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. 37
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Overview
The Company is among the leading global providers of life reinsurance and financial solutions, with$3.4 trillion of life reinsurance in force and assets of$84.8 billion as ofMarch 31, 2021 . Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, capital solutions, including financial reinsurance and stable value products. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets. 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. 38
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Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the condensed consolidated financial statements could change significantly. Management believes the critical accounting policies relating to the following areas are most dependent on the application of estimates and assumptions:
Premiums receivable;
Deferred acquisition costs;
Liabilities for future policy benefits and incurred but not reported claims;
Valuation of investments and impairments to specific investments;
Valuation of embedded derivatives; and
Income taxes. A discussion of each of the critical accounting policies may be found in the Company's 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, clients' ability to write new business in this environment may result in a slowdown in the Company's new business temporarily; however, much of the Company's premiums and other revenues are contractually recurring for many years to come. 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. Although it varies from country to country, the overall financial impact of COVID-19 on the Company is currently projected to be within the range of previous estimates for the same level of general population deaths as there continues to be significant differences between general and insured population mortality. TheU.S. is the key driver of mortality claim costs followed by theUK ,Canada andSouth Africa . For the three month period endedMarch 31, 2021 , the Company estimates it has incurred approximately$485 million of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$358 million of that amount being associated with theU.S. and Latin America Traditional segment. 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: •$15 million to$25 million in theU.S. ; •$4 million to$6 million in theUK ; and •$10 million to$15 million inCanada . While the global financial markets 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 39
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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. For the three months endedMarch 31 , (Dollars in millions, except per share data) 2021 2020 2021 vs 2020
Revenues:
Net premiums$ 2,914 $ 2,819 $ 95 Investment income, net of related expenses 812 594 218
Investment related gains (losses), net: Impairments and change in allowance for credit losses on fixed maturity securities
(2) (34) 32 Other investment related gains (losses), net 304 (251) 555 Total investment related gains (losses), net 302 (285) 587 Other revenues 91 76 15 Total revenues 4,119 3,204 915 Benefits and Expenses: Claims and other policy benefits 3,192 2,664 528 Interest credited 146 146 - Policy acquisition costs and other insurance expenses 333 248 85 Other operating expenses 214 195 19 Interest expense 45 41 4 Collateral finance and securitization expense 3 6 (3) Total benefits and expenses 3,933 3,300 633 Income (loss) before income taxes 186 (96) 282 Provision for income taxes 47 (8) 55 Net income (loss)$ 139 $ (88) $ 227 Earnings per share: Basic earnings per share$ 2.04 $ (1.41) $ 3.45 Diluted earnings per share $
2.03
The increase in income for the three months endedMarch 31, 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 40
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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. •$144 million, pretax, of capital gains included in other investment related gains (losses), net associated with portfolio repositioning. •Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, increased investment related gains by$50 million for the three month period endedMarch 31 2021 , compared to a decrease of$230 million for the three month period endedMarch 31, 2020 . •The increases in investment income and investment related gains (losses), net were partially offset by unfavorable mortality claims, primarily in theU.S. andLatin America and EMEA segments. •As discussed in the "Impacts of the COVID-19 Pandemic" above, the Company estimates it has incurred approximately$485 million , pretax, of COVID-19 related life and health claim costs, including amounts incurred but not reported, with approximately$358 million , pretax, in theU.S. andLatin America segment. Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency exchange fluctuation did not have a material impact on income before taxes for the three months endedMarch 31, 2021 . Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Premiums and business growth The increase in premiums is primarily due to growth in life reinsurance in force. Consolidated assumed life insurance in force increased to$3,428.6 billion as ofMarch 31, 2021 , from$3,412.4 billion as ofMarch 31, 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 result of the ongoing COVID-19 pandemic. The Company added new business production, measured by face amount of insurance in force, of$77.9 billion , and$94.8 billion during the three months endedMarch 31, 2021 and 2020, respectively. Investment income, net of related expenses and investment related gains and losses The increase in investment income, net of related expenses is primarily attributable to the aforementioned accounting correction associated with equity method limited partnerships, in addition to an increase in the average invested asset base and yield: •The average invested assets at amortized cost, excluding spread related business, totaled$33.4 billion and$29.7 billion in 2021 and 2020, respectively. •The average yield earned on investments, excluding spread related business, was 5.67% and 4.08% for the three-month periods endedMarch 31, 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, the timing of dividends and distributions on certain investments. Investment income is allocated to the operating segments based upon average