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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 39
Overview 40
Industry Trends 42
Critical Accounting Policies 43
Consolidated Results of Operations 47
Results of Operations by Segment 51
U.S. and Latin America Operations 51
Canada Operations 55
Europe , Middle East and Africa Operations 57
Asia Pacific Operations 59
Corporate and Other 61
Liquidity and Capital Resources 62
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Cautionary Note Regarding Forward-Looking Statements
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws 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 "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "if," "intend," "likely," "may," "plan," "potential," "pro forma," "project," "should," "will," "would," and other words and terms of similar meaning or that are otherwise tied to future periods or future performance, in each case in all derivative forms. 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. Factors that could also cause results or events to differ, possibly materially, from those expressed or implied by forward-looking statements, include, among others: (1) adverse changes in mortality (whether related to COVID-19 or otherwise), 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 the 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, pandemics, epidemics or other major public health issues 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 developments with respect to litigation, arbitration or regulatory investigations or actions (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, including Long Duration Targeted Improvement accounting changes 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, except as required under applicable securities law. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A - "Risk Factors" in this Annual Report on Form 10-K, as may be supplemented by Item 1A - "Risk Factors" in the Company's subsequent Quarterly Reports on Form 10-Q and in our other periodic and current reports filed with theSEC . 39
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Overview
The Company is among the leading global providers of life reinsurance and financial solutions, with$3.4 trillion of life reinsurance in force and assets of$84.7 billion as ofDecember 31, 2022 . Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, capital solutions, including financial reinsurance and stable value products. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets. 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 2021 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 are 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.
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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,
2022 2021 2020
Gross Net Gross Net Gross Net
U.S. and Latin America :
Traditional $ 7,011 $ 6,590 $ 6,716 $ 6,244 $ 6,423 $ 5,838
Financial Solutions 66 66 55 55 53 53
Total U.S. and Latin America 7,077 6,656 6,771 6,299 6,476 5,891
Canada:
Traditional 1,282 1,219 1,244 1,194 1,106 1,052
Financial Solutions 95 95 90 90 83 83
Total Canada 1,377 1,314 1,334 1,284 1,189 1,135
Europe , Middle East and Africa :
Traditional 1,768 1,736 1,770 1,738 1,579 1,555
Financial Solutions 623 486 552 350 430 252
Total Europe , Middle East and
Africa 2,391 2,222 2,322 2,088 2,009 1,807
Asia Pacific:
Traditional 2,767 2,650 2,736 2,624 2,787 2,681
Financial Solutions 236 236 218 218 180 180
Total Asia Pacific 3,003 2,886 2,954 2,842 2,967 2,861
Corporate and Other - - - - - -
Total $ 13,848 $ 13,078 $ 13,381 $ 12,513 $ 12,641 $ 11,694
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,
2022 2021 2020
In Force New Business In Force New Business In Force New
BusinessU.S. andLatin America : Traditional$ 1,672.2 $ 145.9 $ 1,628.4 $ 130.5 $ 1,611.6 $ 114.9 Financial Solutions 5.2 - 5.3 - 5.3 - Total U.S. and Latin America 1,677.4 145.9 1,633.7 130.5 1,616.9 114.9 Canada: Traditional 463.6 48.2 472.6 48.8 445.2 40.8 Financial Solutions - - - - - - Total Canada 463.6 48.2 472.6 48.8 445.2 40.8Europe ,Middle East andAfrica : Traditional 735.4 169.4 861.6 198.4 864.4 184.3 Financial Solutions - - - - - - TotalEurope ,Middle East and Africa 735.4 169.4 861.6 198.4 864.4 184.3 Asia Pacific: Traditional 518.6 45.3 497.4 34.2 553.7 49.6 Financial Solutions 5.7 0.1 1.7 0.2 0.5 - Total Asia Pacific 524.3 45.4 499.1 34.4 554.2 49.6 Total$ 3,400.7 $ 408.9 $ 3,467.0 $ 412.1 $ 3,480.7 $ 389.6 41
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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$475.2 billion ,$425.8 billion and$389.1 billion in 2022, 2021 and 2020, 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. 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.
•Deliver unique insights to gain competitive advantage and leverage thought
leadership to drive growth.
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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
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 2022, 2021 and 2020.
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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 of December 31, 2022 , the Company had
$528 million of DAC related to asset-intensive products, within the U.S. and
Latin 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
9.12% (11.53)% Estimated future policy lapse rates decreasing (increasing) 20% on a permanent basis (including surrender charges) 5.77% (5.00)% 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$ 2,000 $ 387 $ -$ 2,387 Canada 171 - - 171 Europe, Middle East and Africa 231 - - 231 Asia Pacific 1,039 141 - 1,180 Corporate - - 5 5 Total$ 3,441 $ 528$ 5 $ 3,974 As ofDecember 31, 2022 , 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 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
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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 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.
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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 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
(iv)tax planning strategies.
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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
Although global COVID-19 related deaths have declined, the Company continues to experience increased claim costs, primarily in the first quarter of 2022, as a result of the COVID-19 global pandemic. However, the Company cannot reliably predict the future impact COVID-19 will have on its business, results of operations and financial condition as the ultimate amount and timing of claims the Company will experience as a result of COVID-19 will depend on many variables and uncertainties. These variables and uncertainties will depend on, the severity of new variants of the virus, vaccination prevalence and effectiveness, country-specific circumstances, and COVID-19's indirect impact on mortality and morbidity. During 2022, general population COVID-19 deaths were heavily concentrated in individuals aged 70 and older and with pre-existing comorbidities; however, some populations experienced 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 the latest external data and the Company's claim experience to date and are subject to the many variables and uncertainties noted above. During 2022, theU.S. continued to be the key driver of mortality claim costs followed byAsia andCanada . For the year endedDecember 31, 2022 , the Company estimates it incurred approximately$451 million of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$336 million of that amount being associated with theU.S. and Latin America Traditional segment. During the second half of 2022, mortality claims related to COVID-19 continued to decline across all segments; however, the Company experienced an increase in medical hospitalization claims for at-home sickness benefits related to COVID-19 inJapan . Changes to the definition of qualifying at-home sickness benefits at the end ofSeptember 2022 is expected to reduce future at-home benefit expenses in future periods. 47
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Results of Operations - 2022 compared to 2021
A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , is presented below. A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , can be found under Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 25, 2022 , 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 the changes in net income for the periods
presented.
