Consolidated Results of Operations
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Three months ended September 30,
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Nine months ended September 30,
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2017
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2016
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2017
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2016
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Revenues:
|
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(Dollars in thousands, except per share data)
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Net premiums
|
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$
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2,489,797
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|
$
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2,251,758
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|
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$
|
7,335,944
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$
|
6,755,708
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Investment income, net of related expenses
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556,918
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489,727
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1,589,820
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1,414,659
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Investment related gains (losses), net
|
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22,653
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86,624
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139,471
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|
84,002
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Other revenues
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75,942
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72,468
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218,091
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197,844
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Total revenues
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3,145,310
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2,900,577
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9,283,326
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8,452,213
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Benefits and Expenses:
|
|
|
|
|
|
|
|
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Claims and other policy benefits
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2,100,680
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1,993,064
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6,371,188
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5,877,330
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Interest credited
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126,099
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116,848
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349,068
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300,602
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Policy acquisition costs and other insurance expenses
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365,424
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300,962
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1,064,645
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940,406
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Other operating expenses
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168,417
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152,556
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481,279
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469,875
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Interest expense
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36,836
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43,063
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108,590
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96,201
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Collateral finance and securitization expense
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7,692
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6,484
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21,235
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19,396
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Total benefits and expenses
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2,805,148
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2,612,977
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8,396,005
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7,703,810
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Income before income taxes
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340,162
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287,600
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887,321
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748,403
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Provision for income taxes
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112,571
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88,881
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282,028
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237,109
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Net income
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$
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227,591
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$
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198,719
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$
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605,293
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$
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511,294
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Earnings per share:
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Basic earnings per share
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$
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3.53
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$
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3.10
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$
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9.39
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$
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7.95
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Diluted earnings per share
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$
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3.47
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$
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3.07
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$
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9.23
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$
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7.87
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Dividends declared per share
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$
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0.50
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$
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0.41
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$
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1.32
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$
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1.15
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Consolidated income before income taxes increased $52.6 million, or 18.3%, and $138.9 million, or 18.6%, for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The increase in income for third quarter of 2017 was primarily due to improved mortality experience in the U.S. operations, increased investment income, new business growth in the Europe, Middle East and Africa (“EMEA”) and Asia Pacific operations and lower interest expense. The increase in income for the first nine months of 2017 was primarily due to improved mortality experience in the U.S., EMEA and Asia Pacific operations and increased investment income, partially offset by higher interest expense. The increases in investment income are discussed below and the changes in interest expense for the third quarter and first nine months are discussed within the Corporate and Other section. Foreign currency fluctuations resulted in an increase (decrease) in income before income taxes by $2.0 million and $(7.4) million for the third quarter and first nine months of 2017, as compared to the same periods in 2016.
The Company recognizes in consolidated income, any changes in the fair value of embedded derivatives on modco or funds withheld treaties, equity-indexed annuity treaties (“EIAs”) and variable annuity products. The combined changes in these three types of embedded derivatives, after adjustment for deferred acquisition costs and retrocession, resulted in a decrease in consolidated income before income taxes of $8.9 million in the third quarter of 2017 and an increase of $218.2 million in the first nine months of 2017, respectively, as compared to the same periods in 2016. This fluctuation does not affect current cash flows, crediting rates or spread performance on the underlying treaties. Therefore, management believes it is helpful to distinguish between the effects of changes in these embedded derivatives, net of related hedging activity and deferred acquisition costs, and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income, and interest credited. The individual effect on income before income taxes for these three types of embedded derivatives is as follows:
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•
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The change in the value of embedded derivatives related to reinsurance treaties written on a modco or funds withheld basis are subject to the general accounting principles for derivatives and hedging related to embedded derivatives. The unrealized gains and losses associated with these embedded derivatives, after adjustment for deferred acquisition costs, resulted in a decrease in income before income taxes of $3.3 million in the third quarter of 2017 and an increase of $53.3 million in the first nine months of 2017, as compared to the same periods in 2016.
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•
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Changes in risk-free rates used in the fair value estimates of embedded derivatives associated with EIAs affect the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with EIAs, after adjustment for deferred acquisition costs and retrocession, increased income before income taxes by $0.1 million and $20.0 million in the third quarter and first nine months of 2017, respectively, as compared to the same periods in 2016.
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•
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The change in the Company’s liability for variable annuities associated with guaranteed minimum living benefits affects the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with guaranteed minimum living benefits, after adjustment for deferred acquisition costs, resulted in a decrease in income before income taxes of $5.7 million in the third quarter of 2017 and an increase of $144.9 million in the first nine months of 2017, as compared to the same periods in 2016. After consideration of the change in fair value of freestanding derivatives used to hedge this liability, income before income taxes decreased by $2.2 million in the third quarter of 2017 and increased by $6.9 million in the first nine months of 2017, as compared to the same periods in 2016.
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Consolidated net premiums increased $238.0 million, or 10.6%, and $580.2 million, or 8.6%, for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, primarily due to growth in life reinsurance in force. Foreign currency fluctuations resulted in an increase (decrease) in net premiums of $18.3 million and $(17.3) million for the third quarter and first nine months of 2017, as compared to the same periods in 2016. Consolidated assumed life insurance in force increased to $3,297.9 billion as of September 30, 2017 from $3,082.8 billion as of September 30, 2016 due to new business production and in force transactions. The Company added new business production, measured by face amount of insurance in force, of $90.7 billion and $81.3 billion during the third quarter of 2017 and 2016, respectively, and $304.8 billion and $296.4 billion during the first nine months of 2017 and 2016, respectively. Foreign currency fluctuations contributed $43.6 billion to the increase in assumed life insurance in force from September 30, 2016. Management believes industry consolidation, regulatory changes and the established practice of reinsuring mortality and morbidity risks should continue to provide opportunities for growth, albeit at rates less than historically experienced in some markets.
Consolidated investment income, net of related expenses, increased $67.2 million, or 13.7%, and $175.2 million, or 12.4%, for the three and nine months ended September 30, 2017, as compared to the same periods in 2016. Market value changes related to the Company’s funds withheld at interest investment associated with the reinsurance of certain EIAs increased (decreased) investment income by $(1.3) million and $73.3 million in the third quarter and first nine months of 2017, respectively, as compared to the same periods in 2016. The effect on investment income of the EIA's market value changes is substantially offset by a corresponding change in interest credited to policyholder account balances resulting in an insignificant effect on net income.
Also contributing to the increase in investment income is a larger average invested asset base, excluding spread related business, partially offset by a decrease in the average investment yield. Average invested assets at amortized cost, excluding spread related business, for the nine months ended September 30, 2017 totaled $25.1 billion, a 9.4% increase over September 30, 2016. The
average yield earned on investments, excluding spread related business, was 4.81% and 4.43% for the third quarter of 2017 and 2016, respectively, and 4.61% and 4.53% for the first nine months ended September 30, 2017 and 2016, respectively. The average yield will vary from quarter to quarter and year to year depending on a number of variables, including the prevailing interest rate and credit spread environment, prepayment fees and make-whole premiums, changes in the mix of the underlying investments and cash balances, and the timing of dividends and distributions on certain investments. The third quarter of 2017, in particular, benefited from a higher level of bond make-whole premiums and distributions from joint ventures and limited partnerships. A continued low interest rate environment is expected to put downward pressure on this yield in future reporting periods.
Total investment related gains (losses), net changed favorably (unfavorably) by $(64.0) million and $55.5 million for the three and nine months ended September 30, 2017, as compared to the same periods in 2016. A significant portion of theses variances in the third quarter and first nine months are due to changes in the value of embedded derivatives related to reinsurance treaties written on a modco or funds withheld basis, reflecting the impact of changes in interest rates and credit spreads on the calculation of fair value. During the third quarter and first nine months of 2017, the favorable (unfavorable) changes in the value of these embedded derivatives was $(26.0) million and $73.1 million respectively, as compared to the same periods in 2016. Impairments on fixed maturity securities decreased by $13.7 million in the first nine months of 2017, as compared to the same period in 2016. See Note 4 - “Investments” and Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for additional information on the impairment losses and derivatives.
The effective tax rate on a consolidated basis was 33.1% and 30.9% for the third quarter 2017 and 2016, respectively, and 31.8% and 31.7% for the first nine months of 2017 and 2016, respectively. The effective tax rate for the third quarter of 2017 was lower than the U.S. Statutory rate of 35% primarily as a result of income generated in non-U.S. jurisdictions with lower tax rates than the U.S. The first nine months of 2017 also includes a reduction related to differences in tax bases in foreign jurisdictions and a tax benefit from the filing of amended returns, which was partially offset with a valuation allowance established related to amended return filings. The effective tax rate for the third quarter of 2016 was lower than the U.S. Statutory rate of 35.0% primarily as a result of effectively settling an uncertain tax position during the quarter and adjustments related to the filing of the US Federal Income tax return. The first nine months of 2016 effective tax rate was lower than the U.S. Statutory rate of 35.0% primarily as a result of tax benefits from income in non-U.S. jurisdictions with lower tax rates than the U.S.
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:
Premiums receivable;
Deferred acquisition costs;
Liabilities for future policy benefits and incurred but not reported claims;
Valuation of investments and other-than-temporary impairments to specific investments;
Valuation of embedded derivatives; and
Income taxes.
A discussion of each of the critical accounting policies may be found in the Company’s 2016 Annual Report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”
Results of Operations by Segment
U.S. and Latin America Operations
The U.S. and Latin America operations include business generated by its offices in the U.S., Mexico and Brazil. The offices in Mexico and Brazil provide services to clients in other Latin American countries. U.S. and Latin America operations consist of two major segments: Traditional and Financial Solutions. The Traditional segment primarily specializes in individual mortality-risk reinsurance and to a lesser extent, group, health and long-term care reinsurance. The Financial Solutions segment consists of Asset-Intensive and Financial Reinsurance. Asset-Intensive within the Financial Solutions segment provides coinsurance of annuities and corporate-owned life insurance policies and to a lesser extent also issues fee-based synthetic guaranteed investment contracts, which include investment-only, stable value contracts. Financial Reinsurance within the Financial Solutions segment primarily involves assisting ceding companies in meeting applicable regulatory requirements by enhancing the ceding companies’ financial strength and regulatory surplus position through relatively low risk reinsurance transactions. Typically these transactions do not qualify as reinsurance under GAAP, due to the low-risk nature of the transactions, so only the related net fees are reflected in other revenues on the condensed consolidated statements of income.
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For the three months ended September 30, 2017:
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Financial Solutions
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(dollars in thousands)
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Asset-Intensive
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Financial
Reinsurance
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Total U.S. and Latin America
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Traditional
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Revenues:
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|
|
|
|
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Net premiums
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$
|
1,327,181
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|
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$
|
6,423
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|
|
$
|
—
|
|
|
$
|
1,333,604
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Investment income, net of related expenses
|
|
191,904
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|
|
188,176
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|
|
2,984
|
|
|
383,064
|
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Investment related gains (losses), net
|
|
(1,503
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)
|
|
12,832
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|
|
—
|
|
|
11,329
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|
Other revenues
|
|
3,801
|
|
|
26,899
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|
|
26,856
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|
|
57,556
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|
Total revenues
|
|
1,521,383
|
|
|
234,330
|
|
|
29,840
|
|
|
1,785,553
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|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
|
1,118,401
|
|
|
11,959
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|
|
—
|
|
|
1,130,360
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Interest credited
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|
20,673
|
|
|
94,120
|
|
|
—
|
|
|
114,793
|
|
Policy acquisition costs and other insurance expenses
|
|
189,291
|
|
|
54,441
|
|
|
5,674
|
|
|
249,406
|
|
Other operating expenses
|
|
32,506
|
|
|
6,684
|
|
|
2,174
|
|
|
41,364
|
|
Total benefits and expenses
|
|
1,360,871
|
|
|
167,204
|
|
|
7,848
|
|
|
1,535,923
|
|
Income before income taxes
|
|
$
|
160,512
|
|
|
$
|
67,126
|
|
|
$
|
21,992
|
|
|
$
|
249,630
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|
|
|
|
|
|
|
|
|
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For the three months ended September 30, 2016:
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|
|
Financial Solutions
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(dollars in thousands)
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|
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Asset-Intensive
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Financial
Reinsurance
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Total U.S. and Latin America
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Traditional
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Revenues:
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|
|
|
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|
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Net premiums
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$
|
1,277,491
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|
|
$
|
5,369
|
|
|
$
|
—
|
|
|
$
|
1,282,860
|
|
Investment income, net of related expenses
|
|
167,898
|
|
|
167,683
|
|
|
1,038
|
|
|
336,619
|
|
Investment related gains (losses), net
|
|
(3,394
|
)
|
|
59,661
|
|
|
—
|
|
|
56,267
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|
Other revenues
|
|
2,922
|
|
|
23,417
|
|
|
18,967
|
|
|
45,306
|
|
Total revenues
|
|
1,444,917
|
|
|
256,130
|
|
|
20,005
|
|
|
1,721,052
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|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
|
1,131,507
|
|
|
18,927
|
|
|
—
|
|
|
1,150,434
|
|
Interest credited
|
|
20,628
|
|
|
86,742
|
|
|
—
|
|
|
107,370
|
|
Policy acquisition costs and other insurance expenses
|
|
184,766
|
|
|
56,497
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|
|
3,492
|
|
|
244,755
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|
Other operating expenses
|
|
30,935
|
|
|
5,232
|
|
|
2,531
|
|
|
38,698
|
|
Total benefits and expenses
|
|
1,367,836
|
|
|
167,398
|
|
|
6,023
|
|
|
1,541,257
|
|
Income before income taxes
|
|
$
|
77,081
|
|
|
$
|
88,732
|
|
|
$
|
13,982
|
|
|
$
|
179,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017:
|
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|
|
Financial Solutions
|
|
|
(dollars in thousands)
|
|
|
|
Asset-Intensive
|
|
Financial
Reinsurance
|
|
Total U.S. and Latin America
|
|
|
Traditional
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
3,966,842
|
|
|
$
|
18,186
|
|
|
$
|
—
|
|
|
$
|
3,985,028
|
|
Investment income, net of related expenses
|
|
554,612
|
|
|
553,286
|
|
|
6,501
|
|
|
1,114,399
|
|
Investment related gains (losses), net
|
|
(192
|
)
|
|
103,229
|
|
|
—
|
|
|
103,037
|
|
Other revenues
|
|
11,322
|
|
|
76,324
|
|
|
77,466
|
|
|
165,112
|
|
Total revenues
|
|
4,532,584
|
|
|
751,025
|
|
|
83,967
|
|
|
5,367,576
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
|
3,538,958
|
|
|
53,998
|
|
|
—
|
|
|
3,592,956
|
|
Interest credited
|
|
61,800
|
|
|
260,941
|
|
|
—
|
|
|
322,741
|
|
Policy acquisition costs and other insurance expenses
|
|
556,476
|
|
|
176,305
|
|
|
17,234
|
|
|
750,015
|
|
Other operating expenses
|
|
94,284
|
|
|
19,883
|
|
|
6,942
|
|
|
121,109
|
|
Total benefits and expenses
|
|
4,251,518
|
|
|
511,127
|
|
|
24,176
|
|
|
4,786,821
|
|
Income before income taxes
|
|
$
|
281,066
|
|
|
$
|
239,898
|
|
|
$
|
59,791
|
|
|
$
|
580,755
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2016:
|
|
|
|
Financial Solutions
|
|
|
(dollars in thousands)
|
|
|
|
Asset-Intensive
|
|
Financial
Reinsurance
|
|
Total U.S. and Latin America
|
|
|
Traditional
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
3,819,280
|
|
|
$
|
17,250
|
|
|
$
|
—
|
|
|
$
|
3,836,530
|
|
Investment income, net of related expenses
|
|
515,159
|
|
|
462,579
|
|
|
6,031
|
|
|
983,769
|
|
Investment related gains (losses), net
|
|
(6,376
|
)
|
|
7,940
|
|
|
—
|
|
|
1,564
|
|
Other revenues
|
|
11,674
|
|
|
70,806
|
|
|
55,511
|
|
|
137,991
|
|
Total revenues
|
|
4,339,737
|
|
|
558,575
|
|
|
61,542
|
|
|
4,959,854
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
|
3,400,614
|
|
|
58,267
|
|
|
—
|
|
|
3,458,881
|
|
Interest credited
|
|
62,873
|
|
|
217,736
|
|
|
—
|
|
|
280,609
|
|
Policy acquisition costs and other insurance expenses
|
|
544,129
|
|
|
113,919
|
|
|
9,145
|
|
|
667,193
|
|
Other operating expenses
|
|
92,512
|
|
|
16,772
|
|
|
7,606
|
|
|
116,890
|
|
Total benefits and expenses
|
|
4,100,128
|
|
|
406,694
|
|
|
16,751
|
|
|
4,523,573
|
|
Income before income taxes
|
|
$
|
239,609
|
|
|
$
|
151,881
|
|
|
$
|
44,791
|
|
|
$
|
436,281
|
|
Income before income taxes increased by
$69.8 million
, or
38.8%
, and
$144.5 million
, or
33.1%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in income before income taxes for the third quarter was primarily due to strong mortality experience in the Traditional segment as well as higher variable investment income. The increase was offset somewhat by a decrease in investment related gains in the Financial Solutions segment. The increase in income before income taxes for the first nine months is the result of several factors, including changes in the value of the embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld, an increase in investment related capital gains and additional variable investment income.
