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REINSURANCE GROUP OF AMERICA INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, among others, statements relating to projections of the future operations, strategies, earnings, revenues, income or loss, ratios, financial performance and growth potential of the Company. Forward-looking statements often contain words and phrases such as "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "believe" and other similar expressions. Forward-looking statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements are not a guarantee of future performance and are subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The effects of the COVID-19 pandemic and the response thereto on economic conditions, the financial markets and insurance risks, and the resulting effects on the Company's financial results, liquidity, capital resources, financial metrics, investment portfolio and stock price, could cause actual results and events to differ materially from those expressed or implied by forward-looking statements. Additionally, numerous other important factors (whether related to, resulting from or exacerbated by the COVID-19 pandemic or otherwise) could also cause results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: (1) adverse changes in mortality, morbidity, lapsation or claims experience, (2) inadequate risk analysis and underwriting, (3) adverse capital and credit market conditions and their impact on the Company's liquidity, access to capital and cost of capital, (4) changes in the Company's financial strength and credit ratings and the effect of such changes on the Company's future results of operations and financial condition, (5) the availability and cost of collateral necessary for regulatory reserves and capital, (6) requirements to post collateral or make payments due to declines in market value of assets subject to the Company's collateral arrangements, (7) action by regulators who have authority over the Company's reinsurance operations in the jurisdictions in which it operates, (8) the effect of the Company parent's status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its debt obligations, (9) general economic conditions or a prolonged economic downturn affecting the demand for insurance and reinsurance in the Company's current and planned markets, (10) the impairment of other financial institutions and its effect on the Company's business, (11) fluctuations inU.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (12) market or economic conditions that adversely affect the value of the Company's investment securities or result in the impairment of all or a portion of the value of certain of the Company's investment securities, that in turn could affect regulatory capital, (13) market or economic conditions that adversely affect the Company's ability to make timely sales of investment securities, (14) risks inherent in the Company's risk management and investment strategy, including changes in investment portfolio yields due to interest rate or credit quality changes, (15) the fact that the determination of allowances and impairments taken on the Company's investments is highly subjective, (16) the stability of and actions by governments and economies in the markets in which the Company operates, including ongoing uncertainties regarding the amount ofU.S. sovereign debt and the credit ratings thereof, (17) the Company's dependence on third parties, including those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party investment managers and others, (18) financial performance of the Company's clients, (19) the threat of natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (20) competitive factors and competitors' responses to the Company's initiatives, (21) development and introduction of new products and distribution opportunities, (22) execution of the Company's entry into new markets, (23) integration of acquired blocks of business and entities, (24) interruption or failure of the Company's telecommunication, information technology or other operational systems, or the Company's failure to maintain adequate security to protect the confidentiality or privacy of personal or sensitive data stored on such systems, (25) adverse litigation or arbitration results, (26) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and discontinued lines of business, (27) changes in laws, regulations, and accounting standards applicable to the Company or its business, 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. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A - "Risk Factors" in the 2021 Annual Report, as may be supplemented by Item 1A - "Risk Factors" in the Company's subsequent Quarterly Reports on Form 10-Q. 38
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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$84.6 billion as ofJune 30, 2022 . Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, capital solutions, including financial reinsurance, and stable value products. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets. Historically, the Company's primary business has been traditional life reinsurance, which involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. To a lesser extent, the Company also reinsures health business typically reinsured for one to three years. Each year, however, a portion of the business under existing treaties terminates due to, among other things, lapses or voluntary surrenders of underlying policies, deaths of insureds, and the exercise of recapture options by ceding companies. The Company has expanded its financial solutions business, including significant asset-intensive and longevity risk transactions, which allow its clients to take advantage of growth opportunities and manage their capital, longevity and investment risk. For its traditional life business, the Company's profitability largely depends on the volume and amount of death- and health-related claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. For longevity business, the Company's profitability depends on the lifespan of the underlying contract holders and the investment performance for certain contracts. Additionally, the Company generates profits on investment spreads associated with the reinsurance of investment type contracts and generates fees from financial reinsurance transactions, which are typically shorter duration than its traditional life reinsurance business. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis. As is customary in the reinsurance business, clients continually update, refine, and revise reinsurance information provided to the Company. Such revised information is used by the Company in preparation of its condensed consolidated financial statements and the financial effects resulting from the incorporation of revised data are reflected in the current period.
Segment Presentation
The Company has geographic-based and business-based operational segments.
Geographic-based operations are further segmented into traditional and financial
solutions businesses. The Company allocates capital to its segments based on an
internally developed economic capital model, the purpose of which is to measure
the risk in the business and to provide a consistent basis upon which capital is
deployed. The economic capital model considers the unique and specific nature of
the risks inherent in RGA's businesses.
As a result of the economic capital allocation process, a portion of investment
income is credited to the segments based on the level of allocated capital. In
addition, the segments are charged for excess capital utilized above the
allocated economic capital basis. This charge is included in policy acquisition
costs and other insurance expenses. Segment investment performance varies with
the composition of investments and the relative allocation of capital to the
operating segments.
Segment revenue levels can be significantly influenced by currency fluctuations,
large transactions, mix of business and reporting practices of ceding companies,
and therefore may fluctuate from period to period. Although reasonably
predictable over a period of years, segment claims experience can be volatile
over shorter periods. See "Results of Operations by Segment" below for further
information about the Company's segments.
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Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the condensed consolidated financial statements could change significantly.
Management believes the critical accounting policies relating to the following
areas are most dependent on the application of estimates and assumptions:
Premiums receivable; Deferred acquisition costs;
Liabilities for future policy benefits and incurred but not reported claims;
Valuation of investments, allowance for credit losses and impairments to
specific investments;
Valuation of embedded derivatives; and
Income taxes.
A discussion of each of the critical accounting policies may be found in the
Company's 2021 Annual Report under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies."
Consolidated Results of Operations
Impacts of the COVID-19 Pandemic
Although global COVID-19 related deaths have begun to decline, the Company continues to experience increased claim costs, primarily in the first quarter of 2022, as a result of the COVID-19 global pandemic. However, the Company cannot reliably predict the future impact the ongoing pandemic will have on its business, results of operations and financial condition as the impact will depend on, among other factors, the severity of new variants of the virus, vaccination effectiveness, country-specific circumstances, and COVID-19's indirect impact on mortality and morbidity. The ultimate amount and timing of claims the Company will experience as a result of the COVID-19 pandemic will depend on many variables and uncertainties. These variables and uncertainties include those discussed above, in addition to age, gender, comorbidities, other insured versus general population characteristics, geography-specific institutional and individual mitigating actions, medical capacity, and other factors. To date, general population COVID-19 deaths have been heavily concentrated in individuals aged 70 and older and with pre-existing comorbidities; however, many populations have seen an increase in younger age deaths, particularly in areas where healthcare facilities were unable to provide adequate care. The Company's insured population has lower exposure to older ages than the general population and covers a generally healthier population due to underwriting and socioeconomic factors of those purchasing insurance. In addition, the Company's longevity business may act as a modest offset to excess life insurance claims at older ages. The Company's COVID-19 projection and financial impact models continue to be updated and refined based on latest external data and the Company's claim experience to date and are subject to the many variables and uncertainties noted above. TheU.S. continues to be the key driver of mortality claim costs followed byCanada and theUK . For the six months endedJune 30, 2022 , the Company estimates it has incurred approximately$316 million of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$258 million of that amount being associated with theU.S. and Latin America Traditional segment. The Company has maintained the range of COVID-19 mortality claim cost estimates relative to the level of general population deaths for theU.S. ,UK andCanada . The Company estimates that every additional 10,000 population deaths in theU.S. ,UK orCanada as a result of COVID-19 would result in the following corresponding excess mortality claims of approximately
•$10 million to
•$4 million to
•$10 million to
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Results from Operations - 2022 compared to 2021
The following table summarizes net income for the periods presented.