For the years ended
2022 2021 2022 vs 2021
Revenues (Dollars in millions, except per share data)
Net premiums $ 13,078 $ 12,513 $ 565
Net investment income 3,161 3,138 23
Investment related gains (losses), net (506) 560 (1,066)
Other revenues 525 447 78
Total revenues 16,258 16,658 (400)
Benefits and expenses
Claims and other policy benefits 12,046 12,776 (730)
Interest credited 682 700 (18)
Policy acquisition costs and other insurance expenses 1,499 1,416 83
Other operating expenses 1,009 936 73
Interest expense 184 127 57
Collateral finance and securitization expense 7 12 (5)
Total benefits and expenses 15,427 15,967 (540)
Income before income taxes 831 691 140
Provision for income taxes 204 74 130
Net income $ 627 $ 617 $ 10
Net income attributable to noncontrolling interest 4 - 4
Net income available to RGA, Inc. shareholders $ 623 $ 617 $ 6
Earnings per share
Basic earnings per share $ 9.31 $ 9.10
Diluted earnings per share 9.21 9.04
The increase in income in 2022 was primarily the result of the following:
•An increase in net premiums and decrease in mortality claims in the
mortality claims was a result of lower COVID-19 claims and favorable
non-COVID-19 experience.
The increase in premiums and decrease in mortality claims was offset by the
following:
•Changes in the fair value of derivative instruments, excluding embedded derivatives, included in investment related gains (losses), net. For the year endedDecember 31, 2022 , the fair value of these instruments decreased by$301 million , compared to an increase of$90 million in 2021. •$204 million, pre-tax, of net realized losses, included in investment related gains (losses), net associated with portfolio repositioning and higher interest rates compared to$234 million of net realized gains recognized in the prior year. •Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains by$173 million for the year endedDecember 31, 2022 , compared to an increase of$107 million in 2021. •The prior year benefited from a one-time adjustment of$162 million , pretax, associated with prior periods that includes$92 million , pretax, to correct the accounting for equity method limited partnerships to reflect unrealized gains in net investment income that were previously included in accumulated other comprehensive income (loss), and a$70 million , pretax, correction reflected in other investment related gains (losses), net to adjust the carrying value of certain limited partnerships from cost less impairments to a fair value approach, using the net asset value ("NAV") per share or its equivalent. 48
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Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency exchange fluctuation decreased income before taxes by$14 million due to the weakening foreign currencies compared to theU.S. Dollar, primarily, the Great British Pound and the Canadian 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 organic growth on existing treaties and new business production, measured by the face amount of reinsurance in force, of$408.9 billion during 2022 compared to$412.1 billion during 2021. Consolidated assumed life reinsurance in force decreased to$3,400.7 billion as ofDecember 31, 2022 , from$3,467.0 billion as ofDecember 31, 2021 , due to lapses and mortality claims in the current year of$324.9 billion , primarily attributable to the COVID-19 pandemic, and changes in foreign exchange, which decreased assumed life reinsurance in force by$150.3 billion .
Net investment income and investment related gains and losses
The increase in net investment income is primarily attributable to an increase
in the average invested asset base and higher risk-free rates earned on new
investments, partially offset by a decrease 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 4.69% and 4.99% in 2022 and 2021, respectively. Investment yield decreased for the year endedDecember 31, 2022 , in comparison to the prior year, primarily due to decreased variable income from limited partnerships and real estate joint ventures. 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 decrease in investment related gains (losses), net is attributable to the
following:
•During 2022, the Company repositioned select portfolios generating net realized
losses of
•Changes in the fair value of embedded derivatives associated with modco/funds withheld treaties, decreased investment related gains (losses) by$173 million in 2022, compared to an increase of$107 million in 2021. •The Company incurred$(39) million and$17 million of impairments and change in allowance for credit (losses) gains during the years endedDecember 31, 2022 and 2021, respectively. •Unrealized gains of$38 million were recognized during 2022 compared to$169 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 recognized during 2021. •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 24.6% and 10.6% for 2022 and 2021, respectively. The effective tax rate for 2022 was greater than theU.S. Statutory rate of 21.0% primarily as a result of income earned in jurisdictions with tax rates higher than theU.S. , Subpart F income and GILTI which were partially offset with foreign tax credits. Furthermore, the Company established a valuation allowance on certain deferred taxes related to unrealized losses on the Company's fixed maturity portfolio which, if reported in income tax expense would have increased the effective tax rate by 3%. The Company considered the need for a valuation allowance on the remaining deferred tax asset associated with the fixed maturity securities. However, based on the ability to carryback and carryforward tax capital losses and the Company's ability and intention to hold available for sale fixed maturity securities showing an unrealized loss until recovery, as described in Note 4 - "Investments" the Company determined it is more likely than not to realize the remaining deferred tax asset. See Note 4 "Investments" and Note 9 - "Income Tax" in the Notes to the Consolidated Financial Statements for additional information.
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
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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 December 31,
2022 2021 2022 vs 2021
Modco /Funds withheld:
Unrealized gains (losses) $ (173) $ 107 $ (280)
Deferred acquisition costs/retrocession 93 (36) 129
Net effect (80) 71 (151)
EIAs:
Unrealized gains (losses) 53 45 8
Deferred acquisition costs/retrocession (25) (23) (2)
Net effect 28 22 6
Guaranteed minimum benefit riders:
Unrealized gains (losses) 39 (7) 46
Related freestanding derivatives, net of deferred
acquisition costs/retrocession (72) (47) (25)
Net effect (33) (54) 21
Net effect after related freestanding derivatives
$ 39 $ (124) 50
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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, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 6,656 $ 6,299 $ 357 Net investment income 2,043 2,019 24 Investment related gains (losses), net (261) 78 (339) Other revenues 291 294 (3) Total revenues 8,729 8,690 39 Benefits and expenses: Claims and other policy benefits 6,446 6,886 (440) Interest credited 555 635 (80) Policy acquisition costs and other insurance expenses 1,019 988 31 Other operating expenses 242 206 36 Total benefits and expenses 8,262 8,715 (453) Income (loss) before income taxes$ 467 $ (25) $ 492 The increase in income before income taxes in 2022 was primarily driven by an increase in premiums and favorable claims experience in the individual mortality line of business, as well as an increase of$42 million due to termination and utilization assumption updates related to individual health disabled life reserves and higher investment income. The increase in income was partially offset by higher investment related losses and a decrease in the fair value of the embedded derivatives associated with modco/funds withheld treaties within Financial Solutions. 51
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Traditional Reinsurance
For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 6,590 $ 6,244 $ 346 Net investment income 965 930 35 Investment related gains, net 48 6 42 Other revenues 26 18 8 Total revenues 7,629 7,198 431 Benefits and expenses: Claims and other policy benefits 6,265 6,720 (455) Interest credited 70 70 - Policy acquisition costs and other insurance expenses 842 792 50 Other operating expenses 184 156 28 Total benefits and expenses 7,361 7,738 (377) Income (loss) before income taxes $ 268 $ (540) $ 808 Key metrics: Life reinsurance in force$1,672.2 billion $1,628.4 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 95.1 % 107.6 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 12.8 % 12.7 % Other operating expenses as a percentage of net premiums 2.8 % 2.5 %
The increase in income before income taxes in 2022 for the
America Traditional segment was primarily due to favorable claims experience
within the individual mortality line of business.
Revenues
•The increase in net premiums was primarily due to organic growth on existing treaties as well as new business treaties. The segment added new life business production, measured by face amount of reinsurance in force, of$145.9 billion and$130.5 billion during 2022 and 2021, respectively.
