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Reinsurance Group Of America Reports Fourth-Quarter Results

Reinsurance Group of America, Incorporated (NYSE: RGA), a leading global provider of life reinsurance, reported fourth-quarter net income of $1,216.9 million, or $18.49 per diluted share, compared with $190.1 million, or $2.92 per diluted share, in the prior-year quarter. Adjusted operating income totaled $170.9 million, or $2.60 per diluted share, compared with $171.3 million, or $2.63 per diluted share, the year before. Net foreign currency fluctuations had a favorable effect of $0.06 per diluted share on net income and on adjusted operating income.

The Tax Cut and Jobs Act of 2017 (“U.S. Tax Reform”) was enacted on December 22, 2017, reducing the statutory federal income tax rate from 35 percent to 21 percent, effective January 1, 2018. The estimated impact of U.S. Tax Reform was a tax benefit, recognized in net income during the fourth quarter, of approximately $1.0 billion, or $15.71 per diluted share. The estimated impact primarily relates to the rate change on the Company’s net deferred tax liabilities existing at the date of enactment, and did not affect RGA’s adjusted operating income, a non-GAAP financial measure. The impact of U.S. Tax Reform may differ from this estimate, and is based on the best information currently available and may change as a result of changes in interpretations and the Company's assumptions.

Book value per share at December 31, 2017, totaled $148.48 including accumulated other comprehensive income (“AOCI”), and $118.88 excluding AOCI*. RGA expects to adopt in its issued financial statements a reclassification between AOCI and retained earnings related to a proposed Accounting Standard Update (“ASU”) issued by the Financial Accounting Standards Board on January 18, 2018. The anticipated impact of adopting the proposed ASU will be an increase in AOCI and a reduction in retained earnings of approximately $156.4 million resulting in a reduction in book value per share, excluding AOCI, of $2.42.

Full-year 2017 net income totaled $1,822.2 million, or $27.71 per diluted share, versus $701.4 million, or $10.79 per diluted share in 2016. The effect of the reduced U.S. corporate tax rate on 2017 net income totaled $1.0 billion, or $15.72 per diluted share. Adjusted operating income for the full year increased to $712.7 million, or $10.84 per diluted share, from $632.6 million, or $9.73 per diluted share, the year before. The reduced U.S. corporate tax rate benefit did not affect adjusted operating income, a non-GAAP financial measure. Net foreign currency fluctuations had an immaterial effect on net income and adjusted operating income. Net premiums totaled $9.8 billion, increasing 6 percent in 2017. Full-year premiums reflected favorable foreign currency effects of $25.9 million.

In the fourth quarter, consolidated net premiums totaled $2.5 billion, up slightly from last year’s fourth quarter, with favorable net foreign currency effects of $43.2 million. Excluding spread-based businesses and the value of associated derivatives, investment income rose slightly over year-ago levels, as a 7 percent increase in average invested assets was offset by the effect of lower yields on new money and reinvested assets, and lower variable investment income. The average investment yield, excluding spread businesses, was down 31 basis points from the fourth quarter of 2016 to 4.38 percent, reflecting lower yields on new money and reinvested assets, and lower variable investment income. The average investment yield was 43 basis points lower than the third-quarter yield due primarily to a lower level of variable investment income.

Primarily as a result of U.S. Tax Reform, the effective tax rate on pre-tax net income was (376.3) percent for the fourth quarter, and (59.5) percent for the full year. The effective tax rate was approximately 30.4 percent on pre-tax adjusted operating income for the fourth quarter. The Company's effective tax rate on pre-tax adjusted operating income was below the expected effective rate of 33 to 34 percent due to the recognized income tax benefits associated with an adjustment to prior-period tax accruals, as well as the tax treatment of uncertain tax positions related to foreign jurisdictions. For the full year, the effective tax rate was 31.4 percent on pre-tax adjusted operating income.

Anna Manning, president and chief executive officer, commented, “U.S. Tax Reform and a number of unusual items contributed to a noisy fourth quarter, but if you strip away the noise, it was a solid quarter, capping off an excellent year.

“In the quarter, we continued to benefit from good earnings diversity, as strong results in the EMEA region and Canada, offset modest weakness in U.S. and Asia Traditional business. Corporate expenses were elevated this quarter due to the write-off of certain capitalized project costs and accelerated pension benefits that together reduced pre-tax adjusted operating income by approximately $30 million. Premiums were up slightly in the quarter, negatively affected by certain treaty recaptures in Australia and the modification of a large health treaty in the U.S. and Latin America segment. Underlying momentum remained favorable overall.

“U.S. Tax Reform resulted in a one-time increase to our net income and stockholders' equity in the quarter. More importantly, we expect ongoing benefits from this legislation because of a lower effective tax rate for RGA and a more level playing field, as compared with our global competitors.

“We closed a number of in-force and other transactions during the quarter, bringing total deployment for the year to approximately $225 million. We ended the year with an excess capital position of approximately $1.4 billion.

