North America. Based on discussions with the Company’s clients, an industry survey and informal knowledge about the industry, the Company believes it is a leader in facultative underwriting in North America. The Company intends to maintain that status by emphasizing its underwriting standards, prompt response on quotes, competitive pricing,
provisions for the risk of adverse deviation and are not adjusted unless experience significantly deteriorates to the point where a premium deficiency exists.
As of December 31, 2019, the Company estimates that all of its DAC balance is collateralized by surrender fees due to the Company and the reduction of policy liabilities, in excess of termination values, upon surrender or lapse of a policy.
Consolidated income before income taxes increased $286 million, or 33.8% in 2019. Diluted earnings per share were $13.62 in 2019 compared to $11.00 in 2018. The increase in income was primarily due to favorable experience in the various Financial Solutions segments, improved claims experience in the Canada and EMEA Traditional segments and increases in investment income. The favorable experience was partially offset by unfavorable results in the Asia Pacific Traditional segment, primarily in Australia, and the U.S. and Latin America Traditional segment. In addition, 2019 income reflects favorable changes in investment related gain (losses) resulting from changes in the fair value of embedded derivatives on modified coinsurance (“modco”) or funds withheld treaties within the U.S. segment due to changes in interest rates and credit spreads. The effects of the change in fair value of these embedded derivatives on income is discussed below. Foreign currency fluctuations relative to the prior year decreased income before income taxes by $15 million in 2019 and increased income before income taxes by $10 million in 2018.
Net premiums increased $195 million, or 3.5%, in 2019. The increase in 2019 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 $115.8 billion, and $106.5 billion during 2019 and 2018, respectively. Total face amount of life business in force was $1,619.6 billion, and $1,610.1 billion of December 31, 2019 and 2018, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums for traditional individual life business were 21.0% and 22.6% in 2019 and 2018, respectively. Overall, while these ratios are expected to remain in a predictable range, and may fluctuate from period to period due to varying allowance levels and product mix. In addition, the amortization pattern of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary.
Net premiums increased by $272 million, or 11.8%, in 2019. The increase in net premiums for 2019 was primarily driven by new business as well as in force growth in Asian markets offset by reductions to Australian group business driven by new legislation that was effective July 2019. The segment added new business production, measured by face amount of insurance in force, of $69.7 billion and $66.9 billion during 2019 and 2018, respectively. The face amount of reinsurance in force totaled $662.0 billion and $616.9 billion at December 31, 2019 and 2018, respectively. Foreign currency fluctuations unfavorably affected the face amount of reinsurance in force by $1.0 billion in 2019. Foreign currency exchange fluctuations resulted in a decrease in net premiums of $65 million in 2019.
Loss before income taxes decreased by $92 million in 2019. The decrease in loss before income taxes for 2019 was primarily due to increased investment income, net of related expenses, decreased investment related losses, and increased other revenues partially offset by increased operating and interest expense.
Other operating expenses increased by $38 million, or 14.8%, in 2019. The increase in other operating expenses during 2019 was due to growth in strategic initiatives, such as RGAx, and increased incentive-based compensation.
The net funded status of the Company’s qualified and nonqualified pension and other postretirement liabilities included within other liabilities has been excluded from the amounts presented in the table above. As of December 31, 2019, the Company had a net unfunded balance of $174 million related to qualified and nonqualified pension and other postretirement liabilities. See
Note 10 - “Employee Benefit Plans” in the Notes to Consolidated Financial Statements for information related to the Company’s obligations and funding requirements for pension and other postretirement benefits.
The Company’s mortgage loan portfolio consists of U.S., Canada and United Kingdom based investments primarily in commercial offices, light industrial properties and retail locations. The mortgage loan portfolio is diversified by geographic region and property type. Most of the mortgage loans in the Company’s portfolio range in size up to $30 million, with the average mortgage
in Note 2 - “Significant Accounting Policies and Pronouncements” in the Notes to Consolidated Financial Statements for further discussion.
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 at the reporting date plus or minus any collateral posted or held by the Company. The Company had no credit exposure related to its derivative contracts, excluding futures, as of December 31, 2019, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts. The Company had no credit exposure related to its derivative contracts, excluding futures and mortality swaps, as of December 31, 2018, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts.
To ensure appropriate oversight of enterprise-wide risk management issues without unnecessary duplication, as well as to foster cross-committee communication and coordination regarding risk issues, risk committee chairs attend RMSC meetings. In addition to the risk committees, their sub-committees and working groups, some RGA operating entities have risk management committees that oversee relevant risks related to segment-level risk limits.
The interest rate sensitivity relating to the Company’s fixed maturity securities is assessed using hypothetical scenarios that assume positive and negative 50 and 100 basis point parallel shifts in the yield curves. This analysis assumes that the U.S., Canada and other pertinent countries’ yield curve shifts are of equal direction and magnitude. Change in value of individual securities is estimated consistently under each scenario using a commercial valuation tool. The Company’s actual experience may differ from the results noted below particularly due to assumptions utilized or if events differ from those included in the methodology. The following tables summarize the results of this analysis for fixed maturity securities in the Company’s investment portfolio as of the dates indicated (dollars in millions):
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish policy benefits. The Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. The premium deficiency reserve is established by a charge to income, as well as a reduction in unamortized acquisition costs and, to the extent there are no unamortized acquisition costs, an increase in future policy benefits.
The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the tax basis of assets and liabilities and the reported amounts, and are recognized in net income or in certain cases in OCI. The Company’s accounting for income taxes represents management’s best estimate of various events and transactions considering the laws enacted as of the reporting date. The Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) creates additional complexity due to various provisions that require management judgment and assumptions, which are subject to change.
The following table includes the amount of borrowed securities, securities lent and securities collateral received as part of the securities lending program, repurchased/reverse repurchased securities pledged and received and cash received as of December 31, 2019 and 2018 (dollars in millions):
The Company has certain embedded derivatives that are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a modco or funds withheld basis. Additionally, the Company reinsures equity-indexed annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. The changes in fair values of embedded derivatives on equity-indexed annuities described below relate to changes in the fair value associated with capital market and other related assumptions. The Company’s utilization of a credit valuation adjustment did not have a material effect on the change in fair value of its embedded derivatives for the years ended December 31, 2019, 2018 and 2017.
The following reflects the amounts of policy acquisition costs deferred and amortized (dollars in millions):
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 basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in the Company’s businesses. As a result of the economic capital allocation process, a portion of investment income is attributed to the segments based on the level of allocated capital. In addition, the
Companies in which the Company has significant influence over the operating and financing decisions but are not required to be consolidated, are reported on the equity basis of accounting. The equity in the net income of such investments is not material to the results of operations or financial position of individual segments or the Company taken as a whole. Capital expenditures of each reporting segment were immaterial in the periods noted.
With the assistance of our actuarial specialists, we assessed the reasonableness of assumptions used in developing the estimates by comparing conclusions reached by management to the related experience study results and industry experience, as applicable.
We utilized statistical analysis to identify outliers in the population for further testing.