Three months ended June 30 , Six months ended June
30,
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues: (Dollars in millions, except per share data)
Net premiums $ 3,230 $ 3,098 $ 132 $ 6,385 $ 6,012 $ 373
Investment income, net of related
expenses 754 759 (5) 1,564 1,571 (7)
Investment related gains (losses),
net (254) 112 (366) (380) 414 (794)
Other revenues 157 168 (11) 248 259 (11)
Total revenues 3,887 4,137 (250) 7,817 8,256 (439)
Benefits and Expenses:
Claims and other policy benefits 2,815 2,813 2 6,040 6,005 35
Interest credited 138 218 (80) 279 364 (85)
Policy acquisition costs and other
insurance expenses 393 339 54 748 672 76
Other operating expenses 243 240 3 469 454 15
Interest expense 42 43 (1) 84 88 (4)
Collateral finance and securitization
expense 2 2 - 3 5 (2)
Total benefits and expenses 3,633 3,655 (22) 7,623 7,588 35
Income before income taxes 254 482 (228) 194 668 (474)
Provision for income taxes 55 138 (83) 58 185 (127)
Net income 199 344 (145) 136 483 (347)
Net income attributable to
noncontrolling interest $ 1 $ - 1 $ 1 $ - 1
Net income available to RGA, Inc.
shareholders $ 198 $ 344 $ (146) $ 135 $ 483 $ (348)
Earnings per share:
Basic earnings per share $ 2.95 $ 5.06 $ (2.11) $ 2.01 $ 7.11 $ (5.10)
Diluted earnings per share $ 2.92 $ 5.02 $ (2.10) $ 2.00 $ 7.06 $ (5.06)
Three months ended
The decrease in income for the three months ended
the result of:
•Changes in the fair value of derivative instruments included in investment related gains (losses), net. During the three and six month periods endedJune 30, 2022 , the fair value of these instruments decreased by$114 million and$204 million , compared to an increase (decrease) of$30 million and$(21) million during the three and six months endedJune 30, 2021 , respectively. •Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains by$56 million for the three months endedJune 30, 2022 , compared to an increase of$16 million for the three month periodJune 30, 2021 .
•$60 million, pre-tax, of net realized losses, included in investment related
gains (losses), net associated with portfolio repositioning compared to
million
Six months ended
The decrease in income for the six months ended
result of:
•Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains by$89 million for the six months endedJune 30, 2022 , compared to an increase of$66 million for the six months endedJune 30, 2021 . •$85 million, pre-tax, of net realized losses, included in investment related gains (losses), net associated with portfolio repositioning compared to$177 million of net realized gains recognized in the prior year. •The prior year benefited from a one-time adjustment of$162 million , pretax, associated with prior periods that includes$92 million , pretax, to correct the accounting for equity method limited partnerships to reflect unrealized gains in investment income, net of related expenses that were previously included in accumulated other comprehensive income, and a$70 million , pretax, correction reflected in other investment related gains (losses), net to adjust the carrying value of certain limited partnerships from cost less impairments to a fair value approach, using the net asset value ("NAV") per share or its equivalent. 41
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Foreign currency fluctuations can result in variances in financial statement line items. Foreign currency increased income before taxes for the three and six month periods endedJune 30, 2022 , by$7 million and$13 million , respectively, primarily due to the weakening of the Japanese Yen compared to theU.S. Dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Premiums and business growth The increase in premiums during the three and six month period endedJune 30, 2022 , is primarily due to new business production. Consolidated assumed life reinsurance in force decreased from$3,471.7 billion as ofJune 30, 2021 , to$3,380.9 billion as ofJune 30, 2022 , due to changes in foreign exchange rates partially offset by new business production. The Company added new business production, measured by face amount of reinsurance in force, of$215.7 billion and$220.9 billion during the six months endedJune 30, 2022 and 2021, respectively.
Investment income, net of related expenses and investment related gains
(losses), net
The decrease in investment income, net of related expenses is primarily attributable to the aforementioned accounting correction associated with equity method limited partnerships recorded in the first quarter of 2021, partially offset by an increase in the average invested asset base and yield: •The average invested assets at amortized cost, excluding spread business, was$34.9 billion for the six months endedJune 30, 2022 , compared to$33.3 billion for the six months endedJune 30, 2021 . •The average yield earned on investments, excluding spread related business, was 4.63% and 4.64% for the three month periods endedJune 30, 2022 and 2021, respectively, and 4.96% and 5.15% for the six months endedJune 30, 2022 and 2021, respectively. The average yield will vary from year to year depending on several variables, including the prevailing risk-fee interest rate and credit spread environment, prepayment fees and make-whole premiums, changes in the mix of the underlying investments and cash and cash equivalents balances. Variable investment income from joint ventures and limited partnerships, including unrealized gains and losses on certain limited partnerships, will also vary from year to year and can be highly variable based on equity-market performance and the timing of dividends and distributions on certain investments. Investment income is allocated to the operating segments based upon average assets and related capital levels deemed appropriate to support segment operations.
The decrease in investment related gains (losses), net is primarily attributable
to the following:
•During the three and six months ended
its portfolio generating capital losses of
respectively, compared to net capital gains of
during the three and six months ended
•The Company uses various derivative instruments such as interest rate swaps, credit default swaps and foreign exchange forwards for risk management purposes that either do not qualify or have not been elected for hedge accounting treatment. Changes in the fair value of these instruments are included in investment related gains (losses), net. During the three and six months periods endedJune 30, 2022 , the fair value of these instruments decreased by$114 million and$204 million , compared to an increase (decrease) of$30 million and$(21) million during the three and six months endedJune 30, 2021 , respectively. See Note 5 - "Derivative Instruments" in the Notes to Condensed Consolidated Financial Statements for additional information. •Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, decreased investment related gains (losses), net by$56 million and$89 million for the three and six month periods endedJune 30, 2022 , respectively, compared to an increase of$16 million and$66 million for the three and six month periods endedJune 30, 2021 . •The Company incurred$15 million and$27 million of impairments and change in allowance for credit losses on fixed maturity securities during the three and six month periods endedJune 30, 2022 , respectively, compared to a decrease of$5 million and$3 of impairments and change in allowance for credit losses during the three and six month periods endedJune 30, 2021 , respectively. •Investment related gains (losses), net, for the first six months of 2021 included the adjustment previously discussed to investments in limited partnerships considered to be investment companies, which should have been recognized in prior periods, of$70 million pre-tax to adjust the carrying value from cost less impairments to the fair value approach, using the net asset value ("NAV") per share or its equivalent. The effective tax rate on a consolidated basis was 22.1% and 28.5% for the three months endedJune 30, 2022 and 2021, respectively, and 30.1% and 27.6% for the six months endedJune 30, 2022 and 2021, respectively. See Note 9 - "Income Tax" 42
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in the Notes to Condensed Consolidated Financial Statements for additional
information on the Company's consolidated effective tax rates.
Impact of certain derivatives
The Company recognizes in consolidated income, any changes in the fair value of
embedded derivatives on modco or funds withheld treaties, equity index annuities
("EIAs") and variable annuities with guaranteed minimum benefit riders. The
Company utilizes freestanding derivatives to minimize the income statement
volatility due to changes in the fair value of embedded derivatives associated
with guaranteed minimum benefit riders. The following table presents the effect
of embedded derivatives and related freestanding derivatives on income before
income taxes for the periods indicated (dollars in millions):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Modco /Funds withheld:
Unrealized gains (losses) $ (56) $ 16 $ (72) $ (89) $ 66 $ (155)
Deferred acquisition
costs/retrocession 31 (7) 38 51 (23) 74
Net effect (25) 9 (34) (38) 43 (81)
EIAs:
Unrealized gains (losses) 27 3 24 44 33 11
Deferred acquisition
costs/retrocession (12) (1) (11) (20) (17) (3)
Net effect 15 2 13 24 16 8
Guaranteed minimum benefit
riders:
Unrealized gains (losses) (11) (16) 5 2 1 1
Related freestanding
derivatives, net of deferred
acquisition costs/retrocession 1 20 (19) (27) (33) 6
Net effect (10) 4 (14) (25) (32) 7
Total net effect after
freestanding derivatives $ (20) $ 15 $ (35) $ (39) $ 27 $ (66)
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Results of Operations by Segment
TheU.S. andLatin America operations consist of two major segments: Traditional and Financial Solutions. The Traditional segment primarily specializes in the reinsurance of individual mortality risk, health and long-term care and to a lesser extent, group reinsurance. The Financial Solutions segment consists of Asset-Intensive and Capital Solutions. Asset-Intensive within the Financial Solutions segment includes coinsurance of annuities and corporate-owned life insurance policies and to a lesser extent, fee-based synthetic guaranteed investment contracts, which include investment-only, stable value contracts. Capital Solutions within the Financial Solutions segment primarily involves assisting ceding companies in meeting applicable regulatory requirements by enhancing the ceding companies' financial strength and regulatory surplus position through relatively low risk reinsurance and other transactions. Typically, these 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 condensed consolidated statements of income.