•The increase in net investment income was primarily the result of higher yields
and asset bases in the current year partially offset by lower variable
investment income.
•The increase in investment related gains (losses), net was the result of an
increase in the fair value of the embedded derivatives associated with
modco/funds withheld treaties.
Benefits and expenses
•The decrease in the loss ratio for 2022 was primarily due to a reduction in COVID-19 claims, mainly within the individual mortality line of business. While the cause of death is not yet available for all claims, the Company estimates that approximately$336 million of claims for the year endedDecember 31, 2022 , were attributable to COVID-19.
•The increase in other operating expenses is primarily attributable to an
increase in incentive compensation expenses.
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Financial Solutions
For the year ended December 31, 2022 2021 2022 vs 2021
(dollars in millions) Capital Capital Capital
Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total
Revenues:
Net premiums $ 66 $ - $ 66 $ 55 $ - $ 55 $ 11 $ - $ 11
Net investment income 1,075 3 1,078 1,087 2 1,089 (12) 1 (11)
Investment related gains (losses), net (309) - (309) 72 - 72 (381) - (381)
Other revenues 113 152 265 168 108 276 (55) 44 (11)
Total revenues 945 155 1,100 1,382 110 1,492 (437) 45 (392)
Benefits and expenses:
Claims and other policy benefits 181 - 181 166 - 166 15 - 15
Interest credited 485 - 485 565 - 565 (80) - (80)
Policy acquisition costs and other
insurance expenses 174 3 177 192 4 196 (18) (1) (19)
Other operating expenses 46 12 58 37 13 50 9 (1) 8
Total benefits and expenses 886 15 901 960 17 977 (74) (2) (76)
Income before income taxes $ 59 $ 140 $ 199 $ 422 $ 93 $ 515 $ (363) $ 47 $ (316)
The decrease in income before income taxes in 2022 for the U.S. and Latin
America Financial Solutions segment was primarily due to lower investment
related gains (losses), net primarily due to a decrease in the fair value of
embedded derivatives related to modco/funds withheld treaties and higher net
investment related losses in coinsurance portfolios.
The invested asset base, at amortized cost, supporting this segment decreased to
$23.8 billion as of December 31, 2022 , from $24.1 billion as of December 31,
2021 .
•The decrease in the asset base was primarily due to $1.1 billion of net run off
in existing in force transactions, partially offset by $0.9 billion from new
transactions.
•As of December 31, 2022 and 2021, $4.2 billion and $4.7 billion , respectively,
of the invested assets were funds withheld at interest, of which greater than
90% is associated with two clients.
Impact of certain derivatives
Income from the asset-intensive business tends to be volatile due to changes in
the fair value of certain derivatives, including embedded derivatives associated
with reinsurance treaties structured on a modco or funds withheld basis, as well
as embedded derivatives associated with the Company's reinsurance of EIAs and
variable annuities with guaranteed minimum benefit riders. Fluctuations occur
period to period primarily due to changing investment conditions including, but
not limited to, interest rate movements (including risk-free rates and credit
spreads), implied volatility, the Company's own credit risk and equity market
performance, all of which are factors in the calculations of fair value.
Therefore, management believes it is helpful to distinguish between the effects
of changes in these derivatives, net of related hedging activity, and the
primary factors that drive profitability of the underlying treaties, namely
investment income, fee income (included in other revenues), and interest
credited. These fluctuations are considered unrealized by management and do not
affect current cash flows, crediting rates or spread performance on the
underlying treaties.
The following table summarizes the asset-intensive results and quantifies the
impact of these embedded derivatives for the periods presented. Revenues before
certain derivatives, benefits and expenses before certain derivatives, and
income before income taxes and certain derivatives, should not be viewed as
substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income
before income taxes.
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For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Total revenues$ 945 $ 1,382 $ (437) Less: Embedded derivatives - modco/funds withheld treaties (221) 101 (322) Guaranteed minimum benefit riders and related free standing derivatives (29) (78) 49 Revenues before certain derivatives 1,195 1,359 (164) Benefits and expenses: Total benefits and expenses 886 960 (74) Less: Embedded derivatives - modco/funds withheld treaties (93) 36 (129) Guaranteed minimum benefit riders and related free standing derivatives 4 (24) 28 Equity-indexed annuities (28) (22) (6) Benefits and expenses before certain derivatives 1,003 970 33 Income (loss) before income taxes: Income before income taxes 59 422 (363)
Less:
Embedded derivatives - modco/funds withheld treaties (128) 65 (193) Guaranteed minimum benefit riders and related free standing derivatives (33) (54) 21 Equity-indexed annuities 28 22 6 Income before income taxes and certain derivatives$ 192 $ 389 $ (197) 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, 2022 and 2021. The change in fair value of the embedded derivatives related to modco/funds withheld treaties, net of deferred acquisition costs decreased income before income taxes by$128 million in 2022. The decrease in fair value in 2022 was primarily driven by higher risk-free interest rates and wider 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$2 million and$(41) million for 2022 and 2021, 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, decrease income before income taxes by$33 million in 2022. The decrease in income for 2022 is primarily due to assumption updates of$19 million , which included a change in the benchmark rate to the secured overnight financing rate, and capital market movements, net of changes in fair value of the free standing derivatives of$14 million . 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$28 million in 2022, primarily due to an increase in interest rates which has the impact of lowering the fair value of the liability.
Discussion and analysis before certain derivatives
•Income before income taxes and certain derivatives decreased by
2022, which was primarily due to a decrease in investment related gains
(losses), net of
coinsurance and funds withheld portfolios. Additionally, the prior period
included favorable prior year policyholder experience.
•Revenue before certain derivatives decreased by$164 million in 2022, primarily due to lower investment related gains (losses), net in coinsurance and funds withheld portfolios and a change in the fair value of equity options associated with the reinsurance of EIAs, partially offset by a$36 million increase in net investment income related to a funds withheld transaction with is retroceded to a third party. The effects on investment income related to the equity options 54
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and the retroceded funds withheld transaction are substantially offset by a
corresponding change in interest credited and other insurance expenses,
respectively.
•Benefits and expenses before certain derivatives increased by$33 million in 2022, primarily due to$34 million higher amortization of deferred acquisition costs associated with investment related gains (losses), net in coinsurance and funds withheld portfolios and a$49 million increase in other insurance expenses related to a funds withheld transaction which is retroceded to a third party. Additionally, the prior period included favorable policyholder experience including impacts from COVID-19 of$13 million . These expense increases were offset by$92 million lower interest credited associated with reinsurance of EIAs. 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 increased$47 million in 2022. The increase was primarily due to a recapture fee earned on a terminated transaction. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period.
