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 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, (28) the effects of the Tax Cuts and Jobs Act of 2017 may be different than expected and (29) 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 2020 Annual Report, as may be supplemented by Item 1A - "Risk Factors" in the Company's subsequent Quarterly Reports on Form 10-Q. 41
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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$88.9 billion as ofJune 30, 2021 . Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, capital solutions, including financial reinsurance, and stable value products. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets. 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. The Company's long-term profitability largely depends on the volume and amount of death- and health-related claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. For longevity business, the Company's profitability depends on the lifespan of the underlying contract holders and the investment performance for certain contracts. Additionally, the Company generates profits on investment spreads associated with the reinsurance of investment type contracts and generates fees from financial reinsurance transactions, which are typically shorter duration than its traditional life reinsurance business. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis. 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. 42
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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 2020 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 The COVID-19 global pandemic continues to cause increases in the Company's claims costs, primarily relating to its mortality business. However, the Company cannot reliably predict the future impact of the pandemic on its business, results of operations and financial condition as the impact will largely depend on, among other factors, the impact of new variants of the virus, successful rollout of the vaccination programs globally, country-specific circumstances, measures by public and private institutions, and COVID-19's impact on all other causes of death. In addition, the Company's clients' ability to write new business in this environment may result in a slowdown in new business temporarily; however, much of the Company's premiums and other revenues are contractually recurring for many years to come. The ultimate amount and timing of claims the Company will experience as a result of the COVID-19 pandemic will be dependent 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. 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. The Company's COVID-19 projection and financial impact models continue to be updated and refined based on updated external data and the Company's claim experience to date and are subject to the many variables and uncertainties noted above. TheU.S. is the key driver of mortality claim costs followed by theUK ,India ,South Africa andCanada . For the six month period endedJune 30, 2021 , the Company estimates it has incurred approximately$595 million of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$352 million of that amount being associated with theU.S. and Latin America Traditional segment. The Company has updated the range of COVID-19 mortality claim cost estimates relative to the level of general population deaths. TheU.S. range was lowered reflecting developing data and go forward expectations. The ranges for theUK andCanada were widened, reflective of our experience as well as the expectation that a lower number of COVID-19 general population deaths will result in more variability in the relationship to claims costs. 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$20 million in theU.S. ; •$4 million to$8 million in theUK ; and •$10 million to$20 million inCanada . While the global financial markets have stabilized since the beginning of the pandemic, they 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 43
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interest reinsurance arrangement are monitored for conformance with the
Company's stated investment policy limits as well as any limits prescribed by
the applicable jurisdiction's insurance laws and regulations. The current market
environment may result in certain investments being downgraded which can affect
conformance with these limits. The level of potential impairments will depend on
broad economic conditions and the pace at which global economies recover from
the effects of COVID-19 and the response thereto. See "Investments" for more
information.
The safety and well-being of the Company's employees and clients continues to be
a priority. The Company's business continuity plans remain activated and the
actions taken during 2020 to protect both employees and clients, such as working
from home, restricting travel, conducting meetings remotely, and reinforcing the
importance of face coverings, good hygiene and social distancing, also 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 experienced any significant disruptions to its daily
operations, despite most of its workforce working remotely. However, COVID-19
heightened operational risks and related impacts, which may include 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. Similar to other reinsurers, the Company is heavily reliant on
timely reporting from its clients and other third parties. The Company continues
to emphasize awareness and training regarding operational risks, including
privacy and cybersecurity risks, as such risks are heightened during remote
working situations. In addition, the Company continues to monitor its programs,
processes and procedures designed to manage these risks.
RGA's operating subsidiaries continue to be well capitalized, and the Company
continues to monitor its solvency position under multiple capital regimes on a
regular basis while considering both its developing experience and economic
conditions. In addition, the Company utilizes its internal capital model to
assess its ability to meet its long-term obligations under a range of stress
scenarios on a consolidated basis. This internal capital model is also used as
the capital basis for RGA's consolidated Own Risk and Solvency Assessment.
Results from Operations - 2021 compared to 2020
The following table summarizes net income for the periods presented.
Three months ended June 30, Six months ended June 30,
2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Revenues: (Dollars in millions, except per share data)
Net premiums $ 3,098 $ 2,790 $ 308 $ 6,012 $ 5,609 $ 403
Investment income, net of related expenses 759 645 114 1,571 1,239
332
Investment related gains (losses), net 112 81 31 414 (204) 618 Other revenues 168 90 78 259 166 93 Total revenues 4,137 3,606 531 8,256 6,810 1,446 Benefits and Expenses: Claims and other policy benefits 2,813 2,700 113 6,005 5,364 641 Interest credited 218 187 31 364 333 31 Policy acquisition costs and other insurance expenses 339 290 49 672 538 134 Other operating expenses 240 188 52 454 383 71 Interest expense 43 42 1 88 83 5 Collateral finance and securitization expense 2 4 (2) 5 10 (5) Total benefits and expenses 3,655 3,411 244 7,588 6,711 877 Income before income taxes 482 195 287 668 99 569 Provision for income taxes 138 37 101 185 29 156 Net income$ 344 $ 158 $ 186 $ 483 $ 70 $ 413 Earnings per share: Basic earnings per share$ 5.06 $ 2.49 $ 2.57 $ 7.11 $ 1.12 $ 5.99 Diluted earnings per share$ 5.02 $ 2.48 $ 2.54 $ 7.06 $ 1.11 $ 5.95 Three months endedJune 30, 2021 compared to three months endedJune 30, 2020 The increase in income for the three months endedJune 30, 2021 , was primarily the result of: •An increase in investment income and investment related gains (losses), net primarily due to an increase in variable investment income. 44
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•An increase in income before taxes generated by the Company's Financial Solutions business in theU.S. andUK . •Improved mortality experience in theU.S. and Latin America Traditional segment. •The increase in income before taxes was partially offset by unfavorable mortality claims in the EMEA,Canada andAsia Pacific segments. Six months endedJune 30, 2021 compared to six months endedJune 30, 2020 The increase in income for the six months endedJune 30, 2021 , was primarily the result of: •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. •$177 million, pretax, of capital gains included in other investment related gains (losses), net associated with portfolio repositioning. •Changes in fair value of embedded derivatives, associated with modco/funds withheld treaties, increased investment related gains by$66 million for the six month period endedJune 30, 2021 , compared to a decrease of$229 million for the six month period endedJune 30, 2020 . •The increases in investment income and investment related gains (losses), net were partially offset by unfavorable claims, primarily in the EMEA andU.S. andLatin America segments. •As discussed in the "Impacts of the COVID-19 Pandemic" above, the Company estimates it has incurred approximately$595 million , pretax, of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$352 million , pretax, in theU.S. andLatin America segment. 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, 2021 , by$14 million and$18 million , respectively, primarily due to the strengthening of the Great British Pound and Canadian Dollar compared to theU.S. Dollar. Premiums and business growth The increase in premiums during the three and six month period endedJune 30, 2021 , is primarily due to growth in life reinsurance in force. Consolidated assumed life insurance in force increased to$3,471.7 billion as ofJune 30, 2021 , from$3,457.8 billion as ofJune 30, 2020 , due to new business production and in force transactions offset by an increase in lapses and mortality claims in the current period, primarily attributable to the increased claims as a result of the ongoing COVID-19 pandemic. The Company added new business production, measured by face amount of insurance in force, of$220.9 billion , and$210.9 billion during the six months endedJune 30, 2021 and 2020, respectively. Investment income, net of related expenses and investment related gains (losses), net The increase 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, in addition to an increase in the average invested asset base and yield: •The average invested assets at amortized cost, excluding spread business, totaled$33.3 billion for the six months endedJune 30, 2021 , compared to$30.0 billion for the six months endedJune 30, 2020 . •The average yield earned on investments, excluding spread related business, was 4.64% and 4.07% for the three month period endedJune 30, 2021 and 2020, respectively, and 5.15% and 4.07% for the six months endedJune 30, 2021 and 2020, respectively. A continued low interest rate environment, in addition to higher cash and cash equivalents balances held by the Company during the COVID-19 pandemic, is expected to put downward pressure on this yield in future reporting periods. 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. 45
