Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 88.9%, 88.3% and 90.8% in 2017, 2016 and 2015, respectively. The increase in the loss ratio for 2017 was primarily due to unfavorable claims experience in the traditional mortality and group health lines of business. The decrease in the loss ratio for 2016 was primarily related to improvement
The Company conducts reinsurance business in Canada primarily through RGA Canada, which assists clients with capital management activity and mortality and morbidity risk management. The Canada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, as well as 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 financial reinsurance.
for 2016 was primarily due to an increase in investment related gains (losses), net, partially offset by less favorable traditional individual life mortality experience and unfavorable experience on longevity business, as compared to 2015. Foreign currency exchange fluctuation in the Canadian dollar resulted in an increase in income before income taxes of $3.7 million and decrease of $6.4 million in 2017 and 2016, respectively.
Income before income taxes increased by $9.1 million, or 223.2%, and decreased by $15.6 million, or 79.3%, in 2017 and 2016, respectively. The increase in income before income taxes in 2017 was primarily due to favorable lapse experience on a closed treaty in Japan as compared to 2016. The decrease in 2016 was primarily due to unfavorable lapse experience from the same treaty, partially offset by gains on derivatives associated with hedging programs to mitigate currency risks. Foreign currency exchange fluctuations contributed to an increase in income before income taxes of $0.3 million and a decrease of $1.5 million in 2017 and 2016, respectively.
The increase in total benefits and expenses in 2016 was primarily due to an increase of other operating expenses of $45.5 million, and partially offset by an increase in other insurance income of $12.7 million, as well as a decrease in interest expense of $5.2 million. The reduction in interest expense is mainly attributable to a $15.7 million reduction in tax-related interest expense resulting from the effective settlement of uncertain tax positions and a $10.8 million reduction in interest expense related to the conversion of the Company’s junior subordinated debentures to a floating rate in December 2015. These reductions in interest expense are largely offset by $21.9 million of additional interest expense related to the issuance of $800.0 million in long-term debt during 2016. The increase in other insurance income is primarily related to the offset to capital charges allocated to the operating segments.
secured borrowings, the ability to issue long-term debt, preferred securities or common equity and, if necessary, the sale of invested assets subject to market conditions.
Undistributed earnings of the Company’s foreign subsidiaries are targeted for reinvestment outside of the U.S. As of December 31, 2017, the amount of cash and cash equivalents and short-term investments held by the Company’s subsidiaries that are taxed in a foreign jurisdiction was $585.4 million. As U.S. Tax Reform generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, the Company does not expect to incur material income taxes if these funds were repatriated. The Company’s liquidity and capital position would not be materially affected by not having these funds available for use in the U.S. due to the Company’s aforementioned alternate liquidity resources.
RGA declared dividends totaling $1.82 per share in 2017. 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.
The Company monitors its fixed maturity and equity securities to determine impairments in value and evaluates factors such as financial condition of the issuer, payment performance, the length of time and the extent to which the market value has been below amortized cost, 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 an other-than-temporary impairment in value are written down to fair value. See “Investments - Other-than-Temporary Impairment” in
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 and mortality swaps, at December 31, 2017 and 2016, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts.
Interest rate sensitivity analysis is used to measure the Company’s interest rate price risk by computing estimated changes in fair value of fixed rate assets and liabilities in the event of a hypothetical 100 basis point change (increase or decrease) in market interest rates. The Company does not have fixed rate instruments classified as trading securities. The Company’s projected net decrease in fair value of financial instruments in the event of a 100 basis point increase in market interest rates at its fiscal years ended December 31, 2017 and 2016 was $966.7 million and $876.5 million, respectively.
Business disruption risk is the risk of impairment to operational capabilities due to the unavailability of people, systems, and/or facilities. The Company’s global business continuity process enables associates to identify potential impacts that threaten operations by providing the framework, policies and procedures and required recurring training for how the Company will recover and restore interrupted critical functions, within a predetermined time, after a disaster or extended disruption, until its normal facilities are restored.
The Company is engaged in providing traditional reinsurance, which includes individual and group life and health, disability, and critical illness reinsurance. The Company also provides financial solutions, which includes longevity reinsurance, asset-intensive products, primarily annuities, and financial reinsurance.
