REINSURANCE GROUP OF AMERICA INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Index to Management's Discussion and Analysis of Financial Condition and Results of Operations Page Cautionary Note Regarding Forward-Looking Statements 40 Overview 41 Industry Trends 43 Critical Accounting Policies 44 Consolidated Results of Operations 48 Results of Operations by Segment 52U.S. and Latin America Operations 52 Canada Operations 56Europe ,Middle East and Africa Operations 58 Asia Pacific Operations 60 Corporate and Other 63 Liquidity and Capital Resources 64 39
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Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, among others, statements relating to projections of the future operations, strategies, earnings, revenues, income or loss, ratios, financial performance and growth potential of the Company. Forward-looking statements often contain words and phrases such as "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "believe" and other similar expressions. Forward-looking statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements are not a guarantee of future performance and are subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The effects of the COVID-19 pandemic and the response thereto on economic conditions, the financial markets and insurance risks, and the resulting effects on the Company's financial results, liquidity, capital resources, financial metrics, investment portfolio and stock price, could cause actual results and events to differ materially from those expressed or implied by forward-looking statements. Additionally, numerous other important factors (whether related to, resulting from or exacerbated by the COVID-19 pandemic or otherwise) could also cause results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: (1) adverse changes in mortality, morbidity, lapsation or claims experience, (2) inadequate risk analysis and underwriting, (3) adverse capital and credit market conditions and their impact on the Company's liquidity, access to capital and cost of capital, (4) changes in the Company's financial strength and credit ratings and the effect of such changes on the Company's future results of operations and financial condition, (5) the availability and cost of collateral necessary for regulatory reserves and capital, (6) requirements to post collateral or make payments due to declines in market value of assets subject to the Company's collateral arrangements, (7) action by regulators who have authority over the Company's reinsurance operations in the jurisdictions in which it operates, (8) the effect of the Company parent's status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its debt obligations, (9) general economic conditions or a prolonged economic downturn affecting the demand for insurance and reinsurance in the Company's current and planned markets, (10) the impairment of other financial institutions and its effect on the Company's business, (11) fluctuations inU.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (12) market or economic conditions that adversely affect the value of the Company's investment securities or result in the impairment of all or a portion of the value of certain of the Company's investment securities, that in turn could affect regulatory capital, (13) market or economic conditions that adversely affect the Company's ability to make timely sales of investment securities, (14) risks inherent in the Company's risk management and investment strategy, including changes in investment portfolio yields due to interest rate or credit quality changes, (15) the fact that the determination of allowances and impairments taken on the Company's investments is highly subjective, (16) the stability of and actions by governments and economies in the markets in which the Company operates, including ongoing uncertainties regarding the amount ofU.S. sovereign debt and the credit ratings thereof, (17) the Company's dependence on third parties, including those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party investment managers and others, (18) financial performance of the Company's clients, (19) the threat of natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (20) competitive factors and competitors' responses to the Company's initiatives, (21) development and introduction of new products and distribution opportunities, (22) execution of the Company's entry into new markets, (23) integration of acquired blocks of business and entities, (24) interruption or failure of the Company's telecommunication, information technology or other operational systems, or the Company's failure to maintain adequate security to protect the confidentiality or privacy of personal or sensitive data and intellectual property stored on such systems, (25) adverse litigation or arbitration results, (26) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and discontinued lines of business, (27) changes in laws, regulations, and accounting standards applicable to the Company or its business, and (28) other risks and uncertainties described in this document and in the Company's other filings with theSecurities and Exchange Commission ("SEC"). Forward-looking statements should be evaluated together with the many risks and uncertainties that affect the Company's business, including those mentioned in this document and described in the periodic reports the Company files with theSEC . These forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update these forward-looking statements, even though the Company's situation may change in the future. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A - "Risk Factors". 40
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Overview
The Company is among the leading global providers of life reinsurance and financial solutions, with$3.5 trillion of life reinsurance in force and assets of$92.2 billion as ofDecember 31, 2021 . Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, capital solutions, including financial reinsurance and stable value products. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets. The Company's underwriting expertise and industry knowledge allowed it to expand into international markets around the world including locations inCanada , theAsia Pacific region,Europe , theMiddle East , Africa andLatin America . Based on the compilation of information from competitors' annual reports, the Company believes it is the second-largest global life and health reinsurer in the world based on 2020 life and health reinsurance revenues. The Company conducts business with the majority of the largestU.S. and international life insurance companies. The Company has also developed its capacity and expertise in the reinsurance of longevity risks, asset-intensive products (primarily annuities and corporate-owned life insurance) and financial reinsurance. More recently, the Company has increased its investment and expenditures in client service and technology-oriented initiatives to both support its clients and generate new future revenue streams. The Company's traditional life reinsurance business, involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years or longer. To a lesser extent, the Company also reinsures certain health business typically reinsured for a shorter duration. Each year, however, a portion of the business under existing treaties terminates due to, among other things, lapses or voluntary surrenders of underlying policies, deaths of the insured, and the exercise of recapture options by ceding companies. The Company's financial solutions business, including significant asset-intensive and longevity risk transactions, allow its clients to take advantage of growth opportunities and manage their capital, longevity and investment risk. The Company's long-term profitability largely depends on the volume and amount of death- and health-related claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. For longevity business, the Company's profitability depends on the lifespan of the underlying contract holders and the investment performance for certain contracts. Additionally, the Company generates profits on investment spreads associated with the reinsurance of investment type contracts and generates fees from financial reinsurance transactions, which are typically shorter duration than its traditional life reinsurance business. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis.
Segment Presentation
The Company has geographic-based and business-based operational segments.
Geographic-based operations are further segmented into traditional and financial
solutions businesses. See "Business - Segments" in Item 1 for more information.
The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a consistent basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in RGA's businesses. As a result of the economic capital allocation process, a portion of investment income is credited to the segments based on the level of allocated capital. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses. Segment investment performance varies with the composition of investments and the relative allocation of capital to the operating segments. Segment revenue levels can be significantly influenced by currency fluctuations, large transactions, mix of business and reporting practices of ceding companies, and therefore may fluctuate from period to period. 41
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The following table sets forth the Company's premiums attributable to each of its segments for the periods indicated on both a gross assumed basis and net of premiums ceded to third parties: Gross and Net Premiums by Segment (in millions) Year Ended December 31, 2021 2020 2019 Gross Net Gross Net Gross NetU.S. andLatin America : Traditional$ 6,716 $ 6,244 $ 6,423 $ 5,838 $ 6,320 $ 5,729 Financial Solutions 55 55 53 53 39 39 Total U.S. and Latin America 6,771 6,299 6,476 5,891 6,359 5,768 Canada: Traditional 1,244 1,194 1,106 1,052 1,332 1,066 Financial Solutions 90 90 83 83 89 89 Total Canada 1,334 1,284 1,189 1,135 1,421 1,155Europe ,Middle East and Africa: Traditional 1,770 1,738 1,579 1,555 1,494 1,442 Financial Solutions 552 350 430 252 366 218 TotalEurope ,Middle East and Africa 2,322 2,088 2,009 1,807 1,860 1,660 Asia Pacific: Traditional 2,736 2,624 2,787 2,681 2,652 2,568 Financial Solutions 218 218 180 180 146 146 Total Asia Pacific 2,954 2,842 2,967 2,861 2,798 2,714 Corporate and Other - - - - - - Total$ 13,381 $ 12,513 $ 12,641 $ 11,694 $ 12,438 $ 11,297 The following table sets forth selected information concerning assumed life reinsurance business in force and assumed new business volume by segment for the periods indicated. The terms "in force" and "new business" refer to insurance policy face amounts or net amounts at risk. Reinsurance Business In Force and New Business by Segment (in billions) As of December 31, 2021 2020 2019 In Force New Business In Force New Business In Force New
BusinessU.S. andLatin America : Traditional$ 1,628.4 $ 130.5 $ 1,611.6 $ 114.9 $ 1,619.6 $ 115.8 Financial Solutions 5.3 - 5.3 - 5.1 3.2 Total U.S. and Latin America 1,633.7 130.5 1,616.9 114.9 1,624.7 119.0 Canada: Traditional 472.6 48.8 445.2 40.8 417.1 40.4 Financial Solutions - - - - - - Total Canada 472.6 48.8 445.2 40.8 417.1 40.4Europe ,Middle East and Africa: Traditional 861.6 198.4 864.4 184.3 776.4 147.4 Financial Solutions - - - - - - TotalEurope ,Middle East and Africa 861.6 198.4 864.4 184.3 776.4 147.4 Asia Pacific: Traditional 497.4 34.2 553.7 49.6 662.0 69.7 Financial Solutions 1.7 0.2 0.5 - - - Total Asia Pacific 499.1 34.4 554.2 49.6 662.0 69.7 Total$ 3,467.0 $ 412.1 $ 3,480.7 $ 389.6 $ 3,480.2 $ 376.5 42
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Reinsurance business in force reflects the addition or acquisition of new life reinsurance business, offset by terminations (e.g., life and group contract terminations, lapses of underlying policies, deaths of insureds, and recapture), changes in foreign currency exchange and any other changes in the amount of insurance in force. As a result of terminations, fluctuations in foreign exchange rates and other changes, assumed in force amounts at risk decreased by$425.8 billion ,$389.1 billion and$225.5 billion in 2021, 2020 and 2019, respectively.
See "Results of Operations by Segment" below for further information about the
Company's segments.
Industry Trends The Company believes life and health insurance companies will continue to partner with reinsurance companies to manage risk, achieve new growth, assist with capital efficiency, develop solutions across the value chain and to help navigate through changes in regulatory and accounting standards. The COVID-19 pandemic has highlighted the importance of insurance products in general and the value of reinsurance as a risk management tool. In addition, the Company believes reinsurers will continue to be an integral part of the life and health insurance market due to their ability to efficiently aggregate a significant volume of life insurance in force, creating economies of scale and greater diversification of risk. As a result of having larger amounts of mortality and morbidity experience data at their disposal compared to primary life insurance companies, reinsurers tend to have more comprehensive insights into mortality and morbidity trends, creating more efficient pricing for mortality and morbidity risk. The Company also believes the following trends in the life and health insurance industry will continue to create demand for both traditional reinsurance and financial solutions. Cession Rates. The percentage of new life and health business being reinsured inNorth America has recently begun to increase following a period of decline, due to strong recurring production coupled with in-force opportunities and an aging population, which increases the need for living benefit morbidity products. Cession rates in the Company's international markets are expected to continue increasing as middle-class growth and wealth creation drive additional insurance growth. The COVID-19 pandemic highlighted the insurance protection gap, and the strategic benefits of reinsurance, and thus may lead to increased cession rates as insurance companies address the gap. Insured Populations. The aging population inNorth America and elsewhere, and the growth in the middle class in the Company's international markets, are increasing demand for insurance products and for financial products among "baby boomers" who are concerned about protecting their peak income stream and are considering retirement and estate planning. This trend is likely to result in continuing demand for annuity products and life insurance policies, larger face amounts of life insurance policies and higher mortality and longevity risk taken by life insurers, all of which should fuel the need for insurers to seek reinsurance coverage. Additionally, in many countries, companies are increasingly interested in reducing their exposure to longevity risk related to employee retirement plans, resulting in a growing demand for pension risk transfer solutions. Economic, Regulatory and Accounting Changes. The continued low interest rate environment puts pressure on new business opportunities for asset-intensive blocks; however, the Company believes that the demand for reinsuring these blocks of business will continue. In addition, regulatory, accounting, and economic changes across the globe are creating opportunities for reinsurance and innovative capital solutions to: •manage risk-based capital by shifting mortality and other risks to reinsurers, thereby reducing amounts of reserves and capital the life and health insurance companies need to maintain;
•release capital to pursue new business initiatives;
•unlock the capital supporting, and value embedded in, non-core product lines;
and
•exit certain lines of business.
Consolidation and Reorganization within theLife Reinsurance and Life Insurance Industry. There are fewer competitors in the traditional life reinsurance industry as a result of consolidations in the industry. As a consequence, the Company believes there will be business opportunities for the remaining life reinsurers, particularly those with a significant market presence and strong ratings. However, competition from new entrants for large in-force blocks, particularly for asset-intensive blocks, has increased in recent years. Additionally, merger and acquisition and other restructuring transactions within the life insurance industry will likely continue to occur, which the Company believes will increase the demand for reinsurance products to facilitate these transactions and manage risk.
The Company's strategy is to continue to capitalize on industry trends by
ensuring it is well positioned to meet its clients' needs through the following
initiatives:
Leading with Expertise and Innovation
•Combine product development, innovation, and new reinsurance structures to open
or expand markets.
•Leverage underwriting, data, analytics, and digital expertise to grow markets.
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•Deliver unique insights to gain competitive advantage and leverage thought
leadership to drive growth.
Succeeding Together
•Broaden and deepen global, regional, and local client relationships to be the
preferred reinsurance partner.
•Foster third-party partnerships to accelerate innovation, capabilities, and
access to efficient capital.
•Strengthen leadership in industry organizations to actively promote and advance
industry purpose.
Prioritizing Agility, Impact and Scale
•Prioritize high-growth, capability-driven opportunities that best fit risk
appetites.
•Prioritize opportunities that recognize competitive differentiators and value
proposition.
•Capitalize on operating model to increase local markets responsiveness and
agility.
Building for Future Generations
•Pursue a balanced approach to in-force management, portfolio optimization, and
new business generation.
•Foster an engaging and inclusive culture to attract and retain diverse,
world-class talent.
•Behave as a responsible global citizen by taking action to address social and
environmental issues.
Critical Accounting Policies The Company's accounting policies are described in Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements. The Company believes its most critical accounting policies include the establishment of premiums receivable; amortization of deferred acquisition costs ("DAC"); the establishment of liabilities for future policy benefits and incurred but not reported claims; the valuation of investments and investment allowance for credit losses and impairments; the valuation of embedded derivatives; and accounting for income taxes. The balances of these accounts require extensive use of assumptions and estimates, particularly related to the future performance of the underlying business. Differences in experience compared with the assumptions and estimates utilized in establishing premiums receivable, the justification of the recoverability of DAC, in establishing reserves for future policy benefits and claim liabilities, or in the determination of impairments to investment securities can have a material effect on the Company's results of operations and financial condition.
Premiums Receivable
Premiums are accrued when due and in accordance with information received from the ceding company. When the Company enters into a new reinsurance agreement, it records accruals based on the terms of the reinsurance treaty. Similarly, when a ceding company fails to report information on a timely basis, the Company records accruals based on the terms of the reinsurance treaty as well as historical experience. Other management estimates include adjustments for increased insurance in force on existing treaties, lapsed premiums given historical experience, the financial health of specific ceding companies, collateral value and the legal right of offset on related amounts (i.e., allowances and claims) owed to the ceding company. Under the legal right of offset provisions in its reinsurance treaties, the Company can withhold payments for allowances and claims from unpaid premiums.