Traditional Reinsurance
The U.S. and Latin America Traditional segment provides life and health reinsurance to clients for a variety of products through yearly renewable term, coinsurance and modco agreements. These reinsurance arrangements may involve either facultative or automatic agreements.
Income before income taxes for the U.S. and Latin America Traditional segment increased by
$83.4 million
, or
108.2%
, and
$41.5 million
, or
17.3%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in the third quarter is primarily due to favorable mortality experience as compared to same period in 2016 and higher variable investment income. The favorable mortality experience was driven by both a lower number and average size of large claims. The increase in income for the first nine months was primarily due to higher variable investment.
Net premiums increased
$49.7 million
, or
3.9%
, and
$147.6 million
, or
3.9%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases were primarily due to expected organic premium growth. The segment added new individual life business production, measured by face amount of insurance in force of $24.8 billion and $19.7 billion for the
third
quarter and $75.1 billion and $93.0 billion for the first
nine
months of
2017
and
2016
, respectively.
Net investment income increased
$24.0 million
, or
14.3%
, and
$39.5 million
, or
7.7%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases were primarily due to higher variable investment income. Investment related gains (losses), net increased
$1.9 million
and
$6.2 million
for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were
84.3%
and
88.6%
for the
third
quarter and
89.2%
and
89.0%
, for the
nine
months ended
September 30, 2017
and
2016
, respectively. The decrease in the loss ratio for the third quarter of 2017, as compared to the same period in 2016 was primarily due to favorable mortality experience, specifically the lower number and average size of large claims. For the first nine months of 2017, as compared to the same period in 2016, mortality experience was relatively consistent.
Interest credited expense decreased
$1.1 million
, or
1.7%
, for the
nine
months ended
September 30, 2017
, as compared to the same period in
2016
. Interest credited in this segment relates to amounts credited on cash value products which also have a significant mortality component. Income before income taxes is affected by the spread between the investment income and the interest credited on the underlying products.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
14.3%
and
14.5%
for the
third
quarter and
14.0%
and
14.2%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. While these ratios are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels within coinsurance-type arrangements. In addition, the amortization pattern of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary. Also, the mix of first year coinsurance business versus yearly renewable term business can cause the percentage to fluctuate from period to period
Other operating expenses, as a percentage of net premiums remained constant at
2.4%
and
2.4%
for the
third
quarter and
2.4%
and
2.4%
first
nine
months of
2017
and
2016
, respectively. The expense ratio tends to fluctuate only slightly from period to period due to the maturity and scale of this segment.
Financial Solutions - Asset-Intensive Reinsurance
Asset-Intensive reinsurance within the U.S. and Latin America Financial Solutions segment primarily involves assuming investment risk within underlying annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance with funds withheld or modco. The Company recognizes profits or losses primarily from the spread between the investment income earned and the interest credited on the underlying deposit liabilities, income associated with longevity risk, and fees associated with variable annuity account values and guaranteed investment contracts.
Impact of certain derivatives:
Income from the asset-intensive business tends to be volatile due to changes in the fair value of certain derivatives, including embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis, as well as embedded derivatives associated with the Company’s reinsurance of equity-indexed annuities and variable annuities with guaranteed minimum benefit riders. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including risk-free rates and credit spreads), implied volatility, the Company’s own credit risk and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives, net of related hedging activity, and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues), and interest credited. These fluctuations are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties.
The following table summarizes the asset-intensive results and quantifies the impact of these embedded derivatives for the periods presented. Revenues before certain derivatives, benefits and expenses before certain derivatives, and income before income taxes and certain derivatives, should not be viewed as substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
234,330
|
|
|
$
|
256,130
|
|
|
$
|
751,025
|
|
|
$
|
558,575
|
|
Less:
|
|
|
|
|
|
|
|
|
Embedded derivatives – modco/funds withheld treaties
|
|
24,539
|
|
|
52,540
|
|
|
107,039
|
|
|
40,174
|
|
Guaranteed minimum benefit riders and related free standing derivatives
|
|
(17,058
|
)
|
|
(12,647
|
)
|
|
(20,935
|
)
|
|
(24,710
|
)
|
Revenues before certain derivatives
|
|
226,849
|
|
|
216,237
|
|
|
664,921
|
|
|
543,111
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
167,204
|
|
|
167,398
|
|
|
511,127
|
|
|
406,694
|
|
Less:
|
|
|
|
|
|
|
|
|
Embedded derivatives – modco/funds withheld treaties
|
|
11,481
|
|
|
34,226
|
|
|
51,008
|
|
|
31,206
|
|
Guaranteed minimum benefit riders and related free standing derivatives
|
|
(5,379
|
)
|
|
(3,135
|
)
|
|
(6,565
|
)
|
|
(3,439
|
)
|
Equity-indexed annuities
|
|
481
|
|
|
549
|
|
|
(13,603
|
)
|
|
6,449
|
|
Benefits and expenses before certain derivatives
|
|
160,621
|
|
|
135,758
|
|
|
480,287
|
|
|
372,478
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
67,126
|
|
|
88,732
|
|
|
239,898
|
|
|
151,881
|
|
Less:
|
|
|
|
|
|
|
|
|
Embedded derivatives – modco/funds withheld treaties
|
|
13,058
|
|
|
18,314
|
|
|
56,031
|
|
|
8,968
|
|
Guaranteed minimum benefit riders and related free standing derivatives
|
|
(11,679
|
)
|
|
(9,512
|
)
|
|
(14,370
|
)
|
|
(21,271
|
)
|
Equity-indexed annuities
|
|
(481
|
)
|
|
(549
|
)
|
|
13,603
|
|
|
(6,449
|
)
|
Income before income taxes and certain derivatives
|
|
$
|
66,228
|
|
|
$
|
80,479
|
|
|
$
|
184,634
|
|
|
$
|
170,633
|
|
Embedded Derivatives - Modco/Funds Withheld Treaties -
Represents the change in the fair value of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis. The fair value changes of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. The Company’s utilization of a credit valuation adjustment did not have a material effect on the change in fair value of these embedded derivatives for the
nine
months ended
September 30, 2017
and
2016
.
The change in fair value of the embedded derivatives - modco/funds withheld treaties increased income before income taxes by
$13.1 million
and
$18.3 million
for the
third
quarter and
$56.0 million
and
$9.0 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increases in income for the
third
quarter of 2016 and 2017 were primarily due to tightening credit spreads. The increase in income for the nine months ended September 30, 2017 was primarily due to tightening credit spreads. The decrease in income for the
nine
months ended September 30, 2016 was primarily due to shifts in the yield curve.
Guaranteed Minimum Benefit Riders -
Represents the impact related to guaranteed minimum benefits associated with the Company’s reinsurance of variable annuities. The fair value changes of the guaranteed minimum benefits along with the changes in fair value of the free standing derivatives (interest rate swaps, financial futures and equity options), purchased by the Company to substantially hedge the liability are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. The Company’s utilization of a credit valuation adjustment did not have a material effect on the change in fair value of these embedded derivatives for the
nine
months ended
September 30, 2017
and
2016
.
The change in fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing derivatives, decreased income before income taxes by
$11.7 million
and
$9.5 million
for the
third
quarter and
$14.4 million
and
$21.3 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The decrease in income for all periods was primarily due to the annual update of best estimate actuarial assumptions to account for lower policyholder lapse experience.
Equity-Indexed Annuities -
Represents changes in the liability for equity-indexed annuities in excess of changes in account value, after adjustments for related deferred acquisition expenses. The change in fair value of embedded derivative liabilities associated with equity-indexed annuities increased (decreased) income before income taxes by
$(0.5) million
and
$(0.5) million
for the
third
quarter and
$13.6 million
and
$(6.4) million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The decreases in income for the
third
quarter of
2017
and
2016
were primarily due to shifts in the yield curve. The increase in income for the first
nine
months of
2017
was primarily due to declining long-term interest rates. The decrease in income for the first
nine
months of
2016
was primarily due to increasing short-term interest rates.
The changes in derivatives discussed above are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including benchmark rates and credit spreads), credit valuation adjustments, implied volatility and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues) and interest credited.
Discussion and analysis before certain derivatives:
Income before income taxes and certain derivatives decreased by $14.3 million and increased by $14.0 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in the third quarter was primarily due to lower investment related gains (losses), net of the corresponding impact to deferred acquisition costs, associated with coinsurance and funds withheld portfolios, which was partially offset by favorable policyholder experience in payout annuities. Funds withheld capital gains (losses) are reported in investment income. The increase in the first nine months was primarily due to favorable policyholder experience in payout annuities and higher variable investment income.
Revenue before certain derivatives increased by $10.6 million and $121.8 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in the
third
quarter was primarily due to the impact to investment income from a new coinsurance transaction in 2017 which was partially offset by lower investment related gains (losses) associated with coinsurance and funds withheld portfolios. The increase in the first nine months was primarily due to the change in fair value of equity options associated with the reinsurance of certain EIAs and higher investment related gains (losses) associated with coinsurance and funds withheld portfolios. The effect on investment income related to equity options is substantially offset by a corresponding change in interest credited.
Benefits and expenses before certain derivatives increased by $24.9 million and $107.8 million for the
three and nine
months ended
September 30, 2017
, as compared to the same period in
2016
. The increase in the
third
quarter was primarily due to the impact to interest credited of a new coinsurance transaction in 2017 and the corresponding impact to deferred acquisition costs from investment related gains (losses) in coinsurance and funds withheld portfolios. The increase in the first nine months was primarily due to higher interest credited associated with the reinsurance of EIAs and the corresponding impact to deferred acquisition costs from investment related gains (losses) in coinsurance and funds withheld portfolios. The effect on interest credited related to equity options is substantially offset by a corresponding change in investment income.
The invested asset base supporting this segment increased to $15.5 billion as of
September 30, 2017
from $13.2 billion as of
September 30, 2016
. The increase in the asset base was due primarily to the aforementioned new coinsurance transaction in 2017. As of
September 30, 2017
, $4.1 billion of the invested assets were funds withheld at interest, of which greater than 90% is associated with one client.
Financial Solutions - Financial Reinsurance
Financial Reinsurance within the U.S. and Latin America Financial Solutions segment income before income taxes consists primarily of net fees earned on financial reinsurance transactions. Additionally, a portion of the business is brokered business in which the Company does not participate in the assumption of risk. The fees earned from financial reinsurance contracts and brokered business are reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance expenses.
Income before income taxes increased
$8.0 million
, or
57.3%
, and
$15.0 million
, or
33.5%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases were primarily due to growth in new transactions and organic growth on existing transactions which was partially offset by the termination of certain agreements.
At
September 30, 2017
and
2016
, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial structures was $12.6 billion and $7.9 billion, respectively. The increase was primarily due to new transactions, as well as organic growth on existing transactions. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period.
