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 solutions, financial reinsurance and stable value products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
RGA reported $3.3 trillion of life reinsurance in force and $82.7 billion of total assets at September 30, 2022. The company operates through U.S. and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other segments.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net premiums | $3,247 million | $3,094 million | $9,632 million | $9,106 million |
| Total revenues | $4,066 million | $4,043 million | $11,883 million | $12,299 million |
| Income before taxes | $366 million | $(34) million | $560 million | $634 million |
| Net income | $285 million | $(22) million | $421 million | $461 million |
| Net income available to shareholders | $284 million | $(22) million | $419 million | $461 million |
| Diluted EPS | $4.19 | $(0.32) | $6.19 | $6.74 |
| Operating cash flow | Not separately reported | Not separately reported | $1,077 million | $3,821 million |
Approximate net margin was 7.0% for the third quarter and 3.5% for the first nine months of 2022, compared with negative 0.5% and 3.7%, respectively, in the comparable 2021 periods. Net investment income declined to $2,333 million for the first nine months from $2,367 million, while investment-related gains and losses changed from a $472 million gain to a $514 million loss.
- Cash and cash equivalents were $3,512 million, versus $2,948 million at December 31, 2021.
- Total investments were $68,040 million, down from $78,528 million, primarily reflecting declines in fixed maturity securities fair values.
- Long-term debt was $4,207 million, versus $3,667 million at year-end 2021.
- Total equity declined to $3,743 million from $13,014 million, primarily because of $9,606 million of after-tax other comprehensive loss, including $9,398 million of net unrealized investment losses.
- Liquidity, defined by the company as cash and cash equivalents plus short-term investments, was approximately $3.7 billion at September 30, 2022.
- RGA had $843 million of availability under its revolving credit facility and $641 million of additional FHLB collateralized borrowing capacity. No cash borrowings were outstanding under the revolving facility.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income improved by $307 million to $285 million, primarily because of lower mortality claims, particularly in U.S. and Latin America, EMEA and Asia Pacific traditional businesses.
- First-nine-month net income declined by $40 million, reflecting substantially lower investment-related results despite improved claims experience.
- Net premiums increased 5% in the quarter and 6% year to date, primarily from new business production and organic growth.
- Investment-related results declined by $192 million in the quarter and $986 million year to date. The deterioration reflected derivative fair-value losses, portfolio repositioning losses, higher credit-loss provisions and the absence of prior-year gains and accounting adjustments.
- Claims and other policy benefits declined $474 million in the quarter and $439 million year to date, largely due to reduced COVID-19 mortality claims.
- Corporate and Other pretax income declined to a $92 million loss in the quarter and a $186 million loss year to date, compared with income of $16 million and $401 million, respectively, in 2021.
- Traditional segment results improved materially in the U.S. and Latin America, EMEA and Asia Pacific, while Canada declined because of unfavorable mortality and group claims experience.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal earnings guidance. Management stated that current cash flows and liquidity sources are expected to satisfy obligations for at least the next twelve months, including under scenarios involving early treaty recaptures, market uncertainty, inflation and higher-than-expected claims.
- RGA estimated approximately $388 million of COVID-19-related life and health claims for the first nine months of 2022, including approximately $295 million in U.S. and Latin America Traditional.
- Gross unrealized losses on fixed maturity securities increased to $7.8 billion from $349 million at year-end 2021, primarily because of higher interest rates. Management stated it generally expects to hold affected securities until recovery if issuer credit remains acceptable.
- The company issued $700 million of 7.125% fixed-rate reset subordinated debentures due 2052, generating approximately $690 million of net proceeds. It tendered $151 million of 2042 debentures and intends to redeem the remainder under the indenture.
- The remaining approximately $185 million of Timberlake Financial Series A Floating Rate Insured Notes was redeemed on August 29, 2022.
- RGA expects to adopt the long-duration targeted improvements standard in the first quarter of 2023. Management estimates adoption could reduce retained earnings by approximately $1.0 billion to $1.3 billion at January 1, 2021, and by approximately $0.5 billion to $0.8 billion at December 31, 2021. Accumulated other comprehensive income could decrease by approximately $5.1 billion to $7.1 billion and $3.2 billion to $5.2 billion, respectively. Actual effects remain subject to change.
- Key risks include mortality and morbidity volatility, COVID-19 developments, interest-rate and credit-spread movements, foreign exchange, investment impairments, derivative valuations, liquidity and collateral requirements, regulatory capital restrictions, counterparty and retrocessionaire performance, lapses and early recaptures, litigation, cybersecurity, and changes in accounting standards.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2022.
Important Facts for Investors to Verify
- Reconcile the significant decline in equity and AOCI with statutory capital, regulatory ratios and rating-agency capital measures.
- Validate the ultimate impact and timing of the long-duration contract accounting adoption, including effects on retained earnings, AOCI, reserves and comparability of future results.
- Assess the sustainability of improved mortality experience after the estimated $388 million of COVID-19-related claims through nine months.
- Review the credit quality, duration, liquidity and unrealized-loss exposure of the $50.5 billion fixed maturity portfolio, including the $7.8 billion of gross unrealized losses.
- Evaluate derivative exposures and earnings volatility, including $30.9 billion of derivative notional amounts and the $14 million reported non-collateralized derivative credit exposure.
- Confirm debt covenants and capital requirements, including the minimum consolidated net worth covenant of $5.3 billion, debt-to-capital limitations, refinancing plans and the intended redemption of remaining 2042 debentures.
- Monitor liquidity associated with interest-sensitive contract liabilities, which increased to $49.8 billion from $43.4 billion at year-end 2021, and with lapses, withdrawals and early treaty recaptures.