Deferred Acquisition Costs
Costs of acquiring new business, which vary with and are directly related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting. Non-commission costs related to the acquisition of new and renewal insurance contracts may be deferred only if they meet the following criteria:
•Incremental direct costs of a successful contract acquisition.
•Portions of employees' salaries and benefits directly related to time spent
performing specified acquisition activities for a contract that has been
acquired or renewed.
•Other costs directly related to the specified acquisition or renewal activities that would not have been incurred had that acquisition contract transaction not occurred. The Company tests the recoverability for each year of business at issue before establishing additional DAC. The Company also performs annual tests to establish that DAC remain recoverable at all times, and if financial performance 44
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significantly deteriorates to the point where a deficiency exists, a cumulative charge to current operations will be recorded. No such adjustments related to DAC recoverability were made in 2021, 2020 and 2019. DAC related to traditional life insurance contracts are amortized with interest over the premium-paying period of the related policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the life of the policy. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits. DAC related to interest-sensitive life and investment-type contracts is amortized over the lives of the contracts, in relation to the present value of estimated gross profits ("EGP") from mortality, investment income, and expense margins. The EGP for asset-intensive products include the following components: (1) estimates of fees charged to policyholders to cover mortality, surrenders and maintenance costs, less amount of risk upon death; (2) expected interest rate spreads between income earned and amounts credited to policyholder accounts; and (3) estimated costs of administration. EGP is also reduced by the Company's estimate of future losses due to defaults in fixed maturity securities as well as the change in reserves for embedded derivatives. DAC is sensitive to changes in assumptions regarding these EGP components, and any change in such assumptions could have an effect on the Company's profitability. The Company periodically reviews the EGP valuation model and assumptions so that the assumptions reflect best estimates of future experience. Two assumptions are considered to be most significant: (1) estimated interest spread, and (2) estimated future policy lapses. As ofDecember 31, 2021 , the Company had$264 million of DAC related to asset-intensive products, within theU.S. andLatin America and Asia Pacific Financial Solutions segments. The following table reflects the possible change, as a percentage of current DAC related to asset-intensive products, that would occur in a given year if assumptions are changed as illustrated: One-Time Increase in One-Time Decrease in Quantitative Change in Significant Assumptions DAC DAC
Estimated interest spread increasing (decreasing) 25
basis points from the current spread
6.96% (8.94)% Estimated future policy lapse rates decreasing (increasing) 20% on a permanent basis (including surrender charges) 3.17% (2.94)% In general, a change in assumption that improves the Company's expectations regarding EGP is going to have the effect of deferring the amortization of DAC into the future, thus increasing earnings and the current DAC balance. DAC can be no greater than the initial DAC balance plus interest and would be subject to recoverability testing, which is ignored for purposes of this analysis. Conversely, a change in assumption that decreases EGP will have the effect of speeding up the amortization of DAC, thus reducing earnings and lowering the DAC balance. The Company also adjusts DAC to reflect changes in the unrealized gains and losses on available-for-sale fixed maturity securities since these changes affect EGP. This adjustment to DAC is reflected in accumulated other comprehensive income. The DAC associated with the Company's non-asset-intensive business is less sensitive to changes in estimates for investment yields, mortality and lapses. In accordance with generally accepted accounting principles, the estimates include provisions for the risk of adverse deviation and are not adjusted unless experience significantly deteriorates to the point where a premium deficiency exists.
The following table summarizes the DAC balances for the Traditional and
Financial Solutions segments as of
(dollars in millions) Traditional Financial Solutions Other Total U.S. and Latin America$ 1,926 $ 190 $ -$ 2,116 Canada 192 - - 192 Europe, Middle East and Africa 253 - - 253 Asia Pacific 1,052 74 - 1,126 Corporate - - 3 3 Total$ 3,423 $ 264$ 3 $ 3,690 As ofDecember 31, 2021 , the Company estimates that all of its DAC balance is collateralized by surrender fees due to the Company and the reduction of policy liabilities, in excess of termination values, upon surrender or lapse of a policy.
Liabilities for Future Policy Benefits and Incurred but not Reported Claims
Liabilities for future policy benefits under long-duration life insurance
policies (policy reserves) are computed based upon expected investment yields,
mortality and withdrawal (lapse) rates, and other assumptions, including a
provision for
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adverse deviation from expected claim levels. Liabilities for use policy claims and benefits for short-duration contracts are accounted for based on actuarial estimates of the amount of loss inherent in that period's claims, including losses incurred for which claims have not been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. The Company primarily relies on its own valuation and administration systems to establish policy reserves. The policy reserves the Company establishes may differ from those established by the ceding companies due to the use of different mortality and other assumptions. However, the Company relies upon its ceding company clients to provide accurate data, including policy-level information, premiums and claims, which is the primary information used to establish reserves. The Company's administration departments work directly with clients to help ensure information is submitted in accordance with the reinsurance contracts. Additionally, the Company performs periodic audits of the information provided by clients. The Company establishes reserves for processing backlogs with a goal of clearing all backlogs within a ninety-day period. The backlogs are usually due to data errors the Company discovers or computer file compatibility issues, since much of the data reported to the Company is in electronic format and is uploaded to its computer systems. The Company periodically reviews actual historical experience and relative anticipated experience compared to the assumptions used to establish aggregate policy reserves. Further, the Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing aggregate policy reserves, together with the present value of future gross premiums, are not sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. The premium deficiency reserve is established through a charge to income, as well as a reduction to unamortized acquisition costs and, to the extent there are no unamortized acquisition costs, an increase to future policy benefits. Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the Company's reinsurance contracts, the reserving process, while based on actuarial science, is inherently uncertain. If the Company's assumptions, particularly on mortality, are inaccurate, its reserves may be inadequate to pay claims and there could be a material adverse effect on its results of operations and financial condition. Claims payable for incurred but not reported losses for long-duration life policies are determined using case-basis estimates and lag studies of past experience. The time lag from the date of the claim or death to the date when the ceding company reports the claim to the Company can be several months and can vary significantly by ceding company, business segment and product type. Incurred but not reported claims are estimates on an undiscounted basis, using actuarial estimates of historical claims expense, adjusted for current trends and conditions. These estimates are continually reviewed and the ultimate liability may vary significantly from the amount recognized, which are reflected in net income in the period in which they are determined. Claims payable for incurred but not reported losses for disability, medical and other short-duration contracts are determined using actuarial methods based on historical claim patterns as well as estimated changes in cost trends. The Company also reviews and evaluates how prior periods' estimates are developed when estimating the accrual for the current period. To the extent appropriate, changes in such development are recorded as a change to the current period expense. Historically, the amount of the claim development adjustment made in subsequent reporting periods for prior period estimates has been in a reasonable range given the Company's normal claim fluctuations.
Valuation of Investments, Allowance for Credit Losses and Impairments
The Company primarily invests in fixed maturity securities, mortgage loans, short-term investments, and other invested assets. For investments reported at fair value, the Company utilizes, when available, fair values based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require management judgment. When quoted prices in active markets are not available, fair value is based on market valuation techniques, market comparable pricing and the income approach. The Company may utilize information from third parties, such as pricing services and brokers, to assist in determining the fair value for certain investments; however, management is ultimately responsible for all fair values presented in the Company's consolidated financial statements. This includes responsibility for monitoring the fair value process, ensuring objective and reliable valuation practices and pricing of assets and liabilities, and approving changes to valuation methodologies and pricing sources. The selection of the valuation technique(s) to apply considers the definition of an exit price and the nature of the investment being valued and significant expertise and judgment is required. In addition, investments are subject to impairment reviews to identify when a decline in value necessitates the recording of an allowance for credit losses or an impairment for non-credit factors. Impairment losses for non-credit factors are recognized in AOCI whereas allowances for credit losses are recognized in investment related gains (losses), net. See "Allowance for Credit Losses and Impairments" in Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements for a discussion of the policies regarding allowance for credit losses and impairments. Fixed maturity securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on fixed maturity securities classified as available-for-sale, less applicable deferred income taxes as well as related adjustments 46
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to deferred acquisition costs, if applicable, are reflected as a direct charge or credit to accumulated other comprehensive income ("AOCI") in stockholders' equity on the consolidated balance sheets. See "Investments" in Note 2 - "Significant Accounting Policies and Pronouncements" and Note 6 - "Fair Value of Assets and Liabilities" in the Notes to Consolidated Financial Statements for additional information regarding the valuation of the Company's investments. Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances. For a discussion regarding the valuation allowance for mortgage loans see "Allowance for Credit Losses and Impairments" in Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements.
Valuation of Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded derivatives, primarily equity-indexed annuities and variable annuities with guaranteed minimum benefits. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated under the general accounting principles for Derivatives and Hedging. If the instrument would not be reported in its entirety at fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are carried on the consolidated balance sheets at fair value with the host contract. Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. The majority of the Company's funds withheld at interest balances are associated with its reinsurance of annuity contracts, the majority of which are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. Management believes the embedded derivative feature in each of these reinsurance treaties is similar to a total return swap on the assets held by the ceding companies. The valuation of the various embedded derivatives requires complex calculations based on actuarial and capital markets inputs and assumptions related to estimates of future cash flows and interpretations of the primary accounting guidance continue to evolve in practice. The valuation of embedded derivatives is sensitive to the investment credit spread environment. Changes in investment credit spreads are also affected by the application of a credit valuation adjustment ("CVA"). The fair value calculation of an embedded derivative in an asset position utilizes a CVA based on the ceding company's credit risk. Conversely, the fair value calculation of an embedded derivative in a liability position utilizes a CVA based on the Company's credit risk. Generally, an increase in investment credit spreads, ignoring changes in the CVA, will have a negative impact on the fair value of the embedded derivative (decrease in income). See "Derivative Instruments" in Note 2 - "Significant Accounting Policies and Pronouncements" and Note 6 - "Fair Value of Assets and Liabilities" in the Notes to Consolidated Financial Statements for additional information regarding the valuation of the Company's embedded derivatives.
Income Taxes
The
eligible subsidiaries. The Company's foreign subsidiaries are taxed under
applicable local statutes.
The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the tax basis of assets and liabilities and the reported amounts, and are recognized in net income or in certain cases in other comprehensive income. The Company's accounting for income taxes represents management's best estimate of various events and transactions considering the laws enacted as of the reporting date. Deferred tax assets and liabilities are measured by applying the relevant jurisdictions' enacted tax rate for the period in which the temporary differences are expected to reverse to the temporary difference change for that period. The Company will establish a valuation allowance if management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. The Company has deferred tax assets including those related to foreign tax credits, net operating and capital losses. The Company has projected its ability to utilize its deferred tax assets and established a valuation allowance on the portion of the deferred tax assets the Company believes more likely than not will not be realized. Significant judgment is required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such a determination, consideration is given to, among other things, the following:
(i)taxable income in prior carryback years
(ii)future reversals of existing taxable temporary differences;
(iii)future taxable income exclusive of reversing temporary differences and
carryforwards; and
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(iv)tax planning strategies.
Any such changes could significantly affect the amounts reported in the
consolidated financial statements in the year these changes occur.
The Company made a policy election to account for global intangible low-taxed
income ("GILTI") as a period cost.
The Company reports uncertain tax positions in accordance with generally accepted accounting principles. In order to recognize the benefit of an uncertain tax position, the position must meet the more likely than not criteria of being sustained. Unrecognized tax benefits due to tax uncertainties that do not meet the more likely than not criteria are included within liabilities and are charged to earnings in the period that such determination is made. The Company classifies interest related to tax uncertainties as interest expense whereas penalties related to tax uncertainties are classified as a component of income tax.
See Note 9 - "Income Tax" for further discussion.
Consolidated Results of Operations
Impacts of the COVID-19 Pandemic
The COVID-19 global pandemic continues to cause increases in the Company's claims costs, primarily relating to its mortality business. However, the Company cannot reliably predict the future impact of the pandemic on its business, results of operations and financial condition as the impact will largely depend on, among other factors, the impact of new variants of the virus, vaccination effectiveness and take-up rates, development and deployment of new antiviral therapeutics, country-specific circumstances, measures by public and private institutions, and COVID-19's indirect impact on mortality and morbidity. The ultimate amount and timing of claims the Company will experience as a result of the COVID-19 pandemic will depend on many variables and uncertainties. These variables and uncertainties include those discussed above, in addition to age, gender, comorbidities, other insured versus general population characteristics, geography-specific institutional and individual mitigating actions, medical capacity, and other factors. To date, general population COVID-19 deaths have been heavily concentrated in individuals aged 70 and older and with pre-existing comorbidities; however, more recently, many populations have seen an increase in younger age deaths, particularly in areas where healthcare facilities were unable to provide adequate care. The Company's insured population has lower exposure to older ages than the general population and covers a generally healthier population due to underwriting and socioeconomic factors of those purchasing insurance. In addition, the Company's longevity business may act as a modest offset to excess life insurance claims at older ages. The Company's COVID-19 projection and financial impact models continue to be updated and refined based on updated external data and the Company's claim experience to date and are subject to the many variables and uncertainties noted above. TheU.S. is the key driver of mortality claim costs followed byIndia ,South Africa , theUK andCanada . For the year endedDecember 31, 2021 , the Company estimates it has incurred approximately$1.4 billion of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$850 million of that amount being associated with theU.S. and Latin America Traditional segment. The Company has maintained the range of COVID-19 mortality claim cost estimates relative to the level of general population deaths for theU.S. , theUK andCanada although short-term experience may be at the higher end of those ranges, reflecting mortality that is still driven in part by the Delta variant. The Company estimates that every additional 10,000 population deaths in theU.S. ,UK , orCanada as a result of COVID-19 would result in the following corresponding excess mortality claims of approximately
•$10 million to
•$4 million to
•$10 million to
The global financial markets have stabilized since the beginning of the pandemic; however, they continue to be in a state of uncertainty due to COVID-19, including supply chain issues and the impact of historically large and rapid central bank actions and fiscal policies meant to offset the economic impact of the pandemic. The economic uncertainty caused by these events may also adversely affect the Company's financial performance. 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. The current market environment may result in certain investments being downgraded which can affect conformance with these limits. The level of potential impairments will depend on broad economic conditions and the pace at which global economies recover from the effects of COVID-19 and the response thereto. See "Investments" for more information. The safety and well-being of the Company's employees and clients continues to be a priority. The Company's business continuity plans remain activated and the actions taken during 2020 to protect both employees and clients, such as working from home, restricting travel, conducting meetings remotely, and reinforcing the importance of face coverings, good hygiene and social distancing, also largely continue. The Company's offices worldwide are at a minimum adhering to local government 48
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mandates and guidelines regarding occupancy levels; however, in certain
situations the Company's guidelines are more restrictive than those of local
governments.
