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REINSURANCE GROUP OF AMERICA INC - Quarter Report: 2018 June (Form 10-Q)

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
 
 
 
(Mark One)
  
 
  
 
 x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
  
 
  
OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
For the quarterly period ended June 30, 2018
  
 
 
  
 OR
  
 
 ¨
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
  
 
  
OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
 
Commission File Number 1-11848
  
 
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of Registrant as specified in its charter)
MISSOURI                        
  
43-1627032
(State or other jurisdiction                  
  
(IRS employer
of incorporation or organization)  
  
identification number)
16600 Swingley Ridge Road
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x     Accelerated filer o     Non-accelerated filer o     
Smaller reporting company o     Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

As of July 31, 2018, 63,656,444 shares of the registrant’s common stock were outstanding.


Table of Contents


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
 
Item
  
 
  
Page
 
 
 
 
  
PART I – FINANCIAL INFORMATION
  
 
 
 
 
1
  
  
 
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
 
 
 
 
 
 
 
     3. Equity
 
 
 
     4. Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     9. Income Tax
 
 
 
 
 
 
     11. Reinsurance
 
 
 
 
2
  
  
3
  
  
4
  
  
 
 
 
 
  
PART II – OTHER INFORMATION
  
 
 
 
 
1
  
  
1A
  
  
2
  
  
6
  
  
 
  
  
 
  
  

2

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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
June 30,
2018
 
December 31,
2017
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $35,233,970 and $35,281,412)
 
$
36,784,954

 
$
38,150,820

Equity securities, at fair value (cost $121,744 and $102,841)
 
108,070

 
100,152

Mortgage loans on real estate (net of allowances of $9,706 and $9,384)
 
4,558,669

 
4,400,533

Policy loans
 
1,339,252

 
1,357,624

Funds withheld at interest
 
5,981,092

 
6,083,388

Short-term investments
 
123,028

 
93,304

Other invested assets
 
1,605,562

 
1,505,332

Total investments
 
50,500,627

 
51,691,153

Cash and cash equivalents
 
1,397,679

 
1,303,524

Accrued investment income
 
400,160

 
392,721

Premiums receivable and other reinsurance balances
 
2,617,382

 
2,338,481

Reinsurance ceded receivables
 
789,429

 
782,027

Deferred policy acquisition costs
 
3,205,667

 
3,239,824

Other assets
 
855,553

 
767,088

Total assets
 
$
59,766,497

 
$
60,514,818

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
22,286,622

 
$
22,363,241

Interest-sensitive contract liabilities
 
16,513,668

 
16,227,642

Other policy claims and benefits
 
5,334,210

 
4,992,074

Other reinsurance balances
 
412,846

 
488,739

Deferred income taxes
 
2,009,514

 
2,198,309

Other liabilities
 
1,094,826

 
1,102,975

Long-term debt
 
2,788,111

 
2,788,365

Collateral finance and securitization notes
 
724,998

 
783,938

Total liabilities
 
51,164,795

 
50,945,283

Commitments and contingent liabilities (See Note 8)
 


 


Stockholders’ Equity:
 
 
 
 
Preferred stock - par value $.01 per share, 10,000,000 shares authorized, no shares issued or outstanding
 

 

Common stock - par value $.01 per share, 140,000,000 shares authorized, 79,137,758 shares issued at June 30, 2018 and December 31, 2017
 
791

 
791

Additional paid-in capital
 
1,887,336

 
1,870,906

Retained earnings
 
6,952,170

 
6,736,265

Treasury stock, at cost - 15,465,272 and 14,685,663 shares
 
(1,243,566
)
 
(1,102,058
)
Accumulated other comprehensive income
 
1,004,971

 
2,063,631

Total stockholders’ equity
 
8,601,702

 
9,569,535

Total liabilities and stockholders’ equity
 
$
59,766,497

 
$
60,514,818

See accompanying notes to condensed consolidated financial statements (unaudited).

3

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,594,460

 
$
2,480,451

 
$
5,177,011

 
$
4,846,147

Investment income, net of related expenses
 
528,061

 
518,538

 
1,044,390

 
1,032,902

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(3,350
)
 
(3,401
)
 
(3,350
)
 
(20,590
)
Other investment related gains (losses), net
 
(7,222
)
 
59,696

 
(7,692
)
 
137,408

Total investment related gains (losses), net
 
(10,572
)
 
56,295

 
(11,042
)
 
116,818

Other revenues
 
83,959

 
73,992

 
159,256

 
142,149

Total revenues
 
3,195,908

 
3,129,276

 
6,369,615

 
6,138,016

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,279,593

 
2,164,363

 
4,641,694

 
4,270,508

Interest credited
 
109,327

 
115,285

 
189,776

 
222,969

Policy acquisition costs and other insurance expenses
 
320,276

 
319,832

 
677,178

 
699,221

Other operating expenses
 
194,959

 
154,356

 
386,233

 
312,862

Interest expense
 
37,025

 
29,352

 
74,479

 
71,754

Collateral finance and securitization expense
 
7,440

 
6,773

 
15,042

 
13,543

Total benefits and expenses
 
2,948,620

 
2,789,961

 
5,984,402

 
5,590,857

 Income before income taxes
 
247,288

 
339,315

 
385,213

 
547,159

Provision for income taxes
 
42,914

 
107,125

 
80,609

 
169,457

Net income
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
3.19

 
$
3.60

 
$
4.74

 
$
5.86

Diluted earnings per share
 
$
3.13

 
$
3.54

 
$
4.65

 
$
5.76

Dividends declared per share
 
$
0.50

 
$
0.41

 
$
1.00

 
$
0.82

See accompanying notes to condensed consolidated financial statements (unaudited).

