Reinsurance Group of America, Incorporated (NYSE: RGA) has reported second-quarter net income of $204.4 million, or $3.13 per diluted share, compared with $232.2 million, or $3.54 per diluted share, in the prior-year quarter. Adjusted operating income totaled $202.1 million, or $3.10 per diluted share, compared with $193.7 million, or $2.95 per diluted share, the year before. Net foreign currency fluctuations had a favorable effect of $0.08 per diluted share on net income and $0.07 per diluted share on adjusted operating income.
In the second quarter, consolidated net premiums totaled $2.6 billion, up 5 percent from last year’s second quarter of $2.5 billion, with favorable net foreign currency effects of $40.9 million. Excluding spread-based businesses and the value of associated derivatives, investment income increased slightly over year-ago levels. The average investment yield, excluding spread businesses, was down 28 basis points from the second quarter of 2017 to 4.32 percent, attributable to a lower level of variable investment income. The average investment yield was 14 basis points lower than the first-quarter yield due primarily to a lower level of variable investment income in the second quarter.
The effective tax rate this quarter was 17.4 percent on pre-tax income and 19.2 percent on pre-tax adjusted operating income, lower than the expected range of 21 to 24 percent largely due to the effective settlement of an uncertain tax position during the quarter, and a lower-than-expected provision for Global Intangible Low-Taxed Income.
Anna Manning, president and chief executive officer, commented, “On balance, this was a good quarter as many of our key businesses reported strong or in-line results. Our U.S. Individual Mortality business bounced back this quarter as mortality experience was in line with our expectations, while both EMEA and Asia performed very well overall. However, we did have disappointing results from parts of our U.S. Group business, and we will continue to take rate action in select areas as appropriate. Consolidated premium growth of 5 percent reflected a tough comparison with a year-ago quarter that included some catch-up premiums, and our underlying momentum remains very good.
“After a strong first quarter, deployment into in-force and other transactions was on the light side in terms of capital usage, but we did close on a number of attractive transactions, and we remain optimistic about the environment and our pipeline. As indicated at our recent Investor Day, we were active in the quarter in regard to share repurchases, deploying $150.0 million to repurchase approximately 991,000 shares. We ended the quarter with an excess capital position of approximately $1.2 billion, down slightly from the previous quarter. We continue to pursue a balanced approach to capital management through deployment of capital into in-force and other attractive transactions, share repurchases and shareholder dividends. Book value per share was $135.09 including AOCI, and $119.31 excluding AOCI.
“Overall, we remain optimistic about our business prospects, and in recognition of our ongoing earnings power, the board increased the common stock dividend by 20 percent, marking the ninth straight year of double-digit percentage increases.”
U.S. and Latin America
The U.S. and Latin America Traditional segment reported pre-tax income of $72.0 million, compared with $90.6 million in the second quarter of 2017. Pre-tax adjusted operating income totaled $68.3 million for the quarter, compared with $91.2 million in last year’s second quarter. Results for the current quarter reflected individual mortality experience that was in line with expectations, while group experience was unfavorable. Additionally, variable investment income was below our average run rate in the quarter. The year-ago period reflected favorable morality experience, offset by unfavorable group experience.
Traditional net premiums were up 3 percent from last year’s second quarter to $1,373.5 million.
The Asset-Intensive business reported pre-tax income of $60.8 million compared with $87.0 million last year. Second-quarter pre-tax adjusted operating income totaled $49.7 million compared with $49.9 million in the prior-year period. Results were at the low end of our expected range due to lower prepayment income.
The Financial Reinsurance business reported pre-tax income and pre-tax adjusted operating income of $21.5 million, up from $20.0 million the year before.
The Canada Traditional segment reported pre-tax income of $21.8 million, compared with $32.8 million the year before. Pre-tax adjusted operating income declined to $22.2 million, from $31.2 million a year ago, attributable to unfavorable individual mortality experience. Foreign currency exchange rates had a favorable effect of $0.6 million on pre-tax income and pre-tax adjusted operating income.
Reported net premiums totaled $260.8 million for the quarter, up 18 percent over $221.4 million in the year-ago period primarily due to new business and in particular one larger transaction that drove the increase. Net foreign currency fluctuations had a favorable effect of $10.2 million on net premiums.
The Canada Financial Solutions business segment, which consists of longevity and fee-based transactions, reported second-quarter pre-tax income and pre-tax adjusted operating income of $3.5 million, compared with $4.4 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 $0.1 million.
Europe, Middle East and Africa (EMEA)
The EMEA Traditional segment reported pre-tax income and pre-tax adjusted operating income of $6.5 million, compared with $11.4 million in last year’s second quarter. The current-period results reflected unfavorable underwriting results in a couple of markets. Net foreign currency fluctuations favorably affected pre-tax income and pre-tax adjusted operating income by $1.0 million.