The following table summarizes income before income taxes for the Company's
and
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums $ 1,645 $ 1,593 $ 52 $ 3,201 $ 3,025 $ 176
Investment income, net of
related expenses 461 509 (48) 1,028 974 54
Investment related gains
(losses), net (74) 31 (105) (139) 31 (170)
Other revenues 114 116 (2) 175 174 1
Total revenues 2,146 2,249 (103) 4,265 4,204 61
Benefits and expenses:
Claims and other policy
benefits 1,431 1,439 (8) 3,244 3,239 5
Interest credited 118 200 (82) 242 331 (89)
Policy acquisition costs and
other insurance expenses 268 238 30 517 469 48
Other operating expenses 59 51 8 114 99 15
Total benefits and expenses 1,876 1,928 (52) 4,117 4,138 (21)
Income before income taxes
(51)$ 148 $ 66 $ 82 The decrease in income before income taxes in the second quarter of 2022 was primarily driven by a decrease in investment related gains (losses) in the Financial Solutions segment, as well as a decrease in the fair value of the embedded derivative associated with modco/funds withheld treaties. The decrease was partially offset by favorable claims experience within the Individual Mortality line of business. The increase in income before income taxes for the first six months of 2022 is attributable primarily to higher investment income related to strong variable investment income in the first quarter combined with increases in net premiums, and favorable claims experience within the Individual Mortality line of business. Partially offsetting the six month increases were decreases in investment related gains (losses) and a decrease in the fair value of the embedded derivative associated with modco/funds withheld treaties. 44
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Traditional Reinsurance
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums $ 1,631 $ 1,578 $ 53 $ 3,172 $ 2,997 $ 175
Investment income, net of related
expenses 209 233 (24) 513 440 73
Investment related gains
(losses), net 19 1 18 34 7 27
Other revenues 9 4 5 16 9 7
Total revenues 1,868 1,816 52 3,735 3,453 282
Benefits and expenses:
Claims and other policy benefits 1,389 1,418 (29) 3,154 3,158 (4)
Interest credited 17 18 (1) 34 35 (1)
Policy acquisition costs and
other insurance expenses 208 206 2 416 388 28
Other operating expenses 45 39 6 88 75 13
Total benefits and expenses 1,659 1,681
(22) 3,692 3,656
36
Income (loss) before income taxes$ 209 $ 135 $ 74 $ 43 $ (203) $
246
Key metrics: Life reinsurance in force$1,650.5 billion $1,619.4 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 85.2 % 89.9 % 99.4 % 105.4 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 12.8 % 13.1 % 13.1 % 12.9 % Other operating expenses as a percentage of net premiums 2.8 % 2.5 % 2.8 % 2.5 % The increase in income before income taxes in the second quarter for theU.S. and Latin America Traditional segment was primarily the result of favorable claims experience within the Individual Mortality business, partially offset by less favorable claims experience within theU.S. Group and Latin American markets. The increase in income before taxes for the first six months was primarily the result of higher investment income related to variable investment income, increased premium, and favorable claims experience within the Individual Mortality business, partially offset by less favorable claims experience within theU.S. Group and Latin American markets.
Revenues
•The increase in net premiums of$53 million for the second quarter was primarily due to organic growth as well as new sales. The increase in net premiums for the six month period was primarily due to organic growth and new sales of$95 million , as well as$47 million in restructuring of a transaction that was previously recognized as a low risk or deposit transaction inLatin America and$33 million related to the partial recapture of a large reinsurance transaction in the second quarter of 2021. The segment added new life business production, measured by face amount of reinsurance in force, of$32.7 billion and$35.7 billion during the second quarter of 2022 and 2021, respectively, and$72.2 billion and$64.2 billion during the first six months of 2022 and 2021, respectively. •The decrease in net investment income for the three month period endedJune 30, 2022 , was primarily due to lower variable investment income. The increase in net investment income for the six month period was primarily the result of higher variable investment income associated with investments in real estate joint ventures, limited partnerships, and private equity funds.
Benefits and expenses
•The decreases in the loss ratio for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were primarily due to favorable COVID-19 and non-COVID-19 experience, 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$258 million of claims for the six months endedJune 30, 2022 , were attributable to COVID-19. •The increase in policy acquisition costs and other insurance expenses as a percentage of net premiums for the six months endedJune 30, 2022 , was primarily attributable to the restructure of a transaction inLatin America . 45
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Financial Solutions
For the three months ended June 30, 2022 2021 2022 vs 2021
Capital Capital Capital
Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total
(dollars in millions) Revenues: Net premiums $ 14 $ -$ 14 $ 15 $ -$ 15 $ (1) $ -$ (1) Investment income, net of related expenses 251 1 252 276 - 276 (25) 1 (24) Investment related gains (losses), net (93) - (93) 30 - 30 (123) - (123) Other revenues 31 74 105 85 27 112 (54) 47 (7) Total revenues 203 75 278 406 27 433 (203) 48 (155) Benefits and expenses: Claims and other policy benefits 42 - 42 21 - 21 21 - 21 Interest credited 101 - 101 182 - 182 (81) - (81) Policy acquisition costs and other insurance expenses 59 1 60 32 - 32 27 1 28 Other operating expenses 12 2 14 8 4 12 4 (2) 2 Total benefits and expenses 214 3 217 243 4 247 (29) (1) (30) Income before income taxes $ (11) $ 72$ 61 $ 163 $ 23$ 186 $ (174) $ 49$ (125) For the six months ended June 30, 2022 2021 2022 vs 2021 Capital Capital Capital Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total
(dollars in millions) Revenues: Net premiums $ 29 $ -$ 29 $ 28 $ -$ 28 $ 1 $ -$ 1 Investment income, net of related expenses 513 2 515 533 1 534 (20) 1 (19) Investment related gains (losses), net (173) - (173) 24 - 24 (197) - (197) Other revenues 58 101 159 111 54 165 (53) 47 (6) Total revenues 427 103 530 696 55 751 (269) 48 (221) Benefits and expenses: Claims and other policy benefits 90 - 90 81 - 81 9 - 9 Interest credited 208 - 208 296 - 296 (88) - (88) Policy acquisition costs and other insurance expenses 99 2 101 79 2 81 20 - 20 Other operating expenses 21 5 26 17 7 24 4 (2) 2 Total benefits and expenses 418 7 425 473 9 482 (55) (2) (57) Income before income taxes $ 9 $ 96$ 105 $ 223 $ 46$ 269 $ (214) $ 50$ (164)
Asset-Intensive Reinsurance
The decreases in income before income taxes forU.S. and Latin America Financial Solutions' Asset-intensive segment for the three and six months endedJune 30, 2022 , were primarily due to higher investment related losses, net in coinsurance portfolios and the decrease in fair value of the embedded derivatives related to modco/funds withheld treaties.
The invested asset base, at amortized cost, supporting this segment decreased to
•The decrease in the asset base was primarily due to
retrocessions completed in the second half of 2021 and net run off in existing
in force transactions.
•As ofJune 30, 2022 and 2021,$4.3 billion and$4.8 billion , respectively, of the invested assets were funds withheld at interest of which greater than 90% was associated with two clients. 46
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Impact of certain derivatives
Income from the asset-intensive business tends to be volatile due to changes in
the fair value of certain derivatives, including embedded derivatives associated
with reinsurance treaties structured on a modco or funds withheld basis, as well
as embedded derivatives associated with the Company's reinsurance of
equity-indexed annuities and variable annuities with guaranteed minimum benefit
riders. Fluctuations occur period to period primarily due to changing investment
conditions including, but not limited to, interest rate movements (including
risk-free rates and credit spreads), implied volatility, the Company's own
credit risk and equity market performance, all of which are factors in the
calculations of fair value. Therefore, management believes it is helpful to
distinguish between the effects of changes in these derivatives, net of related
hedging activity, and the primary factors that drive profitability of the
underlying treaties, namely investment income, fee income (included in other
revenues), and interest credited. These fluctuations are considered unrealized
by management and do not affect current cash flows, crediting rates or spread
performance on the underlying treaties.