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Comprehensive income (loss)
 
(Dollars in thousands)
Net income
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(54,677
)
 
43,565

 
(55,837
)
 
21,352

Net unrealized investment gains (losses)
 
(368,719
)
 
306,329

 
(1,002,323
)
 
509,444

Defined benefit pension and postretirement plan adjustments
 
(29
)
 
849

 
(500
)
 
1,773

Total other comprehensive income (loss), net of tax
 
(423,425
)
 
350,743

 
(1,058,660
)
 
532,569

Total comprehensive income (loss)
 
$
(219,051
)
 
$
582,933

 
$
(754,056
)
 
$
910,271

See accompanying notes to condensed consolidated financial statements (unaudited).

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended June 30,
 
 
2018
 
2017
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
304,604

 
$
377,702

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
1,834

 
(34,676
)
Premiums receivable and other reinsurance balances
 
(345,253
)
 
(230,650
)
Deferred policy acquisition costs
 
20,528

 
35,870

Reinsurance ceded receivable balances
 
18,245

 
(127,995
)
Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
598,015

 
745,799

Deferred income taxes
 
48,117

 
142,044

Other assets and other liabilities, net
 
(98,807
)
 
(63,811
)
Amortization of net investment premiums, discounts and other
 
(25,713
)
 
(47,563
)
Depreciation and amortization expense
 
21,554

 
13,869

Investment related (gains) losses, net
 
11,042

 
(116,818
)
Other, net
 
29,422

 
(37,797
)
Net cash provided by operating activities
 
583,588

 
655,974

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
3,836,575

 
4,288,713

Maturities of fixed maturity securities available-for-sale
 
328,097

 
313,530

Sales of equity securities
 
29,099

 
166,916

Principal payments and sales of mortgage loans on real estate
 
213,691

 
135,450

Principal payments on policy loans
 
24,793

 
26,658

Purchases of fixed maturity securities available-for-sale
 
(3,880,733
)
 
(5,311,818
)
Purchases of equity securities
 
(11,930
)
 
(32,299
)
Cash invested in mortgage loans on real estate
 
(376,470
)
 
(463,063
)
Cash invested in policy loans
 
(6,421
)
 
(5,830
)
Cash invested in funds withheld at interest
 
(42,761
)
 
(6,910
)
Purchase of businesses, net of cash acquired of $4,938
 
(29,315
)
 

Purchases of property and equipment
 
(14,573
)
 
31,686

Change in short-term investments
 
(9,843
)
 
22,671

Change in other invested assets
 
(160,824
)
 
(55,379
)
Net cash used in investing activities
 
(100,615
)
 
(889,675
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(64,370
)
 
(52,815
)
Repayment of collateral finance and securitization notes
 
(53,102
)
 
(23,761
)
Principal payments of long-term debt
 
(1,331
)
 
(301,278
)
Purchases of treasury stock
 
(165,069
)
 
(10,578
)
Exercise of stock options, net
 
1,252

 
2,527

Change in cash collateral for derivative positions and other arrangements
 
17,578

 
(7,046
)
Deposits on universal life and other investment type policies and contracts
 
225,876

 
917,675

Withdrawals on universal life and other investment type policies and contracts
 
(329,899
)
 
(402,528
)
Net cash (used in) provided by financing activities
 
(369,065
)
 
122,196

Effect of exchange rate changes on cash
 
(19,753
)
 
34,137

Change in cash and cash equivalents
 
94,155

 
(77,368
)
Cash and cash equivalents, beginning of period
 
1,303,524

 
1,200,718

Cash and cash equivalents, end of period
 
$
1,397,679

 
$
1,123,350

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
84,670

 
$
90,425

Income taxes paid, net of refunds
 
$
59,397

 
$
26,447

Non-cash transactions:
 
 
 
 
Transfer of invested assets
 
$
604,374

 
$
2,243,360

Purchase of businesses:
 
 
 
 
Assets acquired, excluding cash acquired
 
$
65,948

 
$

Liabilities assumed
 
(36,633
)
 

Net cash paid on purchase
 
$
29,315

 
$

See accompanying notes to condensed consolidated financial statements (unaudited).