The Company has not experienced any significant disruptions to its daily operations, despite most of its workforce working remotely. However, COVID-19 heightened operational risks and related impacts, which may include impacts to the Company's workforce productivity due to travel restrictions, temporary office closures and increased remote working situations, and potential client delays in paying premiums and reporting claims. Similar to other reinsurers, the Company is heavily reliant on timely reporting from its clients and other third parties. The Company continues to emphasize awareness and training regarding operational risks, including privacy and cybersecurity risks, as such risks are heightened during remote working situations. In addition, the Company continues to monitor its programs, processes and procedures designed to manage these risks. RGA's operating subsidiaries continue to be well capitalized, and the Company continues to monitor its solvency position under multiple capital regimes on a regular basis while considering both its developing experience and economic conditions. In addition, the Company utilizes its internal capital model to assess its ability to meet its long-term obligations under a range of stress scenarios on a consolidated basis. This internal capital model is also used as the capital basis for the Company's consolidated Own Risk and Solvency Assessment.
Results of Operations - 2021 compared to 2020
A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , is presented below. A discussion regarding our financial condition and results of operations for year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , can be found under Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onFebruary 26, 2021 , which is available free of charge on theSEC's website at www.sec.gov and our Investor Relations website at www.rgare.com. Information provided on such websites does not constitute part of this Annual Report on Form 10-K.
The following table summarizes net income for the periods presented.
For the years ended
2021 2020 2021 vs 2020 Revenues
(Dollars in millions, except per share data)
Net premiums
$ 12,513$ 11,694 $ 819 Investment income, net of related expenses 3,138 2,575 563 Investment related gains (losses), net 560 (33) 593 Other revenues 447 360 87 Total revenues 16,658 14,596 2,062 Benefits and expenses Claims and other policy benefits 12,776 11,075 1,701 Interest credited 700 704 (4) Policy acquisition costs and other insurance expenses 1,416 1,261 155 Other operating expenses 936 816 120 Interest expense 127 170 (43) Collateral finance and securitization expense 12 17 (5) Total benefits and expenses 15,967 14,043 1,924 Income before income taxes 691 553 138 Provision for income taxes 74 138 (64) Net income $ 617$ 415 $ 202 Earnings per share Basic earnings per share $ 9.10$ 6.35 Diluted earnings per share 9.04 6.31
The increase in income in 2021 was primarily the result of the following:
•$234 million, pre-tax, of capital gains included in other investment related
gains (losses), net associated with portfolio repositioning.
•A one-time adjustment of$162 million , pre-tax, associated with prior periods that includes$92 million , pre-tax, to correct the accounting for equity method limited partnerships to reflect unrealized gains in investment income, net of related expenses that were previously included in accumulated other comprehensive income, and a$70 million , pre-tax, correction reflected in other investment related gains (losses), net to adjust the carrying value of certain limited partnerships from cost less impairments to a fair value approach, using the net asset value ("NAV") per share or its equivalent. 49
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•Changes in fair value of embedded derivatives, associated with modco/funds withheld treaties, increased investment related gains by$107 million in 2021, compared to a decrease of$62 million in 2020. •As discussed in "Impacts of the COVID-19 Pandemic" above, the Company estimates it has incurred approximately$1.4 billion of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$850 million of the current year amount being associated with theU.S. and Latin America Traditional segment. Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency exchange fluctuation increased income before taxes by$13 million due to the strengthening of the Great British Pound, Canadian Dollar and SouthAfrica Rand compared to theU.S. Dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations.
Premiums and business growth
The increase in premiums is primarily due to an increase in new business production, measured by the face amount of insurance in force, of$412.1 billion during 2021 compared to$389.6 billion during 2020. Consolidated assumed life insurance in force decreased to$3,467.0 billion as ofDecember 31, 2021 , from$3,480.7 billion as ofDecember 31, 2020 , due to lapses and mortality claims in the current year of$391.7 billion , primarily attributable to the COVID-19 pandemic and changes in foreign exchange, which decreased assumed life insurance in force by$34.1 billion .
Investment income, net of related expenses and investment related gains and
losses
The increase in investment income, net of related expenses is primarily attributable to an increase in the average invested asset base, and increase in investment yield and an increase in variable investment income associated with joint venture and limited partnership investments:
•The average invested assets at amortized cost, excluding spread related
business, totaled
respectively.
•The average yield earned on investments, excluding spread related business, was
4.99% and 4.00% in 2021 and 2020, respectively.
•Excluding the previously mentioned correction recorded in the first quarter of 2021 of$92 million , variable investment income associated with joint venture and limited partnership investments was$341 million and$63 million in 2021 and 2020, respectively. The average yield will vary from year to year depending on several variables, including the prevailing risk-fee interest rate and credit spread environment, prepayment fees and make-whole premiums, changes in the mix of the underlying investments and cash and cash equivalents balances. Variable investment income from joint ventures and limited partnerships will also vary from year to year and is highly dependent on the timing of dividends and distributions on certain investments. Investment income is allocated to the operating segments based upon average assets and related capital levels deemed appropriate to support segment operations.
The increase in investment related gains (losses), net is attributable to the
following:
•During 2021, the Company repositioned select portfolios generating net realized
gains of
•Changes in the fair value of embedded derivatives associated with modco/funds withheld treaties, increased and (decreased) investment related gains (losses) by$107 million and$(62) million in 2021 and 2020, respectively.
•During 2021, the Company recognized a gain of
allowance for credit losses and impairments on fixed maturity securities,
mortgage loans, and limited partnerships compared to a loss of
during 2020.
•Unrealized gains of$194 million , including the previously mentioned correction recorded in the first quarter of 2021 of$70 million , due to the change in fair value of certain cost method limited partnerships were recognized during 2021 compared to$24 million in 2020. •See the Investment section within Management Discussion and Analysis, Note 4 - "Investments" and Note 5 - "Derivative Instruments" in the Notes to Consolidated Financial Statements for additional information on the changes in allowance for credit losses, impairment losses and derivatives. The effective tax rate on a consolidated basis was 10.6% and 24.9% for 2021 and 2020, respectively. The effective tax rate for 2021 was lower than theU.S. Statutory rate of 21.0% as result of the release of uncertain tax positions in the amount of$124 million due to the expiration of statute of limitations, partially offset by income earned in jurisdictions with tax rates 50
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higher than the
Financial Statements for additional information on the Company's consolidated
effective tax rate.
Impact of certain derivatives The Company recognizes in consolidated income, any changes in the fair value of embedded derivatives on modco or funds withheld treaties, EIAs and variable annuities with guaranteed minimum benefit riders. The Company utilizes freestanding derivatives to minimize the income statement volatility due to changes in the fair value of embedded derivatives associated with guaranteed minimum benefit riders. The following table presents the effect of embedded derivatives and related freestanding derivatives on income before income taxes for the periods indicated (dollars in millions):
Twelve months ended
2021 2020 2021 vs 2020Modco /Funds withheld: Unrealized gains (losses)$ 107 $ (62) $ 169 Deferred acquisition costs/retrocession (36) 22 (58) Net effect 71 (40) 111 EIAs: Unrealized gains (losses) 45 (20) 65 Deferred acquisition costs/retrocession (23) 8 (31) Net effect 22 (12) 34 Guaranteed minimum benefit riders: Unrealized gains (losses) (7) 9 (16) Related freestanding derivatives, net of deferred acquisition costs/retrocession (47) 1 (48) Net effect (54) 10 (64) Net effect after related freestanding derivatives $ 39$ (42) $ 81 51
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Results of Operations by Segment
TheU.S. andLatin America operations consist of two major segments: Traditional and Financial Solutions. The Traditional segment primarily specializes in the reinsurance of individual mortality-risk, health and long-term care and to a lesser extent, group reinsurance. The Financial Solutions segment consists of Asset-Intensive and Capital Solutions. Asset-Intensive within the Financial Solutions segment includes coinsurance of annuities and corporate-owned life insurance policies and to a lesser extent, fee-based synthetic guaranteed investment contracts, which include investment-only, stable value contracts. Capital Solutions 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 and other transactions. Typically, capital solution transactions do not qualify as reinsurance under GAAP, due to the low-risk nature of the transactions, therefore only the related net fees are reflected in other revenues on the consolidated statements of income.
The following table summarizes income before income taxes for the Company's
and
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 6,299 $ 5,891 $ 408 Investment income, net of related expenses 2,019 1,713 306 Investment related gains (losses), net 78 (50) 128 Other revenues 294 226 68 Total revenues 8,690 7,780 910 Benefits and expenses: Claims and other policy benefits 6,886 6,107 779 Interest credited 635 636 (1) Policy acquisition costs and other insurance expenses 988 871 117 Other operating expenses 206 169 37 Total benefits and expenses 8,715 7,783 932 Loss before income taxes$ (25) $ (3) $ (22) The increase in loss before income taxes in 2021 was the result of an increase in claims in theU.S. Traditional segment primarily attributable to COVID-19 related factors, partially offset by an increase in variable investment income and improved results in the Financial Solutions segment primarily due to increased investment related gains (losses), net in coinsurance portfolios, transaction fees and the net increase in fair value of the embedded derivatives. 52
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Traditional Reinsurance
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 6,244 $ 5,838 $ 406 Investment income, net of related expenses 930 714 216 Investment related gains (losses), net 6 (11) 17 Other revenues 18 19 (1) Total revenues 7,198 6,560 638 Benefits and expenses: Claims and other policy benefits 6,720 5,906 814 Interest credited 70 73 (3) Policy acquisition costs and other insurance expenses 792 748 44 Other operating expenses 156 131 25 Total benefits and expenses 7,738 6,858 880 Loss before income taxes $ (540) $ (298)$ (242) Key metrics: Life insurance in force$1,628.4 billion $1,611.6 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 107.6 % 101.2 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 12.7 % 12.8 % Other operating expenses as a percentage of net premiums 2.5 % 2.2 % The increase in loss before income taxes for theU.S. andLatin America Traditional segment was primarily due to unfavorable claims experience within the individual mortality line of business primarily attributable to COVID-19, which was partially offset by higher variable investment income.
Revenues
•The increase in net premiums was primarily due to organic growth as well as new sales. The segment added new life business production, measured by face amount of insurance in force, of$130.5 billion , and$114.9 billion during 2021 and 2020, respectively.
•The increase in net investment income was due to an increase in variable
investment income associated with investments in real estate joint ventures and
an increase in realized and unrealized gains associated with investments in
limited partnerships and private equity funds.
Benefits and expenses
•The increase in the loss ratio for 2021 was primarily due to unfavorable claims experience in the individual mortality line of business, attributed primarily to the COVID-19 pandemic. While the cause of death is not yet available for all claims, the Company estimates that approximately$850 million of claims for the year endedDecember 31, 2021 , were attributable to COVID-19 related factors.
•The increase in other operating expenses was primarily due to an increase in
incentive-based compensation expense.
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Financial Solutions
For the year ended December 31, 2021 2020 2021 vs 2020 Capital Capital Capital Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total
(dollars in millions) Revenues: Net premiums $ 55 $ -$ 55 $ 53 $ -$ 53 $ 2 $ -$ 2 Investment income, net of related expenses 1,087 2 1,089 994 5 999 93 (3) 90 Investment related gains (losses), net 72 - 72 (39) - (39) 111 - 111 Other revenues 168 108 276 103 104 207 65 4 69 Total revenues 1,382 110 1,492 1,111 109 1,220 271 1 272 Benefits and expenses: Claims and other policy benefits 166 - 166 201 - 201 (35) - (35) Interest credited 565 - 565 563 - 563 2 - 2 Policy acquisition costs and other insurance expenses 192 4 196 118 5 123 74 (1) 73 Other operating expenses 37 13 50 28 10 38 9 3 12 Total benefits and expenses 960 17 977 910 15 925 50 2 52 Income before income taxes $ 422 $ 93$ 515 $ 201 $ 94$ 295 $ 221 $ (1)$ 220 Asset-intensive The increase in income before income taxes for theU.S. andLatin America Financial Solutions' Asset-intensive segment was primarily due to higher investment related gains (losses), net primarily due to an increase in the fair value of embedded derivatives reflected in investment related gains (losses), net.
The invested asset base supporting this segment increased to
•The increase in the asset base was primarily due to an increase in fixed
annuity account values due to new transactions.
•As ofDecember 31, 2021 and 2020,$4.7 billion and$3.2 billion , respectively, of the invested assets were funds withheld at interest, of which greater than 90% is associated with two clients.
Impact of certain derivatives
Income from the asset-intensive business tends to be volatile due to changes in the fair value of certain derivatives, including embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis, as well as embedded derivatives associated with the Company's reinsurance of EIAs and variable annuities with guaranteed minimum benefit riders. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including risk-free rates and credit spreads), implied volatility, the Company's own credit risk and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives, net of related hedging activity, and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues), and interest credited. These fluctuations are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties. The following table summarizes the asset-intensive results and quantifies the impact of these embedded derivatives for the periods presented. Revenues before certain derivatives, benefits and expenses before certain derivatives, and income before income taxes and certain derivatives, should not be viewed as substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income before income taxes. 54
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For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Total revenues$ 1,382 $ 1,111 $ 271 Less: Embedded derivatives - modco/funds withheld treaties 101 (51) 152
Guaranteed minimum benefit riders and related free
standing derivatives
(78) 47 (125) Revenues before certain derivatives 1,359 1,115 244 Benefits and expenses: Total benefits and expenses 960 910 50 Less: Embedded derivatives - modco/funds withheld treaties 36 (22) 58
Guaranteed minimum benefit riders and related free
standing derivatives
(24) 37 (61) Equity-indexed annuities (22) 12 (34) Benefits and expenses before certain derivatives 970 883 87 Income (loss) before income taxes: Income before income taxes 422 201 221
Less:
Embedded derivatives - modco/funds withheld treaties 65 (29) 94
Guaranteed minimum benefit riders and related free
standing derivatives
(54) 10 (64) Equity-indexed annuities 22 (12) 34
Income before income taxes and certain derivatives
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 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 years endedDecember 31, 2021 and 2020.
The change in fair value of the embedded derivatives - modco/funds withheld
treaties increased income before income taxes by
increase in 2021 was primarily the result of tightening credit spreads.
