(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, among others, statements relating to projections of the future operations, strategies, earnings, revenues, income or loss, ratios, financial performance and growth potential of the Company. Forward-looking statements often contain words and phrases such as "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "believe" and other similar expressions. Forward-looking statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements are not a guarantee of future performance and are subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
The effects of the COVID-19 pandemic and the response thereto on economic conditions, the financial markets and insurance risks, and the resulting effects on the Company's financial results, liquidity, capital resources, financial metrics, investment portfolio and stock price, could cause actual results and events to differ materially from those expressed or implied by forward-looking statements. Additionally, numerous other important factors (whether related to, resulting from or exacerbated by the COVID-19 pandemic or otherwise) could also cause results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: (1) adverse changes in mortality, morbidity, lapsation or claims experience, (2) inadequate risk analysis and underwriting, (3) adverse capital and credit market conditions and their impact on the Company's liquidity, access to capital and cost of capital,
Forward-looking statements should be evaluated together with the many risks and uncertainties that affect the Company's business, including those mentioned in this document and described in the periodic reports the Company files with the SEC. These forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update these forward-looking statements, even though the Company's situation may change in the future. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A - "Risk Factors" in the 2021 Annual Report, as may be supplemented by Item 1A - "Risk Factors" in the Company's subsequent Quarterly Reports on Form 10-Q.
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The Company is among the leading global providers of life reinsurance and financial solutions, with $3.4 trillion of life reinsurance in force and assets of $84.6 billion as of June 30, 2022. Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, capital solutions, including financial reinsurance, and stable value products. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets.
Historically, the Company's primary business has been traditional life reinsurance, which involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. To a lesser extent, the Company also reinsures health business typically reinsured for one to three years. Each year, however, a portion of the business under existing treaties terminates due to, among other things, lapses or voluntary surrenders of underlying policies, deaths of insureds, and the exercise of recapture options by ceding companies. The Company has expanded its financial solutions business, including significant asset-intensive and longevity risk transactions, which allow its clients to take advantage of growth opportunities and manage their capital, longevity and investment risk.
For its traditional life business, the Company's profitability largely depends on the volume and amount of death- and health-related claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. For longevity business, the Company's profitability depends on the lifespan of the underlying contract holders and the investment performance for certain contracts. Additionally, the Company generates profits on investment spreads associated with the reinsurance of investment type contracts and generates fees from financial reinsurance transactions, which are typically shorter duration than its traditional life reinsurance business. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis.
As is customary in the reinsurance business, clients continually update, refine, and revise reinsurance information provided to the Company. Such revised information is used by the Company in preparation of its condensed consolidated financial statements and the financial effects resulting from the incorporation of revised data are reflected in the current period.
The Company has geographic-based and business-based operational segments. Geographic-based operations are further segmented into traditional and financial solutions businesses. The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a consistent basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in RGA's businesses.
As a result of the economic capital allocation process, a portion of investment income is credited to the segments based on the level of allocated capital. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses. Segment investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.
Segment revenue levels can be significantly influenced by currency fluctuations, large transactions, mix of business and reporting practices of ceding companies, and therefore may fluctuate from period to period. Although reasonably predictable over a period of years, segment claims experience can be volatile over shorter periods. See "Results of Operations by Segment" below for further information about the Company's segments.
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Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the condensed consolidated financial statements could change significantly.
Management believes the critical accounting policies relating to the following areas are most dependent on the application of estimates and assumptions:
Deferred acquisition costs;
Liabilities for future policy benefits and incurred but not reported claims;
Valuation of investments, allowance for credit losses and impairments to specific investments;
Valuation of embedded derivatives; and
A discussion of each of the critical accounting policies may be found in the Company's 2021 Annual Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies."
Consolidated Results of Operations
Impacts of the COVID-19 Pandemic
Although global COVID-19 related deaths have begun to decline, the Company continues to experience increased claim costs, primarily in the first quarter of 2022, as a result of the COVID-19 global pandemic. However, the Company cannot reliably predict the future impact the ongoing pandemic will have on its business, results of operations and financial condition as the impact will depend on, among other factors, the severity of new variants of the virus, vaccination effectiveness, country-specific circumstances, and COVID-19's indirect impact on mortality and morbidity.