Canada Operations
The Company conducts reinsurance business in Canada primarily through RGA Canada, which assists clients with capital management activity and mortality and morbidity risk management. The Canada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, as well as creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and financial reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three months ended September 30,
|
|
2017
|
|
2016
|
Revenues:
|
Traditional
|
|
Financial Solutions
|
|
Total Canada
|
|
Traditional
|
|
Financial Solutions
|
|
Total Canada
|
Net premiums
|
$
|
225,841
|
|
|
$
|
9,874
|
|
|
$
|
235,715
|
|
|
$
|
231,154
|
|
|
$
|
9,946
|
|
|
$
|
241,100
|
|
Investment income, net of related expenses
|
51,593
|
|
|
1,120
|
|
|
52,713
|
|
|
45,239
|
|
|
1,037
|
|
|
46,276
|
|
Investment related gains (losses), net
|
2,380
|
|
|
—
|
|
|
2,380
|
|
|
3,832
|
|
|
—
|
|
|
3,832
|
|
Other revenues
|
1,281
|
|
|
1,436
|
|
|
2,717
|
|
|
734
|
|
|
1,376
|
|
|
2,110
|
|
Total revenues
|
281,095
|
|
|
12,430
|
|
|
293,525
|
|
|
280,959
|
|
|
12,359
|
|
|
293,318
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
193,978
|
|
|
7,170
|
|
|
201,148
|
|
|
175,618
|
|
|
10,567
|
|
|
186,185
|
|
Interest credited
|
6
|
|
|
—
|
|
|
6
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Policy acquisition costs and other insurance expenses
|
50,023
|
|
|
221
|
|
|
50,244
|
|
|
61,019
|
|
|
285
|
|
|
61,304
|
|
Other operating expenses
|
8,299
|
|
|
567
|
|
|
8,866
|
|
|
10,039
|
|
|
347
|
|
|
10,386
|
|
Total benefits and expenses
|
252,306
|
|
|
7,958
|
|
|
260,264
|
|
|
246,684
|
|
|
11,199
|
|
|
257,883
|
|
Income before income taxes
|
$
|
28,789
|
|
|
$
|
4,472
|
|
|
$
|
33,261
|
|
|
$
|
34,275
|
|
|
$
|
1,160
|
|
|
$
|
35,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
Revenues:
|
Traditional
|
|
Financial Solutions
|
|
Total Canada
|
|
Traditional
|
|
Financial Solutions
|
|
Total Canada
|
Net premiums
|
$
|
662,983
|
|
|
$
|
28,598
|
|
|
$
|
691,581
|
|
|
$
|
686,724
|
|
|
$
|
29,089
|
|
|
$
|
715,813
|
|
Investment income, net of related expenses
|
140,929
|
|
|
3,515
|
|
|
144,444
|
|
|
134,121
|
|
|
1,649
|
|
|
135,770
|
|
Investment related gains (losses), net
|
8,821
|
|
|
—
|
|
|
8,821
|
|
|
7,757
|
|
|
—
|
|
|
7,757
|
|
Other revenues
|
1,910
|
|
|
4,127
|
|
|
6,037
|
|
|
(731
|
)
|
|
4,159
|
|
|
3,428
|
|
Total revenues
|
814,643
|
|
|
36,240
|
|
|
850,883
|
|
|
827,871
|
|
|
34,897
|
|
|
862,768
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
566,227
|
|
|
21,888
|
|
|
588,115
|
|
|
524,497
|
|
|
29,005
|
|
|
553,502
|
|
Interest credited
|
15
|
|
|
—
|
|
|
15
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Policy acquisition costs and other insurance expenses
|
143,302
|
|
|
571
|
|
|
143,873
|
|
|
178,178
|
|
|
1,002
|
|
|
179,180
|
|
Other operating expenses
|
24,146
|
|
|
1,292
|
|
|
25,438
|
|
|
27,500
|
|
|
1,010
|
|
|
28,510
|
|
Total benefits and expenses
|
733,690
|
|
|
23,751
|
|
|
757,441
|
|
|
730,192
|
|
|
31,017
|
|
|
761,209
|
|
Income before income taxes
|
$
|
80,953
|
|
|
$
|
12,489
|
|
|
$
|
93,442
|
|
|
$
|
97,679
|
|
|
$
|
3,880
|
|
|
$
|
101,559
|
|
Income before income taxes decreased by
$2.2 million
, or
6.1%
, and
$8.1 million
, or
8.0%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in income for the
third
quarter and first
nine
months is primarily due to unfavorable traditional individual life mortality experience compared to favorable experience in the same periods in 2016, partially offset by favorable experience on longevity business in the current year. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in income before income taxes of $1.7 million and $1.6 million for the three and
nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Traditional Reinsurance
Income before income taxes for the Canada Traditional segment decreased by
$5.5 million
, or
16.0%
, and
$16.7 million
, or
17.1%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in income before income taxes for the
third
quarter and first
nine
months is primarily due to unfavorable traditional individual life mortality experience compared to favorable experience in the same periods in 2016. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in income before income taxes of $1.5 million and $1.4 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net premiums decreased
$5.3 million
, or
2.3%
, and
$23.7 million
, or
3.5%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases in net premiums were primarily due to an anticipated decrease in creditor premiums of $21.0 million and $60.4 million for the third quarter and first nine months, respectively. These decreases were partially offset by an increase in traditional individual life business premiums from annually increasing premium rates on yearly renewable term treaties and favorable foreign currency exchange fluctuation. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in net premiums of approximately $9.0 million and $7.0 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net investment income increased
$6.4 million
, or
14.0%
, and
$6.8 million
, or
5.1%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases in investment income for the third quarter and the first nine months were primarily the result of an increase in the invested asset base due to growth in the underlying business volume and an increase in investment yields from a higher level of variable investment income. Foreign currency exchange fluctuation in the Canadian dollar resulted in an increase in net investment income of approximately $2.1 million and $1.7 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in 2016.
Other revenues increased by
$0.5 million
and
$2.6 million
for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in other revenues for the third quarter of 2017 is primarily due to foreign currency exchange fluctuations. The increase in other revenues for the first nine months of 2017 is primarily due to fee income from the recapture of a previously assumed block of individual life business during the second quarter of 2017.
Loss ratios for this segment were
85.9%
and
76.0%
for the
third
quarter and
85.4%
and
76.4%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increases in the loss ratio for the
three and nine
months of 2017, as compared to the same periods in 2016, are due to unfavorable traditional life mortality experience compared to favorable experience in the same periods in 2016 and a decrease in creditor business premiums. Loss ratios for the traditional individual life mortality business were 99.5% and 94.4% for the
third
quarter and 98.7% and 93.4% for the first
nine
months ended
September 30, 2017
and
2016
, respectively. Historically, the loss ratio increased primarily as the result of several large permanent level premium in force blocks assumed in 1997 and 1998. These blocks are mature blocks of long-term permanent level premium business in which mortality as a percentage of net premiums is expected to be higher than historical ratios. The nature of permanent level premium policies requires the Company to set up actuarial liabilities and invest the amounts received in excess of early-year claims costs to fund claims in later years when premiums, by design, continue to be level as compared to expected increasing mortality or claim costs. As such, investment income becomes a more significant component of profitability of these in force blocks. Excluding creditor business, claims and other policy benefits, as a percentage of net premiums and investment income were 77.7% and 73.7% for the
third
quarter and 77.7% and 73.5% for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
22.1%
and
26.4%
for the
third
quarter and
21.6%
and
25.9%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. Overall, while these ratios are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels and product mix. The decrease for the third quarter and first nine months reflects a lower level of creditor business which typically has a higher level of acquisition costs. In addition, the amortization patterns of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary.
Other operating expenses decreased
$1.7 million
, or
17.3%
, and
$3.4 million
, or
12.2%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in 2016, primarily due to a decrease in corporate overhead expenses. Other operating expenses as a percentage of net premiums were
3.7%
and
4.3%
for the
third
quarter and
3.6%
and
4.0%
for the
nine
month periods ended
September 30, 2017
and
2016
, respectively.
Financial Solutions Reinsurance
Income before income taxes increased by
$3.3 million
and
$8.6 million
for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases in income for both the three and
nine
month periods are primarily due to favorable experience on longevity business in the current-year periods. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in income before income taxes of $0.2 million for both the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net premiums decreased
$0.1 million
, or
0.7%
, and
$0.5 million
, or
1.7%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in net premiums of approximately $0.4 million for both the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net investment income increased
$0.1 million
and
$1.9 million
for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in 2016 primarily due to an increase in the invested asset base.
Claims and other policy benefits decreased
$3.4 million
, or
32.1%
, and
$7.1 million
, or
24.5%
, for the
three and nine
months ended
September 30, 2017
as compared to the same periods in
2016
. The decreases for the
third
quarter and first
nine
months are primarily due to favorable experience on longevity business.
Europe, Middle East and Africa Operations
The Europe, Middle East and Africa (“EMEA”) segment includes business generated by its offices principally in the United Kingdom (“UK”), South Africa, France, Germany, Ireland, Italy, the Netherlands, Poland, Spain and the United Arab Emirates (“UAE”). EMEA consists of two major segments: Traditional and Financial Solutions. The Traditional segment primarily provides reinsurance through yearly renewable term and coinsurance agreements on a variety of life, health and critical illness products. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and, in some markets, group risks. The Financial Solutions segment consists of reinsurance and other transactions associated with longevity closed blocks, payout annuities, capital management solutions and financial reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three months ended September 30,
|
|
2017
|
|
2016
|
Revenues:
|
Traditional
|
|
Financial Solutions
|
|
Total EMEA
|
|
Traditional
|
|
Financial Solutions
|
|
Total EMEA
|
Net premiums
|
$
|
344,211
|
|
|
$
|
39,294
|
|
|
$
|
383,505
|
|
|
$
|
275,514
|
|
|
$
|
47,018
|
|
|
$
|
322,532
|
|
Investment income, net of related expenses
|
14,727
|
|
|
30,892
|
|
|
45,619
|
|
|
13,067
|
|
|
33,187
|
|
|
46,254
|
|
Investment related gains (losses), net
|
—
|
|
|
1,192
|
|
|
1,192
|
|
|
—
|
|
|
8,159
|
|
|
8,159
|
|
Other revenues
|
2,034
|
|
|
5,663
|
|
|
7,697
|
|
|
489
|
|
|
11,388
|
|
|
11,877
|
|
Total revenues
|
360,972
|
|
|
77,041
|
|
|
438,013
|
|
|
289,070
|
|
|
99,752
|
|
|
388,822
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
285,071
|
|
|
35,648
|
|
|
320,719
|
|
|
241,763
|
|
|
45,805
|
|
|
287,568
|
|
Interest credited
|
—
|
|
|
2,475
|
|
|
2,475
|
|
|
—
|
|
|
5,540
|
|
|
5,540
|
|
Policy acquisition costs and other insurance expenses
|
35,751
|
|
|
327
|
|
|
36,078
|
|
|
14,133
|
|
|
(304
|
)
|
|
13,829
|
|
Other operating expenses
|
24,729
|
|
|
7,638
|
|
|
32,367
|
|
|
24,659
|
|
|
4,925
|
|
|
29,584
|
|
Total benefits and expenses
|
345,551
|
|
|
46,088
|
|
|
391,639
|
|
|
280,555
|
|
|
55,966
|
|
|
336,521
|
|
Income before income taxes
|
$
|
15,421
|
|
|
$
|
30,953
|
|
|
$
|
46,374
|
|
|
$
|
8,515
|
|
|
$
|
43,786
|
|
|
$
|
52,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
Revenues:
|
Traditional
|
|
Financial Solutions
|
|
Total EMEA
|
|
Traditional
|
|
Financial Solutions
|
|
Total EMEA
|
Net premiums
|
$
|
979,733
|
|
|
$
|
119,809
|
|
|
$
|
1,099,542
|
|
|
$
|
838,810
|
|
|
$
|
126,108
|
|
|
$
|
964,918
|
|
Investment income, net of related expenses
|
41,032
|
|
|
88,602
|
|
|
129,634
|
|
|
38,556
|
|
|
95,288
|
|
|
133,844
|
|
Investment related gains (losses), net
|
7
|
|
|
8,225
|
|
|
8,232
|
|
|
5
|
|
|
8,623
|
|
|
8,628
|
|
Other revenues
|
4,206
|
|
|
13,799
|
|
|
18,005
|
|
|
2,975
|
|
|
18,466
|
|
|
21,441
|
|
Total revenues
|
1,024,978
|
|
|
230,435
|
|
|
1,255,413
|
|
|
880,346
|
|
|
248,485
|
|
|
1,128,831
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
846,476
|
|
|
108,381
|
|
|
954,857
|
|
|
745,342
|
|
|
126,252
|
|
|
871,594
|
|
Interest credited
|
—
|
|
|
6,297
|
|
|
6,297
|
|
|
—
|
|
|
8,914
|
|
|
8,914
|
|
Policy acquisition costs and other insurance expenses
|
66,263
|
|
|
1,070
|
|
|
67,333
|
|
|
46,465
|
|
|
226
|
|
|
46,691
|
|
Other operating expenses
|
71,488
|
|
|
22,911
|
|
|
94,399
|
|
|
74,306
|
|
|
16,414
|
|
|
90,720
|
|
Total benefits and expenses
|
984,227
|
|
|
138,659
|
|
|
1,122,886
|
|
|
866,113
|
|
|
151,806
|
|
|
1,017,919
|
|
Income before income taxes
|
$
|
40,751
|
|
|
$
|
91,776
|
|
|
$
|
132,527
|
|
|
$
|
14,233
|
|
|
$
|
96,679
|
|
|
$
|
110,912
|
|
Income before income taxes decreased by
$5.9 million
, or
11.3%
, and increased by
$21.6 million
, or
19.5%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in income for the third quarter was primarily due to lower payout annuity income partially offset by favorable mortality experience. The increase in income before income taxes for the first
nine
months was primarily due to favorable individual mortality and longevity experience. Foreign currency exchange fluctuations resulted in an increase (decrease) in income before income taxes of $0.8 million and $(8.5) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Traditional Reinsurance
Income before income taxes increased by
$6.9 million
, or
81.1%
, and
$26.5 million
, or
186.3%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in income for the third quarter was primarily due to favorable mortality experience. The increases in income before income taxes for the first nine months was primarily due to business growth and favorable individual mortality experience partially offset by unfavorable morbidity experience. Foreign currency exchange fluctuations resulted in an increase (decrease) in income before income taxes of $0.7 million and $(0.5) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net premiums increased
$68.7 million
, or
24.9%
, and
$140.9 million
, or
16.8%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in the
three and nine
months was primarily due to increased business volumes, most notably in the UAE, Italy and South Africa related to new treaties in 2017 and favorable growth from existing treaties. Foreign currency exchange fluctuations increased (decreased) net premiums by approximately $7.3 million and $(27.8) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage, primarily in the UK. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Net premiums earned from this coverage totaled $49.0 million and $49.5 million for the
third
quarter and $144.2 million and $157.0 million for the first
nine
months of
2017
and
2016
, respectively.
Net investment income increased
$1.7 million
, or
12.7%
, and
$2.5 million
, or
6.4%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases were primarily due to an increase in the invested asset base related to increased business volumes. Foreign currency exchange fluctuations resulted in an increase (decrease) in net investment income of approximately $0.4 million and $(0.8) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Loss ratios for this segment were
82.8%
and
87.7%
for the
third
quarter and
86.4%
and
88.9%
for the first
nine
months ended
September 30, 2017
and
2016
, respectively. The decreases in loss ratios were primarily due to changes in the mix of business in the third quarter of 2017 reflecting increased volumes of new business with lower loss ratios, but with higher commissions. These higher commissions are reflected in the increases of 2017 policy acquisition cost ratios below.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
10.4%
and
5.1%
for the
third
quarter and
6.8%
and
5.5%
for the first
nine
months ended
September 30, 2017
and
2016
, respectively. The increases in policy acquisition cost ratios are due primarily to changes in the mix of business in the third quarter of 2017 reflecting increased volumes of new business with higher commissions.