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. Changes in fair values of the embedded derivatives on guaranteed minimum benefits are net of an increase (decrease) in investment related gains (losses), net of$(41) million and$77 million for 2021 and 2020, respectively, associated with the Company's utilization of a credit valuation adjustment. 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$54 million in 2021. The decrease in income for 2021 is primarily due to a decrease in the credit valuation adjustment, which has the impact of increasing the fair value of the guaranteed minimum benefit liability, net of related impact on deferred acquisition expenses and the annual update of best estimate actuarial assumptions for future mortality improvement. 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 income before income taxes by$22 million in 2021, primarily due to an increase in risk free interest rates which has the impact of lowering the fair value of the liability. 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 calculation 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. 55
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Discussion and analysis before certain derivatives
•Income before income taxes and certain derivatives increased by$157 million in 2021, which was primarily due to contributions from new transactions, favorable policyholder experience and higher investment related gains (losses), net in coinsurance and funds withheld portfolios. •Revenue before certain derivatives increased by$244 million in 2021, primarily due to the revenue associated with transactions executed during the year, increases in fair value of equity options associated with the reinsurance of EIAs and higher investment related gains (losses), net in coinsurance 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$87 million in 2021, primarily resulting from an increase in interest credited associated with the reinsurance of EIAs due to equity market performance and benefits associated with transactions executed during the year, partially offset by the expected run-off from closed block transactions. The effect on interest credited related to equity options is substantially offset by a corresponding increase in investment income.
Capital Solutions
Income before income taxes for theU.S. and Latin America Capital Solutions' business decreased$1 million for the year endedDecember 31, 2021 . The decrease was primarily due to the termination of certain transactions, partially offset by growth from new transactions and 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. •AtDecember 31, 2021 and 2020, the amount of business assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures, was$22.7 billion and$19.9 billion , respectively. Canada Operations TheCanada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, and to a lesser extent creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and capital solutions. For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 1,284 $ 1,135 $ 149 Investment income, net of related expenses 248 208 40 Investment related gains (losses), net 3 - 3 Other revenues 14 9 5 Total revenues 1,549 1,352 197 Benefits and expenses: Claims and other policy benefits 1,175 977 198 Interest credited - - - Policy acquisition costs and other insurance expenses 190 181 9 Other operating expenses 41 39 2 Total benefits and expenses 1,406 1,197 209 Income before income taxes$ 143 $
155 $ (12)
•The decrease in income before income taxes in 2021 is primarily due to unfavorable individual life mortality experience compared to 2020 attributed primarily to the COVID-19 pandemic, partially offset by increased investment income. •While foreign currency fluctuations can result in variances in the financial statement line items, fluctuation in the Canadian dollar did not result in a material change in income before income taxes in 2021. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 56
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Traditional Reinsurance
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 1,194 $ 1,052 $ 142 Investment income, net of related expenses 248 207 41 Investment related gains (losses), net 3 - 3 Other revenues 3 1 2 Total revenues 1,448 1,260 188 Benefits and expenses: Claims and other policy benefits 1,096 909 187 Interest credited - - - Policy acquisition costs and other insurance expenses 187 180 7 Other operating expenses 37 37 - Total benefits and expenses 1,320 1,126 194 Income before income taxes $ 128 $ 134 $ (6) Key metrics: Life insurance in force$472.6 billion $445.3 billion Loss ratios 91.8 % 86.4 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 15.7 % 17.1 % Other operating expenses as a percentage of net premiums 3.1 % 3.5 %
The decrease in income before income taxes in 2021 is primarily due to
unfavorable individual life mortality experience compared to 2020 and the impact
of COVID-19 related claims.
Revenues •The increase in net premiums was primarily due to a new transaction completed in the second half of the year for group business and an increase in business volume under existing treaties. •The segment added new life business production, measured by face amount of insurance in force, of$48.8 billion and$40.8 billion during 2021 and 2020, respectively. •The increase in net investment income was primarily due to increased variable investment income and an increase in the invested asset base due to growth in the underlying business volume partially offset by a decline in interest rates.
Benefits and expenses
•The increase in the loss ratio for 2021 was primarily due to unfavorable claims experience in the individual mortality line of business, attributed primarily to the COVID-19 pandemic. In addition, while the cause of death is not yet available for all claims, the Company estimates that approximately$60 million of claims for the year endedDecember 31, 2021 , were attributable to COVID-19 related factors. 57
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Financial Solutions
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 90 $ 83 $ 7 Investment income, net of related expenses - 1 (1) Investment related gains (losses), net - - - Other revenues 11 8 3 Total revenues 101 92 9 Benefits and expenses: Claims and other policy benefits 79 68 11 Interest credited - - -
Policy acquisition costs and other insurance expenses 3 1
2 Other operating expenses 4 2 2 Total benefits and expenses 86 71 15 Income before income taxes$ 15 $ 21
$ (6)
The decrease in income before income taxes in 2021 was primarily a result of less favorable mortality experience on longevity business in 2021 as compared to 2020.
TheEurope ,Middle East and Africa ("EMEA") operations 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. For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 2,088 $ 1,807 $ 281 Investment income, net of related expenses 293 265 28 Investment related gains (losses), net 49 15 34 Other revenues 13 17 (4) Total revenues 2,443 2,104 339 Benefits and expenses: Claims and other policy benefits 2,083 1,541 542 Interest credited 4 11 (7) Policy acquisition costs and other insurance expenses 135 123 12 Other operating expenses 157 144 13 Total benefits and expenses 2,379 1,819 560 Income before income taxes$ 64 $
285
•The decrease in income before income taxes in 2021 was primarily due to
unfavorable mortality experience attributed primarily to COVID-19. The
unfavorable mortality experience was partially offset by increases in net
premiums, investment income and investment related gains.
•Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in a$2 million decrease in income before income taxes in 2021. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 58
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Traditional Reinsurance
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 1,738 $ 1,555 $ 183 Investment income, net of related expenses 88 72 16 Investment related gains (losses), net - - - Other revenues 1 6 (5) Total revenues 1,827 1,633 194 Benefits and expenses: Claims and other policy benefits 1,829 1,389 440 Interest credited - - - Policy acquisition costs and other insurance expenses 125 119 6 Other operating expenses 112 98 14 Total benefits and expenses 2,066 1,606 460 Income (loss) before income taxes$ (239) $ 27$ (266) Key metrics: Life insurance in force$861.6 billion $864.3 billion Loss ratios 105.2 % 89.3 %
Policy acquisition costs and other insurance expenses
as a percentage of net premiums
7.2 % 7.7 % Other operating expenses as a percentage of net premiums 6.4 % 6.3 %
The decrease in income before income taxes in 2021 is primarily due to less
favorable individual life mortality experience, as well as poor morbidity
experience, driven in part by COVID-19 related claims. The decrease in income
was partially offset by an increase in net premiums.
Revenues
•The increase in net premiums was primarily due to an increase in business
volume from new and existing treaties.
•The segment added new life business production, measured by face amount of insurance in force, of$198.4 billion and$184.3 billion during 2021 and 2020, respectively. Benefits and expenses •The increase in the loss ratio was due to unfavorable mortality experience, primarily attributable to COVID-19. While the cause of death is not available for all claims, the Company estimates that approximately$265 million of claims, were attributable to COVID-19 related factors, of which approximately$150 million were incurred inSouth Africa and$105 million were incurred in theUK .
•The increase in other operating expenses was primarily due to an increase in
incentive compensation expenses.
Financial Solutions
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 350 $ 252 $ 98 Investment income, net of related expenses 205 193 12 Investment related gains (losses), net 49 15 34 Other revenues 12 11 1 Total revenues 616 471 145 Benefits and expenses: Claims and other policy benefits 254 152 102 Interest credited 4 11 (7)
Policy acquisition costs and other insurance expenses 10 4
6 Other operating expenses 45 46 (1) Total benefits and expenses 313 213 100 Income before income taxes$ 303 $
258 $ 45
The increase in income before income taxes is primarily due to an increase in new business activity and an increase in investment related gains on investments supporting annuity business. 59
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Revenues
•The increase in net premiums was primarily due to an increase in new business
volumes of closed longevity business.
•The increase in investment related gains (losses), net was primarily due to fluctuations in the fair market value of CPI swap derivatives due to changes in future inflation expectations and higher investment related gains on fixed-income securities, respectively.
Benefits and expenses
•The increase in claims and other policy benefits was the result of increased
volumes of closed longevity block business.
Asia Pacific Operations
TheAsia Pacific operations include business generated by its offices throughoutAsia andAustralia . The Traditional segment's principal types of reinsurance include individual and group life and health, critical illness, disability and superannuation. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks, and in some markets, group risks. 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. For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 2,842 $ 2,861 $ (19) Investment income, net of related expenses 274 192 82 Investment related gains (losses), net 18 13 5 Other revenues 61 49 12 Total revenues 3,195 3,115 80 Benefits and expenses: Claims and other policy benefits 2,632 2,450 182 Interest credited 57 49 8 Policy acquisition costs and other insurance expenses 215 198 17 Other operating expenses 203 185 18 Total benefits and expenses 3,107 2,882 225 Income before income taxes$ 88 $
233
•The decrease in income before income taxes as compared to the same period in 2020 was due to unfavorable claims experience inAsia compared to the prior period, partially offset by continued growth of Financial Solutions Reinsurance inAsia and increases in investment income, net and investment related gains. •Foreign currency fluctuations can result in variances in the financial statement line items, foreign currency fluctuations resulted in a$3 million decrease in income before income taxes in 2021. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 60
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Traditional Reinsurance
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 2,624 $ 2,681 $ (57) Investment income, net of related expenses 136 107 29 Investment related gains (losses), net (1) 3 (4) Other revenues 19 15 4 Total revenues 2,778 2,806 (28) Benefits and expenses: Claims and other policy benefits 2,445 2,293 152 Interest credited - - - Policy acquisition costs and other insurance expenses 159 167 (8) Other operating expenses 184 172 12 Total benefits and expenses 2,788 2,632 156 Income before income taxes $ (10) $ 174$ (184) Key metrics: Life insurance in force$497.4 billion $553.7 billion Loss ratios 93.2 % 85.5 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 6.1 % 6.2 % Other operating expenses as a percentage of net premiums 7.0 % 6.4 %
The decrease in income before income taxes is primarily the result of net
unfavorable claims experience across the segment, primarily attributable to
COVID-19 related claims in
Revenues
•The decrease in net premiums was primarily due to new business growth inAsia , partially offset by premium reductions inAustralia group business as a result of the non-renewal of two large group treaties effectiveJune 30, 2020 . •The segment added new life business production, measured by face amount of insurance in force, of$34.2 billion and$49.6 billion during 2021 and 2020, respectively, due to new business production and in force transactions.
Benefits and expenses
•The increase in the loss ratio for 2021 was primarily due to unfavorable claims experience inAsia , primarily inIndia . While the cause of death is not yet available for all claims, the Company estimates that approximately$240 million of claims, of which$220 million were incurred inIndia , for the year endedDecember 31, 2021 , were attributable to COVID-19 related factors. 61
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Financial Solutions
For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums$ 218 $ 180 $ 38 Investment income, net of related expenses 138 85 53 Investment related gains (losses), net 19 10 9 Other revenues 42 34 8 Total revenues 417 309 108 Benefits and expenses: Claims and other policy benefits 187 157 30 Interest credited 57 49 8
Policy acquisition costs and other insurance expenses 56 31
25 Other operating expenses 19 13 6 Total benefits and expenses 319 250 69 Income before income taxes$ 98 $
59 $ 39
The increase in income before income taxes is primarily due to the contributions from asset-intensive transactions executed during 2021, in addition to organic growth, inAsia . The invested asset base supporting asset-intensive transactions increased to$8.6 billion as ofDecember 31, 2021 , from$4.4 billion as ofDecember 31, 2020 , primarily as a result of asset-intensive transactions executed during the year.
Revenues
•The increase in net premiums is primarily due to contributions from new single
premium asset-intensive transactions.
•The increase in net investment income is due to the growth in the invested
asset base supporting asset-intensive transactions in
Benefits and expenses
•The increase in claims and other policy benefits and policy acquisition costs
is the result of increased production from single premium asset-intensive
transactions.
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Corporate and Other
Corporate and Other revenues primarily include investment income from unallocated invested assets, investment related gains and losses and service fees. 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 and service business expenses. Additionally, Corporate and Other includes results from certain wholly-owned subsidiaries, such as RGAX, and joint ventures that, among other activities, develop and market technology, and provide consulting and outsourcing solutions for the insurance and reinsurance industries. The Company has increased its investment and expenditures in this area in an effort to both support its clients and accelerate the development of new solutions and services to increase consumer engagement within the life insurance industry and hence generate new future revenue streams. For the year ended December 31, 2021 2020 2021 vs 2020 (dollars in millions) Revenues: Net premiums $ - $ - $ - Investment income, net of related expenses 304 197 107 Investment related gains (losses), net 412 (11) 423 Other revenues 65 59 6 Total revenues 781 245 536 Benefits and expenses: Claims and other policy benefits - - - Interest credited 4 8 (4)
Policy acquisition costs and other insurance income (112) (112)
- Other operating expenses 329 279 50 Interest expense 127 170 (43) Collateral finance and securitization expense 12 17 (5) Total benefits and expenses 360 362 (2) Income/(loss) before income taxes$ 421 $ (117)
$ 538
The increase in income before income taxes in 2021 is primarily due to an
increase in total revenues and a decrease in interest expense, offset by
increases in other operating expenses.
•The increase in net investment income is primarily due to higher variable investment income associated with investments in limited partnerships generated from unrealized gains in the underlying investments. The increase includes a reclassification recorded in the first quarter of approximately$92 million of pre-tax unrealized gains on certain limited partnerships, for which the Company uses the equity method of accounting, from AOCI to net investment income that should have been recognized in net investment income in the same prior periods they were reported as earnings by the investees. •The increase in investment related gains (losses), net includes changes in the carrying value of investments in limited partnerships considered to be investment companies of$169 million of which$70 million relates to a prior period adjustment recorded in the first quarter of 2021 to adjust the carrying value from cost less impairments to fair value, using NAV per share or its equivalent. The remaining increase is attributable to an increase of$197 million of gains on sales of fixed maturity securities, a decrease in the allowance for credit losses on mortgage loans as a result of assumption updates due to the improving view of the impact of the COVID-19 pandemic, and changes in the fair value of derivatives.
•The increase in other operating expenses is primarily due to higher
incentive-based compensation expense.
•The decrease in interest expense is due to the reversal of approximately$32 million of accrued interest associated with the recognition of uncertain tax positions due to the expiration of the statute of limitations. 63
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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 the Company under various scenarios that include the potential risk of early recapture of reinsurance treaties, market events and higher than expected claims associated with COVID-19. The Company is currently holding higher cash and cash equivalents levels in response to COVID-19. 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 the sale of invested assets subject to market conditions, borrowings under committed credit facilities, secured borrowings, and if necessary issuing long-term debt, preferred securities or common equity.