Impairment losses on equity securities are reported in investment related gains (losses), net on the consolidated statements of income. Impairment losses on fixed maturity securities recognized in the financial statements are dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that it would be required to sell a security before the recovery of its amortized cost, less any recorded credit loss, it recognizes an other-than-temporary impairment in investment related gains (losses), net on the consolidated statements of income for the difference between amortized cost and fair value. If neither of these two conditions exists then the recognition of the other-than-temporary impairment is bifurcated and the Company recognizes the credit loss portion in investment related gains (losses), net and the non-credit loss portion in AOCI.
In August 2017, the FASB updated the general accounting principal for Derivatives and Hedging. The updated guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting in current GAAP related to the assessment of hedge effectiveness. The updated guidance is effective for the Company January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this updated guidance on its consolidated financial statements.
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”). The following tables provide information relating to investments in fixed maturity and equity securities by sector as of December 31, 2017 and 2016 (dollars in thousands):
The following tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 1,116 and 1,535 fixed maturity and equity securities that have estimated fair values below amortized cost as of December 31, 2017 and 2016, respectively. These investments are presented by class and grade of security, as well as the length of time the related fair value has remained below amortized cost (dollars in thousands):
The maturities of the mortgage loans as of December 31, 2017 and 2016 are as follows (dollars in thousands):
Embedded Derivatives - The fair value of embedded derivative liabilities, including those calculated by third parties, are monitored through the use of attribution reports to quantify the effect of underlying sources of fair value change, including capital market inputs based on policyholder account values, interest rates and short-term and long-term implied volatilities, from period to period.
Retrocessions are arranged through the Company’s retrocession pools for amounts in excess of the Company’s retention limit. As of December 31, 2017 and 2016, all rated retrocession pool participants followed by the A.M. Best Company were rated “A- (excellent)” or better. The Company verifies retrocession pool participants’ ratings on a quarterly basis. For a majority of the retrocessionaires that were not rated, security in the form of letters of credit or trust assets has been posted. In addition, the Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. In addition to its third party retrocessionaires, various RGA reinsurance subsidiaries retrocede amounts in excess of their retention to affiliated subsidiaries.
As of December 31, 2017, a valuation allowance against deferred tax assets was approximately $226.9 million. During 2017, a valuation allowance was established on the U.S. Foreign tax credit carryforwards of $65.1 million, RGA Reinsurance Company of Australia Limited’s, (“RGA Australia”) net operating losses of $20.1 million, as well as on the deferred tax assets of other jurisdictions of $3.3 million. Further movement in the valuation allowance includes foreign currency translation and reclassifications with other deferred tax assets of $10.6 million and ($5.6) million, respectively. The other significant components of the valuation allowance relate to a partial valuation allowance on the net operating loss carryforwards in RGA Australia and the foreign tax credit carryforwards in RGA International Reinsurance Company dac (“RGA International”). A valuation allowance also exists against the deferred tax assets of other branches and legal entities most of which there is no history of earnings in recent years.
During 2018, the Company expects to contribute $14.5 million and $1.2 million to the pension plans and other benefit plans, respectively.
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts due under certain reinsurance treaties, securities borrowing and repurchase arrangements, financing arrangements and office lease obligations, whereby if a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment to fulfill the obligation. In limited circumstances, treaty guarantees are granted to ceding companies in order to provide them additional security, particularly in cases where RGA’s subsidiary is relatively new, unrated, or not of a significant size, relative to the ceding company. Liabilities supported by the treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed party are reflected on the Company’s consolidated balance sheets in a policy related liability. Potential guaranteed amounts of future payments will vary depending on production levels and underwriting results. Guarantees related to securities borrowing and repurchase arrangements provide additional security to third parties should a subsidiary fail to provide securities when due. RGA’s guarantees issued as of December 31, 2017 and 2016 are reflected in the following table (dollars in thousands):
As of December 31, 2017, the total compensation cost of non-vested awards not yet recognized in the financial statements was $26.3 million. It is estimated that these costs will vest over a weighted average period of 1.5 years.