The ultimate amount and timing of claims the Company will experience as a result of the COVID-19 pandemic will depend on many variables and uncertainties. These variables and uncertainties include those discussed above, in addition to age, gender, comorbidities, other insured versus general population characteristics, geography-specific institutional and individual mitigating actions, medical capacity, and other factors. To date, general population COVID-19 deaths have been heavily concentrated in individuals aged 70 and older and with pre-existing comorbidities; however, many populations have seen an increase in younger age deaths, particularly in areas where healthcare facilities were unable to provide adequate care. The Company's insured population has lower exposure to older ages than the general population and covers a generally healthier population due to underwriting and socioeconomic factors of those purchasing insurance. In addition, the Company's longevity business may act as a modest offset to excess life insurance claims at older ages.
The Company's COVID-19 projection and financial impact models continue to be updated and refined based on latest external data and the Company's claim experience to date and are subject to the many variables and uncertainties noted above. The U.S. continues to be the key driver of mortality claim costs followed by Canada and the UK. For the six months ended June 30, 2022, the Company estimates it has incurred approximately $316 million of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately $258 million of that amount being associated with the U.S. and Latin America Traditional segment. The Company has maintained the range of COVID-19 mortality claim cost estimates relative to the level of general population deaths for the U.S., UK and Canada. The Company estimates that every additional 10,000 population deaths in the U.S., UK or Canada as a result of COVID-19 would result in the following corresponding excess mortality claims of approximately
$10 million to $20 million in the U.S.;
$4 million to $8 million in the UK; and
$10 million to $20 million in Canada.
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Results from Operations - 2022 compared to 2021
The following table summarizes net income for the periods presented.
Three months ended June 30, Six months ended June 30, 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021 Revenues: (Dollars in millions, except per share data) Net premiums $ 3,230 $ 3,098 $ 132 $ 6,385 $ 6,012 $ 373 Investment income, net of related expenses 754 759 (5) 1,564 1,571 (7) Investment related gains (losses), net (254) 112 (366) (380) 414 (794) Other revenues 157 168 (11) 248 259 (11) Total revenues 3,887 4,137 (250) 7,817 8,256 (439) Benefits and Expenses: Claims and other policy benefits 2,815 2,813 2 6,040 6,005 35 Interest credited 138 218 (80) 279 364 (85) Policy acquisition costs and other insurance expenses 393 339 54 748 672 76 Other operating expenses 243 240 3 469 454 15 Interest expense 42 43 (1) 84 88 (4) Collateral finance and securitization expense 2 2 - 3 5 (2) Total benefits and expenses 3,633 3,655 (22) 7,623 7,588 35 Income before income taxes 254 482 (228) 194 668 (474) Provision for income taxes 55 138 (83) 58 185 (127) Net income 199 344 (145) 136 483 (347) Net income attributable to noncontrolling interest $ 1 $ - 1 $ 1 $ - 1 Net income available to RGA, Inc. shareholders $ 198 $ 344 $ (146) $ 135 $ 483 $ (348) Earnings per share: Basic earnings per share $ 2.95 $ 5.06 $ (2.11) $ 2.01 $ 7.11 $ (5.10) Diluted earnings per share $ 2.92 $ 5.02 $ (2.10) $ 2.00 $ 7.06 $ (5.06)
Three months ended June 30, 2022 compared to three months ended June 30, 2021
The decrease in income for the three months ended June 30, 2022, was primarily the result of:
Changes in the fair value of derivative instruments included in investment related gains (losses), net. During the three and six month periods ended June 30, 2022, the fair value of these instruments decreased by $114 million and $204 million, compared to an increase (decrease) of $30 million and $(21) million during the three and six months ended June 30, 2021, respectively.
Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains by $56 million for the three months ended June 30, 2022, compared to an increase of $16 million for the three month period June 30, 2021.
$60 million, pre-tax, of net realized losses, included in investment related gains (losses), net associated with portfolio repositioning compared to $23 million of net realized gains recognized in the prior year.
Six months ended June 30, 2022 compared to six months ended June 30, 2021
The decrease in income for the six months ended June 30, 2022, was primarily the result of:
Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains by $89 million for the six months ended June 30, 2022, compared to an increase of $66 million for the six months ended June 30, 2021.
$85 million, pre-tax, of net realized losses, included in investment related gains (losses), net associated with portfolio repositioning compared to $177 million of net realized gains recognized in the prior year.