Current Market Environment
The Company's average investment yield, excluding spread related business, for 2021 was at 4.99%, 99 basis points above the comparable 2020 rate due to higher variable investment income. However, the current interest rate environment continues to put downward pressure on the Company's investment yield. The Company's insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Due to increases in risk free interest rates, gross unrealized gains on fixed maturity securities available-for-sale decreased from$7.4 billion atDecember 31, 2020 , to$5.3 billion atDecember 31, 2021 . Gross unrealized losses increased from$197 million atDecember 31, 2020 to$349 million atDecember 31, 2021 . 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$5.3 billion remain well in excess of gross unrealized losses of$349 million as ofDecember 31, 2021 . 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 and results of operations are not overly sensitive to these risks. Mortality and morbidity risks continue to be the most significant risk for the Company. 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.
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 withRGA Reinsurance , RCM and Rockwood Re and dividends from operating subsidiaries. As the Company continues its growth efforts, RGA will continue to be dependent upon these sources of liquidity. See "Part IV - Item 15(a)(2) Financial Statement Schedules - Schedule II - Condensed Financial Information of Registrant" for more information regarding RGA's financial information. RGA, through wholly-owned subsidiaries, has committed to provide statutory reserve support to third parties, in exchange for a fee, by funding loans if certain defined events occur. Such statutory reserves are required under theU.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX for term life insurance policies and Regulation A-XXX for universal life secondary guarantees). The third-parties have recourse to RGA should the subsidiary fail to provide the required funding, however, as ofDecember 31, 2021 , the Company does not believe that it will be required to provide any funding under these commitments as the occurrence of the defined events is considered remote. See Note 12 - "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements for a table that presents these commitments by period and maximum obligation. RGA established an intercompany revolving credit facility where certain subsidiaries can lend to or borrow from each other and from RGA in order to manage capital and liquidity more efficiently. The intercompany revolving credit facility, which is a series of demand loans among RGA and its affiliates, is permitted under applicable insurance laws. This facility reduces overall borrowing costs by allowing RGA and its operating companies to access internal cash resources instead of 64
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incurring third-party transaction costs. The statutory borrowing and lending limit for RGA'sMissouri -domiciled insurance subsidiaries is currently 3% of the insurance company's admitted assets as of its most recent year-end. There were borrowings of$192 million and$153 million outstanding under the intercompany revolving credit facility as ofDecember 31, 2021 and 2020, respectively. In addition to loans associated with the intercompany revolving credit facility, RGA and its subsidiaries, RGA Americas and RGA International Division Sydney Office Pty Limited, provided loans toRGA Australian Holdings Pty Limited with a total outstanding balance of$44 million and$46 million as ofDecember 31, 2021 and 2020, respectively. During 2020, RGA established an intercompany derivative cash collateral pool where RGA and certain subsidiaries pool derivative cash collateral into a single concentration account. This derivative cash collateral pool allows RGA and its affiliates to lend or borrow cash from the concentration account in order to more efficiently meet its collateral obligations under their respective derivative transactions. Cash surplus in RGA or its affiliates accounts is transferred to the concentration account and any deficit is funded by the concentration account, thereby creating a loan balance. RGA and its subsidiaries participating in the pool are paid or charged an arm's length interest rate based on its net loan balance with the concentration account. Undistributed earnings of the Company's foreign subsidiaries are generally targeted for reinvestment outside of theU.S. As ofDecember 31, 2021 , the amount of cash and cash equivalents and short-term investments held by the Company's subsidiaries that are taxed in a foreign jurisdiction was$1,032 million . The Global Intangible Low-Taxed Income ("GILTI") and Subpart F provisions ofU.S. Tax Reform generally eliminateU.S. federal income tax deferral on earnings of foreign subsidiaries, while the dividend received deduction generally allows for tax-free repatriation of any untaxed earnings. Therefore, the Company does not expect to incur any material incrementalU.S. federal income tax on repatriation of these earnings. Incremental foreign withholding taxes are not expected to be material. 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, it has in recent years repurchased shares of RGA common stock and paid dividends to RGA shareholders, as authorized by the board of directors. OnJanuary 24, 2019 , RGA's board of directors authorized a share repurchase program for up to$400 million of RGA's outstanding common stock. As ofDecember 31, 2021 , approximately$72 million of RGA's common stock may still be purchased under the 2019 share repurchase program. OnFebruary 25, 2022 , RGA's board of directors authorized a share repurchase program for up to$400 million of RGA's outstanding common stock. The authorization was effective immediately and does not have an expiration date. In connection with this authorization, the board of directors terminated the stock repurchase authority granted in 2019. The pace of repurchase activity depends on various factors such as the level of available cash, the impact of the ongoing COVID-19 pandemic, an evaluation of the costs and benefits associated with alternative uses of excess capital, such as acquisitions and in force reinsurance transactions, and RGA's stock price. Details underlying dividend and share repurchase program activity were as follows (in millions, except share data): 2021 2020 2019 Dividends to shareholders$ 194 $ 182 $ 163 Purchase of common stock (1) 96 153 80 Total amount paid to shareholders$ 290 $ 335 $ 243 Number of common shares purchased (1) 852,037 1,074,413 546,614 Average price per share$ 112.67 $ 142.05 $ 146.00
(1)Excludes shares utilized to execute and settle certain stock incentive
awards.
RGA declared dividends totaling$2.86 per share in 2021. 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 13 - "Debt" and Note 17 - "Equity" in the Notes to Consolidated
Financial Statements for additional information regarding the Company's
securities transactions.
Statutory Dividend Limitations
RCM,RGA Reinsurance and Chesterfield Re are subject toMissouri statutory provisions that restrict the payment of dividends. They may not pay dividends in any 12-month period in excess of the greater of the prior year's statutory net gain from operations or 10% of statutory capital and surplus at the preceding year-end, without regulatory approval. Aurora National is subject toCalifornia statutory provisions that are identical to those imposed byMissouri regarding the ability of Aurora National to pay dividends toRGA Reinsurance . The applicable statutory provisions only permit an insurer to pay a shareholder 65
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dividend from unassigned surplus. Any dividends paid byRGA Reinsurance would be paid to RCM, its parent company, which in turn has restrictions related to its ability to pay dividends to RGA. Chesterfield Re would pay dividends to its immediate parent Chesterfield Financial, which would in turn pay dividends to RCM. The MDCI allows RCM to pay a dividend to RGA to the extent RCM received the dividend from its subsidiaries, without limitation related to the level of unassigned surplus. Dividend payments from other subsidiaries are subject to regulations in the jurisdiction of domicile, which are generally based on their earnings and/or capital level. The dividend limitations for RCM,RGA Reinsurance and Chesterfield Re are based on statutory financial results. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. Significant differences include the treatment of deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes. Dividend payments from non-U.S. operations are subject to similar restrictions established by local regulators. The non-U.S. regulatory regimes also commonly limit the dividend payments to the parent to a portion of the prior year's statutory income, as determined by the local accounting principles. The regulators of the Company's non-U.S. operations may also limit or prohibit profit repatriations or other transfers of funds to theU.S. if such transfers are deemed to be detrimental to the solvency or financial strength of the non-U.S. operations, or for other reasons. Most of the non-U.S. operating subsidiaries are second tier subsidiaries that are owned by various non-U.S. holding companies. The capital and rating considerations applicable to the first tier subsidiaries may also impact the dividends paid to RGA.
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$5.3 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-acceleration 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 the amounts set forth in those agreements, bankruptcy proceedings, or any other event that results in the acceleration of the maturity of indebtedness. As ofDecember 31, 2021 and 2020, the Company had$3.7 billion and$3.6 billion , respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As ofDecember 31, 2021 and 2020, the average interest rate on long-term debt outstanding was 4.42% and 4.54%, respectively. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of its subsidiaries, investment earnings on undeployed capital proceeds, available liquidity at the holding company, and the Company's ability to raise additional funds. OnDecember 13, 2021 ,RGA Reinsurance issued 4.00% Surplus Notes due in 2051, with a face amount of$500 million . The net proceeds were approximately$494 million and will be used for general corporate purposes. OnJune 9, 2020 , the Company issued 3.15% Senior Notes dueJune 15, 2030 , with a face amount of$600 million . This security has been registered with theSecurities and Exchange Commission . The net proceeds were approximately$593 million and were used in part to repay the Company's$400 million 5.00% Senior Notes due in 2021, and the remainder was used for general corporate purposes. Capitalized issue costs were approximately$5 million . 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, should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody's) or the financial strength ratings drop below eitherA- (S&P) or A3 (Moody's). The Company may borrow up to$850 million in cash and obtain letters of credit in multiple currencies on its syndicated revolving credit facility that matures inAugust 2023 . As ofDecember 31, 2021 , the Company had no cash borrowings outstanding and$21 million in issued, but undrawn, letters of credit under this facility.
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 twelve months.
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Letters of Credit
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. AtDecember 31, 2021 , there were approximately$53 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 theU.S. and theUK . 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 ofDecember 31, 2021 ,$1.4 billion in letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the Company. See Note 13 - "Debt" in the Notes to Consolidated Financial Statements for information regarding the Company's letter of credit facilities.
Collateral Finance and Securitization Notes and Statutory Reserve Funding
The Company uses various internal and third-party reinsurance arrangements and funding sources to manage statutory reserve strain, including reserves associated with theU.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) and principles-based reserves (commonly referred to PBR), and the associated collateral requirements. Assets in trust and letters of credit are often used as collateral in these arrangements. Regulation XXX, implemented in theU.S. for various types of life insurance business beginningJanuary 1, 2000 , significantly increased the level of reserves thatU.S. life insurance and life reinsurance companies must hold on their statutory financial statements for various types of life insurance business, primarily certain level premium term life products. The reserve levels required under Regulation XXX increase over time and are normally in excess of reserves required under GAAP. In situations where primary insurers have reinsured business to reinsurers that are unlicensed and unaccredited in theU.S. , the reinsurer must provide collateral equal to its reinsurance reserves in order for the ceding company to receive statutory financial statement credit. In order to manage the effect of Regulation XXX on its statutory financial statements,RGA Reinsurance has retroceded a majority of Regulation XXX reserves to unaffiliated and affiliated reinsurers, both licensed and unlicensed. Effective in 2017, PBR is permitted in theU.S. During 2016, the NAIC amended the standard valuation law to adopt life PBR that was effectiveJanuary 1, 2017 , allowing a three-year adoption period. The Company adopted PBR in 2020. Under PBR, reserves are determined based on terms of the reinsurance agreement which may differ from those of the direct policies.
unlicensed unaffiliated or affiliated reinsurer is unable to provide the
required collateral to support
The Company has issued both collateral finance and securitization notes. The consolidated balance sheets include outstanding notes of$180 million and$388 million as ofDecember 31, 2021 and 2020, respectively. During 2021, the Company called and fully redeemed the notes issued by the Company's subsidiary,Chesterfield Financial Holdings, LLC . See Note 14 - "Collateral Finance and Securitization Notes" in the Notes to Consolidated Financial Statements for additional information regarding the Company's collateral finance and securitization notes. The demand for financing of the ceded reserve credits associated with the Company's assumed term life business has grown at a slower rate in recent years. The Company has been able to utilize its certified reinsurer, RGA Americas, as a means of reducing the burden of financing PBR, Regulation XXX and other types of reserves. The Company's PBR and Regulation XXX statutory reserve requirements associated with term life business and other statutory reserve requirements continues to require the Company to obtain additional letters of credit, put additional assets in trust, or utilize other funding mechanisms to support reserve credits. If the Company is unable to support the reserve credits, the regulatory capital levels of several of its subsidiaries may be significantly reduced, while the regulatory capital requirements for these subsidiaries would not change. The reduction in regulatory capital would not directly affect the Company's consolidated shareholders' equity under GAAP; however, it could affect the Company's ability to write new business and retain existing business. Affiliated captives are commonly used in the insurance industry to help manage statutory reserve and collateral requirements. The NAIC analyzed the insurance industry's use of affiliated captive reinsurers to satisfy certain reserve requirements and in 2014 adopted measures to promote uniformity in both the approval and supervision of such captives reinsuring business subject to Regulation XXX, allowing current captives to continue in accordance with their currently approved plans. Reinsuring business subject to the additional provisions of Actuarial Guideline 48 increases costs and adds complexity. 67
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In theU.S. , the introduction of the certified reinsurer has provided an alternative way to manage collateral requirements. In 2014, RGA Americas was designated as a certified reinsurer by the MDCI. This designation allows the Company to retrocede business to RGA Americas in lieu of using captives for collateral requirements. Therefore, the Company has chosen not to establish captives subject to Actuarial Guideline 48. It is also possible that the NAIC could place limits on the recognition of the Company's capital held in related party captives when adopting its group capital calculation. Doing so would adversely impact the amount of capital that the group would otherwise be able to recognize and report as capital resident in the group, potentially requiring the Company to restructure or change the financing of its captives. Assets in Trust The Company enters into reinsurance treaties in the ordinary course of business. In some cases, if the credit rating and/or defined statutory measures of the Company declines to certain levels, the reinsurance treaty would require the Company to post collateral or additional collateral to secure the Company's obligations under such reinsurance treaty, obtain guarantees, permit the ceding company to recapture such reinsurance treaty, or some other negotiated remedy. As ofDecember 31, 2021 , neither the Company nor its subsidiaries have been required to post additional collateral or have had a reinsurance treaty recaptured as a result of a credit downgrade or a defined statutory measure decline. In addition, certain reinsurance treaties require the Company to place assets in trust at the time of closing to collateralize its obligations to the ceding company. Assets placed in trust continue to be owned by the Company, but their beneficial ownership and use are restricted based on the terms of the trust agreement. Securities with an amortized cost of$3.8 billion were held in trust for the benefit of the Company's subsidiaries to satisfy collateral requirements for reinsurance business atDecember 31, 2021 . Additionally, securities with an amortized cost of$28.7 billion as ofDecember 31, 2021 , were held in trust to satisfy collateral requirements under certain third-party reinsurance treaties. Under certain conditions, the Company may be obligated to move reinsurance from one subsidiary to another subsidiary, post additional collateral or make payments under a given reinsurance treaty. These conditions include change in control or ratings of the subsidiary, insolvency, nonperformance under a reinsurance treaty, or loss of license or other regulatory authorization of such subsidiary. If the Company was ever required to move reinsurance from one subsidiary to another subsidiary, the risk to the Company on a consolidated basis under the reinsurance treaties would not change; however, additional collateral may need to be posted or additional capital may be required due to the change in jurisdiction of the subsidiary reinsuring the business, which could lead to a strain on liquidity. Proceeds from the notes issued byTimberlake Financial and RGA's direct investment inTimberlake Financial were deposited into a series of trust accounts as collateral and are not available to satisfy the general obligations of the Company. As ofDecember 31, 2021 , the Company held deposits in trust and in custody of$426 million for this purpose, which is not included in the figures in the paragraph above. A reserve account has been established to cover interest payments on notes issued byTimberlake Financial that are not available to satisfy the general obligations of the Company. AtDecember 31, 2021 , the Company held deposits in trust of$39 million for this purpose, which is not included in the figures in the paragraph above. See "Collateral Finance and Securitization Notes and Statutory Reserve Funding" above for additional information on theTimberlake Financial notes.
