RGA 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) reported unaudited results for the three and nine months ended September 30, 2018. RGA is a global provider of life reinsurance and financial solutions, with approximately $3.3 trillion of life reinsurance in force. Operations span the United States and Latin America, Canada, Europe, the Middle East and Africa, and Asia Pacific.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net premiums | $2.562 billion | $2.490 billion | $7.739 billion | $7.336 billion |
| Total revenues | $3.228 billion | $3.145 billion | $9.597 billion | $9.283 billion |
| Income before income taxes | $322.7 million | $340.2 million | $707.9 million | $887.3 million |
| Net income | $301.2 million | $227.6 million | $605.8 million | $605.3 million |
| Diluted EPS | $4.68 | $3.47 | $9.30 | $9.23 |
| Dividends declared per share | $0.60 | $0.50 | $1.60 | $1.32 |
- Q3 total revenue increased 2.6%, while nine-month revenue increased 3.4% year over year.
- Q3 pretax margin was approximately 10.0% versus 10.8% in the prior-year quarter; nine-month pretax margin was approximately 7.4% versus 9.6%.
- Q3 net margin was approximately 9.3% versus 7.2%; the nine-month net margin was approximately 6.3% in both periods.
- Net cash provided by operating activities was $1.100 billion for the first nine months of 2018, compared with $1.104 billion in 2017.
- Cash and cash equivalents were $1.730 billion at September 30, 2018, compared with $1.304 billion at December 31, 2017. Cash and short-term investments totaled approximately $1.960 billion.
- Total assets were $62.973 billion and stockholders’ equity was $8.579 billion at September 30, 2018, compared with $60.515 billion and $9.570 billion, respectively, at year-end 2017.
- Long-term debt was $2.788 billion and collateral finance and securitization notes were $711 million. RGA reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Net premiums grew primarily from expansion in life reinsurance in force. Assumed life insurance in force increased to $3.307 trillion from $3.298 trillion at September 30, 2017.
- Pretax income declined 5.1% in Q3 and 20.2% for the first nine months. Management attributed the decline principally to unfavorable U.S. group claims experience, higher operating expenses related to strategic initiatives, lower variable investment income, and less favorable investment-related gains and losses.
- The U.S. and Latin America segment’s pretax income declined 18.5% in Q3 and 26.3% year to date, primarily because of group disability and healthcare excess claims experience and, for the nine-month period, unfavorable group and individual life experience, including effects from a severe influenza season.
- Canada pretax income declined 31.5% in Q3 and 19.7% year to date, mainly because of unfavorable traditional individual life mortality experience.
- EMEA pretax income increased 60.8% in Q3 and 51.7% year to date, led by favorable closed-block longevity, payout annuity and individual life performance.
- Asia Pacific pretax income increased 136.2% in Q3 and 14.7% year to date, reflecting regional business growth and favorable claims experience in Asia, partly offset by adverse Australian experience.
- Investment-related gains and losses changed from gains of $22.7 million in Q3 2017 and $139.5 million for the first nine months of 2017 to losses of $20.0 million and $31.1 million, respectively, in 2018. The change reflected asset repositioning, security-sale losses, impairments, and changes in embedded derivative values.
- Other comprehensive income was a loss of $189.6 million in Q3 and $1.248 billion for the first nine months, primarily because of net unrealized investment losses and foreign currency effects. This contributed materially to the decline in stockholders’ equity.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management stated that available sources of liquidity should be sufficient for at least the next 12 months, including under scenarios involving higher claims, market events and potential early treaty recaptures.
- Average investment yield, excluding spread-related business, declined to 4.57% in Q3 and 4.45% for the first nine months, down 24 and 16 basis points, respectively. Management expects a continued low-interest-rate environment to pressure investment yields.
- Gross unrealized losses on fixed-maturity securities increased to $653.1 million from $113.3 million at year-end 2017, while gross unrealized gains declined to $1.907 billion from $2.983 billion. Management stated that it generally intends and expects to be able to hold securities with unrealized losses until recovery, subject to credit and liquidity considerations.
- The effective tax rate declined to 6.7% in Q3 and 14.4% for the first nine months, versus 33.1% and 31.8% in the comparable 2017 periods. The decrease primarily reflected a $58.9 million release of a valuation allowance on foreign tax credits, partially offset by foreign tax differences and GILTI-related tax expense.
- RGA acquired LOGiQ3 Inc. in January 2018. The acquisition contributed $15.7 million of other revenues and $21.4 million of operating expenses during the first nine months.
- RGA entered into a new five-year $850 million syndicated revolving credit facility maturing in August 2023. At September 30, 2018, there were no cash borrowings and $18.3 million of issued but undrawn letters of credit under the facility.
- The company repurchased 1.75 million shares for $258.5 million during the first nine months and paid $102.4 million of dividends. Approximately $114.6 million remained available under the $400 million repurchase authorization at September 30.
- Statutory reserve support commitments had maximum potential obligations of approximately $13.7 billion across maturities from 2023 through 2038; management considered the triggering events remote. Treaty guarantees totaled $1.073 billion, or $966.1 million net of assets in trust.
- Principal risks include mortality, morbidity, lapse and claims volatility; interest-rate, credit-spread, equity and foreign-currency movements; investment impairments; counterparty and retrocessionaire collectability; collateral and liquidity requirements; regulatory and accounting changes; cyber and operational disruption; and catastrophe, pandemic and litigation risk.
- The filing states that RGA had no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Most Important Facts for Investors to Verify
- Whether adverse U.S. group and individual mortality claims experience normalizes or persists beyond the reported influenza-related volatility.
- The sustainability of earnings excluding unrealized embedded-derivative movements, investment gains and losses, and the unusually low 2018 effective tax rate.
- Credit quality, duration and liquidity of the fixed-maturity portfolio, including the sharp increase in unrealized losses.
- Concentration risk in funds withheld assets, including approximately $3.9 billion associated with one client.
- Progress and costs associated with strategic initiatives and the integration of LOGiQ3.
- Capacity under the revolving credit, letter-of-credit and collateralized borrowing facilities, and compliance with debt covenants.
- Potential effects of future implementation of the long-duration insurance accounting standard, which management expects could materially affect measurement and recognition of insurance contracts.