At
companies, as measured by pre-tax statutory surplus, risk based capital and
other financial structures were
Canada Operations
TheCanada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, and to a lesser extent creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and capital solutions. For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 1,314 $ 1,284 $ 30 Net investment income 239 248 (9) Investment related gains (losses), net 2 3 (1) Other revenues 15 14 1 Total revenues 1,570 1,549 21 Benefits and expenses: Claims and other policy benefits 1,226 1,175 51 Interest credited - - - Policy acquisition costs and other insurance expenses 182 190 (8) Other operating expenses 44 41 3 Total benefits and expenses 1,452 1,406 46 Income before income taxes$ 118 $ 143 $ (25) •The decrease in income before income taxes in 2022 is primarily due to unfavorable claims experience in the individual mortality and group lines of business and lower investment income, partially offset by favorable longevity experience.
•Foreign currency fluctuations can result in variances in the financial
statement line items. Foreign currency fluctuations in the Canadian dollar
resulted in a
otherwise stated, all amounts discussed below are net of foreign currency
fluctuations.
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Traditional Reinsurance
For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 1,219 $ 1,194 $ 25 Net investment income 238 248 (10) Investment related gains (losses), net 2 3 (1) Other revenues 6 3 3 Total revenues 1,465 1,448 17 Benefits and expenses: Claims and other policy benefits 1,158 1,096 62 Interest credited - - - Policy acquisition costs and other insurance expenses 180 187 (7) Other operating expenses 41 37 4 Total benefits and expenses 1,379 1,320 59 Income before income taxes $ 86 $ 128 $ (42) Key metrics: Life reinsurance in force$463.6 billion $472.6 billion Loss ratios 95.0 % 91.8 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 14.8 % 15.7 % Other operating expenses as a percentage of net premiums 3.4 % 3.1 %
The decrease in income before income taxes in 2022 is primarily due to
unfavorable claims experience in the individual mortality and group lines of
business and lower investment income.
Revenues
•The increase in premiums is the result of additional life insurance in force. The segment added new life business production, measured by face amount of reinsurance in force, of$48.2 billion and$48.8 billion during 2022 and 2021, respectively.
•The decrease in net investment income was primarily due to decreased variable
investment income, partially offset by an increase in the invested asset base.
Benefits and expenses
•The increase in the loss ratio for 2022 was primarily due to unfavorable claims experience in the individual mortality and group lines of business. While the cause of death is not yet available for all claims, the Company estimates that approximately$30 million of claims for the year endedDecember 31, 2022 , were attributable to COVID-19. Financial Solutions For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 95 $ 90 $ 5 Net investment income 1 - 1 Investment related gains (losses), net - - - Other revenues 9 11 (2) Total revenues 105 101 4 Benefits and expenses: Claims and other policy benefits 68 79 (11) Interest credited - - -
Policy acquisition costs and other insurance expenses 2 3
(1) Other operating expenses 3 4 (1) Total benefits and expenses 73 86 (13) Income before income taxes$ 32 $ 15
$ 17
The increase in income before income taxes in 2022 was primarily a result of
favorable termination experience as a result of increases in deaths on longevity
business in 2022 as compared to 2021.
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TheEurope ,Middle East andAfrica ("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, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 2,222 $ 2,088 $ 134 Net investment income 237 293 (56) Investment related gains (losses), net (26) 49 (75) Other revenues 20 13 7 Total revenues 2,453 2,443 10 Benefits and expenses: Claims and other policy benefits 1,965 2,083 (118) Interest credited (24) 4 (28) Policy acquisition costs and other insurance expenses 128 135 (7) Other operating expenses 178 157 21 Total benefits and expenses 2,247 2,379 (132) Income before income taxes$ 206 $ 64 $ 142
•The increase in income before income taxes in 2022 was primarily the result of
increased net premiums and favorable claims experience, partially offset by
decreases in net investment income and investment related gains (losses), net.
•Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in a$19 million decrease in income before income taxes in 2022, the majority of which impacted the Financial Solutions segment. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. •An earthquake with a 7.8 magnitude struck easternTurkey in the early hours onFebruary 6, 2023 . The current death toll inTurkey is estimated to be in excess of 40,000, plus more than 100,000 were injured. Although the Company does not currently expect a material financial impact due to the earthquake it continues to monitor the situation. Traditional Reinsurance For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 1,736 $ 1,738 $ (2) Net investment income 89 88 1 Investment related gains (losses), net - - - Other revenues 5 1 4 Total revenues 1,830 1,827 3 Benefits and expenses: Claims and other policy benefits 1,573 1,829 (256) Interest credited - - - Policy acquisition costs and other insurance expenses 123 125 (2) Other operating expenses 124 112 12 Total benefits and expenses 1,820 2,066 (246) Income (loss) before income taxes $ 10$ (239) $ 249 Key metrics: Life reinsurance in force$735.4 billion $861.6 billion Loss ratios 90.6 % 105.2 %
Policy acquisition costs and other insurance expenses
as a percentage of net premiums
7.1 % 7.2 % Other operating expenses as a percentage of net premiums 7.1 % 6.4 %
The increase in income before income taxes in 2022 is primarily due to an
improvement in individual life mortality experience.
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Table of Contents Revenues •The segment added new life business production, measured by face amount of reinsurance in force, of$169.4 billion and$198.4 billion during 2022 and 2021, respectively. The reduction in premiums and reinsurance in force was negatively impacted by the strengthening of theU.S. Dollar compared to the British Pound, Euro and South African Rand.
Benefits and expenses
•The decrease in the loss ratio was due to improved mortality experience due to a decrease in COVID-19 claims, primarily inSouth Africa and theUK . While the cause of death is not available for all claims, the Company estimates that approximately$17 million of claims were attributable to COVID-19.
•The increase in other operating expenses was primarily due to an increase in
incentive compensation expenses.
Financial Solutions
For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 486 $ 350 $ 136 Net investment income 148 205 (57) Investment related gains (losses), net (26) 49 (75) Other revenues 15 12 3 Total revenues 623 616 7 Benefits and expenses: Claims and other policy benefits 392 254 138 Interest credited (24) 4 (28) Policy acquisition costs and other insurance expenses 5 10 (5) Other operating expenses 54 45 9 Total benefits and expenses 427 313 114 Income before income taxes$ 196 $ 303 $ (107) The decrease in income before income taxes in 2022 is primarily due to decreases in net investment income, investment related gains (losses), net and increased volume of claims, partially offset by increases in net premiums.
Revenues
•The increase in net premiums was primarily due to increased volumes on closed
longevity block business.
•The decreases in net investment income was primarily due to lower income
associated with unit-linked policies which fluctuate with market performance and
are offset by a decrease in interest credited related to the unit-linked
liabilities.
•The decrease 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 lower investment related gains on fixed-income securities. Benefits and expenses
•The increase in claims and other policy benefits was the result of increased
volumes and adverse experience of closed longevity block business.
•The increase in other operating expenses was primarily due to an increase in
incentive compensation expenses.
