Consolidated net income decreased $1.1 billion, or 60.7% in 2018, and increased $1.1 billion, or 159.8%, in 2017. Diluted earnings per share were $11.00 in 2018 compared to $27.71 in 2017 and $10.79 in 2016. During 2017, a net tax benefit was recorded of approximately $1.0 billion or $15.72 per diluted share, primarily related to the revaluation of the Company’s net deferred tax liabilities as a result of the U.S. corporate income tax rate being reduced from 35% to 21% as part of the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”).
The Company’s accounting policies are described in Note 2 - “Significant Accounting Policies and Pronouncements” in the Notes to Consolidated Financial Statements. The Company believes its most critical accounting policies include the establishment of premiums receivable; amortization of deferred acquisition costs (“DAC”); the establishment of liabilities for future policy benefits and incurred but not reported claims; the valuation of investments and investment impairments; the valuation of embedded derivatives; and accounting for income taxes. The balances of these accounts require extensive use of assumptions and estimates, particularly related to the future performance of the underlying business.
Income before income taxes decreased by $15.4 million, or 21.8%, and increased by $40.4 million, or 134.5%, in 2018 and 2017, respectively. The decrease in income before income taxes in 2018 was primarily due to unfavorable individual mortality and morbidity experience. The increase in income before income taxes in 2017 was primarily due to business growth and favorable individual morbidity and mortality experience. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $1.5 million in both 2018 and 2017.
Other revenues increased by $0.5 million, or 9.3% and $0.1 million, or 1.9%, in 2018 and 2017, respectively. These variances are primarily due to foreign currency transactions.
Loss ratios for this segment were 82.1%, 79.7% and 80.0% for 2018, 2017 and 2016, respectively. The increase in the loss ratio in 2018 was primarily due to new business mix in Asia and adverse claims experience in Australia. The decrease in the loss ratio in 2017 was primarily due to improved claims experience in Australia compared to the prior year.
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 security portfolio, as of December 31, 2018 and 2017 was as follows (dollars in thousands):
The risk that a client’s in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation damage or other market changes affecting the counterparty. Substantially higher than expected surrenders and/or lapses could result in inadequate in force business to recover cash paid out for acquisition costs.
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, financial reinsurance and stable value products.
In addition to FHLB common stock discussed in the Equity Securities section above and derivative contracts discussed below, other invested assets include limited partnership interests, joint ventures (other than operating joint ventures), equity release mortgages and contractholder-directed investments. Limited partnership interests are primarily carried at cost. Based on the nature and structure of these investments, they do not meet the characteristics of an equity security in accordance with applicable accounting standards. Joint ventures and certain limited partnerships are reported using the equity method of accounting.
The Company considers its cost method investments for other-than-temporary impairment when the carrying value of these investments exceeds the net asset value. The Company takes into consideration the severity and duration of this excess when deciding if the cost method investment is other-than-temporarily impaired. For equity method investments (including real estate joint ventures), the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred.
Under a fair value hedge, changes in the fair value of the hedging derivative, including amounts measured as ineffective, and changes in the fair value of the hedged item related to the designated risk being hedged, are reported within investment related gains (losses), net. The fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statements of income within interest income or interest expense to match the location of the hedged item.
Retrocession reinsurance treaties do not relieve the Company from its obligations to direct writing companies. Failure of retrocessionaires to honor their obligations could result in losses to the Company. Consequently, allowances would be established for amounts deemed uncollectible. At December 31, 2018 and 2017, no allowances were deemed necessary. The Company regularly evaluates the financial condition of the insurance companies from which it assumes and to which it cedes reinsurance.
Retrocessions are arranged through the Company’s retrocession pools for amounts in excess of the Company’s retention limit. As of December 31, 2018 and 2017, all rated retrocession pool participants followed by the A.M. Best Company were rated “A- (excellent)” or better except one pool member that was rated “B+.” 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, 2018 and 2017, the Company classified all of its qualified pension plan assets in the Level 1 category as quoted prices in active markets are available for these assets. See Note 6 - “Fair Value of Asset and Liabilities” for additional detail on the fair value hierarchy.
Rent expenses amounted to approximately $17.5 million, $15.7 million and $13.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
RGA, through wholly-owned subsidiaries, has committed to provide statutory reserve support to third-parties, in exchange for a fee, by funding loans if certain defined events occur. Such statutory reserves are required under the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX for term life insurance policies and Regulation A-XXX for universal life secondary guarantees). The third-parties have recourse to RGA should the subsidiary fail to provide the required funding, however, as of December 31, 2018, the Company does not believe that it will be required to provide any funding under these commitments as the occurrence of the defined events is considered remote. The following table presents the maximum potential obligation for these commitments as of December 31, 2018 (dollars in millions):