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The increase in investment related gains (losses), net is primarily attributable to the following: •During the three and six months endedJune 30, 2021 , the Company repositioned its portfolio generating capital gains of$23 million and$177 million , respectively. •There were no material impairments or changes in allowance for credit losses on fixed maturities during the three months endedJune 30, 2021 orJune 30, 2020 . During the six months endedJune 30, 2021 , the Company recognized a reduction of$3 million of impairments and change in allowance for credit losses on fixed maturities compared to an increase of$34 million during the first six months of 2020. •Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, increased investment related gains (losses), net by$16 million and$66 million for the three and six month period endedJune 30, 2021 , respectively, compared to an increase (decrease) of$1 million and$(229) million for the three and six month period endedJune 30, 2020 . •Unrealized gains of$48 million and$155 million , including the previously mentioned correction recorded in the first quarter of 2021 of$70 million due to the change in fair value of certain cost method limited partnerships were recognized during the three and six month periods endedJune 30 , of 2021. The effective tax rate on a consolidated basis was 28.5% and 18.9% for the three months endedJune 30, 2021 and 2020, respectively, and 27.6% and 28.6% for the six months endedJune 30, 2021 and 2020, respectively. See Note 9 - "Income Tax" in the Notes to Condensed Consolidated Financial Statements for additional information on the Company's consolidated effective tax rates. Impact of certain derivatives The Company recognizes in consolidated income, any changes in the fair value of embedded derivatives on modco or funds withheld treaties, equity index annuities ("EIAs") and variable annuities with guaranteed minimum benefit riders. The Company utilizes freestanding derivatives to minimize the income statement volatility due to changes in the fair value of embedded derivatives associated with guaranteed minimum benefit riders. The following table presents the effect of embedded derivatives and related freestanding derivatives on income before income taxes for the periods indicated (dollars in millions): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020Modco /Funds withheld: Unrealized gains (losses)$ 16 $ 1 $ 15$ 66 $ (229) $ 295 Deferred acquisition costs/retrocession (7) 2 (9) (23) 115 (138) Net effect 9 3 6 43 (114) 157 EIAs: Unrealized gains (losses) 3 (7) 10 33 (19) 52 Deferred acquisition costs/retrocession (1) 2 (3) (17) 10 (27) Net effect 2 (5) 7 16 (9) 25 Guaranteed minimum benefit riders: Unrealized gains (losses) (16) 107 (123) 1 (21) 22 Related freestanding derivatives, net of deferred acquisition costs/retrocession 20 (70) 90 (33) 94 (127) Net effect 4 37 (33) (32) 73 (105) Total net effect after freestanding derivatives$ 15 $ 35 $ (20)$ 27 $ (50) $ 77 46
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Results of Operations by SegmentU.S. and Latin America Operations TheU.S. andLatin America operations include business generated by the Company's offices in theU.S. ,Mexico andBrazil . The offices inMexico andBrazil provide services to clients in other Latin American countries. 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'sU.S. andLatin America operations for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 1,593 $ 1,469 $ 124$ 3,025 $ 2,854 $ 171 Investment income, net of related expenses 509 420 89 974 815 159 Investment related gains (losses), net 31 22 9 31 (145) 176 Other revenues 116 54 62 174 113 61 Total revenues 2,249 1,965 284 4,204 3,637 567 Benefits and expenses: Claims and other policy benefits 1,439 1,607 (168) 3,239 3,027 212 Interest credited 200 157 43 331 305 26 Policy acquisition costs and other insurance expenses 238 204 34 469 341 128 Other operating expenses 51 38 13 99 82 17 Total benefits and expenses 1,928 2,006 (78) 4,138 3,755 383
Income before income taxes
362$ 66 $ (118) $ 184 The increase in income before income taxes in the second quarter of 2021 was the result of a nine percent decrease in claims and other policy benefits in theU.S. Traditional segment, strong performance from Financial Solutions related to both experience gains, an increase in transaction and other fees, as well as higher variable investment income from real estate joint ventures and unrealized gains from investments in limited partnerships. The increase in income before income taxes for the first six months of 2021 is also attributable to the impact of embedded derivatives inU.S. Financial Solutions. Partially offsetting the six month increase were realized capital losses compared to realized capital gains in 2020 and significantly higher claims inU.S. Mortality Markets. The significant increase in claims in theU.S. Mortality Markets during the first six months compared to the same period in 2020 was primarily related to an increase in large and non-large claim frequency within the individual mortality business in the first three months of 2021 as compared to the same period in 2020. While the cause of death is not yet available for all claims, the Company believes the excess claim costs are primarily attributable to COVID-19. 47
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Traditional Reinsurance
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Revenues:
Net premiums $ 1,578 $ 1,454 $ 124 $ 2,997 $ 2,827 $ 170
Investment income, net of related
expenses 233 177 56 440 338 102
Investment related gains
(losses), net 1 7 (6) 7 - 7
Other revenues 4 4 - 9 10 (1)
Total revenues 1,816 1,642 174 3,453 3,175 278
Benefits and expenses:
Claims and other policy benefits 1,418 1,558 (140) 3,158 2,925 233
Interest credited 18 18 - 35 37 (2)
Policy acquisition costs and
other insurance expenses 206 195 11 388 370 18
Other operating expenses 39 29 10 75 63 12
Total benefits and expenses 1,681 1,800 (119) 3,656 3,395 261
Income (loss) before income taxes $ 135 $ (158) $ 293 $ (203) $ (220) $
17
Key metrics: Life insurance in force$1,619.4 billion $1,620.5 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 89.9 % 107.2 % 105.4 % 103.5 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 13.1 % 13.4 % 12.9 % 13.1 % Other operating expenses as a percentage of net premiums 2.5 % 2.0 % 2.5 % 2.2 % The increase in income before income taxes in the second quarter for theU.S. and Latin America Traditional segment was primarily the result of a nine percent decrease in claims in theU.S. Mortality Market primarily due to lower claims attributable to COVID-19 or COVID-19 related factors and an increase in investment income. The decrease in the loss before income taxes for six months endedJune 30, 2021 , as compared the same period in 2020 is primarily attributable an increase in investment income partially offset by an increase in claims attributable to COVID-19 or COVID-19 related factors. Revenues •The increase in net premiums for the three and six month periods endedJune 30, 2021 , was primarily due to organic growth as well as new sales. The segment added new life business production, measured by face amount of insurance in force, of$35.7 billion and$25.3 billion during the second quarter of 2021 and 2020, respectively, and$64.2 and$59.3 billion during the first six months of 2021 and 2020, respectively. Also contributing to the premium growth was the restructure and extension of an existing transaction and the partial recapture of a retroceded block of individual life business. •The increase in net investment income for the three and six month periods endedJune 30, 2021 , was primarily due to higher variable investment income associated with investments in limited partnerships and private equity funds primarily generated from unrealized gains in the underlying investments and higher variable investment income from real estate joint ventures. Benefits and expenses •The decrease in the loss ratio for the three months endedJune 30, 2021 , as compared to the same period in 2020, was primarily due to favorable claims experience in the individual mortality line of business, attributed primarily to fewer claims from COVID-19 or COVID-19 related factors than in 2020. The increase in the loss ratio for the six months endedJune 30, 2021 , as compared to the same period in 2020, was primarily due to unfavorable large and non-large claims experience in the individual mortality line of business, attributed to the COVID-19 pandemic. As explained above, while the cause of death is not yet available for all claims, the Company estimates that approximately$352 million of excess claims for the six months endedJune 30, 2021 , were attributable to COVID-19. •The increase in other operating expenses for the three and six months endedJune 30, 2021 , was primarily due to an increase in incentive compensation expense. 48
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Financial Solutions
For the three months ended June 30, 2021 2020 2021 vs 2020