assets and related capital levels deemed appropriate to support segment operations. The increase in investment related gains (losses) is primarily attributable to the following: •During the three months endedMarch 31, 2021 , the Company incurred$2 million of impairments and change in allowance for credit losses on fixed maturities compared to$34 million during the first three months of 2020. •Changes in the fair value of embedded derivatives, associated with modco/funds withheld treaties, increased investment related gains (losses) by$50 million for the three month period endedMarch 31 2021 , compared to a decrease of$230 million for the three month period endedMarch 31, 2020 . •During the three months endedMarch 31, 2021 , the Company repositioned its portfolio generating capital gains of$144 million . •Unrealized gains of$104 million , including the previously mentioned correction of$70 million due to the change in fair value of certain cost method limited partnerships were recognized during the first three months of 2021. 41
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The effective tax rate on a consolidated basis was 25.3% and 8.9% for the three months endedMarch 31, 2021 and 2020, respectively. See Note 9 - "Income Tax" in the Notes to Consolidated Financial Statements for additional information on the Company's consolidated effective tax rate. Impact of certain derivatives The Company recognizes in consolidated income, any changes in the fair value of embedded derivatives on modco or funds withheld treaties, equity index annuities ("EIAs") and variable annuities with guaranteed minimum benefit riders. The Company utilizes freestanding derivatives to minimize the income statement volatility due to changes in the fair value of embedded derivatives associated with guaranteed minimum benefit riders. The following table presents the effect of embedded derivatives and related freestanding derivatives on income before income taxes for the periods indicated (dollars in millions):
Three months ended
2021 2020 2021 vs. 2020Modco /Funds withheld: Unrealized gains (losses)$ 50 $ (230) $ 280 Deferred acquisition costs/retrocession (17) 113 (130) Net effect 33 (117) 150 EIAs: Unrealized gains (losses) 29 (12) 41 Deferred acquisition costs/retrocession (15) 8 (23) Net effect 14 (4) 18 Guaranteed minimum benefit riders: Unrealized gains (losses) 19 (128) 147 Related freestanding derivatives, net of deferred acquisition costs costs/retrocession (54) 164 (218) Net effect (35) 36 (71) Total net effect after freestanding derivatives$ 12 $ (85) $ 97 42
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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: For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020
Revenues:
Net premiums$ 1,432 $ 1,385 $ 47 Investment income, net of related expenses 465 395 70 Investment related gains (losses), net - (167) 167 Other revenues 58 59 (1) Total revenues 1,955 1,672 283 Benefits and expenses: Claims and other policy benefits 1,800 1,420 380 Interest credited 131 148 (17) Policy acquisition costs and other insurance expenses 231 137 94 Other operating expenses 48 44 4 Total benefits and expenses 2,210 1,749 461 Income (loss) before income taxes$ (255)
The increase in loss before income taxes was the result of a significant increase in claims and other policy benefits in theU.S. Traditional segment. Partially offsetting the increase in losses was the impact of embedded derivatives inU.S. Financial Solutions as well as higher variable investment income, primarily generated from unrealized gains in theU.S. Traditional segment's investments in limited partnerships. The significant increase in claims was primarily related to an increase in large and non-large claim frequency within the individual mortality business. 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. 43
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Traditional Reinsurance For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 1,419 $ 1,373 $ 46 Investment income, net of related expenses 207 161 46 Investment related gains (losses), net 6 (7) 13 Other revenues 5 6 (1) Total revenues 1,637 1,533 104 Benefits and expenses: Claims and other policy benefits 1,740 1,367 373 Interest credited 17 19 (2) Policy acquisition costs and other insurance expenses 182 175 7 Other operating expenses 36 34 2 Total benefits and expenses 1,975 1,595 380 Income (loss) before income taxes $
(338) $ (62)
$1,610.2
billion
122.6 % 99.6 %
Policy acquisition costs and other insurance expenses as a percentage of net premiums
12.8 % 12.7 % Other operating expenses as a percentage of net premiums 2.5 % 2.5 % The increase in loss before income taxes for theU.S. andLatin America Traditional segment was primarily due to unfavorable claims experience within the Individual Mortality business. Revenues •The increase in net premiums was primarily due to organic growth as well as new sales. The segment added new life business production, measured by face amount of insurance in force, of$28.5 billion and$34.0 billion during the three months endedMarch 31, 2021 and 2020, respectively. •The increase in net investment income 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. Benefits and expenses •The increase in the loss ratio for the three months endedMarch 31, 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 primarily 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$358 million of excess claims for the three months endedMarch 31, 2021 , were attributable to COVID-19. 44
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Financial Solutions For the three months ended March 31, 2021 2020 2021 vs 2020 Capital Capital Capital Asset-Intensive Solutions Total Asset-Intensive Solutions Total Asset-Intensive Solutions Total