The following table summarizes the asset-intensive results and quantifies the
impact of these embedded derivatives for the periods presented. Revenues before
certain derivatives, benefits and expenses before certain derivatives, and
income before income taxes and certain derivatives, should not be viewed as
substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income
before income taxes.
(dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Revenues:
Total revenues $ 203 $ 406 $ 427 $ 696
Less:
Embedded derivatives - modco/funds withheld
treaties (75) 14 (123) 59
Guaranteed minimum benefit riders and
related free standing derivatives (5) - (28) (65)
Revenues before certain derivatives 283 392 578 702
Benefits and expenses:
Total benefits and expenses 214 243 418 473
Less:
Embedded derivatives - modco/funds withheld treaties (31) 6 (51) 23 Guaranteed minimum benefit riders and related free standing derivatives 5 (4) (3) (33) Equity-indexed annuities (15) (2) (24) (16) Benefits and expenses before certain derivatives 255 243 496 499 Income before income taxes: Income before income taxes (11) 163 9 223
Less:
Embedded derivatives - modco/funds withheld treaties (44) 8 (72) 36 Guaranteed minimum benefit riders and related free standing derivatives (10) 4 (25) (32) Equity-indexed annuities 15 2 24 16 Income before income taxes and certain derivatives $ 28
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 three and six months endedJune 30, 2022 and 2021. The change in fair value of the embedded derivatives related to modco/funds withheld treaties, net of deferred acquisition costs increased (decreased) income before income taxes by$(44) million and$8 million for the second quarter and$(72) million and$36 million for the six months endedJune 30, 2022 and 2021, respectively. The decrease in revenue for the second quarter and six months endedJune 30, 2022 , was primarily driven by the impact of higher interest rates of$(56) million and$(87) million and the impact of widening credit spreads of$(30) million and$(56) million , respectively, on the fair value calculation. The revenue for the second quarter endedJune 30, 2021 , was primarily due to natural run-off of the funds withheld. The revenue for the six months endedJune 30, 2021 , was primarily driven by tightening credit spreads of$71 million . 47
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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$2 million and$(8) million for the second quarters of 2022 and 2021, respectively, and$(11) million and$(63) million for the six months endedJune 30, 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, increased (decreased) income before income taxes by$(10) million and$4 million for the second quarter and$(25) million and$(32) million for the six months endedJune 30, 2022 and 2021, respectively. The revenue for the three months endedJune 30, 2022 , was primarily driven by higher interest rates of$(8) million , net of hedging. The decrease in income for the six months endedJune 30, 2022 , was primarily due to higher interest rates of$(9) million , net of hedging and an$(11) million decrease in the credit valuation adjustment which has the impact of increasing the fair value of the guaranteed minimum benefit liability, net of related impact on deferred acquisition expenses. The revenue for the six months endedJune 30, 2021 , was primarily driven by a$(63) million decrease in the credit valuation adjustment which has the impact of increasing the fair value of the guaranteed minimum benefit liability, net of related impact on deferred acquisition expenses. 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$15 million and$2 million for the second quarters of 2022 and 2021, respectively, and$24 million and$16 million for the six months endedJune 30, 2022 and 2021, respectively. The increase in income for the second quarter and first six months of 2022 was primarily due to an increase in risk free interest rates which has the impact of lowering the fair value of the liability. The changes in derivatives discussed above are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including benchmark rates and credit spreads), credit valuation adjustments, implied volatility and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues) and interest credited.
Discussion and analysis before certain derivatives:
•Income before income taxes and certain derivatives decreased by$121 million for both the three and six months endedJune 30, 2022 , as compared to the same periods in 2021. The decrease for the three months endedJune 30, 2022 , was primarily due to a$(61) million decrease in investment related gains (losses), net in coinsurance and funds withheld portfolios. Additionally, the prior period included a one-time fee of$34 million associated with a new transaction and favorable prior year policyholder experience including impacts from COVID-19 of$13 million . The decrease for the six months endedJune 30, 2022 , was primarily due to$(88) million lower investment related gains (losses), net in coinsurance and funds withheld portfolios, partially offset by$22 million of higher variable investment income. Additionally, the prior period included a one-time fee of$34 million associated with a new transaction and favorable prior year policyholder experience including impacts from COVID-19 of$13 million . •Revenue before certain derivatives decreased by$109 million and by$124 million for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in 2021. The decrease for the three months endedJune 30, 2022 , was primarily due to a$(39) million change in the fair value of equity options associated with the reinsurance of EIAs and$(33) million decrease in investment related gains (losses), net in coinsurance and funds withheld portfolios. Additionally, the prior period included a one-time fee of$34 million associated with a new transaction. The decrease for the six months endedJune 30, 2022 , was primarily due to$(72) million change in fair value of equity options associated with the reinsurance of EIAs and$(58) million decrease in investment related gains (losses), net in coinsurance and funds withheld portfolios, partially offset by$28 million of higher variable investment income. Additionally, the prior period included a one-time fee of$34 million associated with a new transaction. The effect on investment income related to equity options is substantially offset by a corresponding change in interest credited. 48
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•Benefits and expenses before certain derivatives increased (decreased) by$12 million and$(3) million for the three and six months endedJune 30, 2022 , as compared to the same period in 2021. The increase in the second quarter of 2022 was primarily due to$23 million higher amortization of deferred acquisition costs associated with investment related gains (losses), net in coinsurance and funds withheld portfolios and a$14 million increase in other insurance expenses related to a funds withheld transaction which is retroceded to a third party. These expense increases were partially offset by$38 million lower interest credited associated with reinsurance of EIAs. Additionally, the prior period included favorable policyholder experience including impacts from COVID-19 of$13 million . The decrease in the first six months of 2022 was due to$70 million lower interest credited associated with the reinsurance of EIAs, and favorable policyholder experience of$13 million in the prior year. The effect on interest credited related to equity options is substantially offset by a corresponding increase in investment income. The decreases in interest credited and policyholder benefits was partially offset by$24 million higher amortization of deferred acquisition costs associated with investment related gains (losses), net in coinsurance and funds withheld portfolios and a$24 million in other insurance expenses related to a funds withheld transactions which is retroceded to a third party. Capital Solutions Income before income taxes for theU.S. and Latin America Capital Solutions' business increased$49 million , or 213.0%, and$50 million , or 108.7%, for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021. The increase was primarily due to a recapture fee earned on a terminated transaction. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period.
•At
companies, as measured by pre-tax statutory surplus, risk based capital and
other financial structures was
Canada Operations
The Company conducts reinsurance business inCanada primarily through RGACanada , which assists clients with capital management activity and mortality and morbidity risk management. TheCanada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, and to a lesser extent creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and capital solutions. Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021 Revenues: Net premiums$ 339 $ 324 $ 15$ 666 $ 627 $ 39 Investment income, net of related expenses 57 63 (6) 113 123 (10) Investment related gains (losses), net (6) - (6) (5) 2 (7) Other revenues 4 5 (1) 7 9 (2) Total revenues 394 392 2 781 761 20 Benefits and expenses: Claims and other policy benefits 317 298 19 628 582 46 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 46 47 (1) 93 92 1 Other operating expenses 11 11 - 21 21 - Total benefits and expenses 374 356 18 742 695 47
Income before income taxes
(16)
•The decreases in income before income taxes for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were primarily due to unfavorable claims experience in the individual mortality line of business and lower investment income, partially offset by favorable claims experience in the creditor line of business and favorable longevity experience. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in a decrease in income before incomes taxes of$1 million for both the three and six months endedJune 30, 2022 . Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 49
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Traditional Reinsurance
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums $ 314 $ 301 $ 13 $ 618 $ 581 $ 37
Investment income, net of related
expenses 58 63 (5) 113 123
(10)
Investment related gains (losses), net (6) - (6) (5) 2 (7) Other revenues 1 2 (1) 3 3 - Total revenues 367 366 1 729 709 20 Benefits and expenses: Claims and other policy benefits 295 277 18 595 543 52 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 46 46 - 92 91 1 Other operating expenses 10 11 (1) 20 19 1 Total benefits and expenses 351 334 17 707 653 54 Income (loss) before income taxes$ 16 $ 32 $ (16) $ 22 $ 56 $
(34)
Key metrics: Life reinsurance in force$477.2 billion $468.3 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 93.9 % 92.0 % 96.3 % 93.5 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 14.6 % 15.3 % 14.9 % 15.7 % Other operating expenses as a percentage of net premiums 3.2 % 3.7 % 3.2 % 3.3 % The decreases in income before income taxes for the three and six months endedJune 30, 2022 , were primarily due to unfavorable claims experience in the individual mortality line of business and lower investment income, partially offset by favorable claims experience in the creditor line of business.