“Looking forward, we remain optimistic about the future and our business prospects. RGA is well positioned in its markets, we have a proven strategy, and a long track record of successful execution. We anticipate ongoing change in the life insurance industry, and RGA continues to innovate and add to its capabilities in order to help our clients successfully address these industry challenges and opportunities.”

SEGMENT RESULTS

U.S. and Latin America

Traditional

The U.S. and Latin America Traditional segment reported pre-tax income of $92.4 million, compared with $131.5 million in the fourth quarter of 2016. Pre-tax adjusted operating income totaled $93.8 million for the quarter, compared with $129.3 million in last year’s fourth quarter. Results for the current quarter reflected modestly unfavorable claims experience in the Individual Mortality segment, and poor performance in Group. The year-ago period benefited from higher variable investment income and moderately favorable claims results in the Individual Mortality line of business. For the full year, pre-tax income increased to $373.4 million from $371.1 million and pre-tax adjusted operating income totaled $375.0 million compared with $375.3 million in 2016. Mortality experience for the full year of 2017 was in line with management's expectations.

Traditional net premiums decreased 3 percent from last year’s fourth quarter to $1,389.5 million due to the negotiated modification of an existing health treaty that effectively reduced premiums in the quarter by about $55 million with limited impact on income. Net premiums increased 2 percent for the full year, totaling $5,356.3 million.

Financial Solutions

The Asset-Intensive business reported pre-tax income of $80.8 million compared with $72.3 million last year. Fourth-quarter pre-tax adjusted operating income improved to $55.3 million from $46.7 million in the prior-year period, due to the addition of income from a new in-force transaction written earlier this year, as well as the impact of favorable equity markets. Full-year pre-tax income totaled $320.7 million, up from $224.1 million in 2016. Pre-tax adjusted operating income increased to $229.4 million from $205.0 million for the full year.

The Financial Reinsurance business reported pre-tax income and pre-tax adjusted operating income of $21.1 million, up from $14.4 million the year before, due to strong, recent new business volumes. For the full year, pre-tax income and pre-tax adjusted operating income totaled $80.9 million compared with $59.2 million in 2016.

Canada

Traditional

The Canada Traditional segment reported pre-tax income of $39.3 million, compared with $37.0 million the year before. Pre-tax adjusted operating income totaled $38.6 million, compared with $34.8 million in the fourth quarter of 2016. The current quarter reflected favorable individual mortality experience. Foreign currency exchange rates had a favorable effect of $1.9 million on pre-tax income and $1.8 million on pre-tax adjusted operating income. For the full year, pre-tax income totaled $120.2 million compared with $134.7 million and pre-tax adjusted operating income totaled $113.9 million versus $125.6 million the year before. Foreign currency exchange rates favorably affected pre-tax income and pre-tax adjusted operating income by $3.2 million for the full year.

Reported net premiums totaled $239.0 million for the quarter, slightly down from $241.9 million in the year-ago period due to the continued effects of the previously disclosed lost creditor business treaty. Net foreign currency fluctuations had a favorable effect of $11.5 million on net premiums. Net premiums for the full year totaled $902.0 million compared with $928.6 million in 2016. Net foreign currency fluctuations favorably affected net premiums by $18.5 million for the full year.

Financial Solutions

The Canada Financial Solutions business segment, which consists of longevity and fee-based transactions, reported fourth-quarter pre-tax income and pre-tax adjusted operating income of $4.2 million, compared with $4.1 million a year ago, with both periods reflecting favorable longevity experience. Net foreign currency fluctuations favorably affected pre-tax income and pre-tax adjusted operating income by $0.2 million. Pre-tax income and pre-tax adjusted operating income totaled $16.6 million for the full year, up from $7.9 million in 2016. For the full year, foreign currency exchange rates favorably affected pre-tax income and pre-tax adjusted operating income by $0.4 million.

Europe, Middle East and Africa (EMEA)

Traditional

The EMEA Traditional segment reported pre-tax income and pre-tax adjusted operating income of $29.7 million, up from $15.8 million in last year’s fourth quarter. The current-period results were driven by favorable mortality and morbidity experience, primarily in the U.K. Net foreign currency fluctuations favorably affected pre-tax income and pre-tax adjusted operating income by $2.0 million. For the full year, pre-tax income totaled $70.5 million compared with $30.1 million and pre-tax adjusted operating income totaled $70.4 million compared with $30.1 in the prior year. Full-year net foreign currency fluctuations favorably affected pre-tax income and pre-tax adjusted operating income by $1.5 million.

Reported net premiums increased 7 percent from the prior-year period to $321.9 million due to new business across the segment and growth of existing treaties. Foreign currency exchange rates favorably affected net premiums by $19.5 million. For the full year, net premiums totaled $1,301.6 million, with an adverse effect of $8.3 million from foreign currency exchange rates.