Capital Capital Capital
Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total(dollars in millions) Revenues: Net premiums $ 15 $ -$ 15 $ 15 $ -$ 15 $ - $ - $ - Investment income, net of related expenses 276 - 276 241 2 243 35 (2) 33 Investment related gains (losses), net 30 - 30 15 - 15 15 - 15 Other revenues 85 27 112 24 26 50 61 1 62 Total revenues 406 27 433 295 28 323 111 (1) 110 Benefits and expenses: Claims and other policy benefits 21 - 21 49 - 49 (28) - (28) Interest credited 182 - 182 139 - 139 43 - 43 Policy acquisition costs and other insurance expenses 32 - 32 7 2 9 25 (2) 23 Other operating expenses 8 4 12 7 2 9 1 2 3 Total benefits and expenses 243 4 247 202 4 206 41 - 41 Income before income taxes $ 163 $ 23$ 186 $ 93 $ 24$ 117 $ 70 $ (1)$ 69 For the six months ended June 30, 2021 2020 2021 vs 2020 Capital Capital Capital Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total
(dollars in millions) Revenues: Net premiums $ 28 $ -$ 28 $ 27 $ -$ 27 $ 1 $ -$ 1 Investment income, net of related expenses 533 1 534 474 3 477 59 (2) 57 Investment related gains (losses), net 24 - 24 (145) - (145) 169 - 169 Other revenues 111 54 165 52 51 103 59 3 62 Total revenues 696 55 751 408 54 462 288 1 289 Benefits and expenses: Claims and other policy benefits 81 - 81 102 - 102 (21) - (21) Interest credited 296 - 296 268 - 268 28 - 28 Policy acquisition costs and other insurance expenses 79 2 81 (31) 2 (29) 110 - 110 Other operating expenses 17 7 24 14 5 19 3 2 5 Total benefits and expenses 473 9 482 353 7 360 120 2 122 Income before income taxes $ 223 $ 46$ 269 $ 55 $ 47$ 102 $ 168 $ (1)$ 167 Asset-Intensive Reinsurance The increase before income taxes forU.S. and Latin America Financial Solutions' Asset-intensive segment for the three months endedJune 30, 2021 was primarily due to an increase in transaction and other fees, favorable policyholder experience including impacts from COVID-19 and higher investment related gains (losses), net in coinsurance and funds withheld portfolios. The increase for the six months endedJune 30, 2021 , was also due to the net increase in fair value of the embedded derivatives. The invested asset base supporting this segment increased to$26.7 billion as ofJune 30, 2021 , from$23.5 billion as ofJune 30, 2020 . •The increase in the asset base was primarily due to growth from new transactions. •As ofJune 30, 2021 and 2020,$4.8 billion and$3.1 billion , respectively, of the invested assets were funds withheld at interest, of which greater than 90% was associated with two clients. 49
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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,
2021 2020 2021 2020
Revenues:
Total revenues $ 406 $ 295 $ 696 $ 408
Less:
Embedded derivatives - modco/funds withheld
treaties 14 (7) 59 (230)
Guaranteed minimum benefit riders and
related free standing derivatives - 39 (65) 113
Revenues before certain derivatives 392 263 702 525
Benefits and expenses:
Total benefits and expenses 243 202 473 353
Less:
Embedded derivatives - modco/funds withheld treaties 6 (2) 23 (115) Guaranteed minimum benefit riders and related free standing derivatives (4) 2 (33) 40 Equity-indexed annuities (2) 5 (16) 9 Benefits and expenses before certain derivatives 243 197 499 419 Income before income taxes: Income before income taxes 163 93 223 55
Less:
Embedded derivatives - modco/funds withheld treaties 8 (5) 36 (115) Guaranteed minimum benefit riders and related free standing derivatives 4 37 (32) 73 Equity-indexed annuities 2 (5) 16 (9) Income before income taxes and certain derivatives $ 149
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 six months endedJune 30, 2021 and 2020. 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$8 million and$(5) million for the second quarter and$36 million and$(115) million for the six months endedJune 30, 2021 and 2020, respectively. The increase in income for the second quarter was primarily due to amortization of the underlying investments within the funds withheld. The increase in income for the six months endedJune 30, 2021 , was primarily due to tightening credit spreads, partially offset by higher risk free interest rates. 50
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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$(8) million and$29 million for the second quarter and$(63) million and$127 million for the six months endedJune 30, 2021 and 2020, respectively, associated with the Company's utilization of a credit valuation adjustment. The change in fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing derivatives, increased (decreased) income before income taxes by$4 million and$37 million for the second quarter and$(32) million and$73 million for the six months endedJune 30, 2021 and 2020, respectively. The increase in income for the three months endedJune 30, 2021 , was primarily due to favorable hedging impacts. The decrease in income for the six months endedJune 30, 2021 , was primarily due to a decrease in the credit valuation adjustment which has the impact of increasing the fair value of the guaranteed minimum benefit liability, net of related impact on deferred acquisition expenses. Equity-Indexed Annuities - Represents changes in the liability for equity-indexed annuities in excess of changes in account value, after adjustments for related deferred acquisition expenses. The change in fair value of embedded derivative liabilities associated with equity-indexed annuities increased (decreased) income before income taxes by$2 million and$(5) million for the second quarter and$16 million and$(9) million for the six months endedJune 30, 2021 and 2020, respectively. The increase in income for the six months of 2021 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 increased by$83 million and$97 million for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020. The increases were primarily due to an increase in transaction and other fees, favorable policyholder experience including impacts from COVID-19 and higher investment related gains (losses), net in coinsurance and funds withheld portfolios. •Revenue before certain derivatives increased by$129 million and by$177 million for the three and six months endedJune 30, 2021 , respectively, as compared to the same periods in 2020. The increases were primarily due to the revenue associated with recently executed transactions, increases in fair value of equity options associated with the reinsurance of EIAs and higher investment related gains (losses), net in coinsurance portfolios. The effect on investment income related to equity options is substantially offset by a corresponding change in interest credited. •Benefits and expenses before certain derivatives increased by$46 million and$80 million for the three and six months endedJune 30, 2021 , as compared to the same period in 2020. The increases in the second quarter and first six months were primarily due to higher interest credited associated with the reinsurance of EIAs due to improved equity market performance and benefits associated with recently executed transactions. The effect on interest credited related to equity options is substantially offset by a corresponding increase in investment income. Capital Solutions Income before income taxes for theU.S. and Latin America Capital Solutions' business decreased$1 million , or 4.2%, and$1 million , or 2.1%, for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020. The decreases were primarily due to the termination of transactions, partially offset by growth from new transactions and organic growth on existing transactions. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period. •AtJune 30, 2021 and 2020, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial structures was$22.3 billion and$19.4 billion , respectively. 51
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Canada Operations The Company conducts reinsurance business inCanada primarily through RGACanada , which assists clients with capital management activity and mortality and morbidity risk management. TheCanada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, and to a lesser extent creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and capital solutions. Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 324 $ 274 $ 50$ 627 $ 555 $ 72 Investment income, net of related expenses 63 50 13 123 100 23 Investment related gains (losses), net - 6 (6) 2 (6) 8 Other revenues 5 3 2 9 4 5 Total revenues 392 333 59 761 653 108 Benefits and expenses: Claims and other policy benefits 298 233 65 582 473 109 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 47 43 4 92 88 4 Other operating expenses 11 9 2 21 18 3 Total benefits and expenses 356 285 71 695 579 116
Income before income taxes
(12)
•The decrease in income before income taxes for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, is primarily due to increased claims and other policy benefits associated with the COVID-19 pandemic. These increases are partially offset by an increase in net premiums in the Canada Traditional segment and investment income. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in a$4 million increase in income before income taxes for both the three and six months endedJune 30, 2021 . Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Traditional Reinsurance Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 301 $ 254 $ 47$ 581 $ 514 $ 67 Investment income, net of related expenses 63 50 13 123 99 24 Investment related gains (losses), net - 6 (6) 2 (6) 8 Other revenues 2 1 1 3 - 3 Total revenues 366 311 55 709 607 102 Benefits and expenses: Claims and other policy benefits 277 216 61 543 436 107 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 46 42 4 91 87 4 Other operating expenses 11 9 2 19 17 2 Total benefits and expenses 334 267 67 653 540 113 Income (loss) before income taxes$ 32 $ 44 $ (12) $ 56 $ 67 $
(11)