Reported net premiums increased 7 percent from the prior-year period to $354.5 million attributable to new business. Foreign currency exchange rates favorably affected net premiums by $18.7 million.
The EMEA Financial Solutions business segment, which consists of longevity, asset-intensive and fee-based transactions, reported second-quarter pre-tax income of $65.4 million, compared with $28.9 million in the year-ago period. Pre-tax adjusted operating income totaled $59.5 million, compared with $26.5 million the year before, due to very favorable longevity experience and continued growth in the underlying business. Net foreign currency fluctuations favorably affected pre-tax income by $3.3 million and pre-tax adjusted operating income by $3.1 million.
The Asia Pacific Traditional segment's pre-tax income and pre-tax adjusted operating income increased to $58.9 million, up from $53.3 million in the prior-year period, due to favorable underwriting experience in Asia, and a break-even result in Australia. Net foreign currency fluctuations had an adverse effect of $0.1 million on pre-tax income and pre-tax adjusted operating income.
Reported net premiums increased slightly to $538.8 million, reflecting a continued strong level of premiums from ongoing positive momentum in Asia offset by a reduction in Australia due to the effects of treaty recaptures. The year-ago period included a significant level of catch-up premiums due to timing of client reporting. Foreign currency exchange rates had a favorable effect of $9.2 million on net premiums.
The Asia Pacific Financial Solutions business segment, which consists of asset-intensive and fee-based transactions, reported second-quarter pre-tax income of $4.1 million, compared with $5.4 million in the prior-year period. Pre-tax adjusted operating income totaled $2.9 million, compared with $2.6 million in the prior-year quarter, attributable to new business combined with slightly better-than-expected results from a treaty that is in runoff. Net foreign currency fluctuations had an immaterial effect on pre-tax income. Foreign currency exchange rates had a favorable effect of $0.1 million on pre-tax adjusted operating income.
Corporate and Other
The Corporate and Other segment’s pre-tax losses totaled $67.3 million, compared with pre-tax operating income of $5.5 million the year before. Pre-tax adjusted operating losses increased to $42.9 million, from year-ago pre-tax adjusted operating losses of $9.5 million primarily due to higher project and regulatory compliance costs. The year-ago period benefited from a $10.0 million pre-tax release of interest on liabilities associated with uncertain tax positions that were deemed settled.
The board of directors increased the quarterly dividend 20 percent, to $0.60 from $0.50, payable August 28 to shareholders of record as of August 7.
Earnings Conference Call
A conference call to discuss second-quarter results will begin at 11 a.m. Eastern Time on Friday, July 27. Interested parties may access the call by dialing 877-627-6544 (domestic) or 719-325-4771 (international). The access code is 4115359. A live audio webcast of the conference call will be available on the Company’s Investor Relations website at www.rgare.com. A replay of the conference call will be available at the same address for 90 days following the conference call.
The Company has posted to its website a Quarterly Financial Supplement that includes financial information for all segments as well as information on its investment portfolio. Additionally, the Company posts periodic reports, press releases and other useful information on its Investor Relations website.
Use of Non-GAAP Financial Measures
RGA uses a non-GAAP financial measure called adjusted operating income as a basis for analyzing financial results. This measure also serves as a basis for establishing target levels and awards under RGA’s management incentive programs. Management believes that adjusted operating income, on a pre-tax and after-tax basis, better measures the ongoing profitability and underlying trends of the Company’s continuing operations, primarily because that measure excludes substantially all of the effect of net investment related gains and losses, as well as changes in the fair value of certain embedded derivatives and related deferred acquisition costs. These items can be volatile, primarily due to the credit market and interest rate environment, and are not necessarily indicative of the performance of the Company’s underlying businesses. Additionally, adjusted operating income excludes any net gain or loss from discontinued operations, the cumulative effect of any accounting changes, tax reform and other items that management believes are not indicative of the Company’s ongoing operations. The definition of adjusted operating income can vary by company and is not considered a substitute for GAAP net income.
Book value per share excluding the impact of AOCI is a non-GAAP financial measure that management believes is important in evaluating the balance sheet in order to ignore the effects of unrealized amounts primarily associated with mark-to-market adjustments on investments and foreign currency translation.
Adjusted operating income per diluted share is a non-GAAP financial measure calculated as adjusted operating income divided by weighted average diluted shares outstanding. Adjusted operating return on equity is a non-GAAP financial measure calculated as adjusted operating income divided by average stockholders’ equity excluding AOCI. Similar to adjusted operating income, management believes these non-GAAP financial measures better reflect the ongoing profitability and underlying trends of the Company’s continuing operations, they also serve as a basis for establishing target levels and awards under RGA’s management incentive programs.
Reconciliations from GAAP net income, book value per share, net income per diluted share and average stockholders’ equity are provided in the following tables. Additional financial information can be found in the Quarterly Financial Supplement on RGA’s Investor Relations website at www.rgare.com in the “Financial Information” section.