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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, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 2,886 $ 2,842 $ 44 Net investment income 414 274 140 Investment related gains (losses), net (193) 18 (211) Other revenues 192 61 131 Total revenues 3,299 3,195 104 Benefits and expenses: Claims and other policy benefits 2,409 2,632 (223) Interest credited 119 57 62 Policy acquisition costs and other insurance expenses 269 215 54 Other operating expenses 226 203 23 Total benefits and expenses 3,023 3,107 (84) Income before income taxes$ 276 $ 88 $ 188 •The increase in income before income taxes was primarily due to favorable claims experience, increases in net premiums and net investment income, partially offset by unfavorable fluctuations in the fair value of derivatives within the Financial Solutions business. •Foreign currency fluctuations can result in variances in the financial statement line items, foreign currency fluctuations resulted in a$12 million increase in income before income taxes in 2022. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations.
Traditional Reinsurance
For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 2,650 $ 2,624 $ 26 Net investment income 142 136 6 Investment related gains (losses), net 12 (1) 13 Other revenues 19 19 - Total revenues 2,823 2,778 45 Benefits and expenses: Claims and other policy benefits 2,152 2,445 (293) Interest credited - - - Policy acquisition costs and other insurance expenses 171 159 12 Other operating expenses 206 184 22 Total benefits and expenses 2,529 2,788 (259) Income before income taxes $ 294 $ (10) $ 304 Key metrics: Life reinsurance in force$518.6 billion $497.4 billion Loss ratios 81.2 % 93.2 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 6.5 % 6.1 % Other operating expenses as a percentage of net premiums 7.8 % 7.0 %
The increase in income before income taxes in 2022 is primarily the result of
favorable claims experience and an increase in net premiums.
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Revenues
•The increase in net premiums was primarily due to continued business growth in
the segment.
•The segment added new life business production, measured by face amount of reinsurance in force, of$45.3 billion and$34.2 billion during 2022 and 2021, respectively, due to new business production and in force transactions.
Benefits and expenses
•The decrease in the loss ratio for 2022 was primarily due to favorable claims experience across the segment due to improved COVID-19 experience, primarily inIndia , and favorable claims experience, primarily inHong Kong . While the cause of death is not yet available for all claims, the Company estimates that approximately$37 million of claims for the year endedDecember 31, 2022 , were attributable to COVID-19 which includes medical hospitalization claims inJapan for at-home sickness benefits related to COVID-19.
•The increase in other operating expenses was primarily due to an increase in
incentive compensation expenses.
Financial Solutions
For the year ended December 31, 2022 2021 2022 vs 2021 (dollars in millions) Revenues: Net premiums$ 236 $ 218 $ 18 Net investment income 272 138 134 Investment related gains (losses), net (205) 19 (224) Other revenues 173 42 131 Total revenues 476 417 59 Benefits and expenses: Claims and other policy benefits 257 187 70 Interest credited 119 57 62
Policy acquisition costs and other insurance expenses 98 56
42 Other operating expenses 20 19 1 Total benefits and expenses 494 319 175 Income before income taxes$ (18) $ 98 $ (116) The decrease in income before income taxes in 2022 is primarily due to unfavorable fluctuations in the fair value of derivatives. The invested asset base, at amortized cost, supporting asset-intensive transactions increased to$12.2 billion as ofDecember 31, 2022 , from$8.6 billion as ofDecember 31, 2021 , primarily as a result of asset-intensive transactions executed during the year. The amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was$1.1 billion and$1.6 billion for the year endedDecember 31, 2022 and 2021, respectively. Fees earned from this business can vary significantly depending on the size, complexity and timing of the transactions and, therefore, can fluctuate from period to period.
Revenues
•The increase in net premiums is primarily due to new asset-intensive
transactions executed during the year.
•The increase in net investment income is due to the growth in the invested
asset base.
•The decrease in investment related gains (losses), net was primarily due to the decrease in fair value of derivatives of$144 million due to the weakening of the Japanese yen, higher interest rates, widening credit spreads and losses due to investment activity of$86 million . •The increase in other revenues was primarily attributable to surrender and market value adjustment charges on a single premium annuity block of business of$134 million due to higher lapses, which was partially offset by an increase in policy acquisition costs of$36 million .
Benefits and expenses
•The increase in claims and other policy benefits was primarily attributable to medical hospitalization claims inJapan for at-home sickness benefits related to COVID-19 of$31 million . •The increase in policy acquisition costs and other reinsurance expenses is the result of an increase in policy acquisition costs of$36 million as result of the aforementioned increase in lapses on a single premium annuity block of business. 60
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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 Funding Agreement Backed Notes ("FABN") program,
collateral finance and securitization transactions and service business
expenses. Additionally, Corporate and Other includes results that, among other
activities, develop and market technology, and provide consulting and
outsourcing solutions for the insurance and reinsurance industries. The Company
invests 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, 2022 2021 2022 vs 2021
(dollars in millions)
Revenues:
Net premiums $ - $ - $ -
Net investment income 228 304 (76)
Investment related gains (losses), net (28) 412 (440)
Other revenues 7 65 (58)
Total revenues 207 781 (574)
Benefits and expenses:
Claims and other policy benefits - - -
Interest credited 32 4 28
Policy acquisition costs and other insurance income (99) (112)
13 Other operating expenses 319 329 (10) Interest expense 184 127 57 Collateral finance and securitization expense 7 12 (5) Total benefits and expenses 443 360 83 Income/(loss) before income taxes$ (236) $ 421
The decrease in income before income taxes in 2022 is primarily due to a
decrease in total revenues and higher interest expense and interest credited.
•Net investment income for the year endedDecember 31, 2021 , includes a one-time adjustment of$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. The unrealized gains should have been recognized directly in net investment income in the same prior periods they were reported as earnings by the investees. Excluding this adjustment, the increase in net investment income is attributable to higher investment income on Corporate invested assets due to a higher asset base. Higher investment income includes income earned on assets associated with the Company's FABN program, which is partially offset by higher interest credited related to the program. •Investment related gains (losses), net for the year endedDecember 31, 2021 , includes an adjustment to investments in limited partnerships considered to be investment companies, which should have been recognized in prior periods, of$70 million to adjust the carrying value from cost less impairments to the fair value approach, using the net asset value ("NAV") per share or its equivalent. The remaining decrease in investment related gains (losses), net is attributable to losses on sales of fixed maturity securities in the current period compared to gains in the prior period, lower unrealized gains on limited partnerships, changes in allowances and impairments on mortgage loans and available-for-sale securities and changes in the fair value of equity securities and derivatives as a result of fluctuations in foreign exchange rates, interest rates and equity markets. •The decrease in other revenues was primarily due to a decline in the cash surrender value on corporate-owned life insurance compared to an increase in value for the prior year, as well as gains on the sales of subsidiaries in the prior period of$11 million . Additionally, foreign currency losses reduced other revenues.
•The decrease in other operating expenses was attributable to a decrease in
retirement benefit related costs partially offset by increased incentive
compensation expense.