(dollars in millions) Revenues: Net premiums $ 13 $ -$ 13 $ 12 $ -$ 12 $ 1 $ -$ 1 Investment income, net of related expenses 257 1 258 233 1 234 24 - 24 Investment related gains (losses), net (6) - (6) (160) - (160) 154 - 154 Other revenues 26 27 53 28 25 53 (2) 2 - Total revenues 290 28 318 113 26 139 177 2 179 Benefits and expenses: Claims and other policy benefits 60 - 60 53 - 53 7 - 7 Interest credited 114 - 114 129 - 129 (15) - (15) Policy acquisition costs and other insurance expenses 47 2 49 (38) - (38) 85 2 87 Other operating expenses 9 3 12 7 3 10 2 - 2 Total benefits and expenses 230 5 235 151 3 154 79 2 81 Income before income taxes $ 60 $ 23$ 83 $ (38) $ 23$ (15) $ 98 $ -$ 98 Asset-Intensive Reinsurance The increase in income before income taxes for theU.S. andLatin America Financial Solutions' Asset-intensive segment was primarily due to higher investment related gains (losses), net in coinsurance portfolios and the increase in fair value of the embedded derivatives related to modco/funds withheld treaties. The invested asset base supporting this segment decreased to$23.2 billion as ofMarch 31, 2021 , from$23.9 billion as ofMarch 31, 2020 . •The decrease in the asset base was primarily due to the run off of existing inforce blocks and fewer blocks reinsured.. •As ofMarch 31, 2021 and 2020,$3.2 billion and$3.4 billion , respectively, of the invested assets were funds withheld at interest, of which greater than 90% was associated with one client. Impact of certain derivatives Income from the asset-intensive business tends to be volatile due to changes in the fair value of certain derivatives, including embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis, as well as embedded derivatives associated with the Company's reinsurance of EIAs and variable annuities with guaranteed minimum benefit riders. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including risk-free rates and credit spreads), implied volatility, the Company's own credit risk and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives, net of related hedging activity, and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues), and interest credited. These fluctuations are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties. The following table summarizes the asset-intensive results and quantifies the impact of these embedded derivatives for the periods presented. Revenues before certain derivatives, benefits and expenses before certain derivatives, and income before income taxes and certain derivatives should not be viewed as substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income before income taxes. 45
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Table of Contents Three months ended (dollars in millions) March 31, 2021 2020 Revenues: Total revenues$ 290 $ 113 Less: Embedded derivatives - modco/funds withheld treaties 44 (222)
Guaranteed minimum benefit riders and related free standing derivatives
(64) 74 Revenues before certain derivatives 310 261 Benefits and expenses: Total benefits and expenses 230 151 Less: Embedded derivatives - modco/funds withheld treaties 17 (113)
Guaranteed minimum benefit riders and related free standing derivatives
(29) 38 Equity-indexed annuities (14) 4 Benefits and expenses before certain derivatives 256 222 Income before income taxes: Income (loss) before income taxes 60 (38)
Less:
Embedded derivatives - modco/funds withheld treaties 27 (109)
Guaranteed minimum benefit riders and related free standing derivatives
(35) 36 Equity-indexed annuities 14 (4) Income before income taxes and certain derivatives
Embedded Derivatives -Modco /Funds Withheld Treaties - Represents the change in the fair value of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis. The fair value changes of these embedded derivatives are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. The Company's utilization of a credit valuation adjustment did not have a material effect on the change in fair value of these embedded derivatives for the three months endedMarch 31, 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$27 million and$(109) million for the three months endedMarch 31, 2021 and 2020, respectively. The increase in income for the three months endedMarch 31, 2021 , was primarily due to tightening credit spreads, partially offset by higher risk free interest rates. 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. The change in fair value of the embedded derivatives on guaranteed minimum benefits are net of an increase (decrease) in investment related gains (losses), net of$(55) million and$99 million for the three months endedMarch 31, 2021 and 2020, respectively, associated with the Company's utilization of a credit valuation adjustment. The change in fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing derivatives, increased (decreased) income before income taxes by$(35) million and$36 million for the three months endedMarch 31, 2021 and 2020, respectively. The decrease in income for the three months endedMarch 31, 2021 , was primarily due to a reduction in the credit valuation adjustment which has the impact of increasing the fair value of the guaranteed minimum benefit liability. 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$14 million and by$(4) million for the three months endedMarch 31, 2021 and 2020, respectively. The increase in income for the three months endedMarch 31, 2021 , was due to an increase in risk free interest rates which has the impact of lowering the fair value of the liability. 46
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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$15 million for the three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase was primarily due to the impact from improved equity market performance and higher investment related gains (losses), net in coinsurance and funds withheld portfolios. •Revenue before certain derivatives increased by$49 million for the three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase in the first quarter of 2021 was primarily due to the 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$34 million for the three months endedMarch 31, 2021 , as compared to the same period in 2020. The increase in the current quarter was primarily due to higher interest credited associated with the reinsurance of EIAs due to improved equity market performance. 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 for the three months endedMarch 31, 2021 , was consistent with the three months endedMarch 31, 2020 , as the growth from new transactions was offset by the termination of certain 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. •As ofMarch 31, 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$22.0 billion and$18.1 billion , respectively. 47