Revenues
•The segment added new life business production, measured by face amount of reinsurance in force, of$12.8 billion and$8.5 billion for the second quarter of 2022 and 2021, respectively, and$25.5 billion , and$22.7 billion during the first six months of 2022 and 2021, respectively. •The decreases in net investment income for the three and six months endedJune 30, 2022 , were primarily due to decreased variable investment income, partially offset by an increase in the invested asset base.
Benefits and expenses
•The increases in the loss ratio for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were primarily due to unfavorable claims experience in the individual mortality line of business. While the cause of death is not yet available for all claims, the Company estimates that approximately$22 million of claims for the six months endedJune 30, 2022 , were attributable to COVID-19. Financial Solutions Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021 Revenues: Net premiums$ 25 $ 23 $ 2$ 48 $ 46 $ 2 Investment income, net of related expenses (1) - (1) - - - Investment related gains (losses), net - - - - - - Other revenues 3 3 - 4 6 (2) Total revenues 27 26 1 52 52 - Benefits and expenses: Claims and other policy benefits 22 21 1 33 39 (6) Interest credited - - - - - - Policy acquisition costs and other insurance expenses - 1 (1) 1 1 - Other operating expenses 1 - 1 1 2 (1) Total benefits and expenses 23 22 1 35 42 (7)
Income (loss) before income taxes $ 4
-
50
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The increase in income before income taxes for the six months endedJune 30, 2022 , was primarily a result of more favorable mortality experience on longevity business as compared to the same period in 2021.
TheEurope ,Middle East andAfrica ("EMEA") operations include business primarily generated by offices inFrance ,Germany ,Ireland ,Italy , theMiddle East ,the Netherlands ,Poland ,South Africa ,Spain and theUnited Kingdom ("UK"). EMEA consists of two major segments: Traditional and Financial Solutions. The Traditional segment primarily provides reinsurance through yearly renewable term and coinsurance agreements on a variety of life, health and critical illness products. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and, in some markets, group risks. The Financial Solutions segment consists of reinsurance and other transactions associated with longevity closed blocks, payout annuities, capital management solutions and financial reinsurance. Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021 Revenues: Net premiums$ 546 $ 517 $ 29$ 1,125 $ 1,034 $ 91 Investment income, net of related expenses 55 74 (19) 112 142 (30) Investment related gains (losses), net (22) 2 (24) (6) 18 (24) Other revenues 2 5 (3) 8 7 1 Total revenues 581 598 (17) 1,239 1,201 38 Benefits and expenses: Claims and other policy benefits 471 456 15 989 1,000 (11) Interest credited (8) 2 (10) (17) 1 (18) Policy acquisition costs and other insurance expenses 39 28 11 65 59 6 Other operating expenses 44 41 3 88 78 10 Total benefits and expenses 546 527 19 1,125 1,138 (13)
Income before income taxes
(36)
•The decrease in income before income taxes for the three months endedJune 30, 2022 , was primarily the result of decreases in net investment income and investment related gains (losses), net. The increase in income before income taxes for the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to increased net premiums, as well as improved mortality experience. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency exchange fluctuations resulted in decreases in income before income taxes of$5 million and$7 million for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in 2021. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 51
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Traditional Reinsurance
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums $ 427 $ 433 $ (6) $ 878 $ 871 $ 7
Investment income, net of related
expenses 22 24 (2) 44 44 -
Investment related gains
(losses), net - - - - - -
Other revenues (2) 2 (4) 1 1 -
Total revenues 447 459 (12) 923 916 7
Benefits and expenses:
Claims and other policy benefits 377 414 (37) 804 883 (79)
Interest credited - - - - - -
Policy acquisition costs and
other insurance expenses 37 27 10 62 56 6
Other operating expenses 31 30 1 61 57 4
Total benefits and expenses 445 471 (26) 927 996 (69)
Income (loss) before income taxes $ 2 $ (12) $
14 $ (4) $ (80) $ 76
Key metrics:
Life reinsurance in force
$756.4 billion $861.4 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 88.3 % 95.6 % 91.6 % 101.4 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 8.7 % 6.2 % 7.1 % 6.4 % Other operating expenses as a percentage of net premiums 7.3 % 6.9 % 6.9 % 6.5 % The increase in income before income taxes for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021 were primarily due to an improvement in individual life mortality experience and increased net premiums in the first six months of 2022.
Revenues
•The increases in net premiums for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were due to an in increase in business volume on new and existing treaties. •The segment added new life business production, measured by face amount of reinsurance in force, of$45.1 billion and$87.8 billion during the second quarter of 2022 and 2022, respectively, and$95.6 billion and$115.4 billion during the six months endedJune 30, 2022 and 2021, respectively.
Benefits and expenses
•The decreases in the loss ratio for the second quarter and first six months of 2022 were due to improved mortality experience. While the cause of death is not available for all claims, the Company estimates for the six months endedJune 30, 2022 , that approximately$12 million of claims were primarily attributable to COVID-19. Financial Solutions Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021 Revenues: Net premiums$ 119 $ 84 $ 35$ 247 $ 163 $ 84 Investment income, net of related expenses 33 50 (17) 68 98 (30) Investment related gains (losses), net (22) 2 (24) (6) 18 (24) Other revenues 4 3 1 7 6 1 Total revenues 134 139 (5) 316 285 31 Benefits and expenses: Claims and other policy benefits 94 42 52 185 117 68 Interest credited (8) 2 (10) (17) 1 (18) Policy acquisition costs and other insurance expenses 2 1 1 3 3 - Other operating expenses 13 11 2 27 21 6 Total benefits and expenses 101 56 45 198 142 56
Income (loss) before income taxes
(50)
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The decreases in income before income taxes for the three and six months ended
decreases in investment income, net of related expenses, investment related
gains (losses), net and unfavorable claims experience, partially offset by
increases in net premiums.
Revenues
•The increases in net premiums for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were primarily due to increased volumes of closed longevity block business. •The decreases in net investment income for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were primarily related lower yield and lower income associated with unit-linked policies which fluctuate with market performance and is offset by a decrease in interest credited related to the unit-linked liabilities. •The decreases in investment related gains (losses), net for the three and six month periods were 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, respectively.
Benefits and expenses
•The increases in claims and other policy benefits for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021, were the result of increased volumes of closed longevity block business.
Asia Pacific Operations
TheAsia Pacific operations include business generated by its offices principally inAustralia ,China ,Hong Kong ,India ,Japan ,Malaysia ,New Zealand ,Singapore ,South Korea andTaiwan . 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. Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums$ 700 $ 664 $ 36$ 1,393 $ 1,326 $ 67 Investment income, net of related expenses 89 65 24 166 126 40 Investment related gains (losses), net (108) 15 (123) (189) 26 (215) Other revenues 48 13 35 68 30 38 Total revenues 729 757 (28) 1,438 1,508 (70) Benefits and expenses: Claims and other policy benefits 596 620 (24) 1,179 1,184 (5) Interest credited 22 15 7 42 30 12 Policy acquisition costs and other insurance expenses 64 52 12 123 106 17 Other operating expenses 55 51 4 107 100 7 Total benefits and expenses 737 738 (1) 1,451 1,420 31
Income before income taxes
(27)$ (13) $ 88 $ (101) •The decreases in income before income taxes for the three and six months endedJune 30, 2022 , were primarily due to unfavorable fluctuations in the fair value of derivatives within the Financial Solutions business, partially offset by increases in net premiums and investment income, net. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in an increase in income before income taxes of$11 million and$19 million for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 53
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Traditional Reinsurance
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums $ 640 $ 616 $ 24 $ 1,290 $ 1,225 $ 65
Investment income, net of related
expenses 33 34 (1) 66 67 (1)
Investment related gains
(losses), net 5 - 5 5 (1) 6
Other revenues 8 3 5 13 9 4
Total revenues 686 653 33 1,374 1,300 74
Benefits and expenses:
Claims and other policy benefits 537 578 (41) 1,079 1,096 (17)
Interest credited - - - - - -
Policy acquisition costs and
other insurance expenses 42 41 1 89 84 5
Other operating expenses 49 46 3 97 91 6
Total benefits and expenses 628 665 (37) 1,265 1,271 (6)
Income (loss) before income taxes $ 58 $ (12) $ 70 $ 109 $ 29 $
80
Key metrics: Life reinsurance in force$486.1 billion $516.1 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 83.9 % 93.8 % 83.6 % 89.5 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 6.6 % 6.7 % 6.9 % 6.9 % Other operating expenses as a percentage of net premiums 7.7 % 7.5 % 7.5 % 7.4 % The increases in income before income taxes for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021 were primarily the result of an increase in net premiums and favorable claims experience, partially offset by increases in expenses across the segment.
