Reinsurance Group of America, Incorporated — 2018 Form 10-K Summary
Business context and reporting period
RGA is a global provider of traditional life and health reinsurance and financial solutions, including longevity, asset-intensive, financial reinsurance and stable-value products. Operations span the U.S. and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other. This filing covers the fiscal year ended December 31, 2018; fourth-quarter results are included in the annual figures.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $12.876 billion | $12.516 billion | Up 2.9% |
| Net premiums | $10.544 billion | $9.841 billion | Up 7.1% |
| Investment income, net | $2.139 billion | $2.155 billion | Down 0.7% |
| Investment-related gains/(losses), net | $(170.1) million | $167.9 million | Down $337.8 million |
| Income before taxes | $845.8 million | $1.143 billion | Down 26.0% |
| Net income | $715.8 million | $1.822 billion | Down 60.7% |
| Diluted EPS | $11.00 | $27.71 | Down 60.3% |
| Net margin | Approximately 5.6% | Approximately 14.6% | Lower |
| Operating cash flow | $1.581 billion | $1.982 billion | Down 20.2% |
- Life reinsurance in force increased to $3.329 trillion from $3.297 trillion. New business production was $406.7 billion, compared with $395.4 billion in 2017.
- Total investments were $54.205 billion and total assets were $64.535 billion at year-end. Cash and cash equivalents were $1.890 billion; liquidity, including cash and short-term investments, was $2.032 billion.
- Stockholders’ equity was $8.451 billion, down from $9.570 billion, primarily reflecting a $1.424 billion after-tax decline in other comprehensive income from unrealized investment losses and foreign currency effects.
- Long-term debt was $2.788 billion, with an average interest rate of 5.24%. Collateral finance and securitization notes were $682.0 million. The company reported compliance with all debt covenants.
- Fixed-maturity securities totaled $39.992 billion at fair value; approximately 95.6% were investment grade. Gross unrealized losses increased to $748.5 million from $113.3 million as interest rates rose.
Material changes versus the prior comparable period
- Premium growth was broad-based, supported by growth in life reinsurance in force. Asia Pacific traditional premiums rose 11.9%, EMEA traditional premiums rose 9.3%, and Canada traditional premiums rose 13.5%, partly due to new in-force block transactions.
- Pre-tax income declined because of net investment-related losses, unfavorable U.S. individual and group claims experience, and adverse claims development in Australian disability business.
- U.S. and Latin America pre-tax income declined to $536.9 million from $775.0 million. The traditional loss ratio increased to 91.2% from 88.9%, reflecting higher individual life claims, a severe influenza season, and unfavorable group disability and healthcare excess claims.
- EMEA pre-tax income increased to $251.5 million from $194.0 million, led by favorable closed-block longevity and payout-annuity performance.
- Asia Pacific pre-tax income increased to $171.5 million from $161.9 million. Traditional results improved, but financial solutions turned to a $6.0 million loss from $13.1 million of income because of investment-related and derivative losses.
- Corporate and Other loss increased to $236.0 million from $125.0 million, driven by investment losses, higher compliance and strategic-initiative costs, and costs from the January 2018 acquisition of LOGiQ3 Inc. LOGiQ3 contributed $20.5 million of revenue and $29.3 million of operating expenses.
- 2017 net income benefited from an approximately $1.034 billion discrete tax benefit related primarily to the U.S. Tax Cuts and Jobs Act. The 2018 effective tax rate was 15.4%, compared with negative 59.4% in 2017.
- RGA paid $140.1 million of dividends and repurchased $283.5 million of common stock in 2018. On January 24, 2019, the board authorized a new $400.0 million share-repurchase program.
Outlook, management commentary, risks and unusual items
Management stated that available liquidity and operating cash flows should be sufficient for at least the next 12 months, including scenarios involving early recapture of treaties, market events and higher-than-expected claims. Additional resources include an $850.0 million syndicated revolving facility, with $831.8 million available at year-end, and up to $684.0 million of additional collateralized borrowing capacity from the Federal Home Loan Bank of Des Moines.
- Management expects continued demand for life reinsurance from capital management, industry consolidation, demographic aging, international market development, longevity risk transfer and asset-intensive products. No quantitative earnings or revenue guidance was provided.
- Low interest rates continue to pressure investment yields. Average investment yield, excluding spread-related business, declined to 4.45% from 4.55%.
- Adverse mortality, morbidity, longevity, lapse and policyholder behavior could reduce earnings and require additional reserves. Reserve adequacy, deferred acquisition cost recoverability and embedded derivative valuations depend on significant estimates.
- Regulatory capital and collateral requirements, including Regulation XXX, principles-based reserving, captive-reinsurance restrictions and evolving group-capital standards, could increase financing needs or limit new business and dividends.
- RGA is an insurance holding company dependent on subsidiary dividends and other upstream cash flows. Dividend payments are subject to statutory capital, surplus and regulatory restrictions.
- Approximately $544.9 billion of gross assumed in-force business was subject to treaties allowing recapture under specified financial-condition or rating triggers. A material recapture could reduce future premiums, require asset transfers or strain liquidity.
- Market risks include interest-rate movements, credit spreads, equity volatility, foreign currency changes, investment impairments and counterparty or retrocessionaire failure. The company’s variable-annuity hedging program may not fully offset guarantee-related volatility.
- The company expects the new long-duration insurance-contract accounting standard, effective January 1, 2021, to have a potentially material effect on reported insurance liabilities, deferred acquisition costs, market-risk benefits and financial ratios; the impact remained under evaluation.
- The filing reports no material litigation, no material cybersecurity breach identified as of filing, and effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether claims experience in U.S. individual life, group disability, healthcare excess and Australian disability improves or produces further reserve development.
- The sustainability of premium and in-force growth, particularly in Asia Pacific, EMEA longevity, and U.S. asset-intensive business.
- Investment portfolio credit quality, unrealized losses, realized losses from portfolio repositioning, and sensitivity to interest rates and credit spreads.
- Liquidity and collateral availability under stress, including the $1.4 billion of intercompany letters of credit, $105.6 million of third-party letters of credit, and statutory reserve-support commitments with maximum potential obligations totaling approximately $14.5 billion.
- Regulatory capital, dividend capacity, captive and certified-reinsurer arrangements, and implementation of principles-based reserving.
- The effect of the 2021 long-duration insurance-contract accounting adoption and any subsequent changes to tax, capital, accounting or collateral regulations.
- Debt maturities, covenant compliance and the company’s ability to fund the $400.0 million repurchase authorization while supporting insurance subsidiaries’ capital needs.