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Canada Operations The Company conducts reinsurance business inCanada primarily through RGACanada , which assists clients with capital management activity and mortality and morbidity risk management. TheCanada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, and to a lesser extent creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and capital solutions. For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 303 $ 281 $ 22 Investment income, net of related expenses 60 50 10 Investment related gains (losses), net 2 (12) 14 Other revenues 4 1 3 Total revenues 369 320 49 Benefits and expenses: Claims and other policy benefits 284 240 44 Interest credited - - - Policy acquisition costs and other insurance expenses 45 45 - Other operating expenses 10 9 1 Total benefits and expenses 339 294 45 Income (loss) before income taxes$ 30 $
26 $ 4
•The increase in income before income taxes for the three months endedMarch 31, 2021 , as compared to the same period in 2020 is primarily due to increases in net premiums in the Canada Traditional segment and investment related gains. These increases are mostly offset by increased claims and other policy benefits associated with the COVID-19 pandemic. •While foreign currency fluctuations can result in variances in the financial statement line items, fluctuation in the Canadian dollar did not result in a material change in income before income taxes for the three months endedMarch 31, 2021 . Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Traditional Reinsurance For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums $ 280 $ 260 $ 20 Investment income, net of related expenses 60 49 11 Investment related gains (losses), net 2 (12) 14 Other revenues 1 (1) 2 Total revenues 343 296 47 Benefits and expenses: Claims and other policy benefits 266 220 46 Interest credited - - - Policy acquisition costs and other insurance expenses 45 45 - Other operating expenses 8 8 - Total benefits and expenses 319 273 46 Income (loss) before income taxes $ 24 $ 23 $ 1 Key metrics: Life insurance in force$460.1
billion
95.0 % 84.6 %
Policy acquisition costs and other insurance expenses as a percentage of net premiums
16.1 % 17.3 % Other operating expenses as a percentage of net premiums 2.9 % 3.1 % The increase in income before income taxes for the three months endedMarch 31, 2021 , is primarily due to increases in net premiums and investment related gains (losses), net, offset by less favorable individual life mortality experience as compared to 2020. Revenues 48
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•The segment added new life business production, measured by face amount of insurance in force, of$14.2 billion , and$12.2 billion during the first three months of 2021 and 2020, respectively. •The increase in net investment income was primarily due to increased variable investment income and an increase in the invested asset base due to growth in the underlying business volume partially offset by a decline in interest rates. The change in investment related gains (losses) is primarily attributable to an increase in the fair value of credit default derivatives due to the tightening of credit spreads. Benefits and expenses •The increase in the loss ratio for the three months endedMarch 31, 2021 , as compared to the same period 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$26 million of excess claims for the three months endedMarch 31, 2021 , were attributable to COVID-19 or COVID-19 related factors. Financial Solutions Reinsurance For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 23 $ 21 $ 2 Investment income, net of related expenses - 1 (1) Investment related gains (losses), net - - - Other revenues 3 2 1 Total revenues 26 24 2 Benefits and expenses: Claims and other policy benefits 18 20 (2) Interest credited - - -
Policy acquisition costs and other insurance expenses - -
- Other operating expenses 2 1 1 Total benefits and expenses 20 21 (1) Income (loss) before income taxes$ 6 $ 3
$ 3
The increase in income before income taxes was primarily a result of favorable mortality experience on longevity business for the three months endedMarch 31, 2021 , as compared to the same period in 2020.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. For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 517 $ 443 $ 74 Investment income, net of related expenses 68 47 21 Investment related gains (losses), net 16 (6) 22 Other revenues 2 1 1 Total revenues 603 485 118 Benefits and expenses: Claims and other policy benefits 544 387 157 Interest credited (1) (17) 16 Policy acquisition costs and other insurance expenses 31 31 - Other operating expenses 37 37 - Total benefits and expenses 611 438 173 Income (loss) before income taxes$ (8) $
47 $ (55)
49
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•The decrease in income before income taxes for the three months endedMarch 31, 2021 , as compared to the same period in 2020 was primarily due to unfavorable mortality experience due to the COVID-19 pandemic partially offset by an increase in net premiums, investment income and investment related gains. •While foreign currency fluctuations can result in variances in the financial statement line items, fluctuations in foreign currency did not have a material impact on income before income taxes for the three months endedMarch 31, 2021 . Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Traditional Reinsurance For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums $ 438 $ 390 $ 48 Investment income, net of related expenses 20 19 1 Investment related gains (losses), net - - - Other revenues (1) (2) 1 Total revenues 457 407 50 Benefits and expenses: Claims and other policy benefits 469 334 135 Interest credited - - - Policy acquisition costs and other insurance expenses 29 30 (1) Other operating expenses 27 26 1 Total benefits and expenses 525 390 135 Income (loss) before income taxes $ (68) $ 17 $ (85) Key metrics: Life insurance in force$830.8
billion
107.1 % 85.6 %
Policy acquisition costs and other insurance expenses as a percentage of net premiums