The prior year benefited from a one-time adjustment of $162 million, pretax, associated with prior periods that includes $92 million, pretax, to correct the accounting for equity method limited partnerships to reflect unrealized gains in investment income, net of related expenses that were previously included in accumulated other comprehensive income, and a $70 million, pretax, correction reflected in other investment related gains (losses), net to adjust the carrying value of certain limited partnerships from cost less impairments to a fair value approach, using the net asset value ("NAV") per share or its equivalent.
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Foreign currency fluctuations can result in variances in financial statement line items. Foreign currency increased income before taxes for the three and six month periods ended June 30, 2022, by $7 million and $13 million, respectively, primarily due to the weakening of the Japanese Yen compared to the U.S. Dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations.
Premiums and business growth
The increase in premiums during the three and six month period ended June 30, 2022, is primarily due to new business production. Consolidated assumed life reinsurance in force decreased from $3,471.7 billion as of June 30, 2021, to $3,380.9 billion as of June 30, 2022, due to changes in foreign exchange rates partially offset by new business production. The Company added new business production, measured by face amount of reinsurance in force, of $215.7 billion and $220.9 billion during the six months ended June 30, 2022 and 2021, respectively.
Investment income, net of related expenses and investment related gains (losses), net
The decrease in investment income, net of related expenses is primarily attributable to the aforementioned accounting correction associated with equity method limited partnerships recorded in the first quarter of 2021, partially offset by an increase in the average invested asset base and yield:
The average invested assets at amortized cost, excluding spread business, was $34.9 billion for the six months ended June 30, 2022, compared to $33.3 billion for the six months ended June 30, 2021.
The average yield earned on investments, excluding spread related business, was 4.63% and 4.64% for the three month periods ended June 30, 2022 and 2021, respectively, and 4.96% and 5.15% for the six months ended June 30, 2022 and 2021, respectively.
The average yield will vary from year to year depending on several variables, including the prevailing risk-fee interest rate and credit spread environment, prepayment fees and make-whole premiums, changes in the mix of the underlying investments and cash and cash equivalents balances. Variable investment income from joint ventures and limited partnerships, including unrealized gains and losses on certain limited partnerships, will also vary from year to year and can be highly variable based on equity-market performance and the timing of dividends and distributions on certain investments. Investment income is allocated to the operating segments based upon average assets and related capital levels deemed appropriate to support segment operations.
The decrease in investment related gains (losses), net is primarily attributable to the following:
During the three and six months ended June 30, 2022, the Company repositioned its portfolio generating capital losses of $60 million and $85 million, respectively, compared to net capital gains of $23 million and $177 million during the three and six months ended June 30, 2021, respectively.
The Company uses various derivative instruments such as interest rate swaps, credit default swaps and foreign exchange forwards for risk management purposes that either do not qualify or have not been elected for hedge accounting treatment. Changes in the fair value of these instruments are included in investment related gains (losses), net. During the three and six months periods ended June 30, 2022, the fair value of these instruments decreased by $114 million and $204 million, compared to an increase (decrease) of $30 million and $(21) million during the three and six months ended June 30, 2021, respectively. See Note 5 - "Derivative Instruments" in the Notes to Condensed Consolidated Financial Statements for additional information.
Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains (losses), net by $56 million and $89 million for the three and six month periods ended June 30, 2022, respectively, compared to an increase of $16 million and $66 million for the three and six month periods ended June 30, 2021.
The Company incurred $15 million and $27 million of impairments and change in allowance for credit losses on fixed maturity securities during the three and six month periods ended June 30, 2022, respectively, compared to a decrease of $5 million and $3 of impairments and change in allowance for credit losses during the three and six month periods ended June 30, 2021, respectively.
Investment related gains (losses), net, for the first six months of 2021 included the adjustment previously discussed to investments in limited partnerships considered to be investment companies, which should have been recognized in prior periods, of $70 million pre-tax to adjust the carrying value from cost less impairments to the fair value approach, using the net asset value ("NAV") per share or its equivalent.
The effective tax rate on a consolidated basis was 22.1% and 28.5% for the three months ended June 30, 2022 and 2021, respectively, and 30.1% and 27.6% for the six months ended June 30, 2022 and 2021, respectively. See Note 9 - "Income Tax"
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in the Notes to Condensed Consolidated Financial Statements for additional information on the Company's consolidated effective tax rates.
Impact of certain derivatives
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021 Modco/Funds withheld: Unrealized gains (losses) $ (56) $ 16 $ (72) $ (89) $ 66 $ (155) Deferred acquisition . . .
Aug 05, 2022
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