Reinsurance Operations
Reinsurance treaties, whether facultative or automatic, generally provide recapture provisions. MostU.S. -based reinsurance treaties include a recapture right for ceding companies, generally after 10 years. Outside of theU.S. , treaties primarily include a mutually agreed-upon recapture provision. Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer. In some situations, the Company has the right to place assets in trust for the benefit of the ceding company in lieu of recapture. Additionally, certain treaties may grant recapture rights to ceding companies in the event of a significant decrease inRGA Reinsurance's NAIC risk based capital ratio or financial strength rating. The RBC ratio trigger varies by treaty, with the majority between 125% and 225% of the NAIC's company action level. Financial strength rating triggers vary by reinsurance treaty with the majority of the triggers reached if the Company's financial strength rating falls five notches from its current rating of "AA-" to the "BBB" level on the S&P scale. Recapture of business previously ceded does not affect premiums ceded prior to the recapture of such business, but would reduce premiums in subsequent periods. Upon recapture, the Company would reflect a net gain or loss on the settlement of the assets and liabilities associated with the reinsurance treaty. In some cases, the ceding company is required to pay the Company a recapture fee. Guarantees The Company has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts due under certain reinsurance treaties, securities borrowing arrangements, financing arrangements and office lease obligations, whereby if a subsidiary fails to meet an obligation, the Company or one of its other subsidiaries will make a payment to fulfill the obligation. In limited circumstances, treaty guarantees are granted to ceding companies in order to provide additional security, 68
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particularly in cases where the Company's subsidiary is relatively new, unrated, or not of significant size, relative to the ceding company. Potential guaranteed amounts of future payments will vary depending on production levels and underwriting results. Guarantees related to borrowed securities provide additional security to third parties should a subsidiary fail to return the borrowed securities when due. The Company has issued payment guarantees on behalf of two of its subsidiaries in the event the subsidiaries fail to make payment under their office lease obligations. See Note 12 - "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements for a table that presents the amounts for guarantees, by type, issued by the Company. In addition, the Company indemnifies its directors and officers pursuant to its charters and by-laws. Since this indemnity generally is not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under this indemnity in the future.
Off-Balance Sheet Arrangements
The Company has commitments to fund investments in limited partnerships, joint ventures, commercial mortgage loans, lifetime mortgages, private placement investments and bank loans, including revolving credit agreements. See Note 12 - "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements for additional information on the Company's commitments to fund investments and other off-balance sheet arrangements.
The Company has not engaged in trading activities involving non-exchange-traded
contracts reported at fair value, nor has it engaged in relationships or
transactions with persons or entities that derive benefits from their
non-independent relationship with 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 concerns 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 also includes drawing funds under a syndicated revolving credit facility, under which the Company had availability of$829 million as ofDecember 31, 2021 . The Company also has$755 million of funds available through collateralized borrowings from theFederal Home Loan Bank of Des Moines ("FHLB") as ofDecember 31, 2021 . As ofDecember 31, 2021 , the Company could have borrowed these additional amounts without violating any of its existing debt covenants. The Company's principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, dividends to shareholders, purchases of treasury stock, and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements). The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires nor to the recoverability of future claims. The Company's management believes its cash and cash equivalents along with its current sources of liquidity are adequate to meet its cash requirements for the next twelve months, despite the uncertainty associated with the pandemic. 69
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Summary of Primary Sources and Uses of Liquidity and Capital
The Company's primary sources and uses of liquidity and capital are summarized
as follows (dollars in millions):
For the years ended
2021 2020 2019
Sources:
Net cash provided by operating activities$ 4,182 $ 3,322 $ 2,307 Proceeds from offering of common stock, net - 481 - Proceeds from long-term debt issuance 500 598 599 Exercise of stock options, net - 1 6 Change in cash collateral for derivative positions and other arrangements 31 - - Change in deposit asset on reinsurance 91 - - Net deposits from investment-type policies and contracts 308 773 200 Effect of exchange rate changes on cash - 63 11 Total sources 5,112 5,238 3,123 Uses: Net cash used in investing activities 4,628 2,680 2,638 Dividends to stockholders 194 182 163 Repayment of collateral finance and securitization notes 208 214 91 Debt issuance costs 6 5 5 Principal payments of long-term debt 403 3 403 Purchases of treasury stock 99 163 101 Change in cash collateral for derivative positions and other arrangements - 32 163 Effect of exchange rate changes on cash 34 - - Total uses 5,572 3,279 3,564 Net change in cash and cash equivalents $
(460)
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 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 sales and maturities 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, which could make it difficult for the Company to sell investments. Financing Cash Flows - The principal cash inflows from the Company's financing activities come from issuances of debt and equity securities, and deposit funds associated with universal life and other investment type policies and contracts. The principal financing cash outflows are the repayments of debt and securitization notes, 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. 70
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Contractual Obligations
The following table summarizes the Company's contractual obligations, including
obligations arising from its reinsurance business (in millions):
Payment Due by Period Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years Future policy benefits(1)$ 19,079 $ (89)$ (1,209) $ (1,069) $
21,446
Interest-sensitive contract liabilities(2) 43,388 3,453 5,953 5,202
28,780
Long-term debt, including interest 7,052 173 727 708
5,444
Collateral finance and securitization notes, including interest 185 52 61 8
64
Other policy claims and benefits 6,993 6,993 - - - Operating leases 92 14 28 21 29 Limited partnership interests and joint ventures 1,031 1,031 - - - Payables for collateral received under derivative transactions 149 149 - - - Other investment related commitments 961 961 - - - Total$ 78,930 $ 12,737$ 5,560 $ 4,870 $ 55,763 (1)Future policy benefits are primarily related to the Company's reinsurance of life and health insurance products. The amounts presented in the table above represent the estimated benefit obligations as they become due, and also include estimated future premiums on policies in force, allowances and other amounts due to or from the ceding companies as the result of the Company's assumptions of mortality, morbidity, policy lapse and surrender risk as appropriate to the respective product. All estimated cash payments presented in the table above are undiscounted as to interest and gross of any reinsurance recoverable. The discounted liability amount of$35.8 billion included on the consolidated balance sheets exceeds the sum of the undiscounted estimated cash flows of$19.1 billion shown above. The difference is substantially due to net obligations including estimated future premiums exceeding estimated policy benefit payments and allowances due to the nature of certain reinsurance treaties, which generally have increasing premium rates that exceed the increasing benefit payments. In addition, differences will arise due to changes in the projection of future benefit payments compared with those developed when the reserve was established. Total payments may vary materially from prior years due to the assumption of new reinsurance treaties or as a result of changes in projections of future experience. (2)Interest-sensitive contract liabilities include amounts related to the Company's reinsurance of asset-intensive products, primarily deferred annuities and corporate-owned life insurance. The amounts in the table above represent the estimated obligations as they become due both to and from ceding companies relating to activity of the underlying policyholders. All amounts presented above are undiscounted as to interest, and include assumptions related to surrenders, withdrawals, premium persistency, partial withdrawals, surrender charges, annuitizations, mortality, future interest credited rates and policy loan utilization. The sum of the obligations shown for all years in the table of$43.4 billion exceeds the liability amount of$26.4 billion included on the consolidated balance sheets, and the difference is primarily related to the lack of discounting and to liabilities related to accounting conventions, which are not contractually due and are therefore excluded.
Excluded from the table above are net deferred income tax liabilities,
unrecognized tax benefits, and accrued interest related to unrecognized tax
benefits of
timing of payment.
The net funded status of the Company's qualified and nonqualified pension and other postretirement liabilities included within other liabilities has been excluded from the amounts presented in the table above. As ofDecember 31, 2021 , the Company had a net unfunded balance of$152 million related to qualified and nonqualified pension and other postretirement liabilities. See Note 10 - "Employee Benefit Plans" in the Notes to Consolidated Financial Statements for information related to the Company's obligations and funding requirements for pension and other postretirement benefits.
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 its operating segments,
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 consolidated balance sheets 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 theU.S. and Latin America Financial Solutions operating segment, are generally funded by fixed maturity securities that are withheld by the ceding company. 71
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The Company's liquidity position (cash and cash equivalents and short-term investments) was$3.0 billion and$3.6 billion atDecember 31, 2021 and 2020, respectively. Given the uncertainty associated with the COVID-19 pandemic and the related volatility in the financial markets, the Company increased its liquidity position at the onset of the pandemic. Liquidity needs are determined from valuation analysis 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 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 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$70 million of FHLB common stock, which is included in other invested assets on the Company's consolidated balance sheets. The Company has 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$1.9 billion atDecember 31, 2021 and 2020, respectively, which is included in interest sensitive contract liabilities on the Company's consolidated balance sheets. The advances on these agreements are collateralized primarily by commercial and residential mortgage-backed securities, commercial mortgage loans, andU.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. The Company seeks 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 applying security and derivative strategies within asset/liability and disciplined risk management frameworks. 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 Consolidated Financial Statements for additional information regarding the Company's investments.
Effects of COVID-19
Credit markets continued to recover during 2021 following the disruption in the global financial markets caused by the COVID-19 pandemic. The Company has exposure to some of the asset classes and industries most affected by the COVID-19 pandemic such as commercial mortgage loans, emerging market debt, energy, and airlines; however, the Company's primary exposure in these asset classes is of high quality assets. The Company continues to monitor and evaluate the impact of the COVID-19 pandemic on its investment portfolio and is working closely with its borrowers to evaluate any short-term cash flow issues. 72
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Portfolio Composition
The Company had total cash and invested assets of
billion
(dollars in millions):
2021 % of Total 2020 % of Total Fixed maturity securities, available-for-sale$ 60,749 74.6 %$ 56,735 74.8 % Equity securities 151 0.2 132 0.2 Mortgage loans on real estate 6,283 7.7 5,787 7.6 Policy loans 1,234 1.5 1,258 1.7 Funds withheld at interest 6,954 8.5 5,432 7.2 Short-term investments 87 0.1 227 0.3 Other invested assets 3,070 3.8 2,829 3.7 Cash and cash equivalents 2,948 3.6 3,408 4.5 Total cash and invested assets$ 81,476 100.0 %$ 75,808 100.0 % Investment Yield The following table presents consolidated average invested assets, excluding spread related business, at amortized cost, net investment income, investment yield, variable investment income ("VII"), and investment yield excluding VII, which can vary significantly from period to period (dollars in millions) for the years endedDecember 31, 2021 , 2020 and 2019. 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. 2021 2020 2019 2021 vs 2020 2020 vs 2019 Average invested assets at amortized cost$ 33,040 $ 30,787
Net investment income
$ 1,648 $ 1,231 $ 1,291 $ 417 $ (60) Annualized investment yield (ratio of net investment income to average invested assets at amortized cost) 4.99 % 4.00 % 4.56 % 99 bps (56) bps VII (included in net investment income) 1$ 433 $ 63 $ 132 $ 370 $ (69) Annualized investment yield excluding VII (ratio of net investment income, excluding VII, to average invested assets, excluding assets with only VII, at amortized cost) 3.81 % 3.93 % 4.23 % (12) bps (30) bps (1)VII for 2021 includes an accounting correction of$92 million related to prior periods recorded in 2021. See "Investment Income and Investment Related Gains (Losses), Net - Accounting Correction" in Note - 4 "Investments" in the Notes to the Consolidated Financial Statements for additional information regarding the correction recorded in 2021. Investment yield increased between 2020 and 2021 primarily due to increased variable income from limited partnerships and real estate joint ventures, which are included in other invested assets on the consolidated balance sheets, partially offset by decreased yield from the continued low interest rate environment. Investment yield decreased between 2019 and 2020 primarily due to the low interest rate environment combined with higher cash and cash equivalents balances held by the Company during the COVID-19 pandemic as well as decreased income from joint ventures and limited partnerships.
Fixed Maturity Securities Available-for-Sale
See "Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables that provide the amortized cost, allowance for credit losses, unrealized gains and losses and estimated fair value of these securities by type as ofDecember 31, 2021 and 2020. The Company holds various types of fixed maturity securities available-for-sale and classifies them as corporate securities ("Corporate"), Canadian and Canadian provincial government securities ("Canadian government"), residential mortgage-backed securities ("RMBS"), asset-backed securities ("ABS"), commercial mortgage-backed securities ("CMBS"),U.S. government and agencies ("U.S. government"), state and political subdivisions, and other foreign government, supranational and foreign government-sponsored enterprises ("Other foreign government"). RMBS, ABS and CMBS are collectively "structured securities." As ofDecember 31, 2021 and 2020, approximately 94.0% 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 Company owns floating rate securities that represent approximately 5.3% and 5.6% of the total fixed maturity securities as ofDecember 31, 2021 and 2020, respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to fluctuations in interest payments. The 73
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Company holds floating rate investments to match specific floating rate
liabilities primarily reflected in the consolidated balance sheets as collateral
finance notes, as well as to enhance asset management strategies.