6.6 % 7.7 % Other operating expenses as a percentage of net premiums 6.2 % 6.7 % The decrease in income before income taxes for the three months endedMarch 31, 2021 , as compared to the same period in 2020 is primarily due to unfavorable mortality experience, partially offset by an increase in net premiums. Revenues •The increase in net premiums 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$27.6 billion , and$32.9 billion during the three months endedMarch 31, 2021 , and the same period in 2020, respectively. Benefits and expenses •The increase in the loss ratio for the first three 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$98 million of excess claims for the three months endedMarch 31, 2021 , were attributable to COVID-19 or COVID-19 related factors. Financial Solutions For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 79 $ 53 $ 26 Investment income, net of related expenses 48 28 20 Investment related gains (losses), net 16 (6) 22 Other revenues 3 3 - Total revenues 146 78 68 Benefits and expenses: Claims and other policy benefits 75 53 22 Interest credited (1) (17) 16
Policy acquisition costs and other insurance expenses 2 1
1 Other operating expenses 10 11 (1) Total benefits and expenses 86 48 38 Income (loss) before income taxes$ 60 $ 30
$ 30
50
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The increase in income before income taxes for the first three months 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 was primarily due to increased volumes of closed longevity block business. •The increase in net investment income was primarily related to higher income associated with unit-linked policies which fluctuate with market performance and is offset by an increase in interest credited. •The increase in net investment related gains was primarily due to increases in the fair market value of derivatives. Benefits and expenses •The increase in claims and other policy benefits is the result of increased volumes of closed longevity block business and some unfavorable experience from payout annuity business. •The increase in benefits and expenses is also related to an increase in interest credited. 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. For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 662 $ 710 $ (48) Investment income, net of related expenses 61 44 17 Investment related gains (losses), net 11 (33) 44 Other revenues 17 14 3 Total revenues 751 735 16 Benefits and expenses: Claims and other policy benefits 564 617 (53) Interest credited 15 13 2
Policy acquisition costs and other insurance expenses 54 63
(9) Other operating expenses 49 43 6 Total benefits and expenses 682 736 (54) Income (loss) before income taxes$ 69 $ (1)
$ 70
•The increase in income before taxes as compared to the same period in 2020 was the result of favorable claims experience across the segment as compared to the prior year, as well as income from new business growth within the Financial Solutions business. •Foreign currency fluctuations can result in variances in the financial statement line items. Foreign currency fluctuations resulted in a$2 million increase in income before income taxes during the three months endedMarch 31, 2021 . Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. 51
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Traditional Reinsurance For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums $ 609 $ 636 $ (27) Investment income, net of related expenses 33 27 6 Investment related gains (losses), net (1) - (1) Other revenues 6 4 2 Total revenues 647 667 (20) Benefits and expenses: Claims and other policy benefits 518 555 (37) Interest credited - - - Policy acquisition costs and other insurance expenses 43 49 (6) Other operating expenses 45 39 6 Total benefits and expenses 606 643 (37) Income (loss) before income taxes $ 41 $ 24 $ 17 Key metrics: Life insurance in force$521.0
billion
85.1 % 87.3 %
Policy acquisition costs and other insurance expenses as a percentage of net premiums
7.1 % 7.7 % Other operating expenses as a percentage of net premiums 7.4 % 6.1 % The increase in income before income taxes is primarily the result of net favorable claims experience across the segment, partially offset by a decrease in net premiums. Revenues •The decrease in net premiums 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$7.6 billion , and$15.7 billion during the three months endedMarch 31, 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 decrease in the loss ratio for the three months endedMarch 31, 2021 , as compared to the same period in 2020 was primarily due to favorable claims experience across the segment. While the cause of death is not yet available for all claims, the Company estimates that approximately$5 million of claims for the three months endedMarch 31, 2021 , were attributable to COVID-19 or COVID-19 related factors, primarily inIndia . Financial Solutions For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums$ 53 $ 74 $ (21) Investment income, net of related expenses 28 17 11 Investment related gains (losses), net 12 (33) 45 Other revenues 11 10 1 Total revenues 104 68 36 Benefits and expenses: Claims and other policy benefits 46 62 (16) Interest credited 15 13 2
Policy acquisition costs and other insurance expenses 11 14
(3) Other operating expenses 4 4 - Total benefits and expenses 76 93 (17) Income (loss) before income taxes$ 28 $
(25) $ 53
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The increase in income before income taxes is primarily 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$3.8 billion for the three months endedMarch 31, 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 decrease in net premiums is attributable to a lower contribution from single premium asset-intensive transactions in the three months endedMarch 31, 2021 , as compared to the same period in 2020. •The increase in investment related gains (losses), net is primarily due to favorable fluctuations in the fair value of derivatives due to tightening credit spreads and higher future inflation expectations. Benefits and expenses •The decrease in claims and other policy benefits is the result of a lower reserve impact from single premium asset-intensive transactions in the three months endedMarch 31, 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, interest expense related to debt, and the investment income and expense associated with the Company's collateral finance and securitization transactions and service business expenses. Additionally, Corporate and Other includes results from certain wholly-owned subsidiaries, such as RGAX, and joint ventures