REINSURANCE GROUP OF AMERICA, INCORPORATED 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 ongoing novel coronavirus ("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. Further, any estimates, projections,
illustrative scenarios or frameworks used to plan for potential effects of the
pandemic are dependent on numerous underlying assumptions and estimates that may
not materialize. Additionally, numerous other important factors (whether related
to, resulting from or exacerbated by the COVID-19 pandemic or otherwise) could
also cause actual 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 in
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Overview
The Company is among the leading global providers of life reinsurance and financial solutions, with$3.5 trillion of life reinsurance in force and assets of$80.7 billion as ofJune 30, 2020 . 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. 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 business, the Company's long-term profitability largely depends on the volume and amount of death-and health-related claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. For longevity business, the Company's profitability depends on the lifespan of the underlying contract holders and the investment performance for certain contracts. Additionally, the Company generates profits on investment spreads associated with the reinsurance of investment type contracts and generates fees from capital solutions transactions, such as financial reinsurance, which are typically shorter duration than its traditional life reinsurance business. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis. As is customary in the reinsurance business, clients continually update, refine, and revise reinsurance information provided to the Company. Such revised information is used by the Company in preparation of its condensed consolidated financial statements and the financial effects resulting from the incorporation of revised data are reflected in the current period. The COVID-19 Pandemic Impact and Update The ongoing COVID-19 global pandemic and the response to it has caused, and will continue to cause, increases in mortality, morbidity and other insurance risks, as well as significant disruption in the international andU.S. economies and financial markets. The extent to which the Company's future results continue to be affected by COVID-19 will largely depend on, among other factors, country-specific circumstances, measures by public and private institutions, COVID-19's impact on all other causes of death and the timing of effective treatments and/or a vaccine for COVID-19. Given these many variables, the Company cannot reliably predict the future impact of the pandemic on its business, results of operations and financial condition. In addition, clients' ability to write new business in this environment may result in a slowdown in the Company's new business temporarily, however, much of the Company's premiums and other revenues are contractually recurring for many years to come. One of the Company's priorities continues to be the safety and well-being of its employees and clients, as such its business continuity plans are still activated and the actions taken to protect both employees and clients, such as working from home, restricting travel, conducting meetings remotely, and reinforcing the importance of face coverings, good hygiene and social distancing, also continue. The Company's offices worldwide are at a minimum adhering to local government mandates and guidelines regarding occupancy levels, however in certain situations the Company's guidelines are more restrictive than those of local governments. The Company has not currently experienced any significant disruptions to its daily operations, despite most of its workforce continuing to work remotely. Expenses incurred to implement its business continuity plans, including work from home arrangements, are not material and have been more than offset by reduced travel and other expenses during the three and six months endedJune 30, 2020 . However, COVID-19 may create operational risks and related impacts, which may include a reduction in new business volumes from slower sales, impacts to the Company's workforce productivity due to travel restrictions, temporary office closures and increased remote working situations, and potential client delays in paying premiums and reporting claims. The Company is heavily reliant on timely reporting from its clients and other third parties. While operational risks, including privacy and cybersecurity risks, are heightened during remote working situations the Company has implemented increased communication related to these risks to all its workforce and continues to monitor its programs, processes and procedures designed to manage these risks. Given the many variables and uncertainties in the amounts and timing of claims, the Company is unable to reliably predict the ultimate claims it will experience as a result of the pandemic, however an infectious pandemic will negatively impact the profitability of the Company's life and health business due to increased claims. The variables and uncertainties include age, gender, comorbidities, other insured versus general population characteristics, geography-specific institutional and individual mitigating 46
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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. 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.
Following revisions to the Company's model, based on updated external data and
the Company's claim experience to date, which revised models are subject to the
many variables and uncertainties noted above, the financial impact of COVID-19
on the Company is projected to be lower than previous estimates for the same
level of general population deaths. The
The global financial markets continue to be in a state of uncertainty due
to COVID-19 mandated economic shutdowns and historically large and rapid central
bank and fiscal policies meant to offset the economic impact of the pandemic.
