadequacy; catastrophe exposure; and underwriting or pricing errors.
- Counterparty risks include client, retrocessionaire and ceding-company insolvency, including risks associated with approximately $4.0 billion of funds withheld at interest tied to one client.
- Statutory reserve support commitments had maximum potential obligations totaling approximately $13.7 billion across maturities from 2023 through 2038, although management considered required funding remote.
- There was no material litigation, no material change in reported risk factors, and no material change in market-risk disclosures. Disclosure controls were evaluated as effective.
- U.S. Tax Reform accounting remained provisional at June 30, 2018; the company was still evaluating BEAT and GILTI effects and had not established an additional BEAT liability.
Most important facts for investors to verify
- Whether U.S. mortality and group claims experience normalizes after the severe influenza season and whether loss ratios improve.
- The sustainability of premium growth relative to claims, acquisition costs and strategic operating expenses.
- The sensitivity of earnings, equity and capital to interest rates, credit spreads, unrealized investment losses and embedded derivative valuations.
- The credit quality and concentration of the investment portfolio, including the increase in unrealized losses and exposure to corporate securities.
- The financial condition of major clients, ceding companies and retrocessionaires, including concentrated funds-withheld and reinsurance receivable exposures.
- The final accounting effects of U.S. Tax Reform and the potential impact of future tax, accounting and regulatory changes.
- Actual use of the revolving credit facility, letters of credit, FHLB capacity and compliance with debt covenants.