Other operating expenses increased
$0.1 million
, or
0.3%
, and decreased
$2.8 million
, or
3.8%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in the first nine months was primarily due to lower corporate overhead expense timing and the effect of foreign currency exchange fluctuations. Foreign currency exchange fluctuations resulted in an increase (decrease) in operating expenses of approximately $0.8 million and $(0.4) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. Other operating expenses as a percentage of net premiums totaled
7.2%
and
9.0%
for the
third
quarter and
7.3%
and
8.9%
for the first
nine
months ended
September 30, 2017
and
2016
, respectively.
Financial Solutions Reinsurance
Income before income taxes decreased by
$12.8 million
, or
29.3%
, and
$4.9 million
, or
5.1%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases in income before income taxes were primarily due to payout annuity experience normalizing after a particularly positive 2016, partly offset by favorable longevity business results. Foreign currency exchange fluctuations resulted in an increase (decrease) in income before income taxes totaling $0.1 million and $(7.9) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net premiums decreased by
$7.7 million
, or
16.4%
, and
$6.3 million
, or
5.0%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases in net premiums were due to a new retrocession treaty, executed for risk management purposes effective in the first quarter of 2017, which cedes longevity risk to third parties, partially offset by an increase in premiums from new transactions. Foreign currency exchange fluctuations increased (decreased) net premiums by approximately $0.1 million and $(10.5) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net investment income decreased
$2.3 million
, or
6.9%
, and
$6.7 million
, or
7.0%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases in investment income for the third quarter was due to decreases in both investment yields and the invested asset base, while the decrease for the nine-month period was primarily due to foreign currency exchange fluctuations. Foreign currency exchange fluctuations resulted in an increase (decrease) in net investment income of approximately $0.1 million and $(7.3) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in 2016.
Other revenues decreased by
$5.7 million
, or
50.3%
, and
$4.7 million
, or
25.3%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases in other revenues were due to experience from a longevity swap normalizing after a particularly positive 2016.
Claims and other policy benefits decreased
$10.2 million
, or
22.2%
, and
$17.9 million
, or
14.2%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in the third quarter and first nine months was primarily due to the aforementioned new longevity retrocession treaty that cedes longevity risk to third parties, net of an increase in claims and other policy benefits from new transactions. Foreign currency exchange fluctuations resulted in a decrease in claims and other policy benefits of approximately $9.6 million for the nine months ended
September 30, 2017
, as compared to the same period in 2016.
Interest credited expense decreased by
$3.1 million
, or
55.3%
, and
$2.6 million
, or
29.4%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. Interest credited in this segment relates to amounts credited to the contractholders of unit-linked products. This amount will fluctuate according to contractholder investment selections, equity returns and interest rates. The effect on interest credited related to unit-linked products is substantially offset by a corresponding change in investment income.
Other operating expenses increased
$2.7 million
, or
55.1%
, and
$6.5 million
, or
39.6%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases are primarily due to increased administration costs related to longevity transactions and are offset partially by the effect of foreign currency exchange fluctuations. Foreign currency exchange fluctuations resulted in an increase (decrease) in operating expenses of approximately $0.2 million and $(1.0) million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Asia Pacific Operations
The Asia Pacific operations include business generated by its offices principally in Australia, China, Hong Kong, India, Japan, Malaysia, New Zealand, Singapore, South Korea and Taiwan. The Traditional segment’s principal types of reinsurance include individual and group life and health, critical illness, disability and superannuation. Superannuation is the Australian government mandated compulsory retirement savings program. Superannuation funds accumulate retirement funds for employees, and, in addition, typically offer life and disability insurance coverage. The Financial Solutions segment includes financial reinsurance, asset-intensive and certain disability and life blocks. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and in some markets, group risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Three months ended September 30,
|
|
2017
|
|
2016
|
Revenues:
|
Traditional
|
|
Financial Solutions
|
|
Total Asia Pacific
|
|
Traditional
|
|
Financial Solutions
|
|
Total Asia Pacific
|
Net premiums
|
$
|
536,931
|
|
|
$
|
19
|
|
|
$
|
536,950
|
|
|
$
|
404,451
|
|
|
$
|
743
|
|
|
$
|
405,194
|
|
Investment income, net of related expenses
|
23,858
|
|
|
10,556
|
|
|
34,414
|
|
|
21,273
|
|
|
5,827
|
|
|
27,100
|
|
Investment related gains (losses), net
|
—
|
|
|
758
|
|
|
758
|
|
|
—
|
|
|
6,108
|
|
|
6,108
|
|
Other revenues
|
871
|
|
|
5,599
|
|
|
6,470
|
|
|
1,923
|
|
|
6,359
|
|
|
8,282
|
|
Total revenues
|
561,660
|
|
|
16,932
|
|
|
578,592
|
|
|
427,647
|
|
|
19,037
|
|
|
446,684
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
442,358
|
|
|
6,110
|
|
|
448,468
|
|
|
365,115
|
|
|
3,777
|
|
|
368,892
|
|
Interest credited
|
—
|
|
|
7,026
|
|
|
7,026
|
|
|
—
|
|
|
3,308
|
|
|
3,308
|
|
Policy acquisition costs and other insurance expenses
|
55,891
|
|
|
653
|
|
|
56,544
|
|
|
4,157
|
|
|
1,482
|
|
|
5,639
|
|
Other operating expenses
|
36,847
|
|
|
3,372
|
|
|
40,219
|
|
|
38,553
|
|
|
2,921
|
|
|
41,474
|
|
Total benefits and expenses
|
535,096
|
|
|
17,161
|
|
|
552,257
|
|
|
407,825
|
|
|
11,488
|
|
|
419,313
|
|
Income (loss) before income taxes
|
$
|
26,564
|
|
|
$
|
(229
|
)
|
|
$
|
26,335
|
|
|
$
|
19,822
|
|
|
$
|
7,549
|
|
|
$
|
27,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
Revenues:
|
Traditional
|
|
Financial Solutions
|
|
Total Asia Pacific
|
|
Traditional
|
|
Financial Solutions
|
|
Total Asia Pacific
|
Net premiums
|
$
|
1,557,590
|
|
|
$
|
2,094
|
|
|
$
|
1,559,684
|
|
|
$
|
1,233,222
|
|
|
$
|
4,936
|
|
|
$
|
1,238,158
|
|
Investment income, net of related expenses
|
68,105
|
|
|
24,662
|
|
|
92,767
|
|
|
61,601
|
|
|
18,086
|
|
|
79,687
|
|
Investment related gains (losses), net
|
—
|
|
|
11,525
|
|
|
11,525
|
|
|
14
|
|
|
14,322
|
|
|
14,336
|
|
Other revenues
|
2,724
|
|
|
17,087
|
|
|
19,811
|
|
|
4,580
|
|
|
18,809
|
|
|
23,389
|
|
Total revenues
|
1,628,419
|
|
|
55,368
|
|
|
1,683,787
|
|
|
1,299,417
|
|
|
56,153
|
|
|
1,355,570
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
1,221,091
|
|
|
14,170
|
|
|
1,235,261
|
|
|
977,860
|
|
|
15,487
|
|
|
993,347
|
|
Interest credited
|
—
|
|
|
15,595
|
|
|
15,595
|
|
|
—
|
|
|
9,474
|
|
|
9,474
|
|
Policy acquisition costs and other insurance expenses
|
180,007
|
|
|
4,111
|
|
|
184,118
|
|
|
116,432
|
|
|
4,436
|
|
|
120,868
|
|
Other operating expenses
|
105,747
|
|
|
10,472
|
|
|
116,219
|
|
|
109,661
|
|
|
10,727
|
|
|
120,388
|
|
Total benefits and expenses
|
1,506,845
|
|
|
44,348
|
|
|
1,551,193
|
|
|
1,203,953
|
|
|
40,124
|
|
|
1,244,077
|
|
Income before income taxes
|
$
|
121,574
|
|
|
$
|
11,020
|
|
|
$
|
132,594
|
|
|
$
|
95,464
|
|
|
$
|
16,029
|
|
|
$
|
111,493
|
|
Income before income taxes decreased by
$1.0 million
, or
3.8%
, and increased by
$21.1 million
, or
18.9%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease in income before income taxes for the third quarter was due to an increase in policy lapses on a financial solutions closed block of business in Japan partially offset by favorable results in the traditional segment. The increase in income before income taxes for the first nine months was primarily due to higher income from offices in Asia driven by business growth, most notably in Hong Kong and Southeast Asia. The prior-year period also included poor claims experience in Australia. The third quarter of 2016 also included a higher level of benefit expense associated with the timing of client reporting on one large treaty in Hong Kong. Foreign currency exchange fluctuations resulted in a decrease to income before income taxes totaling approximately $0.8 million and $0.3 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Traditional Reinsurance
Income before income taxes increased by
$6.7 million
, or
34.0%
, and
$26.1 million
, or
27.4%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases in income before income taxes are primarily due to higher income from offices in Asia driven by business growth. Foreign currency exchange fluctuations resulted in a decrease to income before income taxes totaling approximately $1.0 million and $0.4 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net premiums increased by
$132.5 million
, or
32.8%
, and
$324.4 million
, or
26.3%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases were driven by both new and existing business written throughout the segment. Foreign currency exchange fluctuations resulted in an increase in net premiums of approximately $1.0 million and $14.2 million for the
three and nine
months of
2017
, as compared to the same periods in
2016
.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of critical illness in the segment is offered primarily in South Korea, Australia and Hong Kong. Net premiums earned from this coverage totaled $158.6 million and $100.6 million for the
third
quarter and $474.8 million and $312.3 million for the first
nine
months ended
September 30, 2017
and
2016
, respectively.
Net investment income increased
$2.6 million
, or
12.2%
, and
$6.5 million
, or
10.6%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increases were primarily due to a higher invested asset base. Foreign currency exchange fluctuations resulted in an increase in net investment income of approximately $0.5 million and $1.3 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Other revenues decreased by
$1.1 million
, or
54.7%
, and
$1.9 million
, or
40.5%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. These variances are primarily due to gains and losses related to foreign currency transactions.
Loss ratios for this segment were
82.4%
and
90.3%
for the
third
quarter and
78.4%
and
79.3%
for the first
nine months ended
September 30, 2017
and
2016
, respectively. The decreases in the loss ratios for the
third
quarter and first
nine
months of 2017 were primarily due to improved claims experience in Australia compared to the prior year.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
10.4%
and
1.0%
for the
third
quarter and
11.6%
and
9.4%
for the
nine months ended
September 30, 2017
and
2016
, respectively. The third quarter 2016 included the affect of adjustments associated with client reporting on one large treaty in Hong Kong. These percentages fluctuate due to timing of client company reporting, premium refunds, variations in the mixture of business and the relative maturity of the business.
In addition, as the segment grows, renewal premiums, which have lower allowances than first-year premiums, represent a greater percentage of the total net premiums.
Other operating expenses decreased
$1.7 million
, or
4.4%
, and
$3.9 million
, or
3.6%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
mainly due to the timing of travel and consultant expenditures. Other operating expenses as a percentage of net premiums totaled
6.9%
and
9.5%
for the
third
quarter and
6.8%
and
8.9%
for the first
nine months ended
September 30, 2017
and
2016
, respectively. The timing of premium flows and the level of costs associated with the entrance into and development of new markets within the segment may cause other operating expenses as a percentage of net premiums to fluctuate over periods of time.
Financial Solutions Reinsurance
Income before income taxes decreased by
$7.8 million
and
$5.0 million
for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases in income before income taxes are primarily due to lower income from higher lapses on policies of the aforementioned closed block of business in Japan. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of approximately $0.1 million for both the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net premiums decreased
$0.7 million
or
97.4%
, and
$2.8 million
, or
57.6%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decreases for the third quarter and first nine months were due to higher lapses from policies of the aforementioned closed block of business in Japan. Foreign currency exchange fluctuations had a negligible effect on net premiums for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Net investment income increased
$4.7 million
, or
81.2%
, and
$6.6 million
, or
36.4%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
mainly due to growth in the invested asset base. Foreign currency exchange fluctuations resulted in an increase in net investment income of approximately $0.2 million and $0.4 million for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
.
Other revenues decreased by
$0.8 million
, or
12.0%
, and
$1.7 million
, or
9.2%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. At
September 30, 2017
and
2016
, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was $2.4 billion and $1.0 billion, respectively. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and, therefore, can fluctuate from period to period.
Claims and other policy benefits increased by
$2.3 million
, or
61.8%
, and decreased by
$1.3 million
, or
8.5%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in the third quarter was primarily due to higher lapses from policies of the aforementioned closed block of business in Japan. The decrease in the first nine months is attributable to lower lapses from policies from a closed block of business in Japan.
Other operating expenses increased by
$0.5 million
, or
15.4%
, and decreased by
$0.3 million
, or
2.4%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
, respectively. The timing of premium flows and the level of costs associated with the entrance into and development of new markets within the segment may cause other operating expenses to fluctuate over periods of time.
Corporate and Other
Corporate and Other revenues primarily include investment income from unallocated invested assets and investment related gains and losses. Corporate and Other expenses consist of the offset to capital charges allocated to the operating segments within the policy acquisition costs and other insurance income line item, unallocated overhead and executive costs, interest expense related to debt, and the investment income and expense associated with the Company’s collateral finance and securitization transactions. Additionally, Corporate and Other includes results from certain wholly-owned subsidiaries and joint ventures that, among other activities, develop and market technology solutions for the insurance industry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
23
|
|
|
$
|
72
|
|
|
$
|
109
|
|
|
$
|
289
|
|
Investment income, net of related expenses
|
|
41,108
|
|
|
33,478
|
|
|
108,576
|
|
|
81,589
|
|
Investment related gains (losses), net
|
|
6,994
|
|
|
12,258
|
|
|
7,856
|
|
|
51,717
|
|
Other revenues
|
|
1,502
|
|
|
4,893
|
|
|
9,126
|
|
|
11,595
|
|
Total revenues
|
|
49,627
|
|
|
50,701
|
|
|
125,667
|
|
|
145,190
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Claims and other policy benefits
|
|
(15
|
)
|
|
(15
|
)
|
|
(1
|
)
|
|
6
|
|
Interest credited
|
|
1,799
|
|
|
622
|
|
|
4,420
|
|
|
1,588
|
|
Policy acquisition costs and other insurance income
|
|
(26,848
|
)
|
|
(24,565
|
)
|
|
(80,694
|
)
|
|
(73,526
|
)
|
Other operating expenses
|
|
45,601
|
|
|
32,414
|
|
|
124,114
|
|
|
113,367
|
|
Interest expense
|
|
36,836
|
|
|
43,063
|
|
|
108,590
|
|
|
96,201
|
|
Collateral finance and securitization expense
|
|
7,692
|
|
|
6,484
|
|
|
21,235
|
|
|
19,396
|
|
Total benefits and expenses
|
|
65,065
|
|
|
58,003
|
|
|
177,664
|
|
|
157,032
|
|
Income (loss) before income taxes
|
|
$
|
(15,438
|
)
|
|
$
|
(7,302
|
)
|
|
$
|
(51,997
|
)
|
|
$
|
(11,842
|
)
|
Loss before income taxes increased by
$8.1 million
, or
111.4%
and
$40.2 million
, or
339.1%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase in loss before income taxes for the
third
quarter and the first nine months is primarily due to decreased net investment related gains, decreased other revenues and higher other operating expenses partially offset by increased investment income.