Key metrics: Life insurance in force$468.3 billion $409.2 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 92.0 % 85.0 % 93.5 % 84.8 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 15.3 % 16.5 % 15.7 % 16.9 % Other operating expenses as a percentage of net premiums 3.7 % 3.5 % 3.3 % 3.3 % The decrease in income before income taxes for the three and six months endedJune 30, 2021 , is primarily due to unfavorable individual life mortality experience compared to the same period in 2020, partially offset by an increase in investment income. 52
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Revenues
•The segment added new life business production, measured by face amount of insurance in force, of$8.5 billion and$9.1 billion for the second quarter of 2021 and 2020, respectively, and$22.7 billion , and$21.3 billion during the first six months of 2021 and 2020, respectively. •The increase in net investment income for the three and six months endedJune 30, 2021 , was primarily due to increased variable investment income and an increase in the invested asset base due to growth in the underlying business volume partially offset by a decline in interest rates. •The decrease in investment related gains (losses), net in the second quarter of 2021 is primarily attributable to an increase in the fair value of credit default derivatives in the second quarter of 2020 due to a significant tightening in credit spreads, compared to an immaterial change in credit spreads during the second quarter of 2021. The increase for the six months endedJune 30, 2021 , is due to a modest increase in the fair value of credit default derivatives during the first six months of 2021, compared to a decrease in the fair value of credit default derivatives during the first six months of 2020 due to the significant widening of credit spreads in the first quarter of 2020. Benefits and expenses •The increase in the loss ratio for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, was primarily due to unfavorable claims experience in the individual mortality line of business, attributed primarily to the COVID-19 pandemic. While the cause of death is not yet available for all claims, the Company estimates that approximately$49 million of excess claims for the six months endedJune 30, 2021 , were attributable to COVID-19 or COVID-19 related factors. Financial Solutions Reinsurance Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 23 $ 20 $ 3$ 46 $ 41 $ 5 Investment income, net of related expenses - - - - 1 (1) Investment related gains (losses), net - - - - - - Other revenues 3 2 1 6 4 2 Total revenues 26 22 4 52 46 6 Benefits and expenses: Claims and other policy benefits 21 17 4 39 37 2 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 1 1 - 1 1 - Other operating expenses - - - 2 1 1 Total benefits and expenses 22 18 4 42 39 3
Income (loss) before income taxes $ 4
-
Income before income taxes was flat for the second quarter of 2021 compared to the same period in 2020. The increase in income before income taxes for the first six months of 2021 is primarily the result of favorable mortality experience on longevity business.
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Europe ,Middle East and Africa Operations 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) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 517 $ 409 $ 108$ 1,034 $ 852 $ 182 Investment income, net of related expenses 74 79 (5) 142 126 16 Investment related gains (losses), net 2 16 (14) 18 10 8 Other revenues 5 3 2 7 4 3 Total revenues 598 507 91 1,201 992 209 Benefits and expenses: Claims and other policy benefits 456 314 142 1,000 701 299 Interest credited 2 16 (14) 1 (1) 2 Policy acquisition costs and other insurance expenses 28 33 (5) 59 64 (5) Other operating expenses 41 30 11 78 67 11 Total benefits and expenses 527 393 134 1,138 831 307
Income before income taxes
(43)
•The decreases in income before income taxes for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, were primarily due to unfavorable mortality experience mainly from the impact of COVID-19. These decreases were partially offset by increases in net premiums. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of$6 million for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Traditional Reinsurance Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 433 $ 352 $ 81$ 871 $ 742$ 129 Investment income, net of related expenses 24 18 6 44 37 7 Investment related gains (losses), net - - - - - - Other revenues 2 1 1 1 (1) 2 Total revenues 459 371 88 916 778 138 Benefits and expenses: Claims and other policy benefits 414 301 113 883 635 248 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 27 32 (5) 56 62 (6) Other operating expenses 30 22 8 57 48 9 Total benefits and expenses 471 355 116 996 745 251
Income (loss) before income taxes
(28) $ (80) $ 33 $ (113)
Key metrics:
Life insurance in force $861.4 billion $772.8 billion
Claims and other policy benefits
as a percentage of net premiums
("loss ratios") 95.6 % 85.5 % 101.4 % 85.6 %
Policy acquisition costs and
other insurance expenses as a
percentage of net premiums 6.2 % 9.1 % 6.4 % 8.4 %
Other operating expenses as a
percentage of net premiums 6.9 % 6.3 % 6.5 % 6.5 %
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Income before income taxes decreased for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020. The decreases were the result of poor mortality experience, primarily due to the impact of COVID-19. The decreases in both periods were partially offset by increases in net premiums. Revenues •The increase in net premiums for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, was 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 insurance in force, of$87.8 billion and$65.1 billion during the second quarter of 2021 and 2020, respectively, and$115.4 billion , and$98.0 billion during the six months endedJune 30, 2021 , and the same period in 2020, respectively. Benefits and expenses •The increase in the loss ratio for the second quarter and first six months of 2021 is due to unfavorable mortality experience primarily attributable to COVID-19. While the cause of death is not available for all claims, the Company estimates that approximately$130 million of excess claims for the six months endedJune 30, 2021 , were attributable to COVID-19 or COVID-19 related factors. •The decrease in the ratio of policy acquisition costs and other insurance expense to net premium in the second quarter and first six months of 2021 is due to an overall increase in premiums and transactions with lower or no acquisition costs. •The increase in other operating expenses for the three and six months endedJune 30, 2021 , was primarily due to an increase in incentive compensation expense. Financial Solutions Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Revenues:
Net premiums$ 84 $ 57 $ 27$ 163 $ 110 $ 53 Investment income, net of related expenses 50 61 (11) 98 89 9 Investment related gains (losses), net 2 16 (14) 18 10 8 Other revenues 3 2 1 6 5 1 Total revenues 139 136 3 285 214 71 Benefits and expenses: Claims and other policy benefits 42 13 29 117 66 51 Interest credited 2 16 (14) 1 (1) 2 Policy acquisition costs and other insurance expenses 1 1 - 3 2 1 Other operating expenses 11 8 3 21 19 2 Total benefits and expenses 56 38 18 142 86 56
Income (loss) before income taxes
(15)
The decrease in income before income taxes for the second quarter of 2021 compared to the same period in 2020 is primarily due to decreases in investment income, net of related expenses and investment related gains (losses), net. The increase in income before income taxes for the first six months of 2021 was primarily due to new business activity and investment related gains on the investments supporting the segment's payout annuity business. Revenues •The increase in net premiums for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020 was primarily due to increased volumes of closed longevity block business. •The decrease in net investment income for the three months ended and increase for six month endedJune 30, 2021 , as compared to the same periods in 2020 was primarily related to decreases and increases in income associated with unit-linked policies which fluctuate with market performance and is offset by a decrease in interest credited. •The decrease and increase in investment related gains (losses), net for the three and six month periods, respectively, was primarily due to fluctuations in the fair market value of CPI swap derivatives due to changes in future inflation expectations. Benefits and expenses •The increase in claims and other policy benefits was the result of increased volumes of closed longevity block business. 55
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•The increase in benefits and expenses was partially offset by a decrease in interest credited primarily attributable to the sale of Leidsche, the Company's subsidiary located inthe Netherlands that issued unit-linked products. Interest credited in this segment relates to amounts credited to the contract holders of unit-linked products. This amount will fluctuate according to contract holder investment selections, equity returns and interest rates. The effect on interest credited related to unit-linked products is substantially offset by a corresponding change in investment income. 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) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 664 $ 638 $ 26$ 1,326 $ 1,348 $ (22) Investment income, net of related expenses 65 48 17 126 92 34 Investment related gains (losses), net 15 15 - 26 (18) 44 Other revenues 13 10 3 30 24 6 Total revenues 757 711 46 1,508 1,446 62 Benefits and expenses: Claims and other policy benefits 620 546 74 1,184 1,163 21 Interest credited 15 11 4 30 24 6 Policy acquisition costs and other insurance expenses 52 39 13 106 102 4 Other operating expenses 51 42 9 100 85 15 Total benefits and expenses 738 638 100 1,420 1,374 46
Income before income taxes
(54)$ 88 $ 72 $ 16 •The decrease in income before income taxes for the three months endedJune 30, 2021 , is primarily due to unfavorable claims experience inAsia compared to the prior period, partially offset by continued growth of Financial Solutions Reinsurance inAsia . The increase in income before income taxes for the first six months is primarily attributable to increases in investment income, net and investment related gains (losses), net partially offset by unfavorable claims experience inAsia compared to the prior period. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in an increase (decrease) in income before income taxes of$(1) million and$1 million for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 56