•The increase in interest expense is due to the issuance of the 7.125% fixed-rate reset subordinated debentures dueOctober 15, 2052 , with a face amount of$700 million in the third quarter of 2022, partially offset by the redemption of the 2042 Debentures. In addition, 2021 interest expense included 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. 61
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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 or otherwise. 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 2022 was 4.69%, 30 basis points below the comparable 2021 rate due to decreased variable income from limited partnership investments. 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. The Company's average investment yield, excluding variable investment income, was 4.00%, 3.81%, and 3.93% for 2022, 2021 and 2020, respectively. Due to increases in risk free interest rates, gross unrealized gains on fixed maturity securities available-for-sale decreased from$5.3 billion atDecember 31, 2021 , to$0.6 billion atDecember 31, 2022 . Gross unrealized losses increased from$0.3 billion atDecember 31, 2021 to$7.3 billion atDecember 31, 2022 . 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. 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. To mitigate disintermediation risk, the Company purchased swaptions to protect it against a material increase in interest rates. While the Company has felt the pressures of sustained low interest rates, followed by the recent significant increase in risk-free rates, and volatile equity markets, 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.The Holding Company RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness. The primary sources of RGA's liquidity include proceeds from its capital-raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes withRGA Reinsurance , RGA Life and Annuity 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, 2022 , 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. 62
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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 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$304 million and$192 million outstanding under the intercompany revolving credit facility as ofDecember 31, 2022 and 2021, 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$41 million and$44 million as ofDecember 31, 2022 and 2021, 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 the 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, 2022 , 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$919 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. During the year endedDecember 31, 2022 , the Company repurchased 219,116 shares of common stock under this program for$25 million . 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. During the year endedDecember 31, 2022 , RGA repurchased 380,138 shares of common stock under this program for$50 million .
The pace of repurchase activity depends on various factors such as the level of
available cash, an evaluation of the costs and benefits associated with
alternative uses of excess capital, such as acquisitions and in force
reinsurance transactions, and RGA's stock price.
Details underlying dividend and share repurchase program activity were as
follows (in millions, except share data):
2022 2021 2020
Dividends to shareholders $ 205 $ 194 $ 182
Purchase of common stock (1) 75 96 153
Total amount paid to shareholders $ 280 $ 290 $ 335
Number of common shares purchased (1) 599,254 852,037
1,074,413
Average price per share $ 125.15 $ 112.67
(1)Excludes shares utilized to execute and settle certain stock incentive
awards.
RGA declared dividends totaling$3.06 per share in 2022. 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.
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Statutory Dividend Limitations
RGA Life and Annuity,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 dividend from unassigned surplus. Any dividends paid byRGA Reinsurance would be paid to RGA Life and Annuity, 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 RGA Life and Annuity. The MDCI allows RGA Life and Annuity to pay a dividend to RGA to the extent RGA Life and Annuity 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 RGA Life and Annuity,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, 2022 and 2021, the Company had$4.0 billion and$3.7 billion , respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As ofDecember 31, 2022 and 2021, the average interest rate on long-term debt outstanding was 4.71% and 4.42%, 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. OnSeptember 23, 2022 , RGA issued 7.125% fixed-rate reset subordinated debentures dueOctober 15, 2052 , with a face amount of$700 million . This security has been registered with theSecurities and Exchange Commission . The net proceeds were approximately$690 million . Concurrent with the debt offering, onSeptember 15, 2022 , RGA announced a cash tender offer for any and all of its outstanding 6.20% Fixed-to-Floating Rate Subordinated Debentures due 2042 (the "2042 Debentures") at a price of$25.20 for each$25 principal amount of 2042 Debentures. The tender offer expired onSeptember 22, 2022 , and a total of$151 million or approximately 38%, of the aggregate principal amount of the 2042 Debentures were tendered. The Company redeemed the remaining 2024 Debentures onDecember 15, 2022 . The remaining proceeds from the debt offering will be used for general corporate purposes. Capitalized issue costs were approximately$10 million . 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. 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 64
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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, 2022 , the Company had no cash borrowings outstanding and$1 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.
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, 2022 , there were approximately$128 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, 2022 ,$1.5 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. During 2021, the Company's subsidiary,Chesterfield Financial Holdings, LLC , as issuer, called and fully redeemed the securitization notes. During 2022, the Company's subsidiary,Timberlake Financial L.L.C , as issuer, called and fully redeemed the collateral financing notes. 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. 65
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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. 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. In addition, the introduction of the reciprocal jurisdiction reinsurer has provided another alternative way to manage collateral requirements. In 2022, RGA Americas was designated as a reciprocal jurisdiction reinsurer by the MDCI. These designations allow 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, 2022 , 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$3.7 billion were held in trust for the benefit of the Company's subsidiaries to satisfy collateral requirements for reinsurance business atDecember 31, 2022 . Additionally, securities with an amortized cost of$31.5 billion as ofDecember 31, 2022 , 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.
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. 66
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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, 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$849 million as ofDecember 31, 2022 . The Company also has$1.1 billion of funds available through collateralized borrowings from theFederal Home Loan Bank of Des Moines ("FHLB") as ofDecember 31, 2022 . As ofDecember 31, 2022 , the Company could have borrowed these additional amounts without violating any of its existing debt covenants. The Company's principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, dividends to shareholders, purchases of treasury stock, and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements). The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires nor to the recoverability of future claims. The Company's management believes its cash and cash equivalents along with its current sources of liquidity are adequate to meet its cash requirements for the next twelve months, despite the uncertainty associated with the pandemic. 67
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Summary of Primary Sources and Uses of Liquidity and Capital
The Company's primary sources and uses of liquidity and capital are summarized
as follows (dollars in millions):
For the years ended
2022 2021 2020
Sources:
Net cash provided by operating activities$ 1,343 $ 4,182 $ 3,322 Proceeds from offering of common stock, net - - 481 Proceeds from long-term debt issuance 700 500 598 Exercise of stock options, net - - 1 Change in cash collateral for derivative positions and other arrangements 230 31 - Change in deposit asset on reinsurance - 91 - Net deposits from investment-type policies and contracts 4,340 308 773 Net change in noncontrolling interest 90 - - Effect of exchange rate changes on cash - - 63 Total sources 6,703 5,112 5,238 Uses: Net cash used in investing activities 5,688 4,628 2,680 Dividends to stockholders 205 194 182 Repayment of collateral finance and securitization notes 181 208 214 Debt issuance costs 10 6 5 Principal payments of long-term debt 403 403 3 Purchases of treasury stock 81 99 163 Change in cash collateral for derivative positions and other arrangements - - 32 Change in deposit asset on reinsurance 44 - - Effect of exchange rate changes on cash 112 34 - Total uses 6,724 5,572 3,279 Net change in cash and cash equivalents $
(21)
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.
