RGA 2021 Q3 Form 10-Q Summary
Business context and reporting period
Reinsurance Group of America, Incorporated (RGA) provides traditional life, health, disability and critical illness reinsurance, as well as financial solutions including longevity, asset-intensive, capital and financial reinsurance. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods.
At September 30, 2021, RGA reported $3.4 trillion of life reinsurance in force, $91.4 billion of total assets and 67.6 million common shares outstanding.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net premiums | $3.094 billion | $9.106 billion |
| Total revenues | $4.043 billion | $12.299 billion |
| Income before income taxes | $(34) million | $634 million |
| Net income | $(22) million | $461 million |
| Diluted earnings per share | $(0.32) | $6.74 |
| Net margin | (0.5%) | 3.7% |
| Net cash from operating activities | Not separately reported for the quarter | $3.821 billion |
Investment income, net of related expenses was $796 million in the third quarter and $2.367 billion for the first nine months. Investment-related gains were $58 million and $472 million, respectively. Total benefits and expenses were $4.077 billion in the quarter and $11.665 billion year to date.
Total assets increased to $91.449 billion from $84.656 billion at December 31, 2020. Total investments were $77.569 billion, including $59.289 billion of available-for-sale fixed maturity securities. Stockholders’ equity declined to $12.885 billion from $14.352 billion, primarily because of a $1.776 billion decline in accumulated other comprehensive income from unrealized investment losses.
Long-term debt was $3.173 billion, compared with $3.573 billion at year-end 2020. Collateral finance and securitization notes were $314 million. RGA reported compliance with its debt covenants. The company had $3.027 billion of cash and cash equivalents, $82 million of short-term investments, an $850 million revolving credit facility with $829 million of availability, and $574 million of additional FHLB collateralized borrowing capacity.
Material changes versus the prior comparable period
- Third-quarter net income declined by $235 million from $213 million to a $22 million loss. The principal driver was substantially higher mortality claims, primarily related to COVID-19, in U.S. and Latin America, EMEA and Asia Pacific traditional businesses.
- For the first nine months, net income increased $178 million to $461 million. The increase included a $162 million pretax one-time accounting correction, $213 million of pretax capital gains from portfolio repositioning and more favorable changes in certain embedded derivatives.
- Net premiums increased $269 million in the third quarter and $672 million year to date, reflecting growth in life reinsurance in force and new business production.
- Claims and other policy benefits increased $759 million in the third quarter and $1.400 billion year to date. The company estimated approximately $1.1 billion of COVID-19-related life and health claims for the nine months, including approximately $593 million in U.S. and Latin America.
- Traditional segment performance deteriorated materially: U.S. and Latin America traditional reported pretax losses of $126 million for the quarter and $329 million year to date; EMEA traditional reported losses of $91 million and $171 million; and Asia Pacific traditional reported losses of $96 million and $67 million.
- Financial Solutions was a relative strength. U.S. and Latin America Financial Solutions generated pretax income of $128 million for the quarter and $397 million year to date, compared with $74 million and $176 million in 2020.
- Gross unrealized gains on fixed maturity securities declined to $5.285 billion from $7.404 billion at year-end, while gross unrealized losses increased to $326 million from $197 million. Management stated that it intended and expected to be able to hold securities with unrealized losses.
- RGA repurchased 405,644 shares for $46 million during the first nine months after lifting its suspension of repurchases. Dividends paid were $145 million, or $2.13 per share.
Guidance, outlook, commentary and risks
Management did not provide specific earnings or revenue guidance in the filing. It stated that cash flows, current liquidity sources and capital resources should be sufficient for at least the next twelve months, including under scenarios involving early treaty recaptures, market events and elevated pandemic-related claims.
Management expects investment yields to remain under pressure from the low interest-rate environment and elevated cash balances. The nine-month average investment yield excluding spread business was 5.08%, but 3.83% excluding variable investment income, down from 3.95% in the prior-year period. Variable investment income was $342 million compared with $27 million in the prior-year period and may be volatile.
The most significant operating risk remains mortality and morbidity experience. Other material risks include COVID-19 developments, adverse claims or reserve experience, interest-rate and credit-spread movements, investment impairments, foreign currency changes, collateral requirements, counterparty and retrocessionaire performance, regulatory restrictions, capital-market access, cybersecurity and operational disruptions.
RGA expects to adopt major long-duration insurance accounting changes on January 1, 2023. Management anticipates that changes affecting cash-flow assumptions, discount rates, market risk benefits and deferred acquisition cost amortization could have a material impact on financial position and results of operations, although the company was still evaluating the precise effects.
The filing also disclosed a material accounting correction: approximately $92 million of pretax gains were reclassified from accumulated other comprehensive income to investment income, and approximately $70 million of pretax gains were recognized to adjust certain limited partnership investments to fair value. The company estimated that these amounts should have been recognized in earlier periods.
The company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures as of September 30, 2021.
Most important facts for investors to verify
- Whether elevated mortality claims, particularly COVID-19-related claims, persist into subsequent quarters and how they affect reserve adequacy and traditional segment profitability.
- The sustainability and quality of the nine-month earnings increase, including the $162 million accounting correction, $213 million of portfolio repositioning gains and volatile variable investment income.
- The effect of interest rates, credit spreads and equity markets on investment income, unrealized gains and losses, embedded derivatives and stockholders’ equity.
- The company’s progress toward implementing the 2023 long-duration insurance accounting standard and the eventual impact on equity, earnings and disclosures.
- Liquidity under stress scenarios, including early recaptures, elevated claims, collateral calls and potential rating-related termination provisions for derivative agreements.
- Exposure to concentrated funds-withheld balances, investment commitments, treaty guarantees and statutory reserve support obligations.