Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) is a global life and health reinsurer providing traditional reinsurance and financial solutions, including longevity, asset-intensive, capital solutions, financial reinsurance, and stable value products. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the same periods in 2020. RGA reported approximately $3.5 trillion of life reinsurance in force and $88.9 billion of assets at quarter-end.
Financial Performance and Condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net premiums | $3.098 billion | $2.790 billion | $6.012 billion | $5.609 billion |
| Total revenues | $4.137 billion | $3.606 billion | $8.256 billion | $6.810 billion |
| Income before income taxes | $482 million | $195 million | $668 million | $99 million |
| Net income | $344 million | $158 million | $483 million | $70 million |
| Diluted EPS | $5.02 | $2.48 | $7.06 | $1.11 |
| Net margin | 8.3% | 4.4% | 5.9% | 1.0% |
| Operating cash flow | Not separately reported | Not separately reported | $2.330 billion | $2.579 billion |
Q2 income before taxes increased $287 million, or approximately 147%, and net income increased $186 million, or approximately 118%, year over year. Six-month income before taxes increased $569 million, while net income increased $413 million. The six-month improvement included significant investment-related items and was not solely attributable to recurring underwriting performance.
- Net investment income increased to $759 million in Q2 and $1.571 billion for the six months, from $645 million and $1.239 billion, respectively.
- Net investment-related gains were $112 million in Q2 and $414 million for the six months, compared with $81 million and a $204 million loss in the comparable 2020 periods.
- Claims and other policy benefits increased to $2.813 billion in Q2 and $6.005 billion for the six months, from $2.700 billion and $5.364 billion.
- Average investment yield excluding spread business was 4.64% in Q2 and 5.15% for the six months. Excluding variable investment income, yields declined year over year to 3.84% and 3.82%, reflecting the low interest-rate environment.
Balance Sheet, Debt, and Liquidity
- Total assets increased to $88.944 billion from $84.656 billion at December 31, 2020. Total investments were $76.326 billion, including $58.287 billion of available-for-sale fixed maturity securities.
- Stockholders’ equity was $13.444 billion, down from $14.352 billion, primarily due to a $1.318 billion decline in accumulated other comprehensive income from unrealized investment losses.
- Long-term debt was $3.173 billion, down from $3.573 billion. Total borrowings were approximately $3.2 billion, and the company stated that it was in compliance with all debt covenants.
- Cash and cash equivalents were $3.254 billion; cash and invested assets totaled $79.580 billion. The company reported $2.330 billion of operating cash flow and a $154 million decrease in cash during the first six months.
- RGA had $829 million of availability under its revolving credit facility, $419 million available through collateralized Federal Home Loan Bank borrowings, and no cash borrowings outstanding under the $850 million revolving facility.
- RGA paid $95 million of dividends during the first six months. No shares were repurchased under the public repurchase program during the period; the suspension of repurchases was lifted on August 3, 2021.
Material Changes Versus the Prior Comparable Period
- Premiums increased 11% in Q2 and 7% for the six months, primarily from growth in life reinsurance in force and new business.
- Quarterly U.S. and Latin America income before taxes improved to $321 million from a $41 million loss, driven by better U.S. mortality experience and stronger Financial Solutions results.
- EMEA income before taxes declined to $71 million from $114 million in Q2 and to $63 million from $161 million for the six months, primarily due to unfavorable COVID-19-related mortality.
- Asia Pacific income before taxes declined to $19 million from $73 million in Q2, principally due to unfavorable claims experience in Asia, particularly India; six-month income increased to $88 million from $72 million due to investment gains and higher investment income.
- RGA recorded a $162 million pretax, first-quarter accounting correction relating to prior-period investment accounting: $92 million was recorded in investment income and $70 million in investment-related gains.
- The company recognized $177 million of pretax capital gains from portfolio repositioning during the first six months.
- Management estimated approximately $595 million of COVID-19-related life and health claims for the first six months, including incurred-but-not-reported claims. Approximately $352 million related to U.S. and Latin America Traditional, $130 million to EMEA, $49 million to Canada, and $63 million to Asia Pacific.
Guidance, Outlook, Commentary, and Risks
RGA did not provide explicit earnings guidance in the filing. Management stated that liquidity and capital resources were expected to be sufficient for at least the next twelve months under scenarios including early treaty recaptures, market events, and higher-than-expected pandemic claims. The company maintained elevated cash balances and continued liquidity stress testing.
- COVID-19 remains the principal near-term source of underwriting uncertainty. Future claims depend on variants, vaccination programs, geography, age and health characteristics of insureds, and other mortality factors.
- Mortality and morbidity risk remain the company’s most significant risks. Other material risks include lapses, claims volatility, underwriting deficiencies, interest rates, credit spreads, foreign exchange, investment impairments, collateral requirements, counterparty and retrocessionaire performance, regulatory changes, cybersecurity, litigation, and capital or credit-rating pressure.
- Investment results are exposed to volatile variable investment income, derivative fair values, equity markets, credit spreads, and low interest rates. Unrealized gains on fixed maturity securities declined to $5.8 billion from $7.4 billion, while unrealized losses increased to $267 million from $197 million.
- The company had $41.7 billion of contractual obligations associated with interest-sensitive liabilities and $1.8 billion of limited partnership and other investment commitments at June 30, 2021.
- Statutory reserve support commitments had maximum potential obligations totaling approximately $26.8 billion across commitment years 2034 through 2046, although management considered required funding remote.
- The company expects the insurance long-duration contract accounting standard effective January 1, 2023, to have a potentially material effect on its financial position and results, but had not yet quantified the impact.
Important Facts for Investors to Verify
- Separate recurring underwriting performance from the $162 million prior-period accounting correction, $177 million of portfolio repositioning gains, derivative fair-value movements, and other volatile investment gains.
- Monitor the ultimate development of the estimated $595 million of COVID-19-related claims and mortality trends by geography.
- Assess the sensitivity of earnings, equity, reserves, and liquidity to interest rates, credit spreads, equity markets, foreign exchange, and derivative valuations.
- Review the concentration of funds withheld assets, including approximately $4.7 billion associated with two clients, and the related ceding-company credit and insolvency risks.
- Evaluate debt covenants, credit-rating triggers in derivative agreements, collateral requirements, statutory reserve support commitments, and available liquidity facilities.
- Assess the future impact of long-duration insurance accounting changes expected to take effect in 2023.