Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed its Form 10-K for the fiscal year ended December 31, 2019. RGA is a global provider of traditional life and health reinsurance and financial solutions, including longevity, asset-intensive, capital solutions and stable value products. Operations span the U.S. and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other.
The filing includes audited annual results for 2019, 2018 and 2017. Fourth-quarter 2019 results were also disclosed: revenue of $3.785 billion, income before tax of $308 million, net income of $235 million and diluted EPS of $3.68.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net premiums | $11.297 billion | $10.544 billion | +7.1% |
| Total revenues | $14.300 billion | $12.876 billion | +11.1% |
| Income before income taxes | $1.132 billion | $846 million | +33.8% |
| Net income | $870 million | $716 million | +21.5% |
| Diluted EPS | $13.62 | $11.00 | +23.8% |
| Net investment income | $2.520 billion | $2.139 billion | +17.8% |
| Net investment gains | $91 million | $(170) million | Improved by $261 million |
| Operating cash flow | $2.307 billion | $1.581 billion | +45.9% |
| Total assets | $76.731 billion | $64.535 billion | +18.9% |
| Stockholders’ equity | $11.601 billion | $8.450 billion | +37.3% |
| Long-term debt | $2.981 billion | $2.788 billion | +$193 million |
The reported net income margin was approximately 6.1% of revenue in 2019 versus 5.6% in 2018. The effective tax rate increased to 23.1% from 15.4%, primarily due to valuation allowance increases and uncertain tax-position expense.
- Assumed life reinsurance in force increased to $3.480 trillion from $3.329 trillion.
- New business production declined to $376.5 billion from $406.7 billion.
- Average investment yield, excluding spread-related business, increased to 4.56% from 4.45%.
- Cash and invested assets totaled $68.004 billion, including $51.121 billion of fixed maturity securities.
- Approximately 95.5% of fixed maturity securities were investment grade.
- Dividends increased to $2.60 per share from $2.20; 2019 shareholder distributions totaled $243 million.
Material Changes Versus the Prior Comparable Period
- Income growth was driven by favorable Financial Solutions experience, improved Canada and EMEA Traditional claims experience, higher investment income and a favorable change in investment-related gains.
- U.S. and Latin America Financial Solutions income before tax increased to $398 million from $251 million, supported by asset-intensive transactions executed since the third quarter of 2018 and related portfolio repositioning.
- Canada income before tax increased to $183 million from $122 million, primarily due to favorable individual mortality experience.
- EMEA income before tax increased to $303 million from $252 million, reflecting favorable longevity, payout annuity, mortality and morbidity experience.
- Asia Pacific income before tax declined to $128 million from $172 million. Traditional results fell because of unfavorable claims experience, despite 11.8% growth in net premiums.
- Corporate and Other losses narrowed to $145 million from $237 million, mainly because of higher investment income and lower investment-related losses, partly offset by higher operating and interest expense.
- RGA issued $600 million of 3.90% senior notes due 2029 and repaid $400 million of 6.45% senior notes at maturity.
- Other comprehensive income was $2.501 billion, compared with a $1.424 billion loss in 2018, primarily because of higher unrealized investment gains.
Liquidity, Debt and Capital
- Management stated that available sources of funds should cover liquidity requirements for at least the next 12 months, including stress scenarios involving early recaptures, market events and higher-than-expected claims.
- Cash and cash equivalents were $1.449 billion, down from $1.890 billion. The company also had an $850 million revolving credit facility with no cash borrowings and $20 million of issued but undrawn letters of credit.
- RGA had approximately $3.0 billion of long-term borrowings and was in compliance with debt covenants. The company is required to maintain minimum consolidated net worth of $5.3 billion and keep consolidated indebtedness below 35% of capitalization under its debt agreements.
- Letters of credit included approximately $62 million outstanding in favor of third parties and $1.2 billion supporting intercompany reinsurance arrangements.
- Securities with amortized cost of approximately $27.3 billion were held in trust for third-party reinsurance collateral requirements.
- Statutory capital and surplus exceeded applicable minimum requirements for U.S. and foreign insurance subsidiaries, but dividend payments remain subject to insurance-regulatory and contractual restrictions.
Guidance, Outlook, Commentary and Risks
The filing does not provide a specific quantitative earnings or revenue forecast. Management expects continued demand for traditional reinsurance, longevity and asset-intensive solutions, supported by aging populations, international insurance-market growth, capital-management needs, regulatory change and technology development.
- Low interest rates may pressure future investment yields and spreads on annuity and universal-life business. Management noted that sustained low rates could reduce portfolio yields, although it did not expect current conditions alone to require a DAC write-down or additional capital actions over the next five years, assuming other factors remain constant.
- Mortality and morbidity remain the company’s most significant risks. Actual experience can differ materially from pricing and reserving assumptions for mortality, morbidity, longevity, lapses, expenses and investment returns.
- Asset-intensive earnings are exposed to volatility in embedded-derivative valuations, equity markets, interest rates, credit spreads, volatility and policyholder behavior.
- Regulation XXX, principles-based reserving, captive-reinsurance restrictions, group-capital standards and collateral requirements could increase capital needs or the cost of writing business.
- Recapture rights, ratings downgrades and statutory-capital declines could require additional collateral, subsidiary transfers or payments and could reduce future premiums.
- The company identified Brexit, foreign-currency movements, cybersecurity, privacy regulation, climate and catastrophe exposure, pandemics, counterparty performance, investment impairments and regulatory change as material risks.
- The filing states that COVID-19 was being monitored as of the filing date and that no material operational impact was then known; the ultimate effect on future mortality, markets and client activity was uncertain.
- A new long-duration insurance-contract accounting standard is expected to take effect January 1, 2022, with management anticipating a potentially material impact that remained under evaluation.
- The company expects an approximately $15 million decrease to opening retained earnings from adoption of the current expected credit loss standard on January 1, 2020.
- The company reported no material litigation, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. Deloitte issued unqualified opinions.
Most Important Facts for Investors to Verify
- Whether the 2019 improvement in earnings is sustainable after separating recurring underwriting performance from investment gains, derivative revaluations, portfolio repositioning and other unusual items.
- Claims and loss-ratio trends in Asia Pacific and U.S. and Latin America Traditional, particularly large mortality claims and Australian business changes.
- The sensitivity of asset-intensive earnings, reserves and capital to interest rates, credit spreads, equity markets, volatility and policyholder behavior.
- Availability and cost of collateral, letters of credit and alternative reserve-financing structures as Regulation XXX and capital standards evolve.
- Parent-company liquidity and dividend capacity, given reliance on regulated subsidiary dividends and restrictions under insurance laws and debt agreements.
- Debt maturities, covenant compliance and the effect of any ratings downgrade on collateral requirements, recapture rights and access to capital.
- Potential effects of the 2022 long-duration insurance accounting standard, CECL adoption, LIBOR transition and other regulatory or accounting changes.