6

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.
Business and Basis of Presentation
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments necessary for a fair presentation have been included. Results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries, and all intercompany accounts and transactions have been eliminated. These condensed consolidated statements should be read in conjunction with the Company’s 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2018 (the “2017 Annual Report”).
2.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on net income (in thousands, except per share information):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Earnings:
 
 
 
 
 
 
 
 
Net income (numerator for basic and diluted calculations)
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
64,071

 
64,449

 
64,278

 
64,401

Equivalent shares from outstanding stock options
 
1,179

 
1,159

 
1,277

 
1,204

Denominator for diluted calculation
 
65,250

 
65,608

 
65,555

 
65,605

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
3.19

 
$
3.60

 
$
4.74

 
$
5.86

Diluted
 
$
3.13

 
$
3.54

 
$
4.65

 
$
5.76

The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. The following table presents approximate amounts of stock options and performance contingent shares excluded from the calculation of common equivalent shares (in millions):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Excluded from common equivalent shares:
 
 
 
 
 
 
 
 
Stock options
 
0.2

 
0.2

 
0.3

 
0.3

Performance contingent shares
 
0.2

 
0.3

 
0.2

 
0.3



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3.
Equity
Common Stock
The changes in number of common stock shares, issued, held in treasury and outstanding are as follows for the periods indicated:
 
 
Issued
 
Held In Treasury
 
Outstanding
Balance, December 31, 2017
 
79,137,758

 
14,685,663

 
64,452,095

Common stock acquired
 

 
991,477

 
(991,477
)
Stock-based compensation (1)
 

 
(211,868
)
 
211,868

Balance, June 30, 2018
 
79,137,758

 
15,465,272

 
63,672,486

 
 
Issued
 
Held In Treasury
 
Outstanding
Balance, December 31, 2016
 
79,137,758

 
14,835,256

 
64,302,502

Stock-based compensation (1)
 

 
(189,355
)
 
189,355

Balance, June 30, 2017
 
79,137,758

 
14,645,901

 
64,491,857

(1)
Represents net shares issued from treasury pursuant to the Company’s equity-based compensation programs.
Common Stock Held in Treasury
Common stock held in treasury is accounted for at average cost. Gains resulting from the reissuance of common stock held in treasury are credited to additional paid-in capital. Losses resulting from the reissuance of common stock held in treasury are charged first to additional paid-in capital to the extent the Company has previously recorded gains on treasury share transactions, then to retained earnings.
In January 2017, RGA’s board of directors authorized a share repurchase program for up to $400.0 million of RGA’s outstanding common stock. The authorization was effective immediately and does not have an expiration date. During the first six months of 2018, RGA repurchased 1.0 million shares of common stock under this program for $150.0 million. During the first six months ended June 30, 2017, no common stock was repurchased by RGA under this program.
Accumulated Other Comprehensive Income (Loss)
The balance of and changes in each component of accumulated other comprehensive income (loss) (“AOCI”) for the six months ended June 30, 2018 and 2017 are as follows (dollars in thousands):
 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2017
 
$
(86,350
)
 
$
2,200,661

 
$
(50,680
)
 
$
2,063,631

Other comprehensive income (loss) before reclassifications
 
(44,227
)
 
(1,327,195
)
 
(2,986
)
 
(1,374,408
)
Amounts reclassified to (from) AOCI
 

 
53,646

 
2,366

 
56,012

Deferred income tax benefit (expense)
 
(11,610
)
 
271,226

 
120

 
259,736

Balance, June 30, 2018
 
$
(142,187
)
 
$
1,198,338

 
$
(51,180
)
 
$
1,004,971

 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2016
 
$
(172,541
)
 
$
1,355,033

 
$
(43,163
)
 
$
1,139,329

Other comprehensive income (loss) before reclassifications
 
(13,936
)
 
774,688

 
(196
)
 
760,556

Amounts reclassified to (from) AOCI
 

 
(39,360
)
 
2,935

 
(36,425
)
Deferred income tax benefit (expense)
 
35,288

 
(225,884
)
 
(966
)
 
(191,562
)
Balance, June 30, 2017
 
$
(151,189
)
 
$
1,864,477

 
$
(41,390
)
 
$
1,671,898

(1)
Includes cash flow hedges of $22,656 and $2,619 as of June 30, 2018 and December 31, 2017, respectively, and $1,131 and $(2,496) as of June 30, 2017 and December 31, 2016, respectively. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.