Revenues
•The increases in net premiums for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021 were primarily due to continued business growth in the segment related to continued growth in the segment. •The segment added new life business production, measured by face amount of reinsurance in force, of$5.7 billion and$10.9 billion during the second quarter of 2022 and 2021, respectively, and$22.3 billion and$18.5 billion during the six months endedJune 30, 2022 and 2021, respectively, due to new business production. Benefits and expenses •The decreases in the loss ratio for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021 were 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 for the six months endedJune 30, 2022 , that approximately$20 million of claims were attributable to COVID-19. Financial Solutions Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums$ 60 $ 48 $ 12$ 103 $ 101 $ 2 Investment income, net of related expenses 56 31 25 100 59 41 Investment related gains (losses), net (113) 15 (128) (194) 27 (221) Other revenues 40 10 30 55 21 34 Total revenues 43 104 (61) 64 208 (144) Benefits and expenses: Claims and other policy benefits 59 42 17 100 88 12 Interest credited 22 15 7 42 30 12 Policy acquisition costs and other insurance expenses 22 11 11 34 22 12 Other operating expenses 6 5 1 10 9 1 Total benefits and expenses 109 73 36 186 149 37
Income (loss) before income taxes
(97)
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The decreases in income before income taxes for the second quarter and first six months of 2022 were primarily due to unfavorable fluctuations in the fair value of derivatives. The invested asset base supporting asset-intensive transactions increased to$10.7 billion as ofJune 30, 2022 , from$6.9 billion as ofJune 30, 2021 . The increase in the asset base compared to 2021 was primarily due to$3.7 billion from recently executed transactions and net organic growth of$1.0 billion from existing inforce blocks. The amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was$0.9 billion and$1.6 billion for the period endedJune 30, 2022 and 2021, respectively. Fees earned from this business can vary significantly depending on the size, complexity and timing of the transactions and, therefore, can fluctuate from period to period. •The increase in net premium and claims and other policy benefits for the three months endedJune 30, 2022 , as compared to the same period in 2021 is attributable to the impact of recently executed asset-intensive transactions. The increase in net premiums for the six months endedJune 30, 2022 , as compared to 2021 is attributable to new asset-intensive business, partially offset by lower contributions from single premium asset-intensive transactions.
•The Company estimates for the six months ended
approximately
•The increases in investment income for the three and six months endedJune 30, 2022 , as compared to the same periods in 2021 were primarily due to the increase in the asset base. •The decreases in investment related gains (losses), net for the second quarter and six months endedJune 30, 2022 , were primarily due to the decrease in fair value of derivatives of$(106) million and$(196) million , respectively, due to the weakening of the Japanese yen, higher interest rates and widening credit spreads.
•The increases in other revenues for the second quarter and six months ended
adjustment charges of
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 from certain
wholly-owned subsidiaries, such as RGAX, and joint ventures that, among other
activities, develop and market technology, and provide consulting and
outsourcing solutions for the insurance and reinsurance industries. The Company
continues to invest 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.
(dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Revenues:
Net premiums $ - $ - $
- $ - $ - $ -
Investment income, net of related
expenses
92 48 44 145 206 (61) Investment related gains (losses), net (44) 64 (108) (41) 337 (378) Other revenues (11) 29 (40) (10) 39 (49) Total revenues 37 141 (104) 94 582 (488) Benefits and expenses: Claims and other policy benefits - - - - - - Interest credited 6 1 5 12 2 10 Policy acquisition costs and other insurance income (24) (26) 2 (50) (54) 4 Other operating expenses 74 86 (12) 139 156 (17) Interest expense 42 43 (1) 84 88 (4) Collateral finance and securitization expense 2 2 - 3 5 (2) Total benefits and expenses 100 106 (6) 188 197 (9)
Income (loss) before income taxes
(98)
The decreases in income before income taxes for the three and six month periods endedJune 30, 2022 , were primarily due to a decrease in total revenues, partially offset by a decrease in other operating expenses, attributable to the following: 55
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•Net investment income for the six months endedJune 30, 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 for the three and six month periods endedJune 30, 2022 , is attributable to higher investment income on Corporate invested assets due to a higher asset base and higher yield. Higher investment income includes income earned on assets associated with the Company's FABN program, which is partially offset by interest credited related to the program. •Investment related gains (losses), net, for the first six months of 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 for the second quarter and first six months of 2022 as compared to the prior year 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 a decline in the fair value of equity securities. In addition, changes in the fair value of derivatives as a result of fluctuations in foreign exchange rates, interest rates and equity markets decreased investment related gains (losses), net. •The decrease in other revenues was primarily due to a decline in the cash surrender value on corporate-owned life insurance of$7 million and$10 million for the three and six month periods endedJune 30, 2022 , respectively, and gains on the sales of subsidiaries in the prior period of$11 million . •The decreases in other operating expenses for the three and six month periods endedJune 30, 2022 , were attributable to a decrease in incentive compensation expense.
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, and economic uncertainties, including interest rates and inflation, and higher than expected claims associated with COVID-19 primarily during the first quarter of 2022. 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 and variable investment income, for the six months endedJune 30, 2022 , was 3.88% or 6 basis points above the same period in 2021 due to the rising interest rate environment. The Company's insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Gross unrealized gains on fixed maturity securities available-for-sale decreased from$5.3 billion atDecember 31, 2021 , to$0.9 billion atJune 30, 2022 , due to increased interest rates. Similarly, gross unrealized losses increased from$0.3 billion atDecember 31, 2021 , to$5.1 billion atJune 30, 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. While interest rates have recently increased, the Company continues to feel the pressures of sustained low interest and volatile equity markets and may continue to do so; however, its underlying business is 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 56
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continues to monitor new business opportunities and any associated new capital
needs that could arise from the changing financial landscape
RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness. The primary sources of RGA's liquidity include proceeds from its capital-raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes withRGA Reinsurance Company ("RGA Reinsurance"),RGA Life and Annuity Insurance Company (formerlyReinsurance Company of Missouri, Incorporated ) andRockwood Reinsurance Company ("Rockwood Re") and dividends from operating subsidiaries. The following tables provide comparative information for RGA (dollars in millions): Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Interest and dividend income $ 44$ 32 $ 152$ 64 Interest expense 42 51 83 103 Capital contributions to subsidiaries 5 3 12 7 Dividends to shareholders 49 47 98 95 Purchase of treasury stock - 2 25 2 June 30, 2022 December 31, 2021 Cash and invested assets $ 464 $ 621
See Item 15, Schedule II - "Condensed Financial Information of the Registrant"
in the 2021 Annual Report for additional financial information related to RGA.
The undistributed earnings of substantially all of the Company's foreign subsidiaries have been reinvested indefinitely in those non-U.S. operations, as described in Note 9 - "Income Tax" in the Notes to Consolidated Financial Statements in the 2021 Annual Report. AsU.S. Tax Reform generally eliminatesU.S. federal income taxes on dividends from foreign subsidiaries, the Company does not expect to incur material income taxes if these funds are repatriated. 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 six months endedJune 30, 2022 , RGA 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 six months endedJune 30, 2022 , RGA did not repurchase any shares of common stock under this program.
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 (dollars in millions, except share data):
Six months ended June
30,
2022 2021 Dividends to shareholders $ 98$ 95 Purchase of treasury stock (1) 25 - Total amount paid to shareholders $ 123$ 95 Number of treasury shares purchased (1) 219,116 - Average price per share $ 114.09 $ -
(1)Excludes shares utilized to execute and settle certain stock incentive
awards.