that, among other activities, develop and market technology, and provide consulting and outsourcing solutions for the insurance and reinsurance industries. The Company has increased its investment and expenditures in this area in an effort to both support its clients and accelerate the development of new solutions and services to increase consumer engagement within the life insurance industry and hence generate new future revenue streams. For the three months endedMarch 31 , (dollars in millions) 2021 2020 2021 vs 2020 Revenues: Net premiums $ - $ - $ - Investment income, net of related expenses 158 58 100 Investment related gains (losses), net 273 (67) 340 Other revenues 10 1 9 Total revenues 441 (8) 449 Benefits and expenses: Claims and other policy benefits - - - Interest credited 1 2 (1) Policy acquisition costs and other insurance income (28) (28) - Other operating expenses 70 62 8 Interest expense 45 41 4 Collateral finance and securitization expense 3 6 (3) Total benefits and expenses 91 83 8 Loss before income taxes$ 350
The increase in income before income taxes is primarily due to an increase in total revenues. Revenues •The increase in net investment income 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 remaining increase is attributable to higher investment income on Corporate invested assets due to a higher asset base and higher yield. 53
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•The increase in investment related gains (losses), net, includes$104 million of changes in the carrying value of investments in limited partnerships considered to be investment companies,$70 million of which 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 is attributable to gains on sales of fixed maturity securities of$144 million , a decrease in the valuation allowance on mortgage loans, as a result of assumption updates due to the improving view of the impact of the COVID-19 pandemic, and favorable changes in the fair value of derivatives. 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, see "the COVID-19 Pandemic" for more information, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing 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 three months endedMarch 31, 2021 , was 5.67%, 159 basis points above 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. 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$4.7 billion atMarch 31, 2021 , due to tightening credit spreads. Additionally, gross unrealized losses increased from$0.2 billion atDecember 31, 2020 , to$0.5 billion atMarch 31, 2021 . The Company continues to be in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer. As indicated above, gross unrealized gains on fixed maturity securities of$4.7 billion remain well in excess of gross unrealized losses of$0.5 billion as ofMarch 31, 2021 . The Company does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future. The Company projects its reserves to be sufficient, and it would not expect to write down deferred acquisition costs or be required to take any actions to augment capital, even if interest rates remain at current levels for the next five years, assuming all other factors remain constant. While the Company has felt the pressures of sustained low interest rates and volatile equity markets and may continue to do so, its business and results of operations are not overly sensitive to these risks. Mortality and morbidity risks continue to be the most significant risk for the Company. Although management believes the Company's current capital base is adequate to support its business at current operating levels, it continues to monitor new business opportunities and any associated new capital needs that could arise from the changing financial landscape.The Holding Company RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness. The primary sources of RGA's liquidity include proceeds from its capital-raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes withRGA Reinsurance , RCM and Rockwood Re and dividends from operating subsidiaries. The following tables provide comparative information for RGA (dollars in millions): 54
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Table of Contents Three months ended March 31, 2021 2020 Interest expense$ 52 $ 50 Capital contributions to subsidiaries 4 15 Dividends to shareholders 48 44 Repurchases of treasury stock - 153 Interest and dividend income 32 226 March 31, 2021 December 31, 2020 Cash and invested assets$ 1,176 $ 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. OnJanuary 24, 2019 , RGA's board of directors authorized a share repurchase program for up to$400 million of RGA's outstanding common stock. The authorization was effective immediately and does not have an expiration date. OnMay 6, 2020 , the Company announced that it has suspended stock repurchases until further notice. The resumption and pace of repurchase activity depends on various factors such as the level of available cash, the impact of the ongoing COVID-19 pandemic, an evaluation of the costs and benefits associated with alternative uses of excess capital, such as acquisitions and in force reinsurance transactions, and RGA's stock price. Details underlying dividend and share repurchase program activity were as follows (in millions, except share data): Three months ended March
31,
2021
2020
Dividends to shareholders$ 48 $ 44 Repurchases of common stock - 153 Total amount paid to shareholders$ 48 $ 197 Number of shares repurchased -
1,074,413
Average price per share $ - $
142.05
InApril 2021 , RGA's board of directors declared a quarterly dividend of$0.70 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-default 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. 55