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Traditional Reinsurance
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Revenues:
Net premiums $ 616 $ 607 $ 9 $ 1,225 $ 1,243 $ (18)
Investment income, net of related
expenses 34 27 7 67 54 13
Investment related gains
(losses), net - - - (1) - (1)
Other revenues 3 2 1 9 6 3
Total revenues 653 636
17 1,300 1,303 (3)
Benefits and expenses: Claims and other policy benefits 578 514 64 1,096 1,069 27 Interest credited - - - - - - Policy acquisition costs and other insurance expenses 41 34 7 84 83 1 Other operating expenses 46 41 5 91 80 11 Total benefits and expenses 665 589 76 1,271 1,232
39
Income (loss) before income taxes
(59) $ 29 $ 71 $ (42)
Key metrics: Life insurance in force$516.1 billion $649.5 billion Claims and other policy benefits as a percentage of net premiums ("loss ratios") 93.8 % 84.7 % 89.5 % 86.0 % Policy acquisition costs and other insurance expenses as a percentage of net premiums 6.7 % 5.6 % 6.9 % 6.7 % Other operating expenses as a percentage of net premiums 7.5 % 6.8 % 7.4 % 6.4 % The decrease in income before income taxes is primarily the result of net unfavorable claims experience inAsia , primarily inIndia . The decrease for the first six months is also the result of year to date decreases in net premiums inAustralia . 57
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Revenues
•The increase in net premiums for the three months endedJune 30, 2021 as compared to the same period in 2020 is primarily the due to new business production partially offset by a reduction in premiums inAustralia . Premiums for the first six months of 2021 was primarily due to premium reductions inAustralia group business as a result of the non-renewal of two large group treaties effectiveJune 30, 2020 . •The segment added new life business production, measured by face amount of insurance in force, of$10.9 billion and$16.6 billion during the second quarter of 2021 and 2020, respectively, and$18.5 billion , and$32.3 billion during the six months endedJune 30, 2021 and 2020, respectively, due to new business production and in force transactions offset by lapses, recaptures and non-renewal of two large group treaties inAustralia . Benefits and expenses •The increases in the loss ratio for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020, were primarily due to unfavorable claims experience inAsia . While the cause of death is not yet available for all claims, the Company estimates that approximately$63 million of claims, of which approximately$57 million were incurred inIndia , for the six months endedJune 30, 2021 , were attributable to COVID-19 or COVID-19 related factors. Financial Solutions Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 2021 vs 2020 2021 2020 2021 vs 2020 Revenues: Net premiums$ 48 $ 31 $ 17$ 101 $ 105 $ (4) Investment income, net of related expenses 31 21 10 59 38 21 Investment related gains (losses), net 15 15 - 27 (18) 45 Other revenues 10 8 2 21 18 3 Total revenues 104 75 29 208 143 65 Benefits and expenses: Claims and other policy benefits 42 32 10 88 94 (6) Interest credited 15 11 4 30 24 6 Policy acquisition costs and other insurance expenses 11 5 6 22 19 3 Other operating expenses 5 1 4 9 5 4 Total benefits and expenses 73 49 24 149 142 7
Income (loss) before income taxes
5
The increase in income before income taxes for the second quarter was primarily due to continued growth in the business. The increase in income before income taxes for the first six months of 2021 was due to favorable fluctuations in the fair value of derivatives and continued growth and favorable experience on existing asset-intensive business inAsia . The amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was$1.6 billion and$3.2 billion for the six months endedJune 30, 2021 and 2020, respectively. Fees earned from this business can vary significantly depending on the size, complexity and timing of the transactions and, therefore, can fluctuate from period to period. Revenues •The increase in net premiums for the second quarter is attributable to a higher contribution from single premium asset-intensive transactions in the three months endedJune 30, 2021 , as compared to the same period in 2020. •The increase in investment related gains (losses), net for the six month period endedJune 30, 2021 , is primarily due to favorable fluctuations in the fair value of credit default and CPI swap derivatives due to tightening credit spreads and higher future inflation expectations. Benefits and expenses •The increase in claims and other policy benefits in the second quarter is the result of an increase in reserves from single premium asset-intensive transactions in the three months endedJune 30, 2021 , as compared to the same period in 2020. 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, 58
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interest expense related to debt, and the investment income and expense
associated with the Company's collateral finance and securitization transactions
and service business expenses. Additionally, Corporate and Other includes
results from certain wholly-owned subsidiaries, such as RGAX, and joint ventures
that, among other activities, develop and market technology, and provide
consulting and outsourcing solutions for the insurance and reinsurance
industries. The Company has increased its investment and expenditures in this
area in an effort to both support its clients and accelerate the development of
new solutions and services to increase consumer engagement within the life
insurance industry and hence generate new future revenue streams.
(dollars in millions) Three months ended June 30, Six months ended June 30,
2021 2020 2021 vs 2020 2021 2020 2021 vs 2020
Revenues:
Net premiums $ - $ - $ - $ - $ - $ -
Investment income, net of related
expenses 48 48 - 206 106 100
Investment related gains (losses),
net 64 22 42 337 (45) 382
Other revenues 29 20 9 39 21 18
Total revenues 141 90 51 582 82 500
Benefits and expenses:
Claims and other policy benefits - - - - - -
Interest credited 1 3 (2) 2 5 (3)
Policy acquisition costs and other
insurance income (26) (29) 3 (54) (57) 3
Other operating expenses 86 69 17 156 131 25
Interest expense 43 42 1 88 83 5
Collateral finance and
securitization expense 2 4 (2) 5 10 (5)
Total benefits and expenses 106 89 17 197 172 25
Income (loss) before income taxes
The increase in income before income taxes for the three and six month periods endedJune 30, 2021 , is primarily due to an increase in total revenues and partially offset by an increase in other operating expenses. •The increase in net investment income for the first six months of 2021 includes a reclassification of approximately$92 million of pre-tax unrealized gains on certain limited partnerships, for which the Company uses the equity method of accounting, from AOCI to net investment income. 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. •The increase in investment related gains (losses), net for the three and six months endedJune 30, 2021 , includes$27 million and$131 million , respectively, of changes in the carrying value of investments in limited partnerships considered to be investment companies.$70 million of the changes in the carrying value recognized in the first quarter relates to an adjustment to the carrying value from cost less impairments to a fair value approach, using the net asset value ("NAV") per share or its equivalent, which should have been recognized in prior periods. The remaining increase for the three and six months endedJune 30, 2021 , is attributable to gains on sales of fixed maturity securities, a decrease in the allowance for credit losses on mortgage loans as a result of assumption updates due to the improving view of the impact of the COVID-19 pandemic, and changes in the fair value of derivatives and equity securities. •The increase in other operating expenses for the three and six months endedJune 30, 2021 , was primarily due to an increase 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 events and higher than expected claims associated with the pandemic. Given the uncertainty associated with the COVID-19 pandemic and the related volatility in the financial markets, the Company continues to maintain a higher cash and cash equivalent balance than its historical balances. 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, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing 59