Financial Solutions

The EMEA Financial Solutions business segment includes longevity, asset-intensive and fee-based transactions. Pre-tax income totaled $31.7 million, compared with $41.3 million in the year-ago period. Pre-tax adjusted operating income totaled $34.5 million, compared with $36.7 million the year before. Current-period results reflected favorable longevity experience, while the prior year reflected favorable experience in both asset-intensive and longevity. Net foreign currency fluctuations favorably affected pre-tax income by $2.1 million and pre-tax adjusted operating income by $2.3 million. For the full year, pre-tax income totaled $123.5 million compared with $138.0 million in 2016. Pre-tax adjusted operating income for the year totaled $118.2 million versus $122.4 million the year before. Net foreign currency fluctuations adversely affected full-year pre-tax income by $5.8 million and pre-tax adjusted operating income by $4.6 million.

Asia Pacific

Traditional

The Asia Pacific Traditional segment reported pre-tax income and pre-tax adjusted operating income of $27.2 million, up from $18.5 million in the prior-year period. The increase versus the year-ago period reflected an improvement in Australia, from a loss in the year-ago period to a modest profit in the current quarter. In Asia, which excludes Australia, the current period reflected modestly unfavorable experience versus favorable experience in the year-ago period. Net foreign currency fluctuations had an adverse effect of $1.1 million on pre-tax income and pre-tax adjusted operating income. For the full year, pre-tax income and pre-tax adjusted operating income totaled $148.8 million compared with $113.9 million in 2016. Net foreign currency fluctuations had an adverse effect of $1.4 million on pre-tax income and pre-tax adjusted operating income for the full year.

Reported net premiums rose 11 percent to $495.4 million, with strong growth across Asia, primarily from new and existing treaties in Hong Kong and Southeast Asia. The strong premium growth in Asia was offset by a material reduction in premiums in Australia due to the recapture of several treaties. Foreign currency exchange rates had a favorable effect of $8.5 million on net premiums. For the full year, net premiums totaled $2,053.0 million, an increase of 22 percent over the prior year. Net foreign currency fluctuations had a favorable effect of $22.7 million on net premiums for the full year.

Financial Solutions

The Asia Pacific Financial Solutions business segment includes asset-intensive and fee-based transactions. Pre-tax income totaled $2.1 million, compared with pre-tax losses of $12.0 million in the prior-year period. Pre-tax adjusted operating income totaled $0.7 million, compared with pre-tax adjusted operating losses of $6.1 million in the prior-year quarter. Current-period results reflected better-than-expected results from a treaty that is in runoff, with the prior-year period losses due to unfavorable results on the same treaty. Net foreign currency fluctuations had a favorable effect of $0.2 million on pre-tax losses and pre-tax adjusted operating losses. Pre-tax income for the full year totaled $13.1 million compared with $4.1 million in 2016. Pre-tax adjusted operating income was $2.6 million for the year versus pre-tax operating losses of $2.4 million a year ago. Foreign currency exchange rates had a favorable effect of $0.3 million on pre-tax net income and $0.2 million on pre-tax adjusted operating income for the full year.

Corporate and Other

The Corporate and Other segment’s pre-tax losses totaled $73.0 million, compared with $27.4 million the year before. Pre-tax adjusted operating losses were $59.6 million versus year-ago pre-tax adjusted operating losses of $26.3 million. General expenses were higher this period, due to numerous items, including the write-off of capitalized project costs, increased pension expense, and higher incentive-based compensation expenses. For the full year, pre-tax losses totaled $125.0 million compared with $39.2 million in 2016. Pre-tax adjusted operating losses were $117.4 million versus $88.4 million in the prior year.

Company Guidance

On an annual basis, the Company provides financial guidance based upon the intermediate term rather than giving a range of annual earnings per share for an upcoming year. This better reflects the long-term nature of the business, as the Company accepts risks over very long periods of time, up to 30 years or longer in some cases. While more predictable over longer-term horizons, RGA's business is subject to inherent short-term volatility, primarily due to mortality and morbidity experience.

Over the intermediate term, the Company continues to target growth in adjusted operating earnings per share in the 5 to 8 percent range, and adjusted operating return on equity of 10 to 12 percent. It is presumed that there are no significant changes in the investment environment from current levels, and the Company will deploy $300 to $400 million of excess capital, on average, annually. These guidance ranges are based upon “normalized” results. The Company currently estimates that as a result of tax reform, its effective tax rate for 2018 and thereafter will be in the range of 21 percent to 24 percent. The forward guidance for adjusted operating earnings per share is assumed to be on an equivalent tax basis, using 21 percent to 24 percent for all years, including 2017 on a pro forma basis.

Todd C. Larson, senior executive vice president and chief financial officer, commented, “We believe that our adjusted operating EPS range is appropriate, and we expect the combination of organic growth, execution of block transactions and effective capital management to allow us to reach our financial targets. We have faced significant macro headwinds in terms of weak foreign currencies and sustained low interest rates over the past several years, and we assume that there will be some level of ongoing headwinds for the foreseeable future. Nevertheless, we expect that we can overcome these challenges and achieve our goals.”

Dividend Declaration

The board of directors declared a regular dividend of $0.50, payable March 1 to shareholders of record as of February 8.

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