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The following table presents the amounts of AOCI reclassifications for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
Details about AOCI Components
 
2018
 
2017
 
2018
 
2017
 
Affected Line Item in 
Statements of Income
Net unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
$
(24,642
)
 
$
40,374

 
$
(39,098
)
 
$
28,517

 
Investment related gains (losses), net
Cash flow hedges - Interest rate
 
29

 

 
(342
)
 

 
(1)
Cash flow hedges - Currency/Interest rate
 
76

 
132

 
221

 
329

 
(1)
Cash flow hedges - Forward bond purchase commitments
 

 
51

 

 
101

 
(1)
Deferred policy acquisition costs attributed to unrealized gains and losses
 
(7,835
)
 
4,565

 
(14,427
)
 
10,413

 
(2)
Total
 
(32,372
)
 
45,122

 
(53,646
)
 
39,360

 
 
Provision for income taxes
 
6,945

 
(15,218
)
 
11,623

 
(12,024
)
 
 
Net unrealized gains (losses), net of tax
 
$
(25,427
)
 
$
29,904

 
$
(42,023
)
 
$
27,336

 
 
Amortization of defined benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
$
247

 
$
60

 
$
493

 
$
142

 
(3)
Actuarial gains/(losses)
 
(1,267
)
 
(1,539
)
 
(2,859
)
 
(3,077
)
 
(3)
Total
 
(1,020
)
 
(1,479
)
 
(2,366
)
 
(2,935
)
 
 
Provision for income taxes
 
214

 
517

 
497

 
1,027

 
 
Amortization of defined benefit plans, net of tax
 
$
(806
)
 
$
(962
)
 
$
(1,869
)
 
$
(1,908
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(26,233
)
 
$
28,942

 
$
(43,892
)
 
$
25,428

 
 
(1)
See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.
(2)
This AOCI component is included in the computation of the deferred policy acquisition cost. See Note 8 – “Deferred Policy Acquisition Costs” of the 2017 Annual Report for additional details.
(3)
This AOCI component is included in the computation of the net periodic pension cost. See Note 10 – “Employee Benefit Plans” for additional details.

Equity Based Compensation
Equity compensation expense was $16.6 million and $11.4 million in the first six months of 2018 and 2017, respectively. In the first quarter of 2018, the Company granted 0.2 million stock appreciation rights at $150.87 weighted average exercise price per share and 0.1 million performance contingent units to employees. Additionally, non-employee directors were granted a total of 7,623 shares of common stock. As of June 30, 2018, 1.5 million share options at a weighted average strike price per share of $65.70 were vested and exercisable, with a remaining weighted average exercise period of 4.4 years. As of June 30, 2018, the total compensation cost of non-vested awards not yet recognized in the condensed consolidated financial statements was $36.9 million. It is estimated that these costs will vest over a weighted average period of 1.4 years.

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4.
Investments
Fixed Maturity and Equity Securities Available-for-Sale
The Company holds various types of fixed maturity securities available-for-sale and classifies them as corporate securities (“Corporate”), Canadian and Canadian provincial government securities (“Canadian government”), residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), U.S. government and agencies (“U.S. government”), state and political subdivisions, and other foreign government, supranational and foreign government-sponsored enterprises (“Other foreign government”).
The following table provides information relating to investments in fixed maturity securities by sector as of June 30, 2018 (dollars in thousands):
June 30, 2018:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
22,249,964

 
$
663,087

 
$
409,544

 
$
22,503,507

 
61.2
%
 
$

Canadian government
 
2,789,699

 
1,277,020

 
3,876

 
4,062,843

 
11.0

 

RMBS
 
1,837,316

 
18,500

 
34,602

 
1,821,214

 
5.0

 

ABS
 
1,711,099

 
11,596

 
13,871

 
1,708,824

 
4.6

 
275

CMBS
 
1,249,616

 
8,591

 
15,698

 
1,242,509

 
3.4

 

U.S. government
 
1,583,622

 
8,193

 
66,665

 
1,525,150

 
4.1

 

State and political subdivisions
 
703,047

 
43,318

 
9,321

 
737,044

 
2.0

 

Other foreign government
 
3,109,607

 
112,887

 
38,631

 
3,183,863

 
8.7

 

Total fixed maturity securities
 
$
35,233,970

 
$
2,143,192

 
$
592,208

 
$
36,784,954

 
100.0
%
 
$
275

 The following table provides information relating to investments in fixed maturity and equity securities by sector as of December 31, 2017 (dollars in thousands):
December 31, 2017:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
21,966,803

 
$
1,299,594

 
$
55,429

 
$
23,210,968

 
60.9
%
 
$

Canadian government
 
2,843,273

 
1,378,510

 
1,707

 
4,220,076

 
11.1

 

RMBS
 
1,695,126

 
36,632

 
11,878

 
1,719,880

 
4.5

 

ABS
 
1,634,758

 
18,798

 
5,194

 
1,648,362

 
4.3

 
275

CMBS
 
1,285,594

 
22,627

 
4,834

 
1,303,387

 
3.4

 

U.S. government
 
1,953,436

 
12,089

 
21,933

 
1,943,592

 
5.1

 

State and political subdivisions
 
647,727

 
59,997

 
4,296

 
703,428

 
1.8

 

Other foreign government
 
3,254,695

 
154,507

 
8,075

 
3,401,127

 
8.9

 

Total fixed maturity securities
 
$
35,281,412

 
$
2,982,754

 
$
113,346

 
$
38,150,820

 
100.0
%
 
$
275

Non-redeemable preferred stock
 
$
41,553

 
$
479

 
$
2,226

 
$
39,806

 
39.7
%
 
 
Other equity securities
 
61,288

 
479

 
1,421

 
60,346

 
60.3

 
 
