Reinsurance Group of America, Incorporated (NYSE: RGA) has reported third-quarter net income of $301.2 million, or $4.68 per diluted share, compared with $227.6 million, or $3.47 per diluted share, in the prior-year quarter. Adjusted operating income* totaled $259.4 million, or $4.03 per diluted share, compared with $226.0 million, or $3.44 per diluted share, the year before. Net foreign currency fluctuations had an adverse effect of $0.02 per diluted share on net income and adjusted operating income as compared with the prior year.
In the third quarter, consolidated net premiums totaled $2.6 billion, up 3 percent from last year’s third quarter of $2.5 billion, with adverse net foreign currency effects of $33.4 million. Excluding spread-based businesses and the value of associated derivatives, investment income decreased slightly versus a year ago, as a 4 percent increase in average assets was more than offset by year-over-year decline in variable investment income. The average investment yield, excluding spread businesses, was down 24 basis points from the third quarter of 2017 to 4.57 percent, as variable investment income was above-average in both periods, but especially strong in the year-ago period. The average investment yield was up 25 basis points from the second-quarter yield, primarily due to a higher level of variable investment income in the third quarter.
The GAAP effective tax rate this quarter was 6.7 percent on pre-tax income. The GAAP effective tax rate was affected by the release of a valuation allowance previously established as part of the Companyʼs provisional estimate of the effects of the Tax Cuts and Jobs Act of 2017.
The effective tax rate was 24.5 percent on pre-tax adjusted operating income, slightly higher than the expected range of 21 to 24 percent primarily due to the annual geographic mix of earnings.
Anna Manning, President and Chief Executive Officer, commented, “This was a very strong quarter for us, with this quarter’s performance offsetting some softness in the first two quarters of the year. I want to reiterate a few key points that this quarterʼs results reinforce. First, our global operating platform, which is diversified by both geography and product, continues to serve us well. Second, the nature of our business is such that we expect short-term volatility by segment, but we expect this volatility to even out over longer periods of time. Finally, we continue to use a balanced approach to effectively manage our capital over time, and this quarterʼs deployment and share repurchases demonstrate our discipline toward this end.
“Highlights for the quarter include a strong result for our U.S. Individual Mortality business due to very favorable mortality experience and strong performances from EMEA and Asia. Strength in these areas more than offset the unfavorable experience in the U.S. Group business and in Australia.
“We deployed $190 million of our excess capital into in-force and other transactions, and we repurchased $109 million of shares, bringing year-to-date deployment and repurchases to $280 million and $259 million, respectively. We ended the quarter with an excess capital position of approximately $1.1 billion, down from the previous quarter.”
U.S. and Latin America
The U.S. and Latin America Traditional segment reported pre-tax income of $116.3 million, compared with $160.5 million in the third quarter of 2017. Pre-tax adjusted operating income totaled $116.4 million for the quarter, compared with $162.0 million in last year’s third quarter. Results for the current quarter reflected favorable individual mortality experience and above-average variable investment income, somewhat offset by unfavorable group experience. The year-ago period results were strong, and reflected very favorable morality experience and variable investment income.
Traditional net premiums were up 3 percent from last year’s third quarter to $1,360.1 million.
The Asset-Intensive business reported pre-tax income of $65.5 million compared with $67.1 million last year. Third-quarter pre-tax adjusted operating income totaled $63.8 million compared with $72.6 million in the prior-year period. Current-period results were attributable to favorable overall experience in terms of spreads and equity markets, while prior-year results reflected favorable experience on payout annuities and above-average variable investment income.
The Financial Reinsurance business reported pre-tax income and pre-tax adjusted operating income of $21.6 million, relatively flat compared with $22.0 million the year before.
The Canada Traditional segment reported pre-tax income of $21.1 million, compared with $28.8 million the year before. Pre-tax adjusted operating income declined to $20.0 million, from $27.4 million a year ago, attributable to unfavorable individual mortality experience due to a greater number of large claims. Foreign currency exchange rates had an adverse effect of $1.1 million on pre-tax income and $1.0 million on pre-tax adjusted operating income.
Reported net premiums totaled $243.1 million for the quarter, up 8 percent over $225.8 million in the year-ago period primarily due to new business and in particular an in-force transaction entered into earlier this year. Net foreign currency fluctuations had an adverse effect of $10.5 million on net premiums.
The Canada Financial Solutions business segment, which consists of longevity and fee-based transactions, reported third-quarter pre-tax income and pre-tax adjusted operating income of $1.6 million, compared with $4.5 million a year ago. Current-period results were relatively in line with expectations, while the prior-year period had favorable longevity experience. Net foreign currency fluctuations adversely 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 $18.4 million, compared with $15.4 million in last year’s third quarter. The current-period results reflected modestly favorable experience across most markets. Net foreign currency fluctuations adversely affected pre-tax income and pre-tax adjusted operating income by $0.4 million for the quarter.
Reported net premiums decreased slightly to $340.4 million compared with a strong year-ago period that included single premium treaties. Foreign currency exchange rates adversely affected net premiums by $6.4 million.
The EMEA Financial Solutions business segment, which consists of longevity, asset-intensive and fee-based transactions, reported third-quarter pre-tax income of $56.2 million, compared with $31.0 million in the year-ago period. Pre-tax adjusted operating income totaled $56.4 million, compared with $29.7 million the year before, due to favorable longevity experience. Net foreign currency fluctuations adversely affected pre-tax income and pre-tax adjusted operating income by $0.7 million.
The Asia Pacific Traditional segment’s pre-tax income and pre-tax adjusted operating income increased to $62.0 million, up from $26.6 million in the prior-year period, due to favorable experience in Asia, which was slightly offset by a loss in Australia. The year-ago period results reflected earnings below expectations in Asia and a modest loss in Australia. Net foreign currency fluctuations had a favorable effect of $1.2 million on pre-tax income and pre-tax adjusted operating income.
Reported net premiums increased 3 percent to $551.7 million, reflecting growth on new and existing treaties in Asia, offset by a reduction in Australia due to treaty recaptures. The year-ago period included strong growth across the region. Foreign currency exchange rates had an adverse effect of $14.9 million on net premiums.
The Asia Pacific Financial Solutions business segment, which consists of asset-intensive and fee-based transactions, reported third-quarter pre-tax income of $0.2 million, compared with pre-tax losses of $0.2 million in the prior-year period. Pre-tax adjusted operating income totaled $1.3 million, compared with pre-tax adjusted operating losses of $0.2 million the year before. Both periods reflect the negative effects of a treaty in runoff, but to a lesser extent in the current period. Net foreign currency fluctuations had an immaterial effect on pre-tax income and pre-tax adjusted operating income.
Corporate and Other
The Corporate and Other segment’s pre-tax losses totaled $40.3 million, compared with pre-tax losses of $15.4 million the year before. Pre-tax adjusted operating losses were $18.1 million, compared with year-ago pre-tax adjusted operating losses of $21.7 million, as the current period benefited from higher variable investment income.
The board of directors declared a regular dividend of $0.60, payable November 27 to shareholders of record as of November 6.
Earnings Conference Call
A conference call to discuss third-quarter results will begin at 11 a.m. Eastern Time on Friday, October 26. Interested parties may access the call by dialing 877-397-0272 (domestic) or 719-325-4789 (international). The access code is 5685420. 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.
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