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As ofMarch 31, 2021 andDecember 31, 2020 , the Company had$3.6 billion , in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As ofMarch 31, 2021 andDecember 31, 2020 , the average interest rate on long-term debt outstanding was 4.54%. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, available liquidity at the holding company, and the Company's ability to raise additional funds. The Company enters into derivative agreements with counterparties that reference either the Company's debt rating or its financial strength rating. If either rating is downgraded in the future, it could trigger certain terms in the Company's derivative agreements, which could negatively affect overall liquidity. For the majority of the Company's derivative agreements, there is a termination event should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody's) or the financial strength ratings drop below eitherA- (S&P) or A3 (Moody's). The Company may borrow up to$850 million in cash and obtain letters of credit in multiple currencies on its revolving credit facility that matures inAugust 2023 . As ofMarch 31, 2021 , the Company had no cash borrowings outstanding and$21 million in issued, but undrawn, letters of credit under this facility. 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 will be used in part to repay the Company's$400 million 5.00% Senior Notes due in 2021, and the remainder will be used for general corporate purposes. Capitalized issue costs were approximately$5 million . 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 12 months. Credit and Committed Facilities AtMarch 31, 2021 , the Company maintained an$850 million syndicated revolving credit facility in addition to committed letter of credit facilities aggregating$1.2 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. AtMarch 31, 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 ofMarch 31, 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 drawing funds under a revolving credit facility, under which the Company had availability of$829 million as ofMarch 31, 2021 . The Company also has$349 million of funds available through collateralized borrowings from the FHLB as ofMarch 31, 2021 . As ofMarch 31, 2021 , the Company could have borrowed these additional amounts without violating any of its existing debt covenants. The Company's principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, dividends to shareholders, purchases of treasury stock, and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2 - "Significant Accounting Policies and Pronouncements" in the Notes to Consolidated Financial Statements 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 56
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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 recent action to increase cash and cash equivalents along with its current sources of liquidity are adequate to meet its cash requirements for the next 12 months, despite the uncertainty associated with the pandemic. Summary of Primary Sources and Uses of Liquidity and CapitalThe Company's primary sources and uses of liquidity and capital are summarized as follows: For the three months endedMarch 31, 2021 2020 (Dollars in millions)
Sources:
Net cash provided by operating activities 2,366 2,207 Exercise of stock options, net - 1 Change in cash collateral for derivative positions and other arrangements - 51 Cash provided by changes in universal life and other investment type policies and contracts - 475 Total sources 2,366 2,734 Uses: Net cash used in investing activities 2,492 1,096 Dividends to stockholders 48 44 Repayment of collateral finance and securitization notes 42 19 Principal payments of long-term debt 1 1 Purchases of treasury stock 1 156 Change in cash collateral for derivative positions and other arrangements 25 - Cash used for changes in universal life and other investment type policies and contracts 26 - Effect of exchange rate changes on cash 17 47 Total uses 2,652 1,363 Net change in cash and cash equivalents (286) 1,371 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 material changes in the Company's contractual obligations from those reported in the 2020 Annual Report. Asset / Liability Management The Company actively manages its cash and invested assets using an approach that is intended to balance quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and duration basis. 57
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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$3.3 billion and$3.6 billion atMarch 31, 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$86 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 atMarch 31, 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. 58
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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 three 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. During the quarter, the Company decreased its valuation allowance on its commercial mortgage loan portfolio by approximately$17 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. Portfolio Composition The Company had total cash and invested assets of$75.5 billion and$75.8 billion as ofMarch 31, 2021 andDecember 31, 2020 , respectively, as illustrated below (dollars in millions): December 31, March 31, 2021 % of Total 2020 % of Total Fixed maturity securities, available-for-sale$ 56,426 74.7 %$ 56,735 74.8 % Equity securities 135 0.2 132 0.2 Mortgage loans on real estate 6,001 7.9 5,787 7.6 Policy loans 1,253 1.7 1,258 1.7 Funds withheld at interest 5,459 7.2 5,432 7.2 Short-term investments 157 0.2 227 0.3 Other invested assets 2,983 4.0 2,829 3.7 Cash and cash equivalents 3,122 4.1 3,408 4.5 Total cash and invested assets$ 75,536 100.0 %$ 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 March 31, Increase/ 2021 2020 (Decrease) Average invested assets at amortized cost
5.67 % 4.08 % 159 bps VII (included in net investment income)
3.79 % 4.19 % (40) bps 59
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Investment yield increased for the three months endedMarch 31, 2021 , in comparison to the same period 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 months endedMarch 31, 2021 , in comparison to the same period 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 ofMarch 31, 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 ofMarch 31, 2021 andDecember 31, 2020 , approximately 93.7% 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 5.3% and 5.6% of the total fixed maturity securities as ofMarch 31, 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 62.5% and 63.9% of total fixed maturity securities as ofMarch 31, 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 ofMarch 31, 2021 andDecember 31, 2020 . As ofMarch 31, 2021 , the Company's investments in Canadian government securities represented 8.3% 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). 60