Total equity securities
 
$
102,841

 
$
958

 
$
3,647

 
$
100,152

 
100.0
%
 
 
The Company enters into various collateral arrangements with counterparties that require both the pledging and acceptance of fixed maturity securities as collateral. Pledged fixed maturity securities are included in fixed maturity securities, available-for-sale in the condensed consolidated balance sheets. Fixed maturity securities received as collateral are held in separate custodial accounts and are not recorded on the Company’s condensed consolidated balance sheets. Subject to certain constraints, the Company is permitted by contract to sell or repledge collateral it receives; however, as of June 30, 2018 and December 31, 2017, none of the collateral received had been sold or repledged. The Company also holds assets in trust to satisfy collateral requirements under derivative transactions and certain third-party reinsurance treaties. The following table includes fixed maturity securities pledged and received as collateral and assets in trust held to satisfy collateral requirements under derivative transactions and certain third-party reinsurance treaties as of June 30, 2018 and December 31, 2017 (dollars in thousands):

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Table of Contents


 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities pledged as collateral
$
63,640

 
$
66,118

 
$
72,542

 
$
75,622

Fixed maturity securities received as collateral
n/a

 
626,081

 
n/a

 
590,417

Assets in trust held to satisfy collateral requirements
16,061,218

 
16,571,173

 
15,584,296

 
16,715,281

The Company monitors its concentrations of financial instruments on an ongoing basis and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer. The Company’s exposure to concentrations of credit risk from single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government and its agencies as well as the securities disclosed below as of June 30, 2018 and December 31, 2017 (dollars in thousands).
 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities guaranteed or issued by:
 
 
 
 
 
 
 
Canadian province of Quebec
$
1,101,825

 
$
1,850,642

 
$
1,119,337

 
$
1,917,996

Canadian province of Ontario
929,913

 
1,239,102

 
939,837

 
1,282,944

The amortized cost and estimated fair value of fixed maturity securities classified as available-for-sale at June 30, 2018 are shown by contractual maturity in the table below (dollars in thousands). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date.
 
 
Amortized Cost
 
Estimated Fair Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
978,683

 
$
986,160

Due after one year through five years
 
7,550,595

 
7,649,023

Due after five years through ten years
 
9,208,763

 
9,323,786

Due after ten years
 
12,697,898

 
14,053,438

Asset and mortgage-backed securities
 
4,798,031

 
4,772,547

Total
 
$
35,233,970

 
$
36,784,954

Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of June 30, 2018 and December 31, 2017 (dollars in thousands): 
June 30, 2018:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
8,097,947

 
$
8,129,125

 
36.2
%
Industrial
 
11,705,150

 
11,847,762

 
52.6

Utility
 
2,446,867

 
2,526,620

 
11.2

Total
 
$
22,249,964

 
$
22,503,507

 
100.0
%
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
Estimated
 
 
 
 
Amortized Cost
 
Fair Value
 
% of Total
Finance
 
$
7,977,885

 
$
8,362,774

 
36.1
%
Industrial
 
11,535,166

 
12,199,333

 
52.5

Utility
 
2,453,752

 
2,648,861

 
11.4

Total
 
$
21,966,803

 
$
23,210,968

 
100.0
%

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Table of Contents


Other-Than-Temporary Impairments - Fixed Maturity Securities
As discussed in Note 2 – “Summary of Significant Accounting Policies” of the 2017 Annual Report, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities is recognized in AOCI. For these securities, the net amount recognized in the condensed consolidated statements of income (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
 
$
3,677

 
$
3,677

 
$
3,677

 
$
6,013

Credit loss OTTI previously recognized on securities impaired to fair value during the period
 

 

 

 
(2,336
)
Balance, end of period
 
$
3,677

 
$
3,677

 
$
3,677

 
$
3,677


Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 2,580 fixed maturity securities as of June 30, 2018, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
June 30, 2018
 
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
571,151

 
96.4
%
20% or more for less than six months
 
21,045

 
3.6

20% or more for six months or greater
 
12

 

Total
 
$
592,208

 
100.0
%
The following table presents the total gross unrealized losses for the 1,116 fixed maturity and equity securities at December 31, 2017 where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
December 31, 2017
 
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
113,466

 
97.0
%
20% or more for less than six months
 
689

 
0.6

20% or more for six months or greater
 
2,838

 
2.4

Total
 
$
116,993

 
100.0
%
The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment.
The following table presents the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 2,580 fixed maturity securities that have estimated fair values below amortized cost as of June 30, 2018 (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related fair value has remained below amortized cost.
 