Total revenues decreased by
$1.1 million
, or
2.1%
, and
$19.5 million
, or
13.4%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The decrease for the third quarter is primarily due to a $5.3 million decrease in investment related gains (losses), net, largely caused by an increase in other-than-temporary impairments on fixed maturity securities and other impairment charges of $3.2 million. The third quarter decrease was partially offset by a $7.6 million increase in investment income related to an increase in unallocated invested assets and higher investment yields, primarily due to a higher level of variable investment income. The decrease for the first nine months is primarily due to a decrease of $43.9 million in investment related gains (losses), net, mainly related to an increase in other-than-temporary impairments on fixed maturity securities and other impairment charges of $12.9 million and a reduction in net gains on the sale of investments of $25.2 million. The decrease for the first nine months was partially offset by an increase of $27.0 million in investment income related to an increase in unallocated invested assets and higher investment yields, primarily due to a higher level of variable investment income.
Total benefits and expenses increased by
$7.1 million
, or
12.2%
, and
$20.6 million
, or
13.1%
, for the
three and nine
months ended
September 30, 2017
, as compared to the same periods in
2016
. The increase of total benefits and expenses in the
third
quarter is primarily due to a $13.2 million increase in other operating expenses, primarily related to compensation and consulting expenses, partially offset by a reduction in interest expense of $6.2 million. The increase in total benefits and expenses in the first nine months was primarily due to an increase in interest expense and other operating expenses offset by an increase in other insurance income, related to the offset to capital charges allocated to the operating segments. The increase in interest expense in the first nine months is primarily due to the issuance of $800.0 million in long-term debt in June 2016, which was partially offset by the repayment of $300.0 million of long-term debt in 2017, and a lower reduction in tax-related interest expense primarily resulting from settlement with the taxing authority in 2016.
Liquidity and Capital Resources
Overview
The Company believes that cash flows from the source of funds available to it will provide sufficient cash flows for the next twelve months to satisfy the current liquidity requirements of RGA, Inc. and its subsidiaries under various scenarios that include the potential risk of early recapture of reinsurance treaties, market events and higher than expected claims. The Company performs periodic liquidity stress testing to ensure its asset portfolio includes sufficient high quality liquid assets that could be utilized to bolster its liquidity position under stress scenarios. These assets could be utilized as collateral for secured borrowing transactions with various third parties or by selling the securities in the open market if needed. The Company’s liquidity requirements have been and will continue to be funded through net cash flows from operations. However, in the event of significant unanticipated cash requirements beyond normal liquidity needs, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing of the liquidity need. These alternatives include borrowings under committed credit facilities, secured borrowings, the ability to issue long-term debt, preferred securities or common equity and, if necessary, the sale of invested assets subject to market conditions.
Current Market Environment
The current interest rate environment in select markets, primarily the U.S. and Canada, continues to negatively affect the Company’s earnings. However, the Company’s average investment yield, excluding spread business, has begun to increase, which for the
nine
months ended
September 30, 2017
was
4.61%
, 8 basis points above the same period in 2016. The Company’s insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Gross unrealized gains on fixed maturity and equity securities available-for-sale increased from $2,246.5 million at
December 31, 2016
to
$2,651.5 million
at
September 30, 2017
. Gross unrealized losses decreased from $374.9 million at
December 31, 2016
to
$163.2 million
at
September 30, 2017
.
The Company continues to be in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer. As indicated above, gross unrealized gains on investment securities of
$2,651.5 million
remain well in excess of gross unrealized losses of
$163.2 million
as of
September 30, 2017
. The Company does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future.
The Company projects its reserves to be sufficient, and it would not expect to write down deferred acquisition costs or be required to take any actions to augment capital, even if interest rates remain at current levels for the next five years, assuming all other factors remain constant. While the Company has felt the pressures of sustained low interest rates and volatile equity markets and may continue to do so, its business operations are not overly sensitive to these risks. Although management believes the Company’s current capital base is adequate to support its business at current operating levels, it continues to monitor new business opportunities and any associated new capital needs that could arise from the changing financial landscape.
The Holding Company
RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness. The primary sources of RGA’s liquidity include proceeds from its capital-raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes with RGA Reinsurance, RCM and Rockwood Re and dividends from operating subsidiaries. As the Company continues its expansion efforts, RGA will continue to be dependent upon these sources of liquidity. The following tables provide comparative information for RGA (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest expense
|
|
$
|
44,697
|
|
|
$
|
50,826
|
|
|
$
|
132,018
|
|
|
$
|
119,700
|
|
Capital contributions to subsidiaries
|
|
10,000
|
|
|
46,002
|
|
|
28,500
|
|
|
87,002
|
|
Dividends to shareholders
|
|
32,271
|
|
|
26,288
|
|
|
85,086
|
|
|
74,034
|
|
Interest and dividend income
|
|
23,635
|
|
|
227,819
|
|
|
75,916
|
|
|
283,712
|
|
Issuance of unaffiliated debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
799,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Cash and invested assets
|
|
$
|
862,480
|
|
|
$
|
1,443,755
|
|
See Item 15, Schedule II - “Condensed Financial Information of the Registrant” in the 2016 Annual Report for additional financial information related to RGA.
The undistributed earnings of substantially all of the Company’s foreign subsidiaries have been reinvested indefinitely in those non-U.S. operations, as described in Note 9 - “Income Tax” of the Notes to Consolidated Financial Statements in the 2016 Annual Report. Under current tax laws, should the Company repatriate such earnings, it may be subject to additional U.S. income taxes and foreign withholding taxes.
RGA endeavors to maintain a capital structure that provides financial and operational flexibility to its subsidiaries, credit ratings that support its competitive position in the financial services marketplace, and shareholder returns. As part of the Company’s capital deployment strategy, is has in recent years repurchased shares of RGA common stock and paid dividends to RGA shareholders, as authorized by the board of directors. RGA’s current share repurchase program, which was approved by the board of directors in January 2017, authorizes the repurchase of up to $400.0 million of common stock. The pace of repurchase activity depends on various factors such as the level of available cash, an evaluation of the costs and benefits associated with alternative uses of excess capital, such as acquisitions and in force reinsurance transactions, and RGA’s stock price.
Details underlying dividend and share repurchase program activity were as follows (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
Dividends to shareholders
|
$
|
85,086
|
|
|
$
|
74,034
|
|
Repurchases of treasury stock
|
26,897
|
|
|
116,522
|
|
Total amount paid to shareholders
|
$
|
111,983
|
|
|
$
|
190,556
|
|
|
|
|
|
Number of shares repurchased
|
208,680
|
|
|
1,356,892
|
|
Average price per share
|
$
|
128.89
|
|
|
$
|
85.87
|
|
In October 2017, RGA’s board of directors declared a quarterly dividend of $0.50 per share. All future payments of dividends are at the discretion of RGA’s board of directors and will depend on the Company’s earnings, capital requirements, insurance regulatory conditions, operating conditions, and other such factors as the board of directors may deem relevant. The amount of dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries. See Note 3 - “Equity” in the Notes to Condensed Consolidated Financial Statements for information on the Company’s share repurchase program.
Debt
Certain of the Company’s debt agreements contain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of consolidated net worth, maximum ratios of debt to capitalization and change of control provisions. The Company is required to maintain a minimum consolidated net worth, as defined in the debt agreements, of $3.5 billion, calculated as of the last day of each fiscal quarter. Also, consolidated indebtedness, calculated as of the last day of each fiscal quarter, cannot exceed 35% of the sum of the Company’s consolidated indebtedness plus adjusted consolidated stockholders’ equity. A material ongoing covenant default could require immediate payment of the amount due, including principal, under the various agreements. Additionally, the Company’s debt agreements contain cross-default covenants, which would make outstanding borrowings immediately payable in the event of a material uncured covenant default under any of the agreements, including, but not limited to, non-payment of indebtedness when due for an amount in excess of $100.0 million, bankruptcy proceedings, or any other event which results in the acceleration of the maturity of indebtedness. As of
September 30, 2017
and
December 31, 2016
, the Company had $2.8 billion and $3.1 billion, respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, available liquidity at the holding company, and the Company’s ability to raise additional funds.
The Company enters into derivative agreements with counterparties that reference either the Company’s debt rating or its financial strength rating. If either rating is downgraded in the future, it could trigger certain terms in the Company’s derivative agreements, which could negatively affect overall liquidity. For the majority of the Company’s derivative agreements, there is a termination event, at the Company’s option, should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody’s) or the financial strength ratings drop below either A- (S&P) or A3 (Moody’s).
The Company may borrow up to $850.0 million in cash and obtain letters of credit in multiple currencies on a revolving credit facility that expires in September 2019. As of
September 30, 2017
, the Company had no cash borrowings outstanding and $97.2 million in issued, but undrawn, letters of credit under this facility. As of
September 30, 2017
and
December 31, 2016
, the average interest rate on short-term and long-term debt outstanding was 5.15% and 5.16%, respectively.
Based on the historic cash flows and the current financial results of the Company, management believes RGA’s cash flows will be sufficient to enable RGA to meet its obligations for at least the next 12 months.
Credit and Committed Facilities
At
September 30, 2017
, the Company maintained an $850.0 million syndicated revolving credit facility and certain committed letter of credit facilities aggregating $1,349.1 million. See Note 13 - “Debt” in the Notes to Consolidated Financial Statements in the 2016 Annual Report for further information about these facilities.
The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements and allow ceding companies to take statutory reserve credits. Certain of these letters of credit contain financial covenant restrictions similar to those described in the “Debt” discussion above. At
September 30, 2017
, there were approximately $133.4 million of outstanding bank letters of credit in favor of third parties. Additionally, in accordance with applicable regulations, the Company utilizes letters of credit to secure statutory reserve credits when it retrocedes business to its affiliated subsidiaries. The Company cedes business to its affiliates to help reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the UK. The Company believes the capital required to support the business in the affiliates reflects more realistic expectations than the original jurisdiction of the business, where capital requirements are often considered to be quite conservative. As of
September 30, 2017
, $1.5 billion in letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the Company.
Cash Flows
The Company’s principal cash inflows from its reinsurance operations include premiums and deposit funds received from ceding companies. The primary liquidity concerns with respect to these cash flows are early recapture of the reinsurance contract by the ceding company and lapses of annuity products reinsured by the Company. The Company’s principal cash inflows from its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concern with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. The Company manages these risks very closely. See “Investments” and “Interest Rate Risk” below.
Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash and equivalents on hand include selling short-term investments or fixed maturity securities and drawing funds under a revolving credit facility, under which the Company had availability of $752.8 million as of
September 30, 2017
. The Company also has $1.1 billion of funds available through collateralized borrowings from the FHLB as of
September 30, 2017
. As of
September 30, 2017
, the Company could have borrowed these additional amounts without violating any of its existing debt covenants.
The Company’s principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, dividends to shareholders, purchases of treasury stock and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2, “Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements in the 2016 Annual Report). The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires nor to the recoverability of future claims. The Company’s management believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months.
Summary of Primary Sources and Uses of Liquidity and Capital
The Company’s primary sources and uses of liquidity and capital are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Sources:
|
|
|
|
|
Net cash provided by operating activities
|
$
|
1,104,499
|
|
|
$
|
1,019,872
|
|
|
Proceeds from long-term debt issuance
|
—
|
|
|
799,984
|
|
|
Exercise of stock options, net
|
4,450
|
|
|
11,752
|
|
|
Change in cash collateral for derivative positions and other arrangements
|
—
|
|
|
24,749
|
|
|
Cash provided by changes in universal life and other
|
|
|
|
|
investment type policies and contracts
|
438,774
|
|
|
487,808
|
|
|
Effect of exchange rate changes on cash
|
43,699
|
|
|
25,436
|
|
|
Total sources
|
1,591,422
|
|
|
2,369,601
|
|
|
|
|
|
|
Uses:
|
|
|
|
|
Net cash used in investing activities
|
1,056,334
|
|
|
2,247,406
|
|
|
Dividends to stockholders
|
85,086
|
|
|
74,034
|
|
|
Repayment of collateral finance and securitization notes
|
56,637
|
|
|
60,971
|
|
|
Debt issuance costs
|
—
|
|
|
9,026
|
|
|
Principal payments of long-term debt
|
301,927
|
|
|
1,850
|
|
|
Purchases of treasury stock
|
41,360
|
|
|
121,896
|
|
|
Change in cash collateral for derivatives and other arrangements
|
46,206
|
|
|
—
|
|
|
Total uses
|
1,587,550
|
|
|
2,515,183
|
|
Net change in cash and cash equivalents
|
$
|
3,872
|
|
|
$
|
(145,582
|
)
|
Cash Flows from Operations
- The principal cash inflows from the Company’s reinsurance activities come from premiums, investment and fee income, annuity considerations and deposit funds. The principal cash outflows relate to the liabilities associated with various life and health insurance, annuity and disability products, operating expenses, income tax payments and interest on outstanding debt obligations. The primary liquidity concern with respect to these cash flows is the risk of shortfalls in premiums and investment income, particularly in periods with abnormally high claims levels.
Cash Flows from Investments
- The principal cash inflows from the Company’s investment activities come from repayments of principal on invested assets, proceeds from maturities of invested assets, sales of invested assets and settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments, issuances of policy loans and settlements of freestanding derivatives. The Company typically has a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with its asset/liability management discipline to fund insurance liabilities. The Company closely monitors and manages these risks through its credit risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption.
