Products and Distribution Channels. New products and distribution channels from accelerated underwriting and insurtech, are expected to contribute to the growth of the insurance market globally and provide opportunities for reinsurers. The COVID-19 pandemic will likely hasten the transformation of the insurance and reinsurance industry and accelerate the shift to digital platforms and distribution channels.
accounts require extensive use of assumptions and estimates, particularly related to the future performance of the underlying business.
The Company has not currently experienced any significant disruptions to its daily operations, despite most of its workforce working remotely. Expenses incurred to implement its business continuity plans, including work from home arrangements, are not material and have been more than offset by reduced travel and other expenses during the year ended December 31, 2020. However, COVID-19 may heighten 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. The Company is heavily reliant on timely reporting from its clients and other third parties. While operational risks, including privacy and cybersecurity risks, are heightened during remote working situations, the Company has increased communication and training related to these risks for all its workforce and continues to monitor its programs, processes and procedures designed to manage these risks.
The Company’s liquidity is monitored and managed on a daily basis to ensure all current and future liquidity demands can be met, and that it maintains access to liquidity resources to meet even extreme tail risk liquidity needs. In addition, RGA maintains a number of arm’s length arrangements for mobilizing liquidity throughout the group. The Company has enhanced liquidity by holding more cash received in the course of its normal operating and investing activities. The Company also suspended common stock repurchases until further notice.
The increase in premiums is primarily due to growth in life reinsurance in force. Consolidated assumed life insurance in force increased to $3,480.7 billion as of December 31, 2020, from $3,480.2 billion as of December 31, 2019, due to new business production and in force transactions offset by an increase in lapses and mortality claims in the current year primarily attributable to the COVID-19 pandemic. The Company added new business production, measured by face amount of insurance in force, of $389.6 billion, and $376.5 billion during 2020 and 2019, 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 will also vary from year to year and can be highly variable based on 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 the loss ratio for 2020 was primarily due to less favorable individual mortality experience as compared to 2019. In addition, while the cause of death is not yet available for all claims, the Company estimates that approximately $20 million of excess claims for the year ended December 31, 2020, were attributable to COVID-19 or COVID-19 related factors.
•The increase in income before income taxes as compared to the same period in 2019 was the result of favorable claims experience as compared to the prior year across the segment, as well as income from new business growth within the Financial Solutions business.
The increase in income before income taxes is primarily due to the growth of asset intensive and financial reinsurance business in Asia. The amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was $2.9 billion and $3.9 billion at December 31, 2020 and 2019, 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.
incurring third-party transaction costs. The statutory borrowing and lending limit for RGA’s Missouri-domiciled insurance subsidiaries is currently 3% of the insurance company’s admitted assets as of its most recent year-end. There were borrowings of $153 million and $196 million outstanding under the intercompany revolving credit facility as of December 31, 2020, and 2019, respectively. In addition to loans associated with the intercompany revolving credit facility, RGA and its subsidiaries, RGA Americas and RGA International Division Sydney Office Pty Limited, provided loans to RGA Australian Holdings Pty Limited with a total outstanding balance of $46 million and $42 million as of December 31, 2020 and 2019, respectively.
In the U.S., the introduction of the certified reinsurer has provided an alternative way to manage collateral requirements. In 2014, RGA Americas was designated as a certified reinsurer by the MDCI. This designation allows the Company to retrocede business to RGA Americas in lieu of using captives for collateral requirements. Therefore, the Company has chosen not to establish captives subject to Actuarial Guideline 48.
The Company’s fixed maturity portfolio includes structured securities. The following table shows the types of structured securities the Company held as of December 31, 2020 and 2019 (dollars in millions):
(1)Represents the fair value of embedded derivatives related to reinsurance written on a modco or funds withheld basis and subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives for the segregated portfolios. When the segregated portfolios are presented on a fair value basis in the “Estimated Fair Value” column, the calculation of a separate embedded derivative is not applicable.
•Review, revise and approve RGA group-level strategic risk limits consistent with the risk appetite statement
The Insurance, Market and Credit, Capital, and Operational risk committees have direct oversight accountability for their respective risk areas including the identification, assessments, and management of established and emerging risk exposures and the review and approval of RGA group-level risk limits
•.Risk Assessment Process: RGA uses qualitative and quantitative methods to assess key risks through a portfolio approach, which analyzes established and emerging risks in conjunction with other risks.
Run-on-the-Bank is the potential 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. Policyholder surrenders and/or lapses substantially higher than expected could result in inadequate in force business to recover cash paid out for acquisition costs.
Company were rated “A-” or better. A rating of “A-” is the fourth highest rating out of sixteen possible ratings. For a majority of the retrocessionaires that were not rated, letters of credit or trust assets have been received by the Company as additional security. In addition, the Company performs annual financial and in force reviews of its retrocessionaires to evaluate financial stability and performance.
iii) stabilize operating results by leveling fluctuations in the ceding company’s loss experience; and
Investment income is recognized as it accrues or is legally due. Realized gains and losses on sales of investments are included in investment related gains (losses), net, as are impairments and change in allowance for credit losses. The cost of investments sold is primarily determined based upon the specific identification method.
