REINSURANCE GROUP OF AMERICA INC quarterly report, Q1 FY2024

Reinsurance Group of America, Incorporated — Q1 2024 Form 10-Q Summary

Business context and reporting period

RGA is a global life reinsurer providing traditional reinsurance, including individual and group life, health, disability and critical illness coverage, and Financial Solutions, including longevity, asset-intensive, pension risk transfer, financial reinsurance, capital solutions and stable-value products. The filing covers the three months ended March 31, 2024, with comparisons to the three months ended March 31, 2023. Results are unaudited and prepared under U.S. GAAP.

Life reinsurance in force was $3.7 trillion at March 31, 2024, compared with $3.4 trillion a year earlier.
Total assets were $106.0 billion, up from $97.6 billion at December 31, 2023.

Financial performance and key metrics

Metric	Q1 2024	Q1 2023	Change
Net premiums	$5,376 million	$3,385 million	+$1,991 million
Net investment income	$961 million	$856 million	+$105 million
Investment-related gains/(losses), net	$(149) million	$(77) million	$(72) million
Total revenues	$6,337 million	$4,251 million	+$2,086 million
Income before taxes	$272 million	$351 million	$(79) million
Net income	$212 million	$253 million	$(41) million
Net income available to RGA shareholders	$210 million	$252 million	$(42) million
Diluted EPS	$3.16	$3.72	$(0.56)
Effective tax rate	22.0%	28.0%	Down 6.0 percentage points

Net income margin, calculated as net income divided by total revenues, was approximately 3.3% in Q1 2024 versus approximately 6.0% in Q1 2023. The filing does not present a single consolidated operating margin.

Premium growth was driven primarily by a large U.S. pension risk transfer transaction, organic growth, new treaty production and the recapture of a large retrocession treaty effective April 1, 2023. The PRT premium was substantially offset by the establishment of related reserves.
Net investment income increased due to a larger average asset base and higher yields on new investments. Average invested assets excluding spread-related business increased to $38.5 billion from $35.9 billion; reported investment yield was 4.70% versus 4.71%.
Investment-related losses increased primarily from $102 million of realized losses associated with portfolio repositioning and $99 million of losses on freestanding derivatives.
Operating cash flow was $5.736 billion, compared with $1.574 billion in Q1 2023. Investing cash flow was $(3.720) billion, principally reflecting net purchases of fixed maturity securities. Financing cash flow was $1.005 billion.
Cash and cash equivalents ended at $5.935 billion versus $2.970 billion at December 31, 2023. Cash and short-term investments, described by management as the liquidity position, were $6.3 billion versus $3.2 billion.
Long-term debt on the balance sheet was $4.427 billion. Management reported approximately $4.5 billion of outstanding borrowings and stated that all debt covenants were satisfied. Average interest rate on long-term debt was 5.09%.
Total equity was $9.558 billion, up from $9.171 billion at year-end 2023. Accumulated other comprehensive loss improved to $(125) million from $(369) million, primarily reflecting the effect of updated discount rates on future policy benefits.

Material changes versus the prior comparable period

U.S. and Latin America income before taxes decreased to $133 million from $235 million. Financial Solutions income fell to $17 million from $114 million, while Traditional income was relatively stable at $116 million versus $121 million.
The U.S. Financial Solutions decline primarily reflected a non-economic initial loss on a single-premium PRT transaction. Management distinguishes this from underlying treaty economics because the loss reflects the difference between the premium received and the U.S. GAAP valuation of the initial reserve.
Income before taxes in Canada increased to $54 million from $39 million, EMEA increased to $92 million from $86 million, and Asia Pacific increased to $122 million from $66 million.
Traditional business performance benefited from favorable claims experience in several regions. Loss ratios were 90.4% versus 90.0% in U.S. and Latin America, 88.1% versus 92.5% in Canada, 84.5% versus 87.2% in EMEA, and 82.0% versus 83.7% in Asia Pacific.
Financial Solutions income before taxes excluding certain derivatives, market risk benefits and non-economic changes in insurance liabilities was $73 million versus $90 million. Management identifies lower variable investment income as the primary reason for the decrease.
Benefits and expenses increased to $6.065 billion from $3.900 billion, primarily reflecting higher claims and policy benefits, reserves associated with the PRT transaction, and increased interest credited and operating expenses.
Gross unrealized losses on fixed maturity securities increased to $5.8 billion from $5.6 billion at year-end 2023, while gross unrealized gains declined to $0.9 billion from $1.1 billion. Management stated that it did not intend, and was not more likely than not, to be required, to sell the securities with unrealized losses.