Financing Cash Flows
- The principal cash inflows from the Company’s financing activities come from issuances of RGA debt and equity securities, and deposit funds associated with universal life and other investment type policies and contracts. The principal cash outflows come from repayments of debt, payments of dividends to stockholders, purchases of treasury stock, and withdrawals associated with universal life and other investment type policies and contracts. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder withdrawal.
Contractual Obligations
There were no material changes in the Company’s contractual obligations from those previously reported.
Asset / Liability Management
The Company actively manages its cash and invested assets using an approach that is intended to balance quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and duration basis.
The Company has established target asset portfolios for each major insurance product, which represent the investment strategies intended to profitably fund its liabilities within acceptable risk parameters. These strategies include objectives and limits for effective duration, yield curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Company’s asset-intensive products are primarily supported by investments in fixed maturity securities reflected on the Company’s balance sheet and under funds withheld arrangements with the ceding company. Investment guidelines are established to structure the investment portfolio based upon the type, duration and behavior of products in the liability portfolio so as to achieve targeted levels of profitability. The Company manages the asset-intensive business to provide a targeted spread between the interest rate earned on investments and the interest rate credited to the underlying interest-sensitive contract liabilities. The Company periodically reviews models projecting different interest rate scenarios and their effect on profitability. Certain of these asset-intensive agreements, primarily in the U.S. and Latin America Financial Solutions operating segment, are generally funded by fixed maturity securities that are withheld by the ceding company.
The Company’s liquidity position (cash and cash equivalents and short-term investments) was $1,285.2 million and $1,277.4 million at
September 30, 2017
and
December 31, 2016
, respectively. Cash and cash equivalents includes cash collateral received from derivative counterparties of
$174.1 million
and
$254.5 million
as of
September 30, 2017
and
December 31, 2016
, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in other liabilities in the Company’s condensed consolidated balance sheets. Liquidity needs are determined from valuation analyses conducted by operational units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs.
See “Securities Borrowing, Lending and Other” in Note 4 - “Investments” in the Notes to Condensed Consolidated Financial Statements for information related to the Company’s securities borrowing, lending and repurchase/reverse repurchase programs. In addition to its security agreements with third parties, certain RGA’s subsidiaries have entered into intercompany securities lending agreements to more efficiently source securities for lending to third parties and to provide for more efficient regulatory capital management.
The Company is a member of the FHLB and holds $67.9 million of FHLB common stock, which is included in other invested assets on the Company’s condensed consolidated balance sheets. Membership provides the Company access to borrowing arrangements (“advances”) and funding agreements, discussed below, with the FHLB. The Company did not have any advances from the FHLB at
September 30, 2017
and
December 31, 2016
. The Company’s average outstanding balance of advances was $8.2 million and $17.0 million during the
third
quarter and the first
nine
months of
2017
, respectively, and was $0.5 million and $29.5 million during the
third
quarter and the first
nine
months of
2016
, respectively. Interest on advances is reflected in interest expense on the Company’s condensed consolidated statements of income.
In addition, the Company has also entered into funding agreements with the FHLB under guaranteed investment contracts whereby the Company has issued the funding agreements in exchange for cash and for which the FHLB has been granted a blanket lien on the Company’s commercial and residential mortgage-backed securities and commercial mortgage loans used to collateralize the Company’s obligations under the funding agreements. The Company maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and the related security agreements represented by this blanket lien provide that upon any event of default by the Company, the FHLB’s recovery is limited to the amount of the Company’s liability under the outstanding funding agreements. The amount of the Company’s liability for the funding agreements with the FHLB under guaranteed investment contracts was $1.4 billion and $1.1 billion at
September 30, 2017
and
December 31, 2016
, respectively, which is included in interest sensitive contract liabilities on the Company’s condensed consolidated balance sheets. The advances on these agreements are collateralized primarily by commercial and residential mortgage-backed securities, commercial mortgage loans, and U.S. Treasury and government agency securities. The amount of collateral exceeds the liability and is dependent on the type of assets collateralizing the guaranteed investment contracts.
Investments
Management of Investments
The Company’s investment and derivative strategies involve matching the characteristics of its reinsurance products and other obligations and to seek to closely approximate the interest rate sensitivity of the assets with estimated interest rate sensitivity of the reinsurance liabilities. The Company achieves its income objectives through strategic and tactical asset allocations, security and derivative strategies within an asset/liability management and disciplined risk management framework. Derivative strategies are employed within the Company’s risk management framework to help manage duration, currency, and other risks in assets and/or liabilities and to replicate the credit characteristics of certain assets. For a discussion of the Company’s risk management process see “Market and Credit Risk” in the “Enterprise Risk Management” section below.
The Company’s portfolio management groups work with the Enterprise Risk Management function to develop the investment policies for the assets of the Company’s domestic and international investment portfolios. All investments held by the Company, directly or in a funds withheld at interest reinsurance arrangement, are monitored for conformance with the Company’s stated investment policy limits as well as any limits prescribed by the applicable jurisdiction’s insurance laws and regulations. See Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Company’s investments.
Portfolio Composition
The Company had total cash and invested assets of
$50.9 billion
and
$46.0 billion
at
September 30, 2017
and
December 31, 2016
, respectively, as illustrated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
% of Total
|
|
December 31, 2016
|
|
% of Total
|
Fixed maturity securities, available-for-sale
|
|
$
|
36,381,742
|
|
|
71.5
|
%
|
|
$
|
32,093,625
|
|
|
69.6
|
%
|
Mortgage loans on real estate
|
|
4,322,329
|
|
|
8.5
|
|
|
3,775,522
|
|
|
8.2
|
|
Policy loans
|
|
1,340,146
|
|
|
2.6
|
|
|
1,427,602
|
|
|
3.1
|
|
Funds withheld at interest
|
|
6,020,336
|
|
|
11.8
|
|
|
5,875,919
|
|
|
12.8
|
|
Short-term investments
|
|
80,582
|
|
|
0.2
|
|
|
76,710
|
|
|
0.2
|
|
Other invested assets
|
|
1,532,523
|
|
|
3.0
|
|
|
1,591,940
|
|
|
3.5
|
|
Cash and cash equivalents
|
|
1,204,590
|
|
|
2.4
|
|
|
1,200,718
|
|
|
2.6
|
|
Total cash and invested assets
|
|
$
|
50,882,248
|
|
|
100.0
|
%
|
|
$
|
46,042,036
|
|
|
100.0
|
%
|
Investment Yield
The following table presents consolidated average invested assets at amortized cost, net investment income and investment yield, excluding spread related business. Spread related business is primarily associated with contracts on which the Company earns an interest rate spread between assets and liabilities. To varying degrees, fluctuations in the yield on other spread related business is generally subject to corresponding adjustments to the interest credited on the liabilities (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Increase/
(Decrease)
|
|
2017
|
|
2016
|
|
Increase/
(Decrease)
|
Average invested assets at amortized cost
|
$
|
25,887,338
|
|
|
$
|
24,128,430
|
|
|
7.3
|
%
|
|
$
|
25,136,119
|
|
|
$
|
22,982,245
|
|
|
9.4
|
%
|
Net investment income
|
305,632
|
|
|
263,111
|
|
|
16.2
|
%
|
|
863,724
|
|
|
777,157
|
|
|
11.1
|
%
|
Investment yield (ratio of net investment income to average invested assets)
|
4.81
|
%
|
|
4.43
|
%
|
|
38 bps
|
|
|
4.61
|
%
|
|
4.53
|
%
|
|
8 bps
|
|
Investment yield increased for the
three and nine
months ended
September 30, 2017
in comparison to the same period in the prior year primarily due to increased income from bond make-whole premiums and limited partnership and joint venture investments, both of which are included in other invested assets on the condensed consolidated balance sheets.
Fixed Maturity and Equity Securities Available-for-Sale
See “Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables that provide the amortized cost, unrealized gains and losses, estimated fair value of fixed maturity and equity securities, and the other-than-temporary impairments in AOCI by sector as of
September 30, 2017
and
December 31, 2016
.
The Company’s fixed maturity securities are invested primarily in corporate bonds, mortgage- and asset-backed securities, and U.S. and foreign government securities. As of
September 30, 2017
and
December 31, 2016
, approximately
95.7%
and
95.0%
, respectively, of the Company’s consolidated investment portfolio of fixed maturity securities were investment grade.
Important factors in the selection of investments include diversification, quality, yield, call protection and total rate of return potential. The relative importance of these factors is determined by market conditions and the underlying reinsurance liability and existing portfolio characteristics. The largest asset class in which fixed maturity securities were invested was corporate securities, which represented approximately
61.9%
and
61.1%
of total fixed maturity securities as of
September 30, 2017
and
December 31, 2016
, respectively. See “Corporate Fixed Maturity Securities” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables showing the major industry types, which comprise the corporate fixed maturity holdings at
September 30, 2017
and
December 31, 2016
.
As of
September 30, 2017
, the Company’s investments in Canadian and Canadian provincial government securities represented
11.0%
of the fair value of total fixed maturity securities compared to
11.4%
of the fair value of total fixed maturity securities at
December 31, 2016
. These assets are primarily high quality, long duration provincial strips, the valuation of which is closely linked to the interest rate curve. These assets are longer in duration and held primarily for asset/liability management to meet Canadian regulatory requirements. See “Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables showing the various sectors as of
September 30, 2017
and
December 31, 2016
.
The Company references rating agency designations in some of its investments disclosures. These designations are based on the ratings from nationally recognized statistical rating organizations, primarily those assigned by S&P. In instances where a S&P rating is not available the Company references the rating provided by Moody’s and in the absence of both the Company will assign equivalent ratings based on information from the NAIC. The NAIC assigns securities quality ratings and uniform valuations called “NAIC Designations” which are used by insurers when preparing their U.S. statutory filings. Structured securities (mortgage-backed and asset-backed securities) held by the Company’s insurance subsidiaries that maintain the NAIC statutory basis of accounting utilize the NAIC rating methodology. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency designation). NAIC designations in classes 3 through 6 are generally considered below investment grade (BB or lower rating agency designation).
The quality of the Company’s available-for-sale fixed maturity securities portfolio, as measured at fair value and by the percentage of fixed maturity securities invested in various ratings categories, relative to the entire available-for-sale fixed maturity security portfolio, at
September 30, 2017
and
December 31, 2016
was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
NAIC
Designation
|
|
Rating Agency
Designation
|
|
Amortized Cost
|
|
Estimated
Fair Value
|
|
% of Total
|
|
Amortized Cost
|
|
Estimated
Fair Value
|
|
% of Total
|
1
|
|
AAA/AA/A
|
|
$
|
22,095,642
|
|
|
$
|
23,989,873
|
|
|
66.0
|
%
|
|
$
|
19,813,653
|
|
|
$
|
21,369,081
|
|
|
66.5
|
%
|
2
|
|
BBB
|
|
10,233,331
|
|
|
10,792,989
|
|
|
29.7
|
|
|
8,834,469
|
|
|
9,162,483
|
|
|
28.5
|
|
3
|
|
BB
|
|
1,107,086
|
|
|
1,143,449
|
|
|
3.1
|
|
|
944,839
|
|
|
955,735
|
|
|
3.0
|
|
4
|
|
B
|
|
360,643
|
|
|
374,478
|
|
|
1.0
|
|
|
414,087
|
|
|
411,138
|
|
|
1.3
|
|
5
|
|
CCC and lower
|
|
86,984
|
|
|
74,093
|
|
|
0.2
|
|
|
187,744
|
|
|
177,481
|
|
|
0.6
|
|
6
|
|
In or near default
|
|
6,282
|
|
|
6,860
|
|
|
—
|
|
|
16,995
|
|
|
17,707
|
|
|
0.1
|
|
|
|
Total
|
|
$
|
33,889,968
|
|
|
$
|
36,381,742
|
|
|
100.0
|
%
|
|
$
|
30,211,787
|
|
|
$
|
32,093,625
|
|
|
100.0
|
%
|
The Company’s fixed maturity portfolio includes structured securities. The following table shows the types of structured securities the Company held at
September 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Amortized Cost
|
|
Estimated
Fair Value
|
|
Amortized Cost
|
|
Estimated
Fair Value
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Agency
|
|
$
|
891,508
|
|
|
$
|
917,589
|
|
|
$
|
579,686
|
|
|
$
|
602,549
|
|
Non-agency
|
|
753,871
|
|
|
761,716
|
|
|
678,353
|
|
|
676,027
|
|
Total residential mortgage-backed securities
|
|
1,645,379
|
|
|
1,679,305
|
|
|
1,258,039
|
|
|
1,278,576
|
|
Commercial mortgage-backed securities
|
|
1,293,296
|
|
|
1,313,322
|
|
|
1,342,440
|
|
|
1,363,654
|
|
Asset-backed securities
|
|
1,680,918
|
|
|
1,694,568
|
|
|
1,443,822
|
|
|
1,429,344
|
|
Total
|
|
$
|
4,619,593
|
|
|
$
|
4,687,195
|
|
|
$
|
4,044,301
|
|
|
$
|
4,071,574
|
|
The residential mortgage-backed securities include agency-issued pass-through securities and collateralized mortgage obligations. A majority of the agency-issued pass-through securities are guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or the Government National Mortgage Association. The principal risks inherent in holding mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase in principal payments from the expected, primarily as a result of owner refinancing. Extension risk relates to the unexpected slowdown in principal payments from the expected. In addition, non-agency mortgage-backed securities face credit risk should the borrower be unable to pay the contractual interest or principal on their obligation. The Company monitors its mortgage-backed securities to mitigate exposure to the cash flow uncertainties associated with these risks.
Asset-backed securities include credit card and automobile receivables, student loans, home equity loans and collateralized debt obligations (primarily collateralized loan obligations). The Company owns floating rate securities that represent approximately
14.0% and 12.9% of the total fixed maturity securities at
September 30, 2017
and
December 31, 2016
, respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to the floating rate nature of the interest payments. The Company holds these investments to match specific floating rate liabilities primarily reflected in the condensed consolidated balance sheets as collateral finance notes, as well as to enhance asset management strategies. In addition to the risks associated with floating rate securities, principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the securities’ cash flow priority in the capital structure and the inherent prepayment sensitivity of the underlying collateral. Credit risks include the adequacy and ability to realize proceeds from the collateral. Credit risks are mitigated by credit enhancements which include excess spread, over-collateralization and subordination. Capital market risks include general level of interest rates and the liquidity for these securities in the marketplace.