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Table of Contents


 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
June 30, 2018:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
9,135,620

 
$
299,909

 
$
818,555

 
$
51,938

 
$
9,954,175

 
$
351,847

Canadian government
 
46,392

 
668

 
110,326

 
3,058

 
156,718

 
3,726

RMBS
 
1,101,941

 
25,546

 
241,914

 
9,032

 
1,343,855

 
34,578

ABS
 
807,714

 
10,637

 
139,676

 
3,187

 
947,390

 
13,824

CMBS
 
612,214

 
11,097

 
104,426

 
4,601

 
716,640

 
15,698

U.S. government
 
584,758

 
20,707

 
747,679

 
45,958

 
1,332,437

 
66,665

State and political subdivisions
 
168,817

 
5,064

 
66,122

 
4,257

 
234,939

 
9,321

Other foreign government
 
919,229

 
25,758

 
199,578

 
5,407

 
1,118,807

 
31,165

Total investment grade securities
 
13,376,685

 
399,386

 
2,428,276

 
127,438

 
15,804,961

 
526,824

 
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
735,338

 
47,846

 
56,042

 
9,851

 
791,380

 
57,697

Canadian government
 
1,864

 
150

 

 

 
1,864

 
150

RMBS
 

 

 
1,194

 
24

 
1,194

 
24

ABS
 

 

 
1,148

 
47

 
1,148

 
47

Other foreign government
 
146,374

 
7,111

 
7,643

 
355

 
154,017

 
7,466

Total below investment grade securities
 
883,576

 
55,107

 
66,027

 
10,277

 
949,603

 
65,384

Total fixed maturity securities
 
$
14,260,261

 
$
454,493

 
$
2,494,303

 
$
137,715

 
$
16,754,564

 
$
592,208

The following table presents the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 1,116 fixed maturity and equity securities that have estimated fair values below amortized cost as of December 31, 2017 (dollars in thousands):
 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
December 31, 2017:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
1,886,212

 
$
17,099

 
$
1,009,750

 
$
28,080

 
$
2,895,962

 
$
45,179

Canadian government
 
18,688

 
91

 
111,560

 
1,596

 
130,248

 
1,687

RMBS
 
566,699

 
5,852

 
224,439

 
6,004

 
791,138

 
11,856

ABS
 
434,274

 
2,707

 
168,524

 
2,434

 
602,798

 
5,141

CMBS
 
220,401

 
1,914

 
103,269

 
2,920

 
323,670

 
4,834

U.S. government
 
800,298

 
6,177

 
767,197

 
15,756

 
1,567,495

 
21,933

State and political subdivisions
 
43,510

 
242

 
68,666

 
4,054

 
112,176

 
4,296

Other foreign government
 
369,717

 
2,707

 
191,265

 
4,704

 
560,982

 
7,411

Total investment grade securities
 
4,339,799

 
36,789

 
2,644,670

 
65,548

 
6,984,469

 
102,337

Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
194,879

 
3,317

 
75,731

 
6,933

 
270,610

 
10,250

Canadian government
 
1,995

 
20

 

 

 
1,995

 
20

RMBS
 

 

 
1,369

 
22

 
1,369

 
22

ABS
 

 

 
1,489

 
53

 
1,489

 
53

Other foreign government
 
28,600

 
113

 
15,134

 
551

 
43,734

 
664

Total below investment grade securities
 
225,474

 
3,450

 
93,723

 
7,559

 
319,197

 
11,009

Total fixed maturity securities
 
$
4,565,273

 
$
40,239

 
$
2,738,393


$
73,107

 
$
7,303,666

 
$
113,346

Non-redeemable preferred stock
 
$
82

 
$
1

 
$
26,471

 
$
2,225

 
$
26,553

 
$
2,226

Other equity securities
 
5,820

 
1,023

 
47,251

 
398

 
53,071

 
1,421

Total equity securities
 
$
5,902

 
$
1,024

 
$
73,722


$
2,623

 
$
79,624

 
$
3,647


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Table of Contents


The Company has no intention to sell, nor does it expect to be required to sell, the securities outlined in the table above, as of the dates indicated. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.
Unrealized losses on below investment grade securities as of June 30, 2018 are primarily related to publicly traded and privately placed corporate securities. Changes in unrealized losses are primarily being driven by changes in interest rates.

Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses, consist of the following (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities available-for-sale
$
373,624

 
$
355,735

 
$
742,827

 
$
680,235

Equity securities
709

 
995

 
2,391

 
2,354

Mortgage loans on real estate
50,460

 
44,442

 
100,659

 
88,789

Policy loans
14,775

 
15,194

 
29,555

 
30,466

Funds withheld at interest
86,417

 
97,367

 
161,862

 
224,945

Short-term investments and cash and cash equivalents
2,964

 
1,779

 
6,209

 
3,289

Other invested assets
20,785

 
22,071

 
44,613

 
40,539

Investment income
549,734

 
537,583

 
1,088,116

 
1,070,617

Investment expense
(21,673
)
 
(19,045
)
 
(43,726
)
 
(37,715
)
Investment income, net of related expenses
$
528,061

 
$
518,538

 
$
1,044,390

 
$
1,032,902

Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands): 
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
$
(3,350
)
 
$
(3,401
)
 
$
(3,350
)
 