The economic weakness and uncertainty caused by these events may also adversely
affect the Company's financial performance. All investments held by the Company,
directly or in a funds withheld at interest reinsurance arrangement, are
monitored for conformance with the Company's stated investment policy limits as
well as any limits prescribed by the applicable jurisdiction's insurance laws
and regulations. The current market environment may result in certain
investments being downgraded which can affect conformance with these limits. The
Company expects to incur a higher-than-normal level of investment impairments
during the remainder of 2020, however it is unable to predict the amount of such
impairments. The level of such impairments will depend on broad economic
conditions and the pace at which global economies recover from the effects of
COVID-19. The Company recognized
• Cash flows from investments, which is approximately
• Access to$850 million of cash through the Company's committed syndicated credit facility, and • Access to over$500 million of cash through the membership in theFederal Home Loan Bank of Des Moines .
In order to further enhance its capital and liquidity position, the Company
executed two capital market transactions during the quarter. On
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Additional sources of liquidity for RGA's operating subsidiaries include near-term reinsurance cash flows, sales of invested assets, and potentially other forms of borrowing. RGA's operating subsidiaries continue to be well capitalized and the Company continues to monitor its solvency position under multiple capital regimes on a regular basis while considering both its developing experience and economic conditions. In addition, the Company utilizes its internal capital model to assess its ability to meet its long-term obligations under a range of stress scenarios on a consolidated basis. This internal capital model is also used as the capital basis for RGA's consolidated Own Risk and Solvency Assessment. The Company's primary insurance subsidiaries' financial strength ratings are strong, with all having an S&P rating of AA-, and some of those also having a Moody's rating of A1, and anA.M. Best rating of A+. In addition, even though the insurance subsidiaries' various capital ratios and solvency measures may be somewhat weakened due to the COVID-19 pandemic and the economic environment, RGA believes its various subsidiaries would remain financially solvent under such a pandemic scenario. Reinsurance treaties, whether facultative or automatic, generally provide recapture provisions. MostU.S. based reinsurance treaties include a recapture right for ceding companies, generally after 10 years. Outside of theU.S. , treaties primarily include a mutually agreed-upon recapture provision. Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer. In some situations, the Company has the right to place assets in trust for the benefit of the ceding company in lieu of recapture. Additionally, certain treaties may grant recapture rights to ceding companies in the event of a significant decrease inRGA Reinsurance Company's NAIC risk based capital ratio or financial strength rating. The RBC ratio trigger varies by treaty, with the majority between 125% and 225% of the NAIC's company action level. Financial strength rating triggers vary by reinsurance treaty with the majority of the triggers reached if the specific legal entity's financial strength rating falls five notches from its current rating of "AA-" to the "BBB" level on the S&P scale. Similar solvency and ratings based on recapture rights exist on treaties with other operating companies. Recapture of business previously ceded does not affect premiums ceded prior to the recapture of such business, but would reduce premiums and insurance liabilities in subsequent periods. Upon recapture, the Company would reflect a net gain or loss on the settlement of the assets and liabilities associated with the reinsurance treaty. In some cases, the ceding company is required to pay the Company a recapture fee. Globally, regulators are closely monitoring the COVID-19 pandemic and its possible impact on the insurance industry. Various regulators and other authorities have been requiring regulated entities to review their business continuity plans and to address potential pandemic risk in their contingency plans. In addition, some regulators have adopted or are considering adopting measures to provide temporary relief in respect to certain regulatory requirements and also to policyholders. These regulatory initiatives have accompanied a range of measures by governments and central banks, such as interest rate cuts and other measures, in a number of jurisdictions to support and stimulate the economy. The Company expects that regulators and other authorities will continue monitoring the spread and effects of COVID-19 closely over the next few months and adapt their guidance and additional requirements as the situation develops. 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. 48
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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 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 2019 Annual Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.
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