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InAugust 2022 , RGA's board of directors declared a quarterly dividend of$0.80 per share. All future payments of dividends are at the discretion of RGA's board of directors and will depend on the Company's earnings, capital requirements, insurance regulatory conditions, operating conditions, and other such factors as the board of directors may deem relevant. The amount of dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries. See Note 3 - "Equity" in the Notes to Condensed Consolidated Financial Statements for information on the Company's share repurchase program.
Debt
Certain of the Company's debt agreements contain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of consolidated net worth, maximum ratios of debt to capitalization and change of control provisions. The Company is required to maintain a minimum consolidated net worth, as defined in the debt agreements, of$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 ofJune 30, 2022 andDecember 31, 2021 , the Company had$3.7 billion in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As ofJune 30, 2022 andDecember 31, 2021 , the average net interest rate on long-term debt outstanding was 4.42%. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, available liquidity at the holding company, and the Company's ability to raise additional funds. The Company enters into derivative agreements with counterparties that reference either the Company's debt rating or its financial strength rating. If either rating is downgraded in the future, it could trigger certain terms in the Company's derivative agreements, which could negatively affect overall liquidity. For the majority of the Company's derivative agreements, there is a termination event 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 revolving credit facility that matures inAugust 2023 . As ofJune 30, 2022 , the Company had no cash borrowings outstanding and$7 million in issued, but undrawn, letters of credit under this facility. 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.
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.
Credit and Committed Facilities
AtJune 30, 2022 , the Company maintained an$850 million syndicated revolving credit facility and certain committed letter of credit facilities aggregating to$928 million . See Note 13 - "Debt" in the Notes to Consolidated Financial Statements in the 2021 Annual Report for further information about these facilities. The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements and allow ceding companies to take statutory reserve credits. Certain of these letters of credit contain financial covenant restrictions similar to those described in the "Debt" discussion above. AtJune 30, 2022 , there were approximately$51 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 ofJune 30, 2022 ,$1.7 billion in letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the Company. Cash Flows The Company's principal cash inflows from its reinsurance operations include premiums and deposit funds received from ceding companies. The primary liquidity concerns with respect to these cash flows are early recapture of the reinsurance contract by the ceding company and lapses of annuity products reinsured by the Company. The Company's principal cash 58
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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" 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 revolving credit facility, under which the Company had availability of$843 million as ofJune 30, 2022 . The Company also has$582 million of funds available through collateralized borrowings from the FHLB as ofJune 30, 2022 . As ofJune 30, 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 in the 2021 Annual Report). The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires nor to the recoverability of future claims. The Company's management believes its 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.
Summary of Primary Sources and Uses of Liquidity and Capital
The Company's primary sources and uses of liquidity and capital are summarized
as follows:
For the six months ended June 30,
2022 2021
(Dollars in millions)
Sources:
Net cash provided by operating activities $ 242 $ 2,330
Change in cash collateral for derivative positions and other
arrangements 143 184
Net deposits from investment-type policies and contracts 2,641 79
Issuance of preferred interests by subsidiary 90 -
Total sources 3,116 2,593
Uses:
Net cash used in investing activities 3,211 2,173
Dividends to stockholders 98 95
Repayment of collateral finance and securitization notes 29 65
Principal payments of long-term debt 2 401
Purchases of treasury stock 27 2
Change in deposit asset on reinsurance 32 -
Distributions to noncontrolling interest 1 -
Effect of exchange rate changes on cash 108 11
Total uses 3,508 2,747
Net change in cash and cash equivalents $ (392) $ (154)
Cash Flows from Operations - The principal cash inflows from the Company's
reinsurance activities come from premiums, investment and fee income, annuity
considerations and deposit funds. The principal cash outflows relate to the
liabilities associated with various life and health insurance, annuity and
disability products, operating expenses, income tax payments and interest on
outstanding debt obligations. The primary liquidity concern with respect to
these cash flows is the risk of shortfalls in premiums and investment income,
particularly in periods with abnormally high claims levels.
Cash Flows from Investments - The principal cash inflows from the Company's
investment activities come from repayments of principal on invested assets,
proceeds from maturities of invested assets, sales of invested assets and
settlements of freestanding derivatives. The principal cash outflows relate to
purchases of investments, issuances of policy loans and settlements of
freestanding derivatives. The Company typically has a net cash outflow from
investing activities because cash inflows from insurance operations are
reinvested in accordance with its asset/liability management discipline to fund
insurance liabilities. The Company closely monitors and manages these risks
through its credit risk management process. The primary liquidity
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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 RGA debt and equity securities, and deposit funds associated with universal life and other investment type policies and contracts. The principal cash outflows come from repayments of debt, payments of dividends to stockholders, purchases of treasury stock, and withdrawals associated with universal life and other investment type policies and contracts. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder withdrawal.
Contractual Obligations
There were no other material changes in the Company's contractual obligations
from those reported in the 2021 Annual Report.
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 balance sheet and under funds withheld arrangements with the ceding company. Investment guidelines are established to structure the investment portfolio based upon the type, duration and behavior of products in the liability portfolio so as to achieve targeted levels of profitability. The Company manages the asset-intensive business to provide a targeted spread between the interest rate earned on investments and the interest rate credited to the underlying interest-sensitive contract liabilities. The Company periodically reviews models projecting different interest rate scenarios and their effect on profitability. Certain of these asset-intensive agreements, primarily in theU.S. and Latin America Financial Solutions operating segment, are generally funded by fixed maturity securities that are withheld by the ceding company. The Company's liquidity position (cash and cash equivalents and short-term investments) was$2.8 billion and$3.0 billion atJune 30, 2022 andDecember 31, 2021 , respectively. Liquidity needs are determined from valuation analyses conducted by operational units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs. See "Securities Borrowing, Lending and Repurchase/Reverse Repurchase Agreements" in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for information related to the Company's securities borrowing, lending and repurchase/reverse repurchase agreements. In addition to its security agreements with third parties, certain RGA's subsidiaries have entered into intercompany securities lending agreements to more efficiently source securities for lending to third parties and to provide for more efficient regulatory capital management.
The Company is a member of the FHLB and holds
which is included in other invested assets on the Company's condensed
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$1.2 billion and$1.4 billion atJune 30, 2022 andDecember 31, 2021 , respectively, which is included in interest-sensitive contract liabilities on the Company's condensed consolidated balance sheets. The advances on these agreements are collateralized primarily by commercial and residential mortgage-backed securities, commercial mortgage loans, 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. 60
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Table of Contents 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. The Company's portfolio management groups work with the Enterprise Risk Management function to develop the investment policies for the assets of the Company's domestic and international investment portfolios. All investments held by the Company, directly or in a funds withheld at interest reinsurance arrangement, are monitored for conformance with the Company's stated investment policy limits as well as any limits prescribed by the applicable jurisdiction's insurance laws and regulations. See Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Company's investments. Portfolio Composition
The Company had total cash and invested assets of
billion
below (dollars in millions):
December 31,
June 30, 2022 % of Total 2021 % of Total
Fixed maturity securities
available-for-sale $ 53,294 72.4 % $ 60,749 74.6 %
Equity securities 127 0.2 151 0.2
Mortgage loans 6,544 8.9 6,283 7.7
Policy loans 1,218 1.7 1,234 1.5
Funds withheld at interest 6,393 8.7 6,954 8.5
Short-term investments 272 0.4 87 0.1
Other invested assets 3,110 4.2 3,070 3.8
Cash and cash equivalents 2,556 3.5 2,948 3.6
Total cash and invested assets $ 73,514 100.0 % $ 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). 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.
Three months ended June 30, Six months ended June 30,
Increase/ Increase/
2022 2021 (Decrease) 2022 2021 (Decrease)
Average invested assets at amortized
cost $ 34,859 $ 33,587
Net investment income
$ 397 $ 383 $ 14$ 854 $ 846 $ 8 Annualized investment yield (ratio of net investment income to average invested assets at amortized cost) 4.63 % 4.64 % (1) bp 4.96 % 5.15 % (19) bps VII (included in net investment income)$ 70 $ 78 $ (8)$ 211 $ 240 $ (29) Annualized investment yield excluding VII (ratio of net investment income, excluding VII, to average invested assets, excluding assets with only VII, at amortized cost) 3.96 % 3.84 % 12 bps 3.88 % 3.82 % 6 bps 61
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Investment yield stayed relatively flat for the three months endedJune 30, 2022 , in comparison to the same period in the prior year. Investment yield decreased for the six months endedJune 30, 2022 , in comparison to the same period in the prior year, primarily due to decreased variable income from limited partnerships, which are included in other invested assets on the condensed consolidated balance sheets. Investment yield excluding variable investment income increased for the three and six months endedJune 30, 2022 , in comparison to the same periods in the prior year, primarily due to the rising interest rate environment.