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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) $ 28,868 $ (3) $ (359) $ (261) $ 29,491
Interest-sensitive contract liabilities(2) 39,012 3,282 5,517 4,792
25,421
Long-term debt, including interest 8,189 780 359 727
6,323
Other policy claims and benefits 6,571 6,571 - - - Operating leases 102 17 34 19 32 Limited partnership interests and joint ventures 937 937 - -
-
Payables for collateral received under derivative transactions 209 209 - -
-
Other investment related commitments 1,026 1,026 - - - Total$ 84,914 $ 12,819$ 5,551 $ 5,277 $ 61,267 (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$35.2 billion included on the consolidated balance sheets exceeds the sum of the undiscounted estimated cash flows of$28.9 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$39.0 billion exceeds the liability amount of$30.6 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, 2022 , the Company had a net unfunded balance of$116 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. 69
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The Company's liquidity position (cash and cash equivalents and short-term investments) was$3.1 billion and$3.0 billion atDecember 31, 2022 and 2021, respectively. 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$65 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$1.3 billion and$1.4 billion atDecember 31, 2022 and 2021, 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.
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Portfolio Composition
The Company had total cash and invested assets of
billion
(dollars in millions):
2022 % of Total 2021 % of Total
Fixed maturity securities, available-for-sale $ 52,901 72.0 % $ 60,749 74.6 %
Equity securities 134 0.2 151 0.2
Mortgage loans 6,590 9.0 6,283 7.7
Policy loans 1,231 1.7 1,234 1.5
Funds withheld at interest 6,003 8.2 6,954 8.5
Limited partnerships and real estate joint
ventures 2,327 3.2 1,996 2.5
Short-term investments 154 0.2 87 0.1
Other invested assets 1,140 1.5 1,074 1.3
Cash and cash equivalents 2,927 4.0 2,948 3.6
Total cash and invested assets $ 73,407 100.0 % $ 81,476 100.0 %
Investment Yield
The following table presents consolidated average invested assets 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 ended December 31, 2022 ,
2021 and 2020. The table excludes spread related business. Spread related
business is primarily associated with contracts on which the Company earns an
interest rate spread between assets and liabilities. To varying degrees,
fluctuations in the yield on other spread related business is generally subject
to corresponding adjustments to the interest credited on the liabilities.
2022 2021 2020 2022 vs 2021 2021 vs 2020
Average invested assets at amortized
cost $ 34,398 $ 33,040
Net investment income
$ 1,614 $ 1,648 $ 1,231 $ (34) $ 417 Annualized investment yield (ratio of net investment income to average invested assets at amortized cost) 4.69 % 4.99 % 4.00 % (30) bps 99 bps VII (included in net investment income)1$ 291 $ 433 $ 63 $ (142) $ 370 Annualized investment yield excluding VII (ratio of net investment income, excluding VII, to average invested assets, excluding assets with only VII, at amortized cost) 4.00 % 3.81 % 3.93 % 19 bps (12) 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 decreased between 2021 and 2022 primarily due to decreased variable income from limited partnerships, partially offset by increased variable income from real estate joint ventures and increased yield from the recent increase in interest rates. Investment yield increased between 2020 and 2021 primarily due to increased variable income from limited partnerships and real estate joint ventures, partially offset by decreased yield from the previous low interest rate environment.
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, 2022 and 2021. 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, 2022 and 2021, approximately 94.3% and 94.0%, respectively, of the Company's consolidated investment portfolio of fixed maturity securities were investment grade. Important factors in the selection of investments include diversification, quality, yield, call protection and total rate of return potential. The relative importance of these factors is determined by market conditions and the underlying reinsurance liability and existing portfolio characteristics. The Company owns floating rate securities that represent approximately 7.4% and 5.3% of the total fixed maturity securities as ofDecember 31, 2022 and 2021, respectively. These investments have a higher 71
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degree of income variability than the other fixed income holdings in the portfolio due to fluctuations in interest payments. The 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 64.2% and 62.8% of total fixed maturity securities as ofDecember 31, 2022 and 2021, 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, 2022 and 2021. As ofDecember 31, 2022 and 2021, the Company's investments in Canadian government securities represented 6.9% and 8.1%, 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). If no rating is available from a rating agency or the NAIC, then an internally developed rating is used. 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, 2022 and 2021 was as follows (dollars in millions): 2022 2021 NAIC Rating Agency Estimated Estimated Designation Designation Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total 1AAA /AA/A$ 36,217 $ 32,295 61.1 %$ 33,540 $ 36,725 60.5 % 2 BBB 20,188 17,580 33.2 18,684 20,379 33.5 3 BB 2,734 2,607 5.0 2,620 2,668 4.4 4 B 397 331 0.6 876 863 1.4 5 CCC and lower 103 71 0.1 96 79 0.1 6 In or near default 24 17 - 57 35 0.1 Total$ 59,663 $ 52,901 100.0 %$ 55,873 $ 60,749 100.0 %
The Company's fixed maturity portfolio includes structured securities. The
following table shows the types of structured securities the Company held as of
2022 2021
Estimated Estimated
Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total
RMBS:
Agency $ 476 $ 427 6.6 % $ 551 $ 582 8.4 %
Non-agency 578 514 8.0 469 468 6.8
Total RMBS 1,054 941 14.6 1,020 1,050 15.2
ABS:
Collateralized loan obligations
("CLOs") 1,825 1,702 26.4 1,761 1,752 25.4
ABS, excluding CLOs 2,499 2,176 33.8 2,263 2,253 32.6
Total ABS 4,324 3,878 60.2 4,024 4,005 58.0
CMBS 1,835 1,623 25.2 1,790 1,849 26.8
Total $ 7,213 $ 6,442 100.0 % $ 6,834 $ 6,904 100.0 %
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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. The Company's ABS portfolio primarily consists of CLOs, aircraft, and single-family rentals. 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, 2022 and 2021, the Company had$7,319 million and$349 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
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" 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, 2022 , totaling approximately$9 million .
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):
2022 2021
Recorded Recorded
Investment % of Total Investment % of Total
U.S. Region :
West $ 2,420 36.4 % $ 2,270 36.0 %
South 2,215 33.3 2,135 33.7
Midwest 1,147 17.2 1,166 18.4
Northeast 474 7.1 419 6.6
Subtotal - U.S. 6,256 94.0 5,990 94.7
Canada 239 3.6 193 3.0
United Kingdom 158 2.4 144 2.3
Other - - 2 -
Total $ 6,653 100.0 % $ 6,329 100.0 %
See "Allowance for Credit Losses and Impairments" in Note 2 - "Significant
Accounting Policies and Pronouncements" and "Mortgage Loans" 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.