Guidance, outlook, risks and unusual items

The filing does not provide formal earnings or revenue guidance. Management stated that current sources of liquidity are expected to satisfy requirements for at least the next 12 months, including under scenarios involving early recapture, market events and higher-than-expected claims. Management also stated that reserves are projected to be sufficient and that capital augmentation is not expected to be required if interest rates remain at current levels for five years, assuming other factors remain constant.

Liquidity alternatives include asset sales, committed credit facilities, secured borrowings and potential issuance of debt, preferred securities or common equity.
RGA had $850 million of availability under its revolving credit facility, $801 million of additional FHLB collateralized borrowing capacity, no cash borrowings or letters of credit outstanding under the revolving facility, approximately $53 million of bank letters of credit supporting third parties, and $1.5 billion of undrawn letters of credit supporting intercompany reinsurance.
Fixed maturity securities totaled $65.8 billion at fair value; approximately 94.6% were investment grade. The portfolio was 62.4% corporate securities, creating exposure to credit spreads, defaults and valuation changes.
Key insurance risks include adverse mortality, morbidity, lapse and claims experience; reserve inadequacy; longevity and surrender behavior; and underwriting or pricing errors.
Key financial risks include interest-rate, credit-spread, equity-market, foreign-exchange, liquidity, collateral and derivative-counterparty risks. The filing reports $33.9 billion of derivative notional amounts and $14 million of derivative credit exposure at March 31, 2024.
Two reinsurance companies, including Ruby Re, represented approximately 74% of reinsurance ceded receivables and other at quarter-end. Claims recoverable more than 90 days past due totaled $12 million.
Statutory reserve support and capital-support guarantees had maximum potential obligations ranging from $720 million to $8.751 billion by commitment period, although management considered funding events remote.
Pending litigation and regulatory matters were not expected by management to have a material adverse effect, but an adverse outcome could be material in a particular reporting period. No material changes to previously disclosed risk factors were reported.
The board authorized a $500 million share repurchase program in January 2024. No shares were repurchased under the program during the quarter; $16 million of treasury-stock purchases primarily reflected equity-award tax withholding activity. The quarterly dividend was $0.85 per share.

Most important facts for investors to verify

Determine the recurring profitability and capital economics of the U.S. Financial Solutions business after excluding the PRT inception loss and other fair-value-driven items.
Assess the size, quality, duration and liquidity of the fixed-income portfolio, including the $5.8 billion of unrealized losses and the $5.8 billion of corporate securities exposure.
Reconcile the reported $4.427 billion of balance-sheet long-term debt with management’s approximately $4.5 billion outstanding-borrowings figure and review covenant headroom.
Evaluate reserve sensitivity to mortality, morbidity, longevity, lapses, surrender activity and discount-rate changes, including the effect of the annual assumption review expected in Q3 2024.
Review concentration and counterparty risks involving ceded reinsurance, funds-withheld assets, Ruby Re, major clients and retrocessionaires.
Confirm the sustainability of the unusually high operating cash flow, given the significant effects of premiums, policy deposits, investment activity and insurance-related timing.
Monitor the $500 million repurchase authorization, dividend capacity and the regulatory ability of subsidiaries to upstream capital to the holding company.