Fixed Maturity Securities Available-for-Sale
See "Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Condensed 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 ofJune 30, 2022 andDecember 31, 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 ofJune 30, 2022 andDecember 31, 2021 , approximately 93.4% 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 7.0% and 5.3% of the total fixed maturity securities as ofJune 30, 2022 andDecember 31, 2021 , respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to fluctuations in interest payments. The Company holds floating rate investments to match specific floating rate liabilities primarily reflected in the condensed consolidated balance sheets as collateral finance notes, as well as to enhance asset management strategies. The largest asset class in which fixed maturity securities were invested was corporate securities, which represented approximately 64.5% and 62.8% of total fixed maturity securities as ofJune 30, 2022 andDecember 31, 2021 . See "Corporate Fixed Maturity Securities " in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for tables showing the major sector types, which comprise the corporate fixed maturity holdings as ofJune 30, 2022 andDecember 31, 2021 . As ofJune 30, 2022 andDecember 31, 2021 , the Company's investments in Canadian government securities represented 7.1% 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. 62
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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 ofJune 30, 2022 andDecember 31, 2021 was as follows (dollars in millions): June 30, 2022 December 31, 2021 NAIC Rating Agency Amortized Estimated Amortized Estimated Designation Designation Cost Fair Value % of Total Cost Fair Value % of Total 1 AAA/AA/A$ 33,989 $ 31,782 59.6 %$ 33,540 $ 36,725 60.5 % 2 BBB 19,851 18,011 33.8 18,684 20,379 33.5 3 BB 2,940 2,774 5.2 2,620 2,668 4.4 4 B 658 619 1.2 876 863 1.4 5 CCC and lower 124 84 0.2 96 79 0.1 6 In or near default 46 24 - 57 35 0.1 Total$ 57,608 $ 53,294 100.0 %$ 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
June 30, 2022 December 31, 2021
Estimated Estimated
Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total
RMBS:
Agency $ 519 $ 498 7.7 % $ 551 $ 582 8.4 %
Non-agency 485 452 7.0 469 468 6.8
Total RMBS 1,004 950 14.7 1,020 1,050 15.2
ABS:
Collateralized loan obligations ("CLOs") 1,714 1,622 25.1 1,761 1,752 25.4
ABS, excluding CLOs 2,377 2,160 33.4 2,263 2,253 32.6
Total ABS 4,091 3,782 58.5 4,024 4,005 58.0
CMBS 1,856 1,735 26.8 1,790 1,849 26.8
Total $ 6,951 $ 6,467 100.0 % $ 6,834 $ 6,904 100.0 %
The Company's RMBS portfolio includes agency-issued pass-through securities and
collateralized mortgage obligations. Agency-issued pass-through securities are
guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association, or the Government 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.
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As ofJune 30, 2022 andDecember 31, 2021 , the Company had$5,129 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 Condensed 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 ofJune 30, 2022 , totaling approximately$9 million . As ofJune 30, 2022 andDecember 31, 2021 , the Company's recorded investment in mortgage loans, gross of unamortized deferred loan origination fees and expenses and allowance for credit losses, were distributed geographically as follows (dollars in millions): June 30, 2022 December 31, 2021 Recorded Recorded Investment % of Total Investment % of TotalU.S. Region : West$ 2,330 35.3 % $ 2,270 36.0 % South 2,250 34.1 2,135 33.7 Midwest 1,158 17.6 1,166 18.4 Northeast 483 7.3 419 6.6 Subtotal - U.S. 6,221 94.3 5,990 94.7 Canada 217 3.3 193 3.0 United Kingdom 156 2.4 144 2.3 Other - - 2 - Total$ 6,594 100.0 % $ 6,329 100.0 % See "Allowance for Credit Losses and Impairments" in Note 2 - "Significant Accounting Policies and Pronouncements" of the Company's 2021 Annual Report and "Mortgage Loans" in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for information regarding the Company's policy for allowance for credit losses on mortgage loans.
Allowance for Credit Losses and Impairments
The Company's determination of whether a decline in value necessitates the recording of an allowance for credit losses includes an analysis of whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall 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" of the Company's 2021 Annual Report for additional information. The table below summarizes investment related gains (losses), net related to allowances for credit losses and impairments for the three and six months endedJune 30, 2022 and 2021 (dollars in millions). Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Change in allowance for credit losses on fixed maturity securities $ 13$ (5) $ 24$ (3) Impairments on fixed maturity securities 2 - 3 - Other impairment losses and changes in provision - (1) - (2) Change in mortgage loan allowance for credit losses 1 (2) 3 (19) Total $ 16$ (8) $ 30$ (24)
The increase in allowance for credit losses and impairments on fixed maturity
securities for the three and six months ended
related to high-yield securities.
See "Unrealized Losses for Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Condensed 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 ofJune 30, 2022 andDecember 31, 2021 . 64
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As ofJune 30, 2022 andDecember 31, 2021 , the Company classified approximately 10.4% 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 Condensed 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 Condensed 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 condensed consolidated balance sheets. In the event of a ceding company's insolvency, the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances against amounts owed by the ceding company. Interest accrues to the total funds withheld at interest assets at rates defined by the treaty terms. 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 ofJune 30, 2022 andDecember 31, 2021 . Certain ceding companies maintain segregated portfolios for the benefit of the Company.
Other Invested Assets
Other invested assets include limited partnership interests, joint ventures (other than operating joint ventures), lifetime mortgages, derivative contracts, FHLB common stock and unit-linked investments. See "Other Invested Assets" in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for a table that presents the carrying value of the Company's other invested assets by type as ofJune 30, 2022 andDecember 31, 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 Condensed Consolidated Financial Statements for a table that presents the notional amounts and fair value of investment related derivative instruments held as ofJune 30, 2022 andDecember 31, 2021 . 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 ofJune 30, 2022 , the Company had credit exposure of$15 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 Condensed Consolidated Financial Statements for more information regarding the Company's derivative instruments. The Company holds$812 million and$758 million of beneficial interest in lifetime mortgages in theUK , net of allowance for credit losses as ofJune 30, 2022 andDecember 31, 2021 , respectively. Investment income includes$9 million and$13 million in interest income earned on lifetime mortgages for the three months endedJune 30, 2022 and 2021, respectively, and$19 million and$26 million in interest income earned on lifetime mortgages for the six months endedJune 30, 2022 and 2021, 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 the borrower or sale of the home. Lifetime mortgages may also be either fully funded at origination, or the borrower can request 65
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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.
New Accounting Standards
Changes to the general accounting principles are established by theFinancial Accounting Standards Board ("FASB") in the form of accounting standards updates to the FASB Accounting Standards CodificationTM.
Financial Services - Insurance
InAugust 2018 , the FASB issued amendments that will significantly change the recognition and measurement of long-duration insurance contracts and expand disclosure requirements. The guidance is effective for the Company onJanuary 1, 2023 . The Company established a team to support the implementation of the updated guidance, which requires significant changes to policies, reporting and processes. The Company's achievements as of the balance sheet date include, but are not limited to, the following:
•Established preliminary key accounting policies;
•Updated chart of accounts to support enhanced financial statement presentation
and disclosures;
•Implemented a data management system and process for grouping treaties into
cohorts;
•Established valuation analytics and reporting foundation;
•Established an assumption governance process for assumption review, changes and
approvals; and
•Conducted dry runs and end to end system testing.
The Company continues to make progress on the following items (includes, but not
limited to):
•Evaluating and finalizing key accounting policies;
•Evaluating the impact to the consolidated financial statements at transition;
•Determining and documenting key risks and appropriate internal controls; and
•Conducting parallel valuation runs.
See Note 13 - "New Accounting Standards" in the Notes to Condensed 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.
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