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The quality of the Company's available-for-sale fixed maturity securities portfolio, as measured at fair value and by the percentage of fixed maturity securities invested in various ratings categories, relative to the entire available-for-sale fixed maturity securities portfolio, as ofMarch 31, 2021 andDecember 31, 2020 was as follows (dollars in millions): March 31, 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$ 31,323 $ 34,096 60.4 %$ 29,770 $ 34,589 60.9 % 2 BBB 17,402 18,799 33.3 16,440 18,751 33.1 3 BB 2,622 2,704 4.8 2,480 2,588 4.6 4 B 695 669 1.2 713 697 1.2 5 CCC and lower 170 145 0.3 131 102 0.2 6 In or near default 17 13 - 14 8 - Total$ 52,229 $ 56,426 100.0 %$ 49,548 $ 56,735 100.0 %
The Company's fixed maturity portfolio includes structured securities. The
following table shows the types of structured securities the Company held as of
March 31, 2021 December 31, 2020 Estimated Estimated Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total RMBS: Agency $ 659$ 701 10.7 % $ 686$ 744 11.0 % Non-agency 877 890 13.4 1,049 1,073 15.8 Total RMBS 1,536 1,591 24.1 1,735 1,817 26.8 ABS: Collateralized loan obligations ("CLOs") 1,603 1,593 24.2 1,707 1,689 24.9 ABS, excluding CLOs 1,553 1,558 23.7 1,392 1,403 20.7 Total ABS 3,156 3,151 47.9 3,099 3,092 45.6 CMBS 1,774 1,840 28.0 1,790 1,868 27.6 Total$ 6,466 $ 6,582 100.0 % $ 6,624$ 6,777 100.0 % The Company's RMBS portfolio includes agency-issued pass-through securities and collateralized mortgage obligations. Agency-issued pass-through securities are guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or theGovernment National Mortgage Association . The principal risks inherent in holding RMBS are prepayment and extension risks, which will affect the timing of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase in principal payments from the expected, primarily as a result of owner refinancing. Extension risk relates to the unexpected slowdown in principal payments from the expected. In addition, non-agency RMBS face credit risk should the borrower be unable to pay the contractual interest or principal on their obligation. The Company monitors its mortgage-backed securities to mitigate exposure to the cash flow uncertainties associated with these risks. 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 ofMarch 31, 2021 andDecember 31, 2020 , the Company had$490 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. 61
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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 ofMarch 31, 2021 , totaling approximately$10 million . For the quarter endedMarch 31, 2021 , the Company decreased its valuation allowance on its commercial mortgage loan portfolio by approximately$17 million to reflect the updated outlook from the COVID-19 pandemic. The Company continues to monitor and evaluate the impact of COVID-19 pandemic on its investment portfolio and is working closely with its borrowers to evaluate any short-term cash flow issues. For the three months endedMarch 31, 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$660 million in response to COVID-19. These loans met the criteria established in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and were not considered a troubled debt restructuring. In accordance with the CARES Act criteria, these loans was not more than 30 days past due atDecember 31, 2019 , and the modifications included deferral or delayed payments of principal or interest on the loan. As ofMarch 31, 2021 andDecember 31, 2020 , the Company's mortgage loans, gross of unamortized deferred loan origination fees and expenses and valuation allowances, were distributed geographically as follows (dollars in millions): March 31, 2021 December 31, 2020 Recorded Recorded Investment % of Total Investment % of TotalU.S. Region : West$ 2,317 38.3 % $ 2,253 38.5 % South 2,097 34.6 2,040 34.8 Midwest 1,055 17.4 1,027 17.5 Northeast 287 4.7 277 4.7 Subtotal - U.S. 5,756 95.0 5,597 95.5 Canada 194 3.2 188 3.2 United Kingdom 108 1.8 76 1.3 Total$ 6,058 100.0 % $ 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 valuation allowances 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 valuation allowances 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 impairments and changes in allowance for credit losses on fixed maturity securities, other impairment losses and changes in the mortgage loan provision for the three months endedMarch 31, 2021 and 2020 (dollars in millions). Three months ended March 31, 2021 2020 Impairments and change in allowance for credit losses$ 2 $ 34 Other impairment losses and changes in provision (1) - Change in mortgage loan provision (17) 13 Total$ (16) $ 47 The change in mortgage loan provision for the three months endedMarch 31, 2021 , was primarily due to a decrease in the mortgage loan valuation allowance to reflect the updated outlook from the COVID-19 pandemic. The impairments and change in allowance for credit losses on fixed maturity securities for the three months endedMarch 31, 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 change 62
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in mortgage loan provision for the three months endedMarch 31, 2020 , was primarily due to an increase in the mortgage loan valuation allowance to reflect 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 ofMarch 31, 2021 andDecember 31, 2020 . As ofMarch 31, 2021 andDecember 31, 2020 , the Company classified approximately 6.3% 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 ofMarch 31, 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 ofMarch 31, 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 ofMarch 31, 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 ofMarch 31, 2021 , the Company had credit exposure of$18 million . The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net 63
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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 valuation allowances, as ofMarch 31, 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 endedMarch 31, 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 13 - "New Accounting Standards" in the Notes to Condensed Consolidated Financial Statements.
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