The Company monitors its fixed maturity and equity securities to determine impairments in value and evaluates factors such as financial condition of the issuer, payment performance, the length of time and the extent to which the market value has been below amortized cost, compliance with covenants, general market and industry sector conditions, current intent and ability to hold securities, and various other subjective factors. Based on management’s judgment, securities determined to have an other-than-temporary impairment in value are written down to fair value. See “Investments – Other-than-Temporary Impairment” in Note 2 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the 2016 Annual Report for additional information. The table below summarizes other-than-temporary impairments and changes in the mortgage loan provision for the
three and nine
months ended
September 30, 2017
and
2016
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Impairment losses on available-for-sale securities:
|
|
|
|
|
|
|
|
Fixed maturity securities
|
$
|
390
|
|
|
$
|
—
|
|
|
$
|
20,980
|
|
|
$
|
34,663
|
|
Equity securities
|
889
|
|
|
—
|
|
|
889
|
|
|
—
|
|
Other impairment losses
|
1,469
|
|
|
15
|
|
|
7,776
|
|
|
2,178
|
|
Change in mortgage loan provision
|
977
|
|
|
247
|
|
|
1,444
|
|
|
(67
|
)
|
Total
|
$
|
3,725
|
|
|
$
|
262
|
|
|
$
|
31,089
|
|
|
$
|
36,774
|
|
The fixed maturity impairments for the
three and nine
months ended
September 30, 2017
and
2016
were largely related to high-yield corporate securities. The equity impairments for the
three and nine
months ended
September 30, 2017
were related to an equity position received as part of a debt restructuring. In addition, other impairment losses for the
three and nine
months ended
September 30, 2017
and
2016
are primarily due to impairments on limited partnerships.
At
September 30, 2017
and
December 31, 2016
, the Company had
$163.2 million
and
$374.9 million
, respectively, of gross unrealized losses related to its fixed maturity and equity securities. The distribution of the gross unrealized losses related to these securities is shown below.
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Sector:
|
|
|
|
|
Corporate securities
|
|
59.6
|
%
|
|
61.6
|
%
|
Canadian and Canada provincial governments
|
|
1.5
|
|
|
0.9
|
|
Residential mortgage-backed securities
|
|
5.1
|
|
|
3.6
|
|
Asset-backed securities
|
|
3.1
|
|
|
6.4
|
|
Commercial mortgage-backed securities
|
|
3.3
|
|
|
2.1
|
|
State and political subdivisions
|
|
3.7
|
|
|
3.3
|
|
U.S. government and agencies
|
|
19.0
|
|
|
16.8
|
|
Other foreign government, supranational and foreign government-sponsored enterprises
|
|
4.7
|
|
|
5.3
|
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
Industry:
|
|
|
|
|
Finance
|
|
15.3
|
%
|
|
20.1
|
%
|
Asset-backed
|
|
3.1
|
|
|
6.4
|
|
Industrial
|
|
40.1
|
|
|
32.9
|
|
Mortgage-backed
|
|
8.4
|
|
|
5.7
|
|
Government
|
|
28.9
|
|
|
26.3
|
|
Utility
|
|
4.2
|
|
|
8.6
|
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
See “Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the total gross unrealized losses for fixed maturity and equity securities at
September 30, 2017
and
December 31, 2016
, respectively, where the estimated fair value had declined and remained below amortized cost by less than 20% or more than 20%.
The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment. In the Company’s impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration given the lack of contractual cash flows and the deferability features of these securities.
See “Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables that present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for fixed maturity and equity securities that have estimated fair values below amortized cost, by class and grade security, as well as the length of time the related market value has remained below amortized cost as of
September 30, 2017
and
December 31, 2016
.
As of
September 30, 2017
and
December 31, 2016
, the Company classified approximately
5.9%
and 6.9%, respectively, of its fixed maturity securities in the Level 3 category (refer to Note 6 – “Fair Value of Assets and Liabilities” in the Notes to Condensed Consolidated Financial Statements for additional information). These securities primarily consist of private placement corporate securities, bank loans, Canadian provincial strips, below investment grade mortgage-backed securities and subprime asset-backed securities with inactive trading markets.
See “Securities Borrowing, Lending and Other” in Note 4 - “Investments” in the Notes to Condensed Consolidated Financial Statements for information related to the Company’s securities borrowing, repurchase and repurchase/reverse repurchase programs.
Mortgage Loans on Real Estate
Mortgage loans represented approximately
8.5
% and
8.2
% of the Company’s cash and invested assets as of
September 30, 2017
and
December 31, 2016
, respectively. The Company’s mortgage loan portfolio consists of U.S. and Canada based investments primarily in commercial offices, light industrial properties and retail locations. The mortgage loan portfolio is diversified by geographic region and property type. Additional information on geographic concentration and property type can be found under “Mortgage Loans on Real Estate” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements.
As of
September 30, 2017
and
December 31, 2016
, the Company’s mortgage loans, gross of unamortized deferred loan origination fees and expenses and valuation allowances, were distributed geographically as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Recorded
Investment
|
|
% of Total
|
|
Recorded
Investment
|
|
% of Total
|
U.S. Region:
|
|
|
|
|
|
|
|
|
Pacific
|
|
$
|
1,304,056
|
|
|
30.1
|
|
|
$
|
1,112,636
|
|
|
29.4
|
%
|
South Atlantic
|
|
858,474
|
|
|
19.8
|
|
|
782,509
|
|
|
20.7
|
|
Mountain
|
|
688,609
|
|
|
15.9
|
|
|
615,915
|
|
|
16.3
|
|
East North Central
|
|
529,007
|
|
|
12.2
|
|
|
422,512
|
|
|
11.2
|
|
West North Central
|
|
305,894
|
|
|
7.1
|
|
|
318,212
|
|
|
8.4
|
|
West South Central
|
|
359,680
|
|
|
8.3
|
|
|
317,194
|
|
|
8.4
|
|
Middle Atlantic
|
|
107,453
|
|
|
2.5
|
|
|
92,683
|
|
|
2.4
|
|
East South Central
|
|
97,379
|
|
|
2.2
|
|
|
57,216
|
|
|
1.5
|
|
New England
|
|
9,191
|
|
|
0.2
|
|
|
9,346
|
|
|
0.2
|
|
Subtotal - U.S.
|
|
4,259,743
|
|
|
98.3
|
|
|
3,728,223
|
|
|
98.5
|
|
Canada
|
|
74,254
|
|
|
1.7
|
|
|
54,984
|
|
|
1.5
|
|
Total
|
|
$
|
4,333,997
|
|
|
100.0
|
%
|
|
$
|
3,783,207
|
|
|
100.0
|
%
|
Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The valuation allowances are established after management considers, among other things, the value of underlying collateral and payment capabilities of debtors. Any subsequent adjustments to the valuation allowances will be treated as investment gains or losses. See “Mortgage Loans on Real Estate” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for information regarding valuation allowances and impairments.
Policy Loans
Policy loans comprised approximately
2.6
% and 3.1% of the Company’s cash and invested assets as of
September 30, 2017
and
December 31, 2016
, respectively, the majority of which are associated with one client. These policy loans present no credit risk because the amount of the loan cannot exceed the obligation due the ceding company upon the death of the insured or surrender of the underlying policy. The provisions of the treaties in force and the underlying policies determine the policy loan interest rates. The Company earns a spread between the interest rate earned on policy loans and the interest rate credited to corresponding liabilities.
Funds Withheld at Interest
Funds withheld at interest comprised approximately
11.8
% and 12.8% of the Company’s cash and invested assets as of
September 30, 2017
and
December 31, 2016
, respectively. For reinsurance agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company, and are reflected as funds withheld at interest on the Company’s condensed consolidated balance sheets. In the event of a ceding company’s insolvency, the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances against amounts owed by the ceding company. Interest accrues to the total funds withheld at interest assets at rates defined by the treaty terms. Additionally, under certain treaties the Company is subject to the investment performance on the withheld assets, although it does not directly control them. These assets are primarily fixed maturity investment securities and pose risks similar to the fixed maturity securities the Company owns. To mitigate this risk, the Company helps set the investment guidelines followed by the ceding company and monitors compliance. Ceding companies with funds withheld at interest had an average financial strength rating of “A” at
September 30, 2017
and
December 31, 2016
. Certain ceding companies maintain segregated portfolios for the benefit of the Company.
Other Invested Assets
Other invested assets include equity securities, limited partnership interests, joint ventures (other than operating joint ventures), structured loans, derivative contracts, FVO contractholder-directed unit-linked investments, FHLB common stock and equity release mortgages. Other invested assets represented approximately
3.0
% and 3.5% of the Company’s cash and invested assets as of
September 30, 2017
and
December 31, 2016
, respectively. See “Other Invested Assets” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the carrying value of the Company’s other invested assets by type as of
September 30, 2017
and
December 31, 2016
.
The Company utilizes derivative financial instruments to protect the Company against possible changes in the fair value of its investment portfolio as a result of interest rate changes, to hedge against risk of changes in the purchase price of securities, to hedge liabilities associated with the reinsurance of variable annuities with guaranteed living benefits and to manage the portfolio’s effective yield, maturity and duration. In addition, the Company utilizes derivative financial instruments to reduce the risk associated with fluctuations in foreign currency exchange rates. The Company uses both exchange-traded, centrally cleared, and customized over-the-counter derivative financial instruments.
See Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the notional amounts and fair value of investment related derivative instruments held at
September 30, 2017
and
December 31, 2016
.
The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. Generally, the credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. The Company had no net credit exposure related to its derivative contracts, excluding futures and mortality swaps, at
September 30, 2017
and
December 31, 2016
, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts.
The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Certain of the Company’s OTC derivatives are cleared derivatives, which are bilateral transactions between the Company and a counterparty where the transactions are cleared through a clearinghouse, such that each derivative counterparty is only exposed to the default of the clearinghouse. As exchange-
traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties. See Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for more information regarding the Company’s derivative instruments.
Enterprise Risk Management
RGA maintains a dedicated Enterprise Risk Management (“ERM”) function that is responsible for analyzing and reporting the Company’s risks on an aggregated basis; facilitating monitoring to ensure the Company’s risks remain within its appetites and limits; and ensuring, on an ongoing basis, that RGA’s ERM objectives are met. This includes ensuring proper risk controls are in place; risks are effectively identified, assessed, and managed; and key risks to which the Company is exposed are disclosed to appropriate stakeholders. The ERM function plays an important role in fostering the Company’s risk management culture and practices.
Enterprise Risk Management Structure and Governance
The Board of Directors (“the Board”) oversees enterprise risk through its standing committees. The Finance, Investments, and Risk Management (“FIRM”) Committee of the Board oversees the management of the Company’s ERM program and policies. The FIRM receives regular reports and assessments which describe the Company’s key risk exposures and include quantitative and qualitative assessments and information about breaches, exceptions, and waivers.
The Company’s Global Chief Risk Officer (“CRO”) leads the dedicated ERM function. The CRO reports to the Chief Executive Officer (“CEO”) and has direct access to the Board through the FIRM Committee with formal reporting occurring quarterly. The CRO is supported by a network of Business Unit Chief Risk Officers and Risk Management Officers throughout the business who are responsible for the analysis and management of risks within their scope. A Lead Risk Management Officer is assigned to each risk to take overall responsibility to monitor and assess the risk consistently across all markets.
In addition to leading the ERM function, the CRO also chairs the Company’s Risk Management Steering Committee (“RMSC”), which is made up of senior management executives, including the CEO, the Chief Financial Officer (“CFO”), and the Chief Operating Officer, among others. The RMSC provides oversight for the Insurance, Market and Credit, Capital, and Operational risk committees and retains direct risk oversight responsibilities for the following:
|
|
•
|
Company’s global ERM framework, activities, and issues.
|
|
|
•
|
Identification, assessments, and management of all known, new and emerging strategic risk exposures.
|
|
|
•
|
Risk appetite statement, including the ongoing alignment of the risk appetite statement with the Company’s strategy and capital plans.
|
|
|
•
|
Review, revise and approve RGA group-level strategic risk limits consistent with the risk appetite statement
|
The Insurance, Market and Credit, Capital, and Operational risk committees have direct oversight accountability for their respective risks areas including the identification, assessments, and management of known, new and emerging risk exposures and the review and approval of RGA group-level risk limits
To ensure appropriate oversight of enterprise-wide risk management issues without unnecessary duplication, as well as to foster cross-committee communication and coordination regarding risk issues, risk committee chairs attend RMSC meetings. In addition to the risk committees, their sub-committees and working groups, some RGA operating entities have risk management committees that oversee relevant risks related to segment-level risk limits.
Enterprise Risk Management Framework
RGA’s ERM framework provides a platform to assess the risk / return profiles of risks throughout the organization to enable enhanced decision making by business leaders. The ERM framework also guides the development and implementation of mitigation strategies to reduce exposures to these risks to acceptable levels.
RGA’s ERM framework includes the following elements:
|
|
1.
|
Risk Culture: Risk management is an integral part of the Company’s culture and is embedded in RGA’s business processes in accordance with RGA’s risk philosophy. As the cornerstone of the ERM framework, a culture of prudent risk management reinforced by senior management plays a preeminent role in the effective management of risks assumed by RGA.
|
|
|
2.
|
Risk Appetite Statement: A general and high level overview of the risk profile RGA aims to achieve to meet its strategic objectives. This statement is then supported by more granular risk limits guiding the businesses to achieve this Risk Appetite Statement.
|
|
|
3.
|
Risk Limits: Risk Limits establish the maximum amount of defined risk that the Company is willing to assume to remain within the Company’s overall risk appetite. These risks have been identified by the management of the Company as relevant to manage the overall risk profile of the Company while allowing achievement of strategic objectives.
|
|
|
4.
|
Risk Assessment Process: RGA uses qualitative and quantitative methods to assess key risks through a portfolio approach, which analyzes established and emerging risks in conjunction with other risks.
|
|
|
5.
|
Business Specific Limits/Controls: These limits/controls provide additional safeguards against undesired risk exposures and are embedded in business processes. Examples include maximum retention limits, pricing and underwriting reviews, per issuer limits, concentration limits, and standard treaty language.
|
Proactive risk monitoring and reporting enable early detection and mitigation of emerging risks. The RMSC and its subcommittees monitor adherence to risk limits through the ERM function, which reports regularly to the RMSC and FIRM Committee. The frequency of monitoring is tailored to the volatility assessment and relative priority of each risk. Risk escalation channels coupled with open communication lines enhance the mitigants explained above. The Company has devoted significant resources to developing its ERM program and expects to continue to do so in the future. Nonetheless, the Company’s policies and procedures to identify, manage, and monitor risks may not be fully effective. Many of the Company’s methods for managing risk are based on historical information, which may not be a good predictor of future risk exposures, such as the risk of a pandemic causing a large number of deaths. Management of operational, legal, and regulatory risk relies on policies and procedures which may not be fully effective under all scenarios.
Risk Categories
The Company groups its risks into the following categories: Insurance risk, Market and Credit risk, Capital risk, Operational risk and Strategic risk. Specific risk assessments and descriptions can be found below and in Item 1A - “Risk Factors” of the 2016 Annual Report.