The largest asset class in which fixed maturity securities were invested was corporate securities, which represented approximately 62.8% and 63.9% of total fixed maturity securities as ofDecember 31, 2021 and 2020, respectively. See "Corporate Fixed Maturity Securities " in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables showing the major sector types, which comprise the corporate fixed maturity holdings as ofDecember 31, 2021 and 2020. As ofDecember 31, 2021 and 2020, the Company's investments in Canadian government securities represented 8.1% and 9.1%, respectively, of the fair value of total fixed maturity securities. These assets are primarily high quality, long duration provincial strip bonds, 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. 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 Moody's, S&P and Fitch. Structured 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 securities portfolio as ofDecember 31, 2021 and 2020 was as follows (dollars in millions): 2021 2020 NAIC Rating Agency Estimated Estimated Designation Designation Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total 1AAA /AA/A$ 33,540 $ 36,725 60.5 %$ 29,770 $ 34,589 60.9 % 2 BBB 18,684 20,379 33.5 16,440 18,751 33.1 3 BB 2,620 2,668 4.4 2,480 2,588 4.6 4 B 876 863 1.4 713 697 1.2 5 CCC and lower 96 79 0.1 131 102 0.2 6 In or near default 57 35 0.1 14 8 - Total$ 55,873 $ 60,749 100.0 %$ 49,548 $ 56,735 100.0 %
The Company's fixed maturity portfolio includes structured securities. The
following table shows the types of structured securities the Company held as of
2021 2020 Estimated Estimated Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total RMBS: Agency $ 551 $ 582 8.4 % $ 686 $ 744 11.0 % Non-agency 469 468 6.8 1,049 1,073 15.8 Total RMBS 1,020 1,050 15.2 1,735 1,817 26.8 ABS: Collateralized loan obligations ("CLOs") 1,761 1,752 25.4 1,707 1,689 24.9 ABS, excluding CLOs 2,263 2,253 32.6 1,392 1,403 20.7 Total ABS 4,024 4,005 58.0 3,099 3,092 45.6 CMBS 1,790 1,849 26.8 1,790 1,868 27.6 Total$ 6,834 $ 6,904 100.0 %$ 6,624 $ 6,777 100.0 % The Company's RMBS portfolio includes agency-issued pass-through securities and collateralized mortgage obligations. Agency-issued pass-through securities are guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or theGovernment National Mortgage Association . The principal risks inherent in holding RMBS 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 RMBS 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. 74
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The Company's ABS portfolio primarily consists of CLOs, aircraft, single-family rentals, lifetime mortgages, and container leasing. The principal risks in holding ABS are structural, credit, capital market and interest rate 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 that 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's CMBS portfolio primarily consists of large pool securitizations that are diverse by property type, borrower and geographic dispersion. The principal risks in holding CMBS are structural and credit 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. The Company focuses on investment grade rated tranches that provide additional credit support beyond the equity protection in the underlying loans. These assets are viewed as an attractive alternative to other fixed income asset classes. As ofDecember 31, 2021 and 2020, the Company had$349 million and$197 million , respectively, of gross unrealized losses related to its fixed maturity securities. The Company monitors its fixed maturity securities to determine impairments in value and evaluates factors such as financial condition of the issuer, payment performance, 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, an allowance for credit losses in the amount that fair value is less than the amortized cost is recorded for securities determined to have expected credit losses.
Mortgage Loans on Real Estate
The Company's mortgage loan portfolio consists ofU.S. ,Canada andUK based investments primarily in commercial offices, light industrial properties and retail locations. The mortgage loan portfolio is diversified by geographic region and property type as discussed further under "Mortgage Loans on Real Estate" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements. Most of the mortgage loans in the Company's portfolio range in size up to$30 million , with the average mortgage loan investment as ofDecember 31, 2021 , totaling approximately$9 million . For the year endedDecember 31, 2021 , the Company decreased its allowance for credit losses on its commercial mortgage loan portfolio by approximately$29 million reflecting the impact of the updated outlook from the COVID-19 pandemic on the Company's borrowers. The Company continues to monitor and evaluate the impact of the COVID-19 pandemic on its investment portfolio and is working closely with its borrowers to evaluate any short-term cash flow issues. See Note 4 - "Investments" in the Notes to Consolidated Financial Statements for information on mortgage loan term modifications resulting from the COVID-19 pandemic.
As of
mortgage loans, gross of unamortized deferred loan origination fees and expenses
and allowance for credit losses, were distributed geographically as follows
(dollars in millions):
2021 2020 Recorded Recorded Investment % of Total Investment % of TotalU.S. Region : West$ 2,270 36.0 %$ 2,253 38.5 % South 2,135 33.7 2,040 34.8 Midwest 1,166 18.4 1,027 17.5 Northeast 419 6.6 277 4.7 Subtotal - U.S. 5,990 94.7 5,597 95.5 Canada 193 3.0 188 3.2 United Kingdom 144 2.3 76 1.3 Other 2 - - - Total$ 6,329 100.0 %$ 5,861 100.0 % See "Allowance for Credit Losses and Impairments" in Note 2 - "Significant Accounting Policies and Pronouncements" and "Mortgage Loans on Real Estate" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for information regarding the Company's policy for allowance for credit losses on mortgage loans.
Allowance for Credit Losses and Impairments
The Company's determination of whether a decline in value necessitates the recording of an allowance for credit losses includes an analysis of 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 75
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ability of the Company to recover the amortized cost of the investment. See "Allowance for Credit Losses and Impairments" in Note 2 - "Significant Accounting Policies and Pronouncements" for additional information. The table below summarizes investment related (gains) losses, net, related to allowances for credit losses and impairments for the years endedDecember 31, 2021 , 2020 and 2019 (dollars in millions): 2021 2020 2019
Change in allowance for credit losses and impairments
on fixed maturity securities
$ 12 $ 21 $ 31 Other impairment losses and changes in provision - 18 11 Change in mortgage loan allowance for credit losses (29) 38 1 Total$ (17) $ 77 $ 43 The change in allowance for credit losses and impairments on fixed maturity securities during 2021 and 2020 was primarily related to high-yield securities reflecting the continued impact of the COVID-19 pandemic. The impairments on fixed maturity securities for 2019 was primarily due to emerging market and high-yield debt exposures. The other impairment losses and changes in provision in 2020 were primarily due to impairments on limited partnerships. The other impairment losses and changes in provision in 2019 were primarily due to impairments on real estate joint ventures and limited partnerships. The decrease in mortgage loan allowance for credit losses occurring during 2021, was primarily due to the updated outlook from the COVID-19 pandemic. The increase in mortgage loan allowance for credit losses in 2020 was primarily due to the estimated impact from the COVID-19 pandemic. See "Unrealized Losses for Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables that present the estimated fair value and gross unrealized losses for securities that have estimated fair values below amortized cost by class and grade, as well as the length of time the related estimated fair value has remained below amortized cost as ofDecember 31, 2021 and 2020. As ofDecember 31, 2021 and 2020, the Company classified approximately 8.5% and 5.9%, 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 Consolidated Financial Statements for additional information). These securities primarily consist of private placement corporate and asset-backed securities. See "Securities Borrowing, Lending and Repurchase Agreements" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for information related to the Company's securities borrowing, lending and repurchase/reverse repurchase programs. Funds Withheld at Interest 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 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. 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" as ofDecember 31, 2021 and 2020. Certain ceding companies maintain segregated portfolios for the benefit of the Company. The majority of the Company's funds withheld at interest balances are associated with its reinsurance of annuity contracts. The funds withheld receivable balance for segregated portfolios is subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. Under these principles, the Company's funds withheld receivable under certain reinsurance arrangements incorporate credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor and include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the consolidated balance sheets and changes in fair value reported in income. See "Embedded Derivatives" in Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements for further discussion. 76
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Based on data provided by ceding companies as of
funds withheld at interest totaled (dollars in millions):
2021 2020 Estimated Estimated Underlying Security Type: Carrying Value Fair Value Carrying Value Fair Value Segregated portfolios$ 4,515 $ 4,843 $ 3,097 $ 3,481 Non-segregated portfolios 2,315 2,315 2,251 2,251 Embedded derivatives(1) 124 - 84 - Total funds withheld at interest$ 6,954
(1)Represents the fair value of embedded derivatives related to reinsurance written on a modco or funds withheld basis and subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives for the segregated portfolios. When the segregated portfolios are presented on a fair value basis in the "Estimated Fair Value" column, the calculation of a separate embedded derivative is not applicable. Based on data provided by the ceding companies as ofDecember 31, 2021 and 2020, segregated portfolios contained investments similar to those directly owned by the Company; primarily fixed maturity securities, as well as commercial mortgage loans and derivative securities. These assets pose risks similar to the investments the Company directly owns. Derivatives consist primarily of S&P 500 options that are used to hedge liabilities and interest credited for EIAs reinsured by the Company. The securities held within the segregated portfolios are primarily investment-grade, with an average rating of "A." The average maturity for investments held within the segregated portfolios of funds withheld at interest is ten years or more. Interest accrues to the total funds withheld at interest assets at rates defined by the treaty terms and the Company estimated the yields were approximately 6.34%, 5.40% and 5.59% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Changes in these estimated yields are affected by changes in the fair value of equity options held in the funds withheld portfolio associated with EIAs. Additionally, under certain treaties the Company is subject to the investment performance on the withheld assets, although it does not directly control them. To mitigate this risk, the Company helps set the investment guidelines followed by the ceding companies and monitors compliance. Other Invested Assets Other invested assets include limited partnership interests, joint ventures (other than operating joint ventures), lifetime mortgages, derivative contracts, fair value option ("FVO") contractholder-directed unit-linked investments and FHLB common stock. See "Other Invested Assets" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for a table that presents the carrying value of the Company's other invested assets by type as ofDecember 31, 2021 and 2020. 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 exchange-traded, centrally cleared, and customized over-the-counter derivative financial instruments.
See Note 5 - "Derivative Instruments" in the Notes to Consolidated Financial
Statements for a table that presents the notional amounts and fair value of
investment related derivative instruments held as of
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 and accrued interest of non-collateralized derivative contracts in an asset position at the reporting date. As ofDecember 31, 2021 , the Company had credit exposure of$18 million . 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. 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 Consolidated Financial Statements for more information regarding the Company's derivative instruments. The Company holds$758 million and$935 million of beneficial interest in lifetime mortgages in theUK , net of allowance for credit losses, as ofDecember 31, 2021 and 2020, respectively. Investment income includes$52 million ,$44 million and$34 million in interest income earned on lifetime mortgages for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Lifetime mortgages represent loans provided to individuals 55 years of age and older secured by the borrower's residence. Lifetime mortgages are comparable to a home equity loan by allowing the borrower to utilize the equity in their home as collateral. The amount of the loan is dependent on the appraised value of the home at the time of origination, 77
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the borrower's age and interest rate. Unlike a home equity loan, no payment of principal or interest is required until the death of the borrower or sale of the home. Lifetime mortgages may also be either fully funded at origination, or the borrower can request periodic funding similar to a line of credit. Lifetime mortgages are subject to risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks.
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 Risk
Committee, which oversees the management of the Company's ERM program and
policies. The Risk Committee receives regular reports and assessments that
describe the Company's key risk exposures and include quantitative and
qualitative assessments and information about breaches, exceptions, and waivers.
The Company's GlobalChief Risk Officer ("CRO") reports to the Chief Executive Officer ("CEO") and has direct access to the Board through the Risk Committee with formal reporting occurring quarterly. The CRO leads the dedicated ERM function and is supported by a dedicated risk management staff as well as a network of Business Unit Chief Risk Officers and Risk Owners throughout the business unit who are responsible for the analysis and management of risks within their scope. A Lead Risk Owner 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'sRisk Management Steering Committee ("RMSC"), which includes senior management executives, including the CEO, the Chief Financial Officer ("CFO"), and the Chief Investment 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 established 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 risk areas including the identification, assessments, and management of established 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, chairs of the risk committees attend the 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:
•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. •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. 78
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•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. •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. •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 the Risk 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 mitigations 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 that 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."