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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 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, 2022 , 2021 and 2020 (dollars in millions): 2022 2021 2020 Change in allowance for credit losses on fixed maturity securities$ (6) $ (11) $ (20) Impairments on fixed maturity securities (17) (1) (1) Change in mortgage loan allowance for credit losses (16) 29 (38) Limited partnerships and real estate joint ventures impairment losses - - (18) Total$ (39) $ 17 $ (77) The increases in allowance for credit losses and impairments on fixed maturity securities during 2022 were primarily related to high-yield securities. The increase in mortgage loan allowance for credit losses during 2022 reflected the impact of market conditions including occupancy rates. The changes in allowance for credit losses on fixed maturity securities during 2021 and 2020 were primarily related to high-yield securities reflecting the impact of the COVID-19 pandemic. The increase in mortgage loan allowance for credit losses in 2020 and the decrease in 2021 were primarily due to the estimated impact from the COVID-19 pandemic in 2020 and subsequent update to estimates in 2021. The limited partnerships and real estate joint ventures impairment losses in 2020 were primarily due to impairments on limited partnerships. 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, 2022 and 2021. As ofDecember 31, 2022 and 2021, the Company classified approximately 10.8% and 8.5%, 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/Reverse 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 agreements.
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 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, 2022 and 2021. 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. 74
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Based on data provided by ceding companies as of
funds withheld at interest totaled (dollars in millions):
2022 2021
Estimated Estimated
Underlying Security Type: Carrying Value Fair Value Carrying Value Fair Value
Segregated portfolios $ 4,136 $ 3,701 $ 4,515 $ 4,843
Non-segregated portfolios 2,237 2,237 2,315 2,315
Embedded derivatives(1) (370) - 124 -
Total funds withheld at interest $ 6,003
(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, 2022 and 2021, segregated portfolios contained investments similar to those directly owned by the Company; primarily fixed maturity securities as well as commercial mortgage loans and derivatives. 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 rates defined by the treaty terms and the Company estimated the yields were approximately 4.55%, 6.34% and 5.40% for the years endedDecember 31, 2022 , 2021 and 2020, 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 lifetime mortgages, derivative contracts, FHLB common stock and unit-linked investments. 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, 2022 and 2021. 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, 2022 , the Company had credit exposure of$14 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$868 million and$758 million of beneficial interest in lifetime mortgages in theUK , net of allowance for credit losses, as ofDecember 31, 2022 and 2021, respectively. Investment income includes$38 million ,$52 million and$44 million in interest income earned on lifetime mortgages for the years endedDecember 31, 2022 , 2021 and 2020, 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, the borrower's age and interest rate. Unlike a home equity loan, no payment of principal or interest is required until the death of 75
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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.
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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. The
Company's future results may continue to be adversely impacted by COVID-19, with
the extent influenced by new variants, measures by public and private
institutions, and timing and adoption of effective vaccinations and 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.
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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$30 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.
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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, 2022 and 2021 (dollars in millions): Current Weighted-Average Minimum
Guaranteed
Account Value Interest Crediting Rate Rate Ranges
Interest Sensitive Contract
Liability 2022 2021 2022 2021 2022 2021
Traditional individual fixed
annuities $ 16,503 $ 15,094 3.22% 3.22% 0.01 - 5.50% 0.01 - 5.50%
Equity-indexed annuities 2,725 3,117 (1.23) 2.10 1.00 - 3.00 0.10 - 3.00
Individual variable annuity
contracts 113 116 3.01 2.98 1.00 - 3.00 1.50 - 3.00
Guaranteed investment contracts 1,296 1,406 1.92 0.76 0.47 - 5.14 0.31 - 3.32
Universal life - type policies 4,268 4,303 3.77 3.76 2.00 - 6.00 2.00 - 6.00
Funding agreement backed notes 906 500 1.03 2.00 2.00 - 2.70
2.00 - 2.00
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, 2022 and 2021 (dollars in millions): Account Value as of December 31, 2022 Interest Sensitive Contract Liability 1% 2% 3% 4% 5% 6% Total Traditional individual fixed annuities$ 1,537 $ 1,204 $
5,175
Equity-indexed annuities
892 1,354 479 - - - 2,725
Individual variable annuity
contracts - 2 111 - - - 113
Guaranteed investment contracts 50 119 77 105 945 - 1,296
Universal life - type policies - 727 318 3,165 48 10 4,268
Funding agreement backed notes - 501 405 - - - 906
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
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. Should portfolio yields decline, the spreads between
investment portfolio yields and the interest rate credited to contract holders
would deteriorate as the Company's ability to manage spreads can become limited
by minimum guaranteed rates on annuity and UL policies. In 2022, 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 3.29%. 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%.
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 $13.7 billion and $13.0
billion of account balances are not subject to surrender charges as of
December 31, 2022 and 2021, respectively. 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. During 2022, the Company experienced a higher level of
policyholder surrenders within the contracts with lower guaranteed minimum
crediting rates due to the rising interest rate environment.
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
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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, 2022 and 2021 was$2.0 billion and$1.4 billion , respectively. The calculation of fair value is based on the net present value of estimated discounted cash flows expected over the life of the market risk sensitive instruments, using market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources, with adjustments made to reflect the shift in the treasury yield curve as appropriate. The interest rate sensitivity relating to the Company's fixed maturity securities is assessed using hypothetical scenarios that assume positive and negative 50 and 100 basis point parallel shifts in the yield curves. This analysis assumes that theU.S. ,Canada and other pertinent countries' yield curve shifts are of equal direction and magnitude. Change in value of individual securities is estimated consistently under each scenario using a commercial valuation tool. The Company's actual experience may differ from the results noted below particularly due to assumptions utilized or if events differ from those included in the methodology. The following tables summarize the results of this analysis for fixed maturity securities in the Company's investment portfolio as of the dates indicated (dollars in millions): Interest Rate Analysis of Estimated Fair Value of Fixed Maturity Securities December 31, 2022: -100 bps -50 bps - +50 bps +100 bps Total estimated fair value$ 57,578 $ 55,152
% Change in estimated fair value from
base
8.8 % 4.3 % - % (3.9) % (7.5) % $ Change in estimated fair value from base$ 4,677 $ 2,251 $ -$ (2,075) $ (3,973) 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
$ -
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, 2022 and 2021 was$43 million and$34 million , respectively. 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 80
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("SOFR") as an alternative rate to replace U.S. Dollar LIBOR, and the European
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. Based on actions taken to date, the
discontinuation of LIBOR, and the transition to replacement rates, has not had a
material impact on the Company's consolidated financial statements.
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 as December 31, 2022 and 2021.
December 31 ,
(dollars in millions) 2022
2021
No guaranteed minimum benefits$ 672 $ 844 GMDB only 771 960 GMIB only 20 25 GMAB only 2 3 GMWB only 863 1,130 GMDB / WB 165 264 Other 15 19 Total variable annuity account values $
2,508
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, 2022 , 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.
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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. Conversely, the recent strength of theU.S. Dollar relative to certain foreign currencies has had a negative 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, 2022 -10% -5% - +5% +10% Income before income taxes$ 773 $ 796 820$ 843 $ 866 % change of income before income taxes from base (5.6) % (2.8) % - % 2.8 % 5.6 % $ change of income before income taxes from base$ (46) $ (23) $ -$ 23 $ 46 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)
$ -
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
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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.
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.
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New Accounting Standards
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
OLD REPUBLIC INTERNATIONAL CORP – 10-K – Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data)
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