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of the liquidity need. These alternatives include borrowings under committed credit facilities, secured borrowings, the ability to issue long-term debt, preferred securities or common equity and, the sale of invested assets subject to market conditions. Current Market Environment The Company's average investment yield, excluding spread business, for the six months endedJune 30, 2021 , was 5.15%, 108 basis points higher compared to the same period in 2020. The increase in average yield is primarily attributable to the aforementioned accounting correction associated with equity method limited partnerships and an increase in the average invested asset base and overall yield, primarily attributable to an increase in variable investment income in the current year. However, the current interest rate environment continues to put downward pressure on the Company's investment yield. The Company's insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Gross unrealized gains on fixed maturity securities available-for-sale decreased from$7.4 billion atDecember 31, 2020 , to$5.8 billion atJune 30, 2021 . Similarly, gross unrealized losses increased from$197 million atDecember 31, 2020 , to$267 million atJune 30, 2021 . The Company continues to be in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer. As indicated above, gross unrealized gains on fixed maturity securities of$5.8 billion remain well in excess of gross unrealized losses of$267 million as ofJune 30, 2021 . The Company does not rely on short-term funding or commercial paper and to date has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future. The Company projects its reserves to be sufficient, and it would not expect to write down deferred acquisition costs or be required to take any actions to augment capital, even if interest rates remain at current levels for the next five years, assuming all other factors remain constant. While the Company has felt the pressures of sustained low interest rates and volatile equity markets and may continue to do so, its business and results of operations are not overly sensitive to these risks. Mortality and morbidity risks continue to be the most significant risk for the Company. Although management believes the Company's current capital base is adequate to support its business at current operating levels, it continues to monitor new business opportunities and any associated new capital needs that could arise from the changing financial landscape.The Holding Company RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness. The primary sources of RGA's liquidity include proceeds from its capital-raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes withRGA Reinsurance , RCM and 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, 2021 2020 2021 2020 Interest and dividend income $ 32$ 183 $ 64$ 408 Interest expense 51 50 103 100 Capital contributions to subsidiaries 3 18 7 33 Issuance of unaffiliated debt - 598 - 598 Dividends to shareholders 47 43 95 87 Issuance of common stock, net of expenses - 481 - 481 Purchase of treasury stock 2 - 2 153 June 30, 2021 December 31, 2020 Cash and invested assets $ 611 $ 1,308 See Item 15, Schedule II - "Condensed Financial Information of the Registrant" in the 2020 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 2020 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. RGA's current share repurchase program, which was approved by the board of directors inJanuary 2019 , authorizes the repurchase of up to$400 million of common stock. OnAugust 3, 2021 , the Company announced the lifting of the existing suspension on share repurchases. The pace of repurchase activity depends on 60
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various factors such as the level of available cash, an evaluation of the costs and benefits associated with alternative uses of excess capital, such as acquisitions and in force reinsurance transactions, and RGA's stock price. Details underlying dividend and share repurchase program activity were as follows (in millions, except share data):
Six months ended June 30,
2021 2020
Dividends to shareholders $ 95 $ 87
Purchase of treasury stock (1) - 153
Total amount paid to shareholders $ 95 $ 240
Number of treasury shares purchased (1) - 1,074,413 Average price per share $ -$ 142.05 (1) Excludes shares utilized to execute and settle certain stock incentive awards. OnJune 5, 2020 , the Company completed a public offering of 6,172,840 shares of common stock,$0.01 par value per share, at a public offering price of$81.00 per share. The Company received net proceeds of approximately$481 million . The Company granted the underwriters an option to purchase from the Company, within 30 days after the underwriting Agreement datedJune 2, 2020 , up to an additional 925,926 shares of common stock at the offering price of$81.00 per share. The underwriters' option was not exercised and expired onJuly 2, 2020 . The Company utilized the net proceeds of the offering for general corporate purposes. InJuly 2021 , RGA's board of directors declared a quarterly dividend of$0.73 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, 2021 andDecember 31, 2020 , the Company had$3.2 billion and$3.6 billion , respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As ofJune 30, 2021 andDecember 31, 2020 , the average net interest rate on long-term debt outstanding was 4.48% and 4.54%, respectively. 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. OnJune 9, 2020 , RGA issued 3.15% Senior Notes dueJune 15, 2030 , with a face amount of$600 million . This security has been registered with theSecurities and Exchange Commission . The net proceeds were approximately$593 million and were used in part to repay the Company's$400 million 5.000% senior notes due in the second quarter of 2021, and the remainder was used for general corporate purposes. Capitalized issue costs were approximately$5 million . The Company enters into derivative agreements with counterparties that reference either the Company's debt rating or its financial strength rating. If either rating is downgraded in the future, it could trigger certain terms in the Company's derivative agreements, which could negatively affect overall liquidity. For the majority of the Company's derivative agreements, there is a termination event should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody's) or the financial strength ratings drop below eitherA- (S&P) or A3 (Moody's). The Company may borrow up to$850 million in cash and obtain letters of credit in multiple currencies on its revolving credit facility that matures inAugust 2023 . As ofJune 30, 2021 , the Company had no cash borrowings outstanding and$21 million in issued, but undrawn, letters of credit under this facility. 61
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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, 2021 , the Company maintained an$850 million syndicated revolving credit facility and certain committed letter of credit facilities aggregating to$1.1 billion . See Note 13 - "Debt" in the Notes to Consolidated Financial Statements in the 2020 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, 2021 , there were approximately$23 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, 2021 ,$1.5 billion in letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the Company. Cash Flows The Company's principal cash inflows from its reinsurance operations include premiums and deposit funds received from ceding companies. The primary liquidity concerns with respect to these cash flows are early recapture of the reinsurance contract by the ceding company and lapses of annuity products reinsured by the Company. The Company's principal cash inflows from its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concerns with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. The Company manages these risks very closely. See "Investments" and "Interest Rate Risk" below. Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash and equivalents on hand also includes drawing funds under a revolving credit facility, under which the Company had availability of$829 million as ofJune 30, 2021 . The Company also has$419 million of funds available through collateralized borrowings from the FHLB as ofJune 30, 2021 . As ofJune 30, 2021 , the Company could have borrowed these additional amounts without violating any of its existing debt covenants. The Company's principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, dividends to shareholders, purchases of treasury stock and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements in the 2020 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. 62
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Summary of Primary Sources and Uses of Liquidity and Capital
For the six months ended June 30,
2021 2020
(Dollars in millions)
Sources:
Net cash provided by operating activities $ 2,330 $ 2,579
Proceeds from issuance of common stock, net - 481
Proceeds from long-term debt issuance - 598
Exercise of stock options, net - 1
Change in cash collateral for derivative positions and other
arrangements 184 93
Cash provided by changes in universal life and other
investment type policies and contracts 79 575
Total sources 2,593 4,327
Uses:
Net cash used in investing activities 2,173 1,024
Dividends to stockholders 95 87
Repayment of collateral finance and securitization notes 65 160
Debt issuance costs - 5
Principal payments of long-term debt 401 1
Purchases of treasury stock 2 162
Effect of exchange rate changes on cash 11 24
Total uses 2,747 1,463
Net change in cash and cash equivalents $ (154) $ 2,864
Cash Flows from Operations - The principal cash inflows from the Company's
reinsurance activities come from premiums, investment and fee income, annuity
considerations and deposit funds. The principal cash outflows relate to the
liabilities associated with various life and health insurance, annuity and
disability products, operating expenses, income tax payments and interest on
outstanding debt obligations. The primary liquidity concern with respect to
these cash flows is the risk of shortfalls in premiums and investment income,
particularly in periods with abnormally high claims levels.
Cash Flows from Investments - The principal cash inflows from the Company's
investment activities come from repayments of principal on invested assets,
proceeds from maturities of invested assets, sales of invested assets and
settlements of freestanding derivatives. The principal cash outflows relate to
purchases of investments, issuances of policy loans and settlements of
freestanding derivatives. The Company typically has a net cash outflow from
investing activities because cash inflows from insurance operations are
reinvested in accordance with its asset/liability management discipline to fund
insurance liabilities. The Company closely monitors and manages these risks
through its credit risk management process. The primary liquidity concerns with
respect to these cash flows are the risk of default by debtors and market
disruption, 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 2020 Annual Report, except for the following:
•The Company's contractual obligations associated with interest sensitive
liabilities increased from $37.1 billion at December 2020 to $41.7 billion as of
June 30, 2021 , primarily due to a large asset-intensive transaction completed in
the second quarter. The majority of the payments due under these commitments are
expected to occur beyond five years.