The Company identifies fixed maturity securities that could result in a credit loss by monitoring market events that could impact issuers’ credit ratings, business climates, management changes, litigation, government actions and other similar factors. The Company also monitors late payments, pricing levels, rating agency actions, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.
The Company considers its cost method investments for 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 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.
The Company assumes and retrocedes financial reinsurance contracts that do not expose it to a reasonable possibility of loss from insurance risk. These contracts are reported as deposits and are included in other reinsurance assets/liabilities. The amount of revenue reported in other revenues on these contracts represents fees and the cost of insurance under the terms of the reinsurance agreement. Assets and liabilities are reported on a net or gross basis, depending on the specific details within each treaty. Reinsurance agreements reported on a net basis, where a legal right of offset exists, are generally included in other reinsurance balances on the consolidated balance sheets. Balances resulting from the assumption and/or subsequent transfer of benefits and obligations resulting from cash flows related to variable annuities have also been classified as other reinsurance balance assets and/or liabilities. Other reinsurance assets are included in premiums receivable and other reinsurance balances while other reinsurance liabilities are included in other reinsurance balances.
equipment and leasehold improvements was $260 million and $244 million at December 31, 2020 and 2019, respectively. Accumulated depreciation of property, equipment and leasehold improvements was $116 million and $99 million at December 31, 2020 and 2019, respectively. Related depreciation expense was $17 million, $18 million and $18 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company reinsures equity-indexed annuity contracts. These contracts allow the contract holder to elect an interest rate return or an equity market component where interest credited is based on the performance of common stock market indices,
The Company provides reinsurance of medical, disability, life and other products for a fixed period of short-duration, typically one to three years. Under the short-duration insurance accounting model:
•Claims or benefits are recognized when insured events occur, based on the ultimate cost to settle the claim, and are adjusted to reflect changes in estimates during the life of the contract. The estimated cost to settle the claim is based on actuarial assumptions for similar claims. The Company also establishes an incurred but not reported (“IBNR”) liability based on historical reporting patterns.
As of December 31, 2020, mortgage loans were geographically dispersed throughout the U.S. with the largest concentrations in California (14.6%), Texas (14.1%) and Washington (8.4%) and include loans secured by properties in Canada (3.2%) and United Kingdom (1.3%). The recorded investment in mortgage loans on real estate presented below is gross of unamortized deferred loan origination fees and expenses, and valuation allowances.
The following tables set forth certain key credit quality indicators of the Company’s recorded investment in mortgage loans as of December 31, 2020 and 2019 (dollars in millions):
The following table presents the Company’s average investment balance of impaired mortgage loans and the related interest income for the years ended December 31, 2020, 2019 and 2018 (dollars in millions):
Derivatives, except for embedded derivatives and longevity and mortality swaps, are included in other invested assets or other liabilities, at fair value. Longevity and mortality swaps, which have been discontinued or matured in 2019, are included in other assets or other liabilities, at fair value. Embedded derivative assets and liabilities on modco or funds withheld arrangements are included on the consolidated balance sheets with the host contract in funds withheld at interest, at fair value. Embedded derivative liabilities on indexed annuity and variable annuity products are included on the consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. The following table presents the notional amounts and gross fair value of derivative instruments prior to taking into account the netting effects of master netting agreements as of December 31, 2020 and 2019 (dollars in millions):
The following table presents the components of AOCI, before income tax, and the consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the years ended December 31, 2020, 2019 and 2018 (dollars in millions):
believes these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. Prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques that require management’s judgment or estimation in developing inputs that are consistent with those other market participants would use when pricing similar assets and liabilities. Non-binding broker quotes, which are utilized when pricing service information is not available, are reviewed for reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certain circumstances, based on its observations of transactions in active markets, the Company may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the Company would apply internally developed valuation techniques to the related assets or liabilities. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties, and longevity and mortality swaps are classified in Level 3 since their values include significant unobservable inputs.
In the normal course of business, 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 or reinsurance companies under excess coverage and coinsurance contracts. In the individual life markets, the Company retains a maximum of $8 million of coverage per individual life. Claims in excess of this retention amount are retroceded to retrocessionaires; however, the Company remains fully liable to the ceding company for the entire amount of risk it assumes. In certain limited situations the Company has retained more than $8 million per individual policy. The Company enters into agreements with other reinsurers to mitigate the residual risk related to the over-retained policies. Additionally, due to some lower face amount reinsurance coverage provided by the Company in addition to individual life, such as group life, disability and health, under certain circumstances, the Company could potentially incur net claims totaling more than $8 million per individual life.
The accounting policies of the segments are the same as those described in Note 2 - “Significant Accounting Policies and Pronouncements.” The Company measures segment performance primarily based on profit or loss from operations before
The following table presents the weighted average assumptions used to determine the fair value of SARs issued:
•We obtained an understanding and evaluated the appropriateness of the Company’s pricing sources.
Actuarial Assumptions - Refer to Notes 1, 6, and 8 to the financial statements
•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.