Reinsurance Group of America, Incorporated and Subsidiaries Quarterly Report (Form 10-Q) for the Period Ended September 30, 2024

Overview

RGA is a leading global provider of life reinsurance and financial solutions, with $4.0 trillion of life reinsurance in force and $120.3 billion in assets as of September 30, 2024. The company’s main business lines are traditional reinsurance, which includes individual and group life, health, disability, and critical illness reinsurance, and financial solutions, which includes longevity reinsurance, asset-intensive reinsurance, and capital solutions.

RGA generates revenue primarily from renewal premiums on existing reinsurance treaties, new business premiums, fee income from financial solutions, and investment income. The traditional reinsurance business involves reinsuring life insurance policies that are often in force for the remaining lifetime of the insured, with premiums earned over 10 to 30 years. The financial solutions business includes significant asset-intensive and longevity risk transactions that allow clients to manage their capital, longevity, and investment risk.

Profitability for the traditional business depends on the volume and amount of death and health claims, as well as the ability to price risks accurately. Longevity business profitability depends on the lifespan of contract holders and investment performance. The company also generates profits on investment spreads and fees from financial reinsurance transactions.

Segment Presentation

RGA has geographic-based and business-based operational segments. The geographic segments are further divided into traditional and financial solutions businesses. The company allocates capital to its segments based on an internal economic capital model that measures the unique risks in each business.

Investment income is credited to the segments based on allocated capital, and the segments are charged for excess capital utilization. Segment revenue and performance can be influenced by currency fluctuations, large transactions, business mix, and reporting practices of ceding companies.

Consolidated Results of Operations

For the three months ended September 30, 2024, net income decreased by $131 million compared to the prior year period. This was primarily due to:

• Unfavorable impacts from the company’s annual assumptions review, including a $58 million loss driven by updated lapse assumptions in India.
• A $136 million future policy benefits remeasurement loss related to the decision to increase the per life retention limit from $8 million to $30 million.
• Higher policy acquisition costs and other insurance expenses.
• A $31 million remeasurement loss on market risk benefits, compared to a $21 million gain in the prior year.

These losses were partially offset by an increase in net investment income.

For the nine months ended September 30, 2024, net income decreased by $175 million compared to the prior year period. This was primarily due to:

• A non-economic loss of $136 million recognized at the inception of a single premium pension risk transfer transaction in the U.S. Financial Solutions business.
• Higher investment related losses from portfolio repositioning.

These were partially offset by higher net investment income and favorable impacts from in-force management actions and higher surrender charges.

Premiums and Business Growth

Premiums increased for both the three and nine month periods, primarily due to single premium pension risk transfer transactions. Excluding these, the remaining premium growth was attributable to organic growth on existing treaties and new business production, which increased the face amount of life reinsurance in force by $403.1 billion and $265.5 billion during the nine months ended September 30, 2024 and 2023, respectively.

Net Investment Income and Investment Related Gains (Losses)

Net investment income increased due to a higher average invested asset base and higher interest rates on new investments, partially offset by lower variable investment income from joint ventures and limited partnerships.

Investment related losses decreased for the three months ended September 30, 2024, but increased for the nine months, primarily due to:

• Higher net capital losses from portfolio repositioning.
• Changes in the fair value of derivatives used for risk management.
• Higher impairments and credit losses on fixed maturity securities.
• Unfavorable changes in the fair value of embedded derivatives associated with modco/funds withheld treaties.

Impact of Certain Derivatives, Market Risk Benefits, and Non-Economic Changes

The company recognizes the impact of embedded derivatives, market risk benefits, and non-economic changes in insurance liabilities, such as the initial loss on pension risk transfer transactions, in its consolidated income. These items can create significant volatility in reported earnings.

For the three and nine months ended September 30, 2024, the net unfavorable impact of these items was $129 million and $162 million, respectively, primarily driven by changes in the fair value of embedded derivatives and non-economic changes in insurance liabilities.

Results of Operations by Segment

U.S. and Latin America Operations

• Traditional segment income decreased due to unfavorable impacts from the change in per life retention limit and investment related losses, partially offset by favorable assumption updates and management actions.
• Financial Solutions segment income decreased due to the non-economic loss on a pension risk transfer transaction, the decline in the invested asset base, and higher other insurance expenses, partially offset by higher net investment income and the net impact of market risk benefits.

Canada Operations

• Traditional segment income increased due to favorable experience on group business and future policy benefits remeasurement gains.
• Financial Solutions segment income increased due to investment related gains and higher surrender charges.

Europe, Middle East and Africa Operations

• Traditional segment income increased due to higher net premiums and net investment income, partially offset by higher claims and policy acquisition costs.
• Financial Solutions segment income increased due to higher net investment income and surrender charges.

Asia Pacific Operations

• Traditional segment income decreased due to higher future policy benefits remeasurement losses and increased claims.
• Financial Solutions segment income increased due to investment related gains and higher surrender charges.

Corporate and Other

• Loss increased due to higher investment related losses, interest credited, and operating expenses, partially offset by higher net investment income.

Liquidity and Capital Resources

RGA believes its cash flows and available liquidity sources are sufficient to meet its obligations for the next 12 months. Key sources of liquidity include:

• Net cash flows from operations
• Sale of invested assets
• Borrowings under committed credit facilities
• Issuance of long-term debt, preferred securities, or common equity

The holding company, RGA, relies on interest and dividend income, capital contributions from subsidiaries, and debt/equity issuances as its primary sources of liquidity. RGA had $853 million in cash and invested assets as of September 30, 2024.

RGA’s debt agreements contain financial covenants related to leverage, net worth, and other requirements. The company was in compliance with all covenants as of September 30, 2024, with $5.1 billion in outstanding debt.

RGA also utilizes letters of credit to support reinsurance operations, with $54 million outstanding to third parties and $1.0 billion backing intercompany reinsurance as of September 30, 2024.

Investments

RGA actively manages its investment portfolio to balance quality, diversification, asset/liability matching, liquidity, and investment return. The company has established target asset portfolios for its operating segments to profitably fund its liabilities.

The company’s liquidity position, consisting of cash, cash equivalents, and short-term investments, was $5.6 billion as of September 30, 2024. Liquidity needs are evaluated periodically and the portfolio is adjusted accordingly.

RGA is a member of the Federal Home Loan Bank (FHLB) and has entered into funding agreements, using a blanket lien on certain invested assets as collateral. The amount of collateral exceeds the liability under these agreements.

In summary, RGA reported a decrease in net income for both the three and nine month periods ended September 30, 2024, primarily due to unfavorable impacts from assumptions updates, the increase in per life retention limit, and non-economic changes in insurance liabilities. However, the company’s underlying business fundamentals remain strong, with continued growth in premiums and new business production. RGA maintains a solid liquidity position and capital structure to support its operations and future growth opportunities.