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•The Company's contractual obligations associated with limited partnerships and other investment related commitments increased from$1.1 billion atDecember 2020 to$1.8 billion as ofJune 30, 2021 , primarily due to an increase in new investment opportunities in the current period. The majority of the payments due under these commitments are expected to occur within the next twelve months. 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$3.4 billion and$3.6 billion atJune 30, 2021 andDecember 31, 2020 , respectively. Given the uncertainty associated with the COVID-19 pandemic and the related volatility in the financial markets, the Company has increased its liquidity position. Liquidity needs are determined from valuation analyses conducted by operational units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs. See "Securities Borrowing, Lending and Other" in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for information related to the Company's securities borrowing, lending and repurchase/reverse repurchase programs. In addition to its security agreements with third parties, certain RGA's subsidiaries have entered into intercompany securities lending agreements to more efficiently source securities for lending to third parties and to provide for more efficient regulatory capital management. The Company is a member of the FHLB and holds$84 million of FHLB common stock, 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$1.8 billion atJune 30, 2021 andDecember 31, 2020 , 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. 64
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Investments
Management of Investments The Company's investment and derivative strategies involve matching the characteristics of its reinsurance products and other obligations and to seek to closely approximate the interest rate sensitivity of the assets with estimated interest rate sensitivity of the reinsurance liabilities. The Company achieves its income objectives through strategic and tactical asset allocations, security and derivative strategies within an asset/liability management and disciplined risk management framework. Derivative strategies are employed within the Company's risk management framework to help manage duration, currency, and other risks in assets and/or liabilities and to replicate the credit characteristics of certain assets. 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. Effects of COVID-19 Credit markets continued to recover during the first six months of 2021 following the disruption in the global financial markets caused by the COVID-19 pandemic. The Company has exposure to some of the asset classes and industries most affected by the COVID-19 pandemic such as commercial mortgage loans, emerging market debt, energy, and airlines; however, the Company's primary exposure in these asset classes is of high quality assets. The Company continues to monitor and evaluate the impact of the COVID-19 pandemic on its investment portfolio and is working closely with its borrowers to evaluate any short-term cash flow issues. Portfolio Composition The Company had total cash and invested assets of$79.6 billion and$75.8 billion as ofJune 30, 2021 andDecember 31, 2020 , respectively, as illustrated below (dollars in millions): December 31, June 30, 2021 % of Total 2020 % of Total Fixed maturity securities, available-for-sale$ 58,287 73.2 %$ 56,735 74.8 % Equity securities 147 0.2 132 0.2 Mortgage loans on real estate 6,481 8.1 5,787 7.6 Policy loans 1,254 1.6 1,258 1.7 Funds withheld at interest 7,049 8.9 5,432 7.2 Short-term investments 184 0.2 227 0.3 Other invested assets 2,924 3.7 2,829 3.7 Cash and cash equivalents 3,254 4.1 3,408 4.5 Total cash and invested assets$ 79,580 100.0 %$ 75,808 100.0 % 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/ 2021 2020 (Decrease) 2021 2020 (Decrease) Average invested assets at amortized cost$ 33,587 $ 30,420
$ 383 $ 305 $ 78$ 846 $ 604 $ 242 Annualized investment yield (ratio of net investment income to average invested assets at amortized cost) 4.64 % 4.07 % 57 bps 5.15 % 4.07 % 108 bps VII (included in net investment income)$ 78 $ 16 $ 62$ 240 $ 19 $ 221 Annualized investment yield excluding VII (ratio of net investment income, excluding VII, to average invested assets, excluding assets with only VII, at amortized cost) 3.84 % 3.99 % (15) bps 3.82 % 4.09 % (27) bps 65
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Investment yield increased for the three and six months endedJune 30, 2021 , in comparison to the same periods in the prior year, primarily due to increased variable income from limited partnerships and real estate joint ventures, which are included in other invested assets on the condensed consolidated balance sheets. Investment yield excluding variable investment income decreased for the three and six months endedJune 30, 2021 , in comparison to the same periods in the prior year, primarily due to the continued low interest rate environment. Fixed Maturity Securities Available-for-Sale See "Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to 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, 2021 andDecember 31, 2020 . The Company holds various types of fixed maturity securities available-for-sale and classifies them as corporate securities ("Corporate"), Canadian and Canadian provincial government securities ("Canadian government"), residential mortgage-backed securities ("RMBS"), asset-backed securities ("ABS"), commercial mortgage-backed securities ("CMBS"),U.S. government and agencies ("U.S. government"), state and political subdivisions, and other foreign government, supranational and foreign government-sponsored enterprises ("Other foreign government"). RMBS, ABS, and CMBS are collectively "structured securities." As ofJune 30, 2021 andDecember 31, 2020 , approximately 93.9% 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 5.2% and 5.6% of the total fixed maturity securities as ofJune 30, 2021 andDecember 31, 2020 , respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to fluctuations in interest payments. The 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 63.4% and 63.9% of total fixed maturity securities as ofJune 30, 2021 andDecember 31, 2020 , respectively. 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, 2021 andDecember 31, 2020 . As ofJune 30, 2021 , the Company's investments in Canadian government securities represented 8.4% of the fair value of total fixed maturity securities compared to 9.1% of the fair value of total fixed maturities as ofDecember 31, 2020 . These assets are primarily high quality, long duration provincial strip bonds, the valuation of which is closely linked to the interest rate curve. These assets are longer in duration and held primarily for asset/liability management to meet Canadian regulatory requirements. The Company references rating agency designations in some of its investments disclosures. These designations are based on the ratings from nationally recognized statistical rating organizations, primarily Moody's, S&P and Fitch. Structured securities held by the Company's insurance subsidiaries that maintain the NAIC statutory basis of accounting utilize the NAIC rating methodology. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency designation). NAIC designations in classes 3 through 6 are generally considered below investment grade (BB or lower rating agency designation). The quality of the Company's available-for-sale fixed maturity securities portfolio, as measured at fair value and by the percentage of fixed maturity securities invested in various ratings categories, relative to the entire available-for-sale fixed maturity securities portfolio, as ofJune 30, 2021 andDecember 31, 2020 was as follows (dollars in millions): June 30, 2021 December 31, 2020 NAIC Rating Agency Amortized Estimated Amortized Estimated Designation Designation Cost Fair Value % of Total Cost Fair Value % of Total 1 AAA/AA/A$ 31,394 $ 34,862 59.8 %$ 29,770 $ 34,589 60.9 % 2 BBB 17,948 19,896 34.1 16,440 18,751 33.1 3 BB 2,575 2,683 4.6 2,480 2,588 4.6 4 B 686 678 1.2 713 697 1.2 5 CCC and lower 179 159 0.3 131 102 0.2 6 In or near default 15 9 - 14 8 - Total$ 52,797 $ 58,287 100.0 %$ 49,548 $ 56,735 100.0 % 66
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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, 2021 December 31, 2020
Estimated Estimated
Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total
RMBS:
Agency $ 623 $ 667 9.9 % $ 686 $ 744 11.0 %
Non-agency 700 710 10.5 1,049 1,073 15.8
Total RMBS 1,323 1,377 20.4 1,735 1,817 26.8
ABS:
Collateralized loan obligations
("CLOs") 1,722 1,720 25.6 1,707 1,689 24.9
ABS, excluding CLOs 1,745 1,762 26.2 1,392 1,403 20.7
Total ABS 3,467 3,482 51.8 3,099 3,092 45.6
CMBS 1,774 1,869 27.8 1,790 1,868 27.6
Total $ 6,564 $ 6,728 100.0 % $ 6,624 $ 6,777 100.0 %
The Company's RMBS portfolio includes agency-issued pass-through securities and
collateralized mortgage obligations. Agency-issued pass-through securities are
guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association, or 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, single-family rentals,
container leasing, railcar leasing, aircraft and student loans. The principal
risks in holding ABS are structural, credit, capital market and interest rate
risks. Structural risks include the securities' cash flow priority in the
capital structure and the inherent prepayment sensitivity of the underlying
collateral. Credit risks include the adequacy and ability to realize proceeds
from the collateral. Credit risks are mitigated by credit enhancements that
include excess spread, over-collateralization and subordination. Capital market
risks include general level of interest rates and the liquidity for these
securities in the marketplace.