$
(20,590
)
Gain on investment activity
21,140

 
54,197

 
32,106

 
72,090

Loss on investment activity
(35,934
)
 
(10,288
)
 
(56,314
)
 
(18,975
)
Equity securities:
 
 
 
 
 
 
 
Gain on investment activity
469

 
23

 
497

 
23

Loss on investment activity

 
(183
)
 
(950
)
 
(4,059
)
Change in unrealized gains (losses) recognized in earnings
(6,966
)
 

 
(11,103
)
 

Other impairment losses and change in mortgage loan provision
(1,357
)
 
(6,675
)
 
(1,669
)
 
(6,774
)
Derivatives and other, net
15,426

 
22,622

 
29,741

 
95,103

Total investment related gains (losses), net
$
(10,572
)
 
$
56,295

 
$
(11,042
)
 
$
116,818

The fixed maturity impairments for the three and six months ended June 30, 2018 and 2017 were largely related to high-yield corporate securities. The other impairment losses and change in mortgage loan provision for the three and six months ended June 30, 2018 includes impairments on real estate joint ventures. The other impairment losses and change in mortgage loan provision for the three and six months ended June 30, 2017 includes impairments on limited partnerships. The fluctuations in investment related gains (losses) for derivatives and other for the three and six months ended June 30, 2018, compared to the same periods in 2017, are primarily due to changes in the fair value of embedded derivatives and interest rate swaps.
During the three months ended June 30, 2018 and 2017, the Company sold fixed maturity securities with fair values of $1,174.4 million and $696.4 million at losses of $35.9 million and $10.3 million, respectively. During the six months ended June 30, 2018 and 2017, the Company sold fixed maturity securities with fair values of $2,438.0 million and $1,125.0 million at losses of $56.3 million and $19.0 million, respectively. The Company did not sell any equity securities at losses during the three months ended June 30, 2018. During the three months ended June 30, 2017, the Company sold equity securities with fair values of $14.1 million at losses of $0.2 million. During the six months ended June 30, 2018 and 2017, the Company sold equity securities with fair values of $28.4 million and $161.7 million at losses of $1.0 million and $4.1 million, respectively. The Company generally does not buy and sell securities on a short-term basis.

14

Table of Contents


Securities Borrowing, Lending and Other
The following table includes the amount of borrowed securities, securities lent and securities collateral received as part of the securities lending program and repurchased/reverse repurchased securities pledged and received as of June 30, 2018 and December 31, 2017 (dollars in thousands).
 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Borrowed securities
$
350,350

 
$
365,730

 
$
358,875

 
$
377,820

Securities lending:
 
 
 
 
 
 
 
Securities loaned
101,995

 
102,208

 
117,246

 
121,551

Securities received
n/a

 
112,000

 
n/a

 
128,000

Repurchase program/reverse repurchase program:
 
 
 
 
 
 
 
Securities pledged
385,391

 
394,698

 
413,819

 
428,344

Securities received
n/a

 
397,712

 
n/a

 
417,550

The Company also held cash collateral for securities lending and the repurchase program/reverse repurchase programs of $29.6 million and $31.2 million at June 30, 2018 and December 31, 2017, respectively. No cash or securities have been pledged by the Company for its securities borrowing program as of June 30, 2018 and December 31, 2017.
The following tables present information on the Company’s securities lending and repurchase transactions as of June 30, 2018 and December 31, 2017 (dollars in thousands). Collateral associated with certain borrowed securities is not included within the table, as the collateral pledged to each counterparty is the right to reinsurance treaty cash flows.
 
June 30, 2018
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Securities lending transactions:
 
 
 
 
 
 
 
 
 
Corporate
$

 
$

 
$

 
$
102,208

 
$
102,208

Total

 

 

 
102,208

 
102,208

Repurchase transactions:
 
 
 
 
 
 
 
 
 
Corporate

 

 

 
151,519

 
151,519

U.S. government

 

 

 
219,154

 
219,154

Foreign government

 

 

 
22,894

 
22,894

Other
1,131

 

 

 

 
1,131

Total
1,131

 

 

 
393,567

 
394,698

Total transactions
$
1,131

 
$

 
$

 
$
495,775

 
$
496,906

 
 
 
 
 
 
 
 
 
 
Gross amount of recognized liabilities for securities lending and repurchase transactions in preceding table
 
$
539,332

Amounts related to agreements not included in offsetting disclosure
 
$
42,426


15

Table of Contents


 
December 31, 2017
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Securities lending transactions:
 
 
 
 
 
 
 
 
 
Corporate
$

 
$

 
$

 
$
121,551

 
$
121,551

Total
$

 
$

 
$

 
$
121,551

 
$
121,551

Repurchase transactions:
 
 
 
 
 
 
 
 
 
Corporate
$

 
$

 
$
312

 
$
184,334

 
$
184,646

U.S. government

 

 

 
220,765

 
220,765

Foreign government

 

 

 
21,802

 
21,802

Other
1,131

 