Insurance Risk
Insurance risk is the risk of lower or negative earnings and potentially a reduction in enterprise value due to a greater amount of benefits and related expenses paid than expected, or from non-market related adverse policyholder or client behavior. The Company uses multiple approaches to managing insurance risk: active insurance risk assessment and pricing appropriately for the risks assumed, transferring undesired risks, and managing the retained exposure prudently. These strategies are explained below.
Insurance Risk Assessment and Pricing
The Company has developed extensive expertise in assessing insurance risks which ultimately forms an integral part of ensuring that it is compensated commensurately for the risks it assumes and that it does not overpay for the risks it transfers to third parties. This expertise includes a vast array of market and product knowledge supported by a large information database of historical experience which is closely monitored. Analysis and experience studies derived from this database help form the basis for the Company’s pricing assumptions which are used in developing rates for new risks. If actual mortality or morbidity experience is materially adverse, some reinsurance treaties allow for increases to future premium rates.
Misestimation of any key risk can threaten the long term viability of the enterprise. Further, the pricing process is a key operational risk and significant effort is applied to ensuring the appropriateness of pricing assumptions. Some of the safeguards the Company uses to ensure proper pricing are: experience studies, strict underwriting, sensitivity and scenario testing, pricing guidelines and controls, authority limits and internal and external pricing reviews. In addition, the ERM function provides pricing oversight which includes periodic pricing audits.
Risk Transfer
To minimize volatility in financial results and reduce the impact of large losses, the Company transfers some of its insurance risk to third parties using vehicles such as retrocession and catastrophe coverage.
Individual Exposure Retrocession
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of claims paid by ceding reinsurance to other insurance enterprises (or retrocessionaires) under excess coverage and coinsurance contracts. In individual life markets, the Company retains a maximum of $8.0 million of coverage per individual life. In certain limited situations the Company has retained more than $8.0 million per individual life. The Company enters into agreements with other reinsurers to mitigate the residual risk related to the over-retained policies. Additionally, due to some lower face amount reinsurance coverages provided by the Company in addition to individual life, such as group life, disability and health, under certain circumstances, the Company could potentially incur claims totaling more than $8.0 million per individual life.
Catastrophic Excess Loss Retrocession
The Company seeks to limit its exposure to loss on its assumed catastrophic excess of loss reinsurance agreements by ceding a portion of its exposure to multiple retrocessionaires through retrocession line slips or directly to retrocession markets. The Company’s policy is to retain a maximum of $20.0 million of catastrophic loss exposure per agreement and to retrocede up to $30.0 million additional loss exposures to the retrocession markets. The Company limits its exposure on a country-by-country (and state-by-state in the U.S.) basis by managing its total exposure to all catastrophic excess of loss agreements bound within a given country to established maximum aggregate exposures. The maximum exposures are established and managed both on gross amounts issued prior to including retrocession and for amounts net of exposures retroceded.
Catastrophe Coverage
The Company accesses the markets each year for annual catastrophic coverages and reviews current coverage and pricing of current and alternate designs. The coverage may vary from year to year based on the Company’s perceived value of such protection. The current policy covers events involving 8 or more insured deaths from a single occurrence and covers $100.0 million of claims in excess of the Company’s $25.0 million deductible.
Managing Retained Exposure
The Company retains most of the inbound insurance risk. The Company manages the retained exposure proactively using various mitigating factors such as diversification and limits. Diversification is the primary mitigating factor of short term volatility risk, but it also mitigates adverse impacts of changes in long term trends and catastrophic events. The Company’s insured populations are dispersed globally, diversifying the insurance exposure because factors that cause actual experience to deviate materially from expectations do not affect all areas uniformly and synchronously or in close sequence. A variety of limits mitigate retained insurance risk. Examples of these limits include geographic exposure limits, which set the maximum amount of business that can be written in a given country, and jumbo limits, which prevent excessive coverage on a given individual.
In the event that mortality or morbidity experience develops in excess of expectations, some reinsurance treaties allow for increases to future premium rates. Other treaties include experience refund provisions, which may also help reduce RGA’s mortality risk.
RGA has various methods to manage its insurance risks, including access to the capital and reinsurance markets.
Market and Credit Risk
Market and Credit risk is the risk of lower or negative earnings and potentially a reduction in enterprise value due to changes in the market prices of asset and liabilities.
Interest Rate Risk
Interest Rate risk is risk that changes in the level and volatility of nominal interest rates affect the profitability, value or solvency position of the Company. This includes credit spread changes and inflation but excludes credit quality deterioration. This risk arises from many of the Company’s primary activities, as the Company invests substantial funds in interest-sensitive assets, primarily fixed maturity securities, and also has certain interest-sensitive contract liabilities. A prolonged period where market yields are significantly below the book yields of the Company’s asset portfolio puts downward pressure on portfolio book yields. The Company has been proactive in its investment strategies, reinsurance structures and overall asset-liability management practices to reduce the risk of unfavorable consequences in this type of environment.
The Company manages interest rate risk to optimize the return on the Company’s capital and to preserve the value created by its business operations within certain constraints. For example, certain management and monitoring processes are designed to minimize the effect of sudden and/or sustained changes in interest rates on fair value, cash flows, and net interest income. The Company manages its exposure to interest rates principally by managing the relative matching of the cash flows of its liabilities and assets.
The Company’s exposure to interest rate price risk and interest rate cash flow risk is reviewed on a quarterly basis. Interest rate price risk exposure is measured using interest rate sensitivity analysis to determine the change in fair value of the Company’s financial instruments in the event of a hypothetical change in interest rates. Interest rate cash flow risk exposure is measured using interest rate sensitivity analysis to determine the Company’s variability in cash flows in the event of a hypothetical change in interest rates.
In order to reduce the exposure to changes in fair values from interest rate fluctuations, the Company has developed strategies to manage the net interest rate sensitivity of its assets and liabilities. In addition, from time to time, the Company has utilized the swap market to manage the sensitivity of fair values to interest rate fluctuations.
Inflation can also have direct effects on the Company’s assets and liabilities. The primary direct effect of inflation is the increase in operating expenses. A large portion of the Company’s operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of inflation.
The Company reinsures annuities with benefits indexed to the cost of living. Some of these benefits are hedged with a combination of CPI swaps and indexed bonds when material.
Long Term Care products have an inflation component linked to the future cost of such services. If health care costs increase at a much larger rate than what is prevalent in the nominal interest rates available in the markets, the Company may not earn enough investment yield to pay future claims on such products.
Foreign Currency Risk
Foreign currency risk is the risk of changes in level and volatility of currency exchange rates affect the profitability, value or solvency position of the Company. The Company manages its exposure to currency principally by currency matching invested assets with the underlying liabilities to the extent possible. The Company has in place net investment hedges for a portion of its investments in its Canadian operations to reduce excess exposure to these currencies. Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are reflected in stockholders’ equity on the condensed consolidated balance sheets.
The Company generally does not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). However, the Company has entered into cross currency swaps to manage exposure to specific currencies. The majority of the Company’s foreign currency transactions are denominated in Australian dollars, British pounds, Canadian dollars, Euros, Japanese yen, Korean won, and the South African rand. The maximum amount of assets held in a specific currency (with the exception of the U.S. dollar) is measured relative to risk targets and is monitored regularly.
Real Estate Risk
Real Estate risk is the risk that changes in the level and volatility of real estate market valuations may impact the profitability, value or solvency position of the Company. The Company has investments in direct real estate equity and debt instruments collateralized by real estate (“real estate loans”). Real estate equity risks include significant reduction in valuations, which could be caused by downturns in the broad economy or in specific geographic regions or sectors. In addition, real estate loan risks include defaults, borrower or tenant bankruptcy and reduced liquidity. Real estate loan risks are partially mitigated by the excess of the value of the property over the loan principle, which provides a buffer should the value of the real estate decrease. The Company manages its real estate loan risk by diversifying by property type and geography and through exposure limits.
Equity Risk
Equity risk is the risk that changes in the level and volatility of equity market valuations affect the profitability, value or solvency position of the company. This risk includes Variable Annuity and other equity linked exposures and asset related equity exposure. The Company assumes equity risk from alternative investments, fixed indexed annuities and variable annuities. The Company uses derivatives to hedge its exposure to movements in equity markets that have a direct correlation with certain of its reinsurance products.
Alternative Investments
Alternative investments are investments in non-traditional asset classes that primarily back the Company’s capital and surplus. The Company generally restricts the alternative investments portfolio to non-liability supporting assets: that is, free surplus. Alternative investments generally encompass: hedge funds, emerging markets debt, distressed debt, commodities, infrastructure, tax credits, and equities, both public and private. The Company mitigates its exposure to alternative investments by limiting the size of the alternative investments holding and using per-issuer investment limits.
Fixed Indexed Annuities
The Company reinsures fixed indexed annuities (“FIAs”). Credits for FIAs are affected by changes in equity markets. Thus the fair value of the benefit is primarily a function of index returns and volatility. The Company hedges most of the underlying FIA equity exposure with derivatives.
Variable Annuities
The Company reinsures variable annuities including those with guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”). Strong equity markets, increases in interest rates and decreases in equity market volatility will generally decrease the fair value of the liabilities underlying the benefits. Conversely, a decrease in the equity markets along with a decrease in interest rates and an increase in equity market volatility will generally result in an increase in the fair value of the liabilities underlying the benefits, which has the effect of increasing reserves and lowering earnings. The Company maintains a customized dynamic hedging program that is designed to substantially mitigate the risks associated with income volatility around the change in reserves on guaranteed benefits, ignoring the Company’s own credit risk assessment. However, the hedge positions may not fully offset the changes in the carrying value of the guarantees due to, among other things, time lags, high levels of volatility in the equity and derivative markets, extreme swings in interest rates, unexpected contract holder behavior, and divergence between the performance of the underlying funds and hedging indices. These factors, individually or collectively, may have a material adverse effect on the Company’s net income, financial condition or liquidity. The table below provides a summary of variable annuity account values and the fair value of the guaranteed benefits as of
September 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
No guaranteed minimum benefits
|
|
$
|
940
|
|
|
$
|
731
|
|
GMDB only
|
|
180
|
|
|
58
|
|
GMIB only
|
|
23
|
|
|
5
|
|
GMAB only
|
|
25
|
|
|
28
|
|
GMWB only
|
|
1,361
|
|
|
1,334
|
|
GMDB / WB
|
|
340
|
|
|
335
|
|
Other
|
|
33
|
|
|
19
|
|
Total variable annuity account values
|
|
$
|
2,902
|
|
|
$
|
2,510
|
|
Fair value of liabilities associated with living benefit riders
|
|
$
|
168
|
|
|
$
|
185
|
|
Credit Risk
Credit risk, which includes default risk, is risk of loss due to credit quality deterioration of an individual financial asset, derivative or non-derivative contract or instrument. Credit quality deterioration may or may not be accompanied by a ratings downgrade. Generally, the credit exposure for an asset is limited to the fair value, net of any collateral received, at the reporting date.
Investment Credit Risk
Investment credit risk is credit risk related to invested assets. The Company manages investment credit risk using per-issuer investment limits. In addition to per-issuer limits, the Company also limits the total amounts of investments per rating category. An automated compliance system checks for compliance for all investment positions and sends warning messages when there is a breach. The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because futures are transacted through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.
The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that vary depending on the posting party’s financial strength ratings. Additionally, a decrease in the Company’s financial strength rating to a specified level results in potential settlement of the derivative positions under the Company’s agreements with its counterparties. A committee is responsible for setting rules and approving and overseeing all transactions requiring collateral. See “Credit Risk” in Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for additional information on credit risk related to derivatives.
Counterparty Risk
Counterparty risk is the potential for the Company to incur losses due to a client, retrocessionaire, or partner becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk.
Run-on-the-Bank
The risk that a client’s in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation damage or other market changes affecting the counterparty. Substantially higher than expected surrenders and/or lapses could result in inadequate in force business to recover cash paid out for acquisition costs.
Collection Risk
For clients and retrocessionaires, this includes their inability to satisfy a reinsurance agreement because the right of offset is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination of the contract; and/or the security supporting the transaction becomes unavailable to RGA.
The Company manages counterparty risk by limiting the total exposure to a single counterparty and by only initiating contracts with creditworthy counterparties. In addition, some of the counterparties have set up trusts and letters of credit, reducing the Company’s exposure to these counterparties.
Generally, RGA’s insurance subsidiaries retrocede amounts in excess of their retention to certain other RGA insurance subsidiaries. External retrocessions are arranged through the Company’s retrocession pools for amounts in excess of its retention. As of
September 30, 2017
, all retrocession pool members in this excess retention pool rated by the A.M. Best Company were rated “A-” or better. A rating of “A-” is the fourth highest rating out of sixteen possible ratings. For a majority of the retrocessionaires that were not rated, letters of credit or trust assets have been given as additional security. In addition, the Company performs annual financial and in force reviews of its retrocessionaires to evaluate financial stability and performance.
The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any material difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires or as to the recoverability of any such claims.
Aggregate Counterparty Limits
In addition to investment credit limits and counterparty limits, there are aggregate counterparty risk limits which include counterparty exposures from reinsurance, financing and investment activities at an aggregated level to control total exposure to a single counterparty. Counterparty risk aggregation is important because it enables the Company to capture risk exposures at a comprehensive level and under more extreme circumstances compared to analyzing the components individually.
All counterparty exposures are calculated on a quarterly basis, reviewed by management and monitored by the ERM function.
Capital Risk
Capital risk is the risk of lower or negative earnings and a potential reduction in enterprise value, and/or the ability to conduct business due to insufficient financial capacity. Collateral, financing, liquidity and tax risks are important to the operations of the Company and its ability to meet obligations with its clients, shareholders and regulators.
Operational Risk
Operational risk is the risk of lower or negative earnings and a potential reduction in enterprise value caused by the inadequacy or failure of internal processes, people and systems, or from the adverse impact of external events or actors. The Company regularly monitors the risks related to human capital, fraud, business conduct and governance, disruption of operations, business operations and privacy and security related matters. Operational risks are core to managing the Company’s brand and market confidence as well as maintaining its ability to acquire and retain the appropriate expertise to execute and operate the business.
Strategic Risk
Strategic risk is the risk of lower or negative earnings and a potential reduction in enterprise value related to the planning, implementation, and management of the Company’s business plans and strategies. This includes the risks associated with the global environment in which it operates; future law and regulation changes; political and sovereign risks; and relationships with key external parties.
New Accounting Standards
See Note 12 — “New Accounting Standards” in the Notes to Condensed Consolidated Financial Statements.