Reinsurance Group of America, Incorporated — Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
RGA provides traditional life, health, disability and critical illness reinsurance, as well as financial solutions including longevity, asset-intensive, financial reinsurance, capital solutions and stable value products. The filing covers the three and six months ended June 30, 2022; results are unaudited and interim results are not necessarily indicative of full-year performance. The company reported $3.4 trillion of life reinsurance in force and $84.6 billion of assets at June 30, 2022.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net premiums | $3,230 million | $3,098 million | $6,385 million | $6,012 million |
| Net investment income | $754 million | $759 million | $1,564 million | $1,571 million |
| Investment-related gains/(losses), net | $(254) million | $112 million | $(380) million | $414 million |
| Total revenues | $3,887 million | $4,137 million | $7,817 million | $8,256 million |
| Income before income taxes | $254 million | $482 million | $194 million | $668 million |
| Net income | $199 million | $344 million | $136 million | $483 million |
| Net income available to RGA shareholders | $198 million | $344 million | $135 million | $483 million |
| Diluted EPS | $2.92 | $5.02 | $2.00 | $7.06 |
Net income margin was approximately 5.1% in Q2 2022 versus 8.3% in Q2 2021, and approximately 1.7% for the first six months versus 5.8% in the prior-year period. The decline primarily reflected investment-related losses, derivative fair-value movements and portfolio repositioning losses.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $84.6 billion at June 30, 2022, down from $92.2 billion at December 31, 2021.
- Total investments were $71.0 billion, including $53.3 billion of fixed maturity securities available for sale. Cash and cash equivalents were $2.6 billion; total liquidity, including short-term investments, was approximately $2.8 billion.
- Total equity was $5.9 billion, down from $13.0 billion at year-end 2021, largely due to $7.2 billion of unfavorable accumulated other comprehensive income driven by unrealized investment losses.
- Long-term debt was $3.7 billion and collateral finance and securitization notes were $152 million. The company reported compliance with all debt covenants.
- Net cash provided by operating activities was $242 million versus $2.3 billion in the prior-year period. Investing activities used $3.2 billion, while financing activities provided $2.7 billion. Cash and cash equivalents decreased by $392 million to $2.6 billion.
- RGA had $843 million of availability under its revolving credit facility, $582 million of additional FHLB collateralized borrowing capacity and no cash borrowings outstanding under the revolver. It had $7 million of issued but undrawn letters of credit under the facility.
- The company paid $98 million of dividends and repurchased 219,116 shares for $25 million during the first six months. The board declared a quarterly dividend of $0.80 per share in August 2022.
Material Changes Versus the Prior Comparable Period
- Q2 net premiums increased 4.3%, and first-half net premiums increased 6.2%, primarily from new business production and organic growth.
- Investment-related gains shifted to losses of $254 million in Q2 and $380 million year to date, compared with gains of $112 million and $414 million, respectively, in 2021. Non-hedging derivative fair-value changes reduced investment-related results by $114 million in Q2 and $204 million year to date.
- Portfolio repositioning generated pre-tax net realized losses of $60 million in Q2 and $85 million year to date, compared with prior-year gains of $23 million and $177 million.
- Gross unrealized losses on fixed maturity securities increased to $5.1 billion from $349 million at year-end 2021, while gross unrealized gains declined to $870 million from $5.3 billion, primarily because of higher interest rates. Management stated it did not intend to sell, and did not expect to be required to sell, the affected securities.
- Traditional reinsurance generally improved operationally: U.S. and Latin America Traditional pre-tax income was $209 million in Q2 versus $135 million, while Asia Pacific Traditional earned $58 million versus a $12 million loss. Canada Traditional declined to $16 million from $32 million, primarily due to unfavorable mortality.
- Financial Solutions results weakened. U.S. and Latin America Financial Solutions pre-tax income was $61 million versus $186 million, and Asia Pacific Financial Solutions recorded a $66 million loss versus $31 million of income, primarily due to derivative fair-value losses and market effects.
- The company estimated $316 million of COVID-19-related life and health claims for the first six months, including approximately $258 million in U.S. and Latin America Traditional.
Guidance, Outlook, Commentary and Risks
- Management stated that available sources of liquidity are sufficient for at least the next twelve months under scenarios including early treaty recapture, market uncertainty, higher claims and COVID-19 effects.
- Management identified mortality and morbidity as the company’s most significant risks. Other material risks include interest-rate and credit-spread movements, foreign exchange, equity and real estate markets, collateral requirements, credit ratings, counterparty and retrocessionaire performance, regulatory restrictions, underwriting, claims development, pandemics, competition, cybersecurity and accounting changes.
- The company expects to adopt the long-duration insurance contract standard, ASU 2018-12, on January 1, 2023. Current estimates indicate a decrease in retained earnings of approximately $1.0 billion to $1.3 billion and a decrease in AOCI of approximately $5.1 billion to $7.1 billion at the January 1, 2021 transition date. At December 31, 2021, estimated decreases were $0.5 billion to $0.8 billion in retained earnings and $3.2 billion to $5.2 billion in AOCI. Actual effects remain subject to change.
- The company reported no material litigation and no material changes to previously disclosed risk factors.
- Statutory reserve support commitments had maximum potential obligations totaling approximately $27.0 billion across maturities from 2034 through 2046; management considered funding events remote.
- Reinsurance ceded receivables totaled $2.6 billion, with no allowance deemed necessary. The largest reinsurer represented 63% of the balance, creating concentration exposure despite an A.M. Best rating of A-.
Investor Verification Priorities
- Verify the sustainability of premium growth and new-business production after the reported decline in consolidated life reinsurance in force to $3.38 trillion.
- Assess whether derivative and investment-related volatility, including interest-rate and credit-spread effects, continues to materially affect earnings.
- Evaluate the credit quality, duration and liquidity of the fixed-income portfolio, including $5.1 billion of unrealized losses and concentrations in corporate securities, foreign government securities and structured assets.
- Confirm the eventual impact and implementation timing of ASU 2018-12 on retained earnings, AOCI, reserves and reported earnings.
- Monitor COVID-19 mortality claims, claims development and regional loss ratios, particularly in U.S. and Latin America, Canada and Asia Pacific.
- Review capital adequacy, debt covenants, rating-sensitive derivative provisions, collateral requirements and holding-company liquidity.
- Evaluate concentration risk in funds withheld balances, ceded reinsurance receivables and mortgage loans.