The Company's CMBS portfolio primarily consists of large pool securitizations
that are diverse by property type, borrower and geographic dispersion. The
principal risks in holding CMBS are structural and credit risks. Structural
risks include the securities' cash flow priority in the capital structure and
the inherent prepayment sensitivity of the underlying collateral. Credit risks
include the adequacy and ability to realize proceeds from the collateral. The
Company focuses on investment grade rated tranches that provide additional
credit support beyond the equity protection in the underlying loans. These
assets are viewed as an attractive alternative to other fixed income asset
classes.
As of June 30, 2021 and December 31, 2020 , the Company had $267 million and $197
million , respectively, of gross unrealized losses related to its fixed maturity
securities. The Company monitors its fixed maturity securities to determine
impairments in value and evaluates factors such as financial condition of the
issuer, payment performance, compliance with covenants, general market and
industry sector conditions, current intent and ability to hold securities, and
various other subjective factors. Based on management's judgment, securities
determined to have expected credit losses will record an allowance for credit
losses in the amount that the fair value is less than the amortized cost.
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Mortgage Loans on Real Estate The Company's mortgage loan portfolio consists ofU.S. ,Canada andUK based investments primarily in commercial offices, light industrial properties and retail locations. The mortgage loan portfolio is diversified by geographic region and property type as discussed further under "Mortgage Loans on Real Estate" in Note 4 - "Investments" in the Notes to 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, 2021 , totaling approximately$9 million . For the six months endedJune 30, 2021 , the Company decreased its allowance for credit losses on its commercial mortgage loan portfolio by approximately$19 million to reflect the updated outlook from the COVID-19 pandemic. The Company continues to monitor and evaluate the impact of the COVID-19 pandemic on its investment portfolio and is working closely with its borrowers to evaluate any short-term cash flow issues. For the six months endedJune 30, 2021 , the Company modified the payment terms of one commercial mortgage loan, with a carrying value of approximately$10 million in response to COVID-19. For the year endedDecember 31, 2020 , the Company modified the payments terms of approximately 52 commercial mortgage loans, with a carrying value of approximately$660 million in response to COVID-19. These loans met the criteria established in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and were not considered a troubled debt restructuring. In accordance with the CARES Act criteria, these loans were not more than 30 days past due atDecember 31, 2019 , and the modifications included deferral or delayed payments of principal or interest on the loan. As ofJune 30, 2021 andDecember 31, 2020 , the Company's recorded investment in mortgage loans, gross of unamortized deferred loan origination fees and expenses and allowance for credit losses, were distributed geographically as follows (dollars in millions): June 30, 2021 December 31, 2020 Recorded Recorded Investment % of Total Investment % of TotalU.S. Region : West$ 2,361 36.1 % $ 2,253 38.5 % South 2,235 34.2 2,040 34.8 Midwest 1,204 18.4 1,027 17.5 Northeast 410 6.3 277 4.7 Subtotal - U.S. 6,210 95.0 5,597 95.5 Canada 208 3.2 188 3.2 United Kingdom 117 1.8 76 1.3 Other 2 - - - Total$ 6,537 100.0 % $ 5,861 100.0 % See "Allowance for Credit Losses and Impairments" in Note 2 - "Significant Accounting Policies and Pronouncements" of the Company's 2020 Annual Report for information regarding the Company's policy for allowance for credit losses and impairments on mortgage loans. See "Mortgage Loans on Real Estate" in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for information regarding allowance for credit losses and impairments. Impairments and Allowance for Credit LossesThe 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 2020 Annual Report for additional information. The table below summarizes investment related (gains) losses, net, for impairments and changes in allowance for credit losses on fixed maturity securities, other impairment losses and changes in the mortgage loan allowance for credit losses for the three and six months endedJune 30, 2021 and 2020 (dollars in millions). Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Impairments and change in allowance for credit losses on fixed maturity securities $ (5) $ - $ (3)$ 34 Other impairment losses and changes in provision (1) 5 (2) 5 Change in mortgage loan allowance for credit losses (2) 17 (19) 30 Total $ (8)$ 22 $ (24)$ 69 68
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The decrease in mortgage loan allowance for credit losses for the six months endedJune 30, 2021 , was primarily due to the updated outlook from the COVID-19 pandemic. The impairments and change in allowance for credit losses on fixed maturity securities for the six months endedJune 30, 2020 , were primarily related to high-yield securities as a result of the uncertainty in the global markets due to the COVID-19 pandemic. In addition, the increase in mortgage loan allowance for credit losses for the six months endedJune 30, 2020 , was primarily due to the estimated impact from the COVID-19 pandemic. See "Unrealized Losses for Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to 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, 2021 andDecember 31, 2020 . As ofJune 30, 2021 andDecember 31, 2020 , the Company classified approximately 6.7% and 5.9%, respectively, of its fixed maturity securities in the Level 3 category (refer to Note 6 - "Fair Value of Assets and Liabilities" in the Notes to Condensed Consolidated Financial Statements for additional information). These securities primarily consist of private placement corporate securities, bank loans, and Canadian provincial strip bonds with inactive trading markets. See "Securities Borrowing, Lending and 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 programs. Policy Loans The majority of policy loans are associated with one client. These policy loans present no credit risk because the amount of the loan cannot exceed the obligation due to the ceding company upon the death of the insured or surrender of the underlying policy. The provisions of the treaties in force and the underlying policies determine the policy loan interest rates. The Company earns a spread between the interest rate earned on policy loans and the interest rate credited to corresponding liabilities. Funds Withheld at Interest 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, 2021 andDecember 31, 2020 . 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, fair value option ("FVO") contractholder-directed unit-linked investments and FHLB common stock. See "Other Invested Assets" in Note 4 - "Investments" in the Notes to Condensed Consolidated Financial Statements for a table that presents the carrying value of the Company's other invested assets by type as ofJune 30, 2021 andDecember 31, 2020 . The Company utilizes derivative financial instruments to protect the Company against possible changes in the fair value of its investment portfolio as a result of interest rate changes, to hedge against risk of changes in the purchase price of securities, to hedge liabilities associated with the reinsurance of variable annuities with guaranteed living benefits and to manage the portfolio's effective yield, maturity and duration. In addition, the Company utilizes derivative financial instruments to reduce the risk associated with fluctuations in foreign currency exchange rates. The Company uses exchange-traded, centrally cleared, and customized over-the-counter derivative financial instruments. See Note 5 - "Derivative Instruments" in the Notes to Condensed Consolidated Financial Statements for a table that presents the notional amounts and fair value of investment related derivative instruments held as ofJune 30, 2021 andDecember 31, 2020 . 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, 2021 , the Company had credit exposure of$18 million . 69
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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$958 million and$935 million , of lifetime mortgages, net of allowance for credit losses, as ofJune 30, 2021 andDecember 31, 2020 , respectively, in beneficial interests in lifetime mortgages in theUK . Investment income includes$13 million and$10 million in interest income earned on lifetime mortgages for the three months endedJune 30, 2021 and 2020, respectively, and$26 million and$20 million in interest income earned on lifetime mortgages for the six months endedJune 30, 2021 and 2020, respectively. Lifetime mortgages represent loans provided to individuals 55 years of age and older secured by the borrower's residence. Lifetime mortgages are comparable to a home equity loan by allowing the borrower to utilize the equity in their home as collateral. The amount of the loan is dependent on the appraised value of the home at the time of origination, the borrower's age and interest rate. Unlike a home equity loan, no payment of principal or interest is required until the death of the borrower or sale of the home. Lifetime mortgages may also be either fully funded at origination, or the borrower can request periodic funding similar to a line of credit. Lifetime mortgages are subject to risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. New Accounting Standards See Note 14 - "New Accounting Standards" in the Notes to Condensed Consolidated Financial Statements.
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