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. The global impact of the COVID-19 pandemic and the response thereto has had a material adverse effect on the Company's earnings and continues to develop rapidly. While COVID-19 vaccines have been widely distributed in some countries, the Company's future results may continue to be adversely impacted by COVID-19, with the extent influenced by the speed of vaccination, measures by public and private institutions, and timing and adoption of effective treatments, among other factors. The Company continues to actively assess the impacts of COVID-19 on its business and update and refine its COVID-19 projection and financial impact models to manage its insurance risk through the pandemic. The Company has developed extensive expertise in assessing insurance risks that 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 that is closely monitored. Analysis and experience studies derived from this database help form the basis for the Company's pricing assumptions that 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 that includes periodic pricing audits. 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. 79
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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 million of coverage per individual life. In certain limited situations the Company has retained more than$8 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 million per individual life. 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$30 million of catastrophic loss exposure per agreement and to retrocede up to$40 million additional loss exposures to the retrocession markets. The Company limits its exposure on a country-by-country (and state-by-state in theU.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. 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 5 or more insured deaths from a single occurrence and covers$100 million of claims in excess of the Company's$25 million deductible. 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 the 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 investment income. The Company manages its exposure to interest rates principally by managing the relative matching of the cash flows of its liabilities and assets. 80
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The following table presents the account values, the weighted average interest-crediting rates and minimum guaranteed rate ranges for the contracts containing guaranteed rates by major class of interest-sensitive product as ofDecember 31, 2021 and 2020 (dollars in millions): Current Weighted-Average Minimum
Guaranteed
Account Value Interest Crediting Rate Rate Ranges Interest Sensitive Contract Liability 2021 2020 2021 2020 2021 2020 Traditional individual fixed annuities$ 15,094 $ 11,493 3.22% 3.16% 0.01 - 5.50% 0.01 - 5.50% Equity-indexed annuities 3,117 3,398 2.10 2.76 0.10 - 3.00 0.10 - 3.00 Individual variable annuity contracts 116 120 2.98 2.99 1.50 - 3.00 1.50 - 3.00 Guaranteed investment contracts 1,406 1,886 0.76 1.44 0.31 - 3.32 0.34 - 3.48 Universal life - type policies 4,303 4,313 3.76 3.78 2.00 - 6.00 2.00 - 6.00 Funding agreement backed notes 500 - 2.00 - 2.00 - 2.00
NA
The following table presents the account values by each minimum guaranteed rate, rounded to the nearest percentage, by class of interest-sensitive product as ofDecember 31, 2021 and 2020 (dollars in millions): Account Value as of December 31, 2021 Interest Sensitive Contract Liability 1% 2% 3% 4% 5% 6% Total Traditional individual fixed annuities$ 2,109 $ 1,057 $
4,384
Equity-indexed annuities
943 1,614 560 - - - 3,117 Individual variable annuity contracts - 1 115 - - - 116 Guaranteed investment contracts 1,202 138 66 - - - 1,406 Universal life - type policies - 736 318 3,185 53 11 4,303 Funding agreement backed notes - 500 - - - - 500 Account Value as of December 31, 2020 Interest Sensitive Contract Liability 1% 2% 3% 4% 5% 6% Total Traditional individual fixed annuities$ 1,424 $ 864 $
4,733
Equity-indexed annuities
946 1,807 645 - - - 3,398 Individual variable annuity contracts - 2 118 - - - 120 Guaranteed investment contracts 1,541 187 158 - - - 1,886 Universal life - type policies - 724 317 3,204 58 10 4,313 The spread profits on the Company's fixed annuity and interest-sensitive whole life, universal life ("UL") and fixed portion of variable universal life insurance policies are at risk if interest rates decline and remain relatively low for a period of time, which has generally been the case in recent years. Should interest rates remain at current levels, which are significantly lower than those existing prior to the declines of recent years, the average earned rate of return on the Company's annuity and UL investment portfolios will continue to decline. Declining portfolio yields may cause the spreads between investment portfolio yields and the interest rate credited to contract holders to deteriorate as the Company's ability to manage spreads can become limited by minimum guaranteed rates on annuity and UL policies. In 2021, minimum guaranteed rates on non-variable annuity and UL policies generally ranged from 0.01% to 6.00%, with an average guaranteed rate of approximately 3.05%. In 2020, minimum guaranteed rates on non-variable annuity and UL policies generally ranged from 0.01% to 6.00%, with an average guaranteed rate of approximately 2.94%. Interest rate spreads are managed for near term income through a combination of crediting rate actions and portfolio management. Certain annuity products contain crediting rates that reset annually, of which$13 billion of account balances are not subject to surrender charges as of bothDecember 31, 2021 and 2020, with substantially all of these already at their minimum guaranteed rates. As such, 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 investment income. 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. Interest rate sensitivity analysis is used to measure the Company's interest rate price risk by computing estimated changes in fair value of fixed rate assets and liabilities in the event of a hypothetical 100 basis point change (increase or decrease) in market interest rates. The Company does not have fixed rate instruments classified as trading securities. The 81
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Company's projected net decrease in fair value of financial instruments in the event of a 100 basis point increase in market interest rates at its fiscal years endedDecember 31, 2021 and 2020 was$1.4 billion and$0.9 billion , respectively. The calculation of fair value is based on the net present value of estimated discounted cash flows expected over the life of the market risk sensitive instruments, using market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources, with adjustments made to reflect the shift in the treasury yield curve as appropriate. The interest rate sensitivity relating to the Company's fixed maturity securities is assessed using hypothetical scenarios that assume positive and negative 50 and 100 basis point parallel shifts in the yield curves. This analysis assumes that theU.S. ,Canada and other pertinent countries' yield curve shifts are of equal direction and magnitude. Change in value of individual securities is estimated consistently under each scenario using a commercial valuation tool. The Company's actual experience may differ from the results noted below particularly due to assumptions utilized or if events differ from those included in the methodology. The following tables summarize the results of this analysis for fixed maturity securities in the Company's investment portfolio as of the dates indicated (dollars in millions): Interest Rate Analysis of Estimated Fair Value of Fixed Maturity Securities December 31, 2021: -100 bps -50 bps - +50 bps +100 bps Total estimated fair value$ 66,926 $ 63,711
% Change in estimated fair value from
base
10.2 % 4.9 % - % (4.5) % (8.5) % $ Change in estimated fair value from base$ 6,177 $ 2,962 $ -$ (2,707) $ (5,161) December 31, 2020: -100 bps -50 bps - +50 bps +100 bps Total estimated fair value$ 62,286 $ 59,404
% Change in estimated fair value from
base
9.8 % 4.7 % - % (4.3) % (8.3) % $ Change in estimated fair value from base$ 5,551 $ 2,669
$ -
Interest rate sensitivity analysis is also used to measure the Company's interest rate cash flow risk by computing estimated changes in the expected cash flows for floating rate assets and liabilities over a one year period following an instantaneous, parallel, hypothetical 100 basis point change (increase or decrease) in market interest rates. The Company does not have variable rate instruments classified as trading securities. The Company's projected decrease in cash flows associated with floating rate instruments in the event of an instantaneous 100 basis point decrease in market interest rates for its fiscal years endedDecember 31, 2021 and 2020 was$34 million . Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, and should not be relied on as indicative of future results. Further, the computations do not contemplate any actions management could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of the estimated fair value of fixed maturity securities and the estimated cash flows of floating rate instruments, which constitute forward-looking statements. Actual values may differ materially from those projections presented due to a number of factors, including, without limitation, market conditions varying from assumptions used in the calculation of the fair value. 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. OnJuly 27, 2017 , theFinancial Conduct Authority (the "FCA") announced that it intends to stop persuading or compelling banks to submit London Interbank Offered Rates ("LIBOR") afterDecember 31, 2021 . Subsequently, onMarch 5, 2021 , theFCA announced that all LIBOR settings will either cease to be provided or no longer be representative, with some being discontinued afterDecember 31, 2021 , and the remaining being discontinued afterJune 30, 2023 . Workstreams have been established in several markets to reform existing reference rates and provide a fall back rate upon discontinuation of LIBOR.The Alternative Rates Committee of the Federal Reserve Board proposed the Secured Overnight Financing Rate 82
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("SOFR") as an alternative rate to replaceU.S. Dollar LIBOR, and theEuropean Central Bank recommended the Euro Short-term Rate ("ESTER") as the new risk-free rate. Other jurisdictions are conducting similar exercises and have proposed potential replacement rates, as necessary. The Company is currently assessing the effects of the discontinuation of LIBOR on existing contracts by analyzing contractual fallback provisions, evaluating alternative rate ramifications, and assessing the effects on current hedging strategies. 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 are investments in non-traditional asset classes that primarily back the Company's capital and surplus as well as certain long-term illiquid liability portfolios. Alternative investments generally include: 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. The Company reinsures fixed indexed annuities ("FIAs"). Credits to FIA contracts 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. 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 changes 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 asDecember 31, 2021 and 2020.December 31 , (dollars in millions) 2021
2020
No guaranteed minimum benefits$ 844 $ 665 GMDB only 960 872 GMIB only 25 24 GMAB only 3 4 GMWB only 1,130 1,132 GMDB / WB 264 275 Other 19 18 Total variable annuity account values $
3,245
Fair value of liabilities associated with living benefit riders
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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 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. As 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 Consolidated Financial Statements for additional information on credit risk related to derivatives.
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 is the potential 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. Policyholder surrenders and/or lapses substantially higher than expected could result in inadequate in force business to recover cash paid out for acquisition costs. For clients and retrocessionaires, collection risk 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 the Company.
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, the Company's insurance subsidiaries retrocede amounts in excess of their retention to the Company's other insurance subsidiaries. External retrocessions are arranged through the Company's retrocession pools for amounts in excess of its retention. As ofDecember 31, 2021 , all retrocession pool members in this excess retention pool rated by theA.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 received by the Company 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. In addition to investment credit limits and counterparty limits, the Company maintains aggregate counterparty risk limits that 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/negative earnings, potential reduction in enterprise value, and/or the loss of ability to conduct business due to insufficient financial capacity, including not having the appropriate amount of group or entity-level capital to conduct business today or in the future. The Company monitors capital risk exposure using relevant bases of measurement including but not limited to economic, rating agency, and regulatory methodologies. Additionally, the Company regularly assesses risk related to collateral, foreign currency, financing, liquidity and tax. 84
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Collateral Risk. Collateral risk is the risk that collateral will not be available at expected costs or in the capacity required to meet current and future needs. The Company monitors risks related to interest rate movement, collateral requirements and position and capital markets environment. Collateral demands and resources continue to be actively managed with available collateral sources being more than sufficient to cover stress level collateral demands. 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 foreign currency risk principally by currency matching invested assets with the underlying liabilities to the extent practical. The Company has in place net investment hedges for a portion of its investments in its Canadian operations to reduce excess exposure to that currency. Translation differences resulting from translating foreign subsidiary balances toU.S. dollars are reflected in stockholders' equity on the 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 theU.S. dollar) is measured relative to risk targets and is monitored regularly. The Company does not hedge the income statement risk associated with translating foreign currencies. The foreign exchange risk sensitivity of the Company's consolidated pre-tax income is assessed using hypothetical test scenarios. Actual results may differ from the results noted below particularly due to assumptions utilized or if events occur that were not included in the methodology. For more information on this risk, see "Item 1A - Risk Factors - Risks Related to Our Business." In general, a weakerU.S. dollar relative to foreign currencies has a favorable impact on the Company's income before income taxes. The following tables summarize the impact on the Company's reported income before income taxes of an immediate favorable or unfavorable change in each of the foreign exchange rates to which the Company has exposure (dollars in millions): Unfavorable Favorable Year Ended December 31, 2021 -10% -5% - +5% +10% Income before income taxes$ 645 $ 668 691$ 713 $ 736 % change of income before income taxes from base (6.6) % (3.3) % - % 3.3 % 6.6 % $ change of income before income taxes from base$ (45) $ (23) $ -$ 23 $ 45 Unfavorable Favorable Year Ended December 31, 2020 -10% -5% - +5% +10% Income before income taxes$ 494 $ 523 553$ 583 $ 612 % change of income before income taxes from base 10.7 % 5.4 % - % 5.4 % 10.7 % $ change of income before income taxes from base$ (59) $ (30)
$ -
Financing Risk. Financing risk is the risk that capital will not be available at expected costs or in the capacity required. The Company continues to monitor financing risks related to regulatory financing, contingency financing, and debt capital and sees no immediate issues with its current structures, capacity and plans. Liquidity Risk. Liquidity risk is the risk that the Company is unable to meet payment obligations at expected costs or in the capacity required. The Company's traditional liquidity demands include items such as claims, expenses, debt financing and investment purchases, which are largely known or can be reasonably forecasted. The Company regularly performs liquidity risk modeling, including both market and Company specific stresses, to assess the sufficiency of available resources.
Tax Risk. Tax risk is the risk that current and future tax positions are
different than expected. The Company monitors tax risks related to the evolving
tax and regulatory environment, business transactions, legal entity
reorganizations, tax compliance obligations, and financial reporting.
Operational Risk
Operational risk is the risk of lower/negative earnings and a potential reduction in enterprise value caused by unexpected losses associated with inadequacy or failure on the part of internal processes, people and systems, or from external events. The Company regularly monitors and assesses the risks related to business conduct and governance, fraud, privacy, and cybersecurity, business disruption, and business operations. Various insurance, market and credit, capital, and strategy risk obligations and concerns often intersect with the Company's core operational process risk areas. Given the scope of the Company's business and the number of countries in which it operates, this set of risks has the potential to affect the business locally, regionally, or globally. 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. 85
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Business Conduct and Governance Risk. Business conduct and governance is the risk related to management oversight, compliance, market conduct, and legal matters. The Company's Compliance Risk Management Program facilitates a proactive evaluation of present and potential compliance risks associated with both local and enterprise-wide regulatory requirements as well as compliance with Company policies and procedures. Fraud Risk. Fraud risk is the risk related to the deliberate abuse of and/or taking of Company assets in order to secure gain for the perpetrator or inflict harm on the Company or other victim. Ongoing monitoring and an annual fraud risk assessment enables the Company to continually evaluate potential fraud risks within the organization. Privacy Risk. Privacy risk is the risk of non-compliance with privacy regulations and laws. The Company's privacy program, processes, and procedures are designed to protect personal information related to its customers, insured individuals or its employees. The Company's privacy program facilitates a proactive evaluation of present and potential privacy risks associated with both local and enterprise-wide regulatory requirements as well as compliance with Company policies and procedures. Cybersecurity Risk. Cybersecurity risk is the risk of theft, loss, unauthorized disclosure, or unauthorized use of physical or electronic assets resulting in a loss of confidentiality, loss of revenue, poor reputational exposure, or regulatory fines. The Company's cybersecurity program, processes, and procedures are designed to prevent unauthorized physical and electronic theft and the disclosure of confidential and personal data related to its customers, insured individuals or its employees. The Company employs technology, administrative related processes and procedural controls, security measures and other preventative actions to reduce the risk of such incidents. Business Disruption Risk. Business disruption risk is the risk of impairment to operational capabilities due to the unavailability of people, systems, and/or facilities. The Company's global business continuity process enables associates to identify potential impacts that threaten operations by providing the framework, policies and procedures and required recurring training for how the Company will recover and restore interrupted critical functions, within a predetermined time, after a disaster or extended disruption, until its normal facilities are restored.
Business Operations Risk. Business operations risk is the risk related to
business processes and procedures. Business operations risk includes risk
associated with the processing of transactions, data use and management,
monitoring and reporting, the integrity and accuracy of models, the use of third
parties, and the delivery of advisory services.
Human Capital Risk. Human capital risk is related to workforce management, including talent acquisition, development, retention, and employment relations/regulations. The Company actively monitors human capital risks using multiple practices that include but are not limited to human resource and compliance policies and procedures, regularly reviewing key risk indicators, performance evaluations, compensation and benefits benchmarking, succession planning, employee engagement surveys and associate exit interviews.
Strategic Risk
Strategic risk relates to the planning, implementation, and management of the Company's business plans and strategies, including the risks associated with: the global environment in which it operates; future law and regulation changes; political risks; and relationships with key external parties. Strategy Risk. Strategy risk is the risk related to the design and execution of the Company's strategic plan, including risks associated with merger and acquisition activity. Strategy risks are addressed by a robust multi-year planning process, regular business unit level assessments of strategy execution and active benchmarking of key performance and risk indicators across the Company's portfolios of businesses. The Company's risk appetites and limits are set to be consistent with strategic objectives.
External Environment Risk
External environment risk relates to external competition, macro trends, and client needs. Macro characteristics that drive market opportunities, risk and growth potential, the competitive landscape and client feedback are closely monitored. Key Relationships Risk. Key relationships risk relates to areas of important interactions with parties external to the Company. The Company's reputation is a critical asset in successfully conducting business and therefore relationships with its primary stakeholders (including but not limited to business partners, shareholders, clients, rating agencies, and regulators) are all carefully monitored. Political and Regulatory Risk. Political and regulatory risk relates to future law and regulation changes and the impact of political changes or instability on the Company's ability to achieve its objectives. Regulatory and political developments and related risks that may affect the Company are identified, assessed and monitored as part of regular oversight activities. 86
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New Accounting Standards
Changes to the general accounting principles are established by theFinancial Accounting Standards Board ("FASB") in the form of accounting standards updates to the FASB Accounting Standards CodificationTM.
Financial Services - Insurance
In August 2018, the FASB issued amendments that will significantly change the recognition and measurement of long-duration insurance contracts and expand disclosure requirements. The guidance is effective for the Company on January 1, 2023. The Company established a team to support the implementation of the updated guidance, which requires significant changes to policies, reporting and processes. The Company's achievements as of the balance sheet date include, but are not limited to, the following:
•Established key accounting policies;
•Updated chart of accounts to support enhanced financial statement presentation
and disclosures;
•Implemented a data management system and process for grouping treaties into
cohorts;
•Established valuation analytics and reporting foundation;
•Established an assumption governance process for assumption review, changes and
approvals; and
•Conducted dry runs and end to end system testing.
The Company continues to make progress on the following items (includes, but not
limited to):
•Evaluating and finalizing key accounting policies;
•Evaluating the impact to the consolidated financial statements at transition;
•Determining and documenting key risks and appropriate internal controls; and
•Conducting parallel valuation runs.
See "New Accounting Pronouncements" in Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements for additional information on new accounting pronouncements and their impact, if any, on the Company's results of operations and financial position.
AMERICAN FINANCIAL GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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