REINSURANCE GROUP OF AMERICA INC quarterly report, Q1 FY2019

Reinsurance Group of America, Incorporated — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparative period is the three months ended March 31, 2018. The filing is unaudited. RGA provides traditional life, health, disability and critical illness reinsurance, along with longevity, financial reinsurance, asset-intensive and stable-value solutions.

Key Financial Metrics

Metric	Q1 2019	Q1 2018	Change
Net premiums	$2.738 billion	$2.583 billion	+6.0%
Total revenues	$3.420 billion	$3.174 billion	+7.8%
Income before taxes	$216.6 million	$137.9 million	+57.0%
Net income	$169.5 million	$100.2 million	+69.1%
Diluted EPS	$2.65	$1.52	+74.3%
Operating cash flow	$340.6 million	$223.7 million	+52.2%
Cash and invested assets	$58.1 billion	$56.1 billion at Dec. 31, 2018	+3.6%
Total assets	$66.7 billion	$64.5 billion at Dec. 31, 2018	+3.3%
Stockholders’ equity	$9.67 billion	$8.45 billion at Dec. 31, 2018	+14.4%

Calculated consolidated pretax margin was approximately 6.3% in Q1 2019 versus 4.3% in Q1 2018; net margin was approximately 5.0% versus 3.2%. The filing does not present a consolidated insurance operating margin.

Business and Operating Performance

Income before taxes improved primarily because of stronger U.S. and Latin America, Canada and Asia Pacific results, higher investment income and lower corporate losses.
New business production, measured by face amount of insurance in force, was $79.3 billion in Q1 2019 versus $96.7 billion in Q1 2018.
Assumed life insurance in force was $3.365 trillion at March 31, 2019, down from $3.384 trillion a year earlier, largely because of foreign exchange movements.
U.S. and Latin America pretax income rose 35.0% to $94.9 million, supported by improved claims experience and higher asset-intensive results.
Canada pretax income rose 91.9% to $51.6 million, primarily from favorable individual-life mortality experience.
EMEA pretax income declined 1.4% to $53.8 million, reflecting foreign exchange effects and normalization of previously favorable longevity and payout-annuity performance.
Asia Pacific pretax income rose 58.7% to $42.7 million, driven by favorable Asian experience and new business, partly offset by an Australian loss.
Corporate and Other loss narrowed to $26.5 million from $40.8 million, including a $12.9 million gain from recapture of a collateral finance transaction and higher RGAx revenue.

Revenue, Investment Performance and Unusual Items

Net investment income increased 12.3% to $579.9 million, primarily due to a larger average asset base and slightly higher yield. Average investment yield excluding spread-related business was 4.49% versus 4.46%.
Investment-related gains were $7.8 million versus a $0.5 million loss in the prior-year quarter. The improvement reflected lower realized losses and favorable derivative and equity-market effects.
RGA recorded $9.5 million of other-than-temporary impairments on fixed maturity securities, largely related to a U.S. utility company; there were no such impairments in Q1 2018.
Gross unrealized losses on fixed maturity securities declined to $230.2 million from $748.5 million at December 31, 2018, while gross unrealized gains increased to $2.780 billion from $1.859 billion.
Fair-value changes in embedded and related freestanding derivatives reduced pretax income by $6.8 million in Q1 2019, compared with a $18.4 million benefit in Q1 2018. Management characterizes these effects as unrealized and not affecting current cash flows or underlying treaty crediting rates.
The effective tax rate was 21.7%, down from 27.3%, primarily because the prior-year period included the effect of U.S. tax reform-related GILTI.

Cash Flow, Liquidity and Debt

Cash and cash equivalents increased to $2.020 billion from $1.890 billion at year-end 2018. Net cash used in financing activities was $309.8 million, including $49.1 million of treasury-stock purchases and $37.7 million of dividends.
Management believes available sources of liquidity are sufficient for at least the next 12 months, including operating cash flows, liquid investments, committed facilities, secured borrowings and potential asset sales.
Liquidity, defined as cash and cash equivalents plus short-term investments, was $2.140 billion at March 31, 2019.
RGA had $2.8 billion of long-term debt outstanding, with an average interest rate of 5.24%, and was in compliance with its debt covenants. The debt agreements require minimum consolidated net worth of $5.3 billion and limit consolidated indebtedness to 35% of indebtedness plus adjusted equity.
The $850 million revolving credit facility had no cash borrowings and $18.7 million of issued but undrawn letters of credit. Reported availability was approximately $831.4 million; additional FHLB collateralized borrowing capacity was $747.5 million.
RGA authorized up to $400 million of common-stock repurchases in January 2019 and repurchased 344,237 shares for $50.0 million during the quarter. The quarterly dividend was $0.60 per share, and the board declared another $0.60 dividend in April 2019.

Guidance, Outlook and Risks

The filing does not provide formal earnings or revenue guidance. Management expects low interest rates to continue pressuring investment yields but states that current capital and liquidity are adequate. RGA expects its reserves to remain sufficient and does not expect to write down deferred acquisition costs or augment capital solely because interest rates remain at current levels for five years, assuming other factors remain constant.

Primary risks include adverse mortality, morbidity, lapsation and claims experience; inadequate pricing or underwriting; credit and investment impairments; interest-rate, equity-market and foreign-exchange volatility; liquidity and collateral requirements; counterparty and retrocessionaire failures; regulatory and accounting changes; litigation; catastrophic events; operational or information-technology failures; and competitive pressures.
RGA has statutory reserve-support commitments with maximum potential obligations totaling approximately $14.5 billion across maturities from 2023 through 2038, although management considers funding requirements remote.
Treaty guarantees totaled $1.481 billion, or $1.381 billion net of assets in trust. The company reported no material litigation.
Funds withheld at interest totaled $5.730 billion, including approximately $3.7 billion associated with one client; the filing notes potential exposure if a ceding company becomes insolvent.
Future policy benefits and other policy claims increased during the quarter, and the claims liability rollforward reflected $31.4 million of adverse prior-year development.
RGA is evaluating major forthcoming insurance-contract accounting changes expected to be adopted January 1, 2021 and anticipates that the changes could materially affect results and financial position. The company is also evaluating the expected-credit-loss standard effective January 1, 2020.

Most Important Facts to Verify

Whether favorable mortality and claims experience in the U.S., Canada and Asia Pacific is sustainable or primarily quarterly volatility.
The future effect of low interest rates on investment yields, asset-intensive spreads, reserves and capital.
Credit performance of the fixed maturity portfolio, including the $9.5 million impairment and concentrations in corporate and Canadian government securities.
Exposure to the large funds-withheld balance associated with one client and to embedded-derivative valuation volatility.
Progress and estimated balance-sheet effects of the 2020 credit-loss and 2021 long-duration insurance accounting standards.
Remaining authorization and capital impact of the $400 million repurchase program, together with dividend capacity at the holding company.
Compliance with debt covenants, availability of committed facilities and potential collateral or liquidity needs under stressed market conditions.