 

 

 
1,131

Total
1,131

 

 
312

 
426,901

 
428,344

Total borrowings
$
1,131

 
$

 
$
312

 
$
548,452

 
$
549,895

 
 
 
 
 
 
 
 
 
 
Gross amount of recognized liabilities for securities lending and repurchase transactions in preceding table
 
$
576,786

Amounts related to agreements not included in offsetting disclosure
 
$
26,891

The Company has elected to offset amounts recognized as receivables and payables resulting from the repurchase/reverse repurchase programs. After the effect of offsetting, the net amount presented on the condensed consolidated balance sheets was a liability of $0.4 million and $1.1 million of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, the Company recognized payables resulting from cash received as collateral associated with a repurchase agreement as discussed above. Amounts owed to and due from the counterparties may be settled in cash or offset, in accordance with the agreements.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 9.0% and 8.5% of the Company’s total investments as of June 30, 2018 and December 31, 2017. As of June 30, 2018, mortgage loans were geographically dispersed throughout the U.S. with the largest concentrations in California (19.4%), Texas (9.6%) and Washington (7.8%) and include loans secured by properties in Canada (2.6%). 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 distribution of mortgage loans by property type is as follows as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
 Property type:
 
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
Office building
 
$
1,546,148

 
33.9
%
 
$
1,487,392

 
33.6
%
Retail
 
1,296,157

 
28.3

 
1,270,676

 
28.8

Industrial
 
962,049

 
21.0

 
938,612

 
21.3

Apartment
 
530,599

 
11.6

 
510,052

 
11.6

Other commercial
 
237,610

 
5.2

 
206,439

 
4.7

Recorded investment
 
4,572,563

 
100.0
%
 
4,413,171

 
100.0
%
Unamortized balance of loan origination fees and expenses
 
(4,188
)
 
 
 
(3,254
)
 
 
Valuation allowances
 
(9,706
)
 
 
 
(9,384
)
 
 
Total mortgage loans on real estate
 
$
4,558,669

 
 
 
$
4,400,533

 
 
The maturities of the mortgage loans as of June 30, 2018 and December 31, 2017 are as follows (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Due within five years
 
$
1,153,623

 
25.2
%
 
$
1,091,066

 
24.8
%
Due after five years through ten years
 
2,623,105

 
57.4

 
2,516,872

 
57.0

Due after ten years
 
795,835

 
17.4

 
805,233

 
18.2

Total
 
$
4,572,563

 
100.0
%
 
$
4,413,171

 
100.0
%

16

Table of Contents


The following tables set forth certain key credit quality indicators of the Company’s recorded investment in mortgage loans as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
Recorded Investment
 
Debt Service Ratios
 
Construction loans
 
 
 
 
 
>1.20x
 
1.00x - 1.20x
 
<1.00x
 
 
Total
 
% of Total
June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
0% - 59.99%
$
2,125,328

 
$
102,254

 
$
19,439

 
$
17,602

 
$
2,264,623

 
49.5
%
60% - 69.99%
1,552,568

 
117,751

 
49,221

 

 
1,719,540

 
37.6

70% - 79.99%
315,274

 
25,121

 
101,213

 

 
441,608

 
9.7

Greater than 80%
101,870

 
12,933

 
31,989

 

 
146,792

 
3.2

Total
$
4,095,040

 
$
258,059

 
$
201,862

 
$
17,602

 
$
4,572,563

 
100.0
%
 
Recorded Investment
 
Debt Service Ratios
 
Construction
loans
 
 
 
 
 
>1.20x
 
1.00x - 1.20x
 
<1.00x
 
 
Total
 
% of Total
December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
0% - 59.99%
$
2,148,428

 
$
53,979

 
$
3,801

 
$

 
$
2,206,208

 
50.0
%
60% - 69.99%
1,517,029

 
47,128

 
43,921

 

 
1,608,078

 
36.4

70% - 79.99%
396,446

 
19,461

 
15,367

 

 
431,274

 
9.8

Greater than 80%
120,850

 
30,713

 
6,362

 
9,686

 
167,611

 
3.8

Total
$
4,182,753

 
$
151,281

 
$
69,451

 
$
9,686

 
$
4,413,171

 
100.0
%
The age analysis of the Company’s past due recorded investments in mortgage loans as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
31-60 days past due
 
$
12,027

 
$
17,100

61-90 days past due
 

 
2,056

Total past due
 
12,027

 
19,156

Current
 
4,560,536

 
4,394,015

Total
 
$
4,572,563

 
$
4,413,171

The following table presents the recorded investment in mortgage loans, by method of measuring impairment, and the related valuation allowances as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
Mortgage loans:
 
 
 
 
Individually measured for impairment
 
$
30,653

 
$
5,858

Collectively measured for impairment
 
4,541,910

 
4,407,313

Recorded investment
 
$
4,572,563

 
$
4,413,171

Valuation allowances:
 
 
 
 
Individually measured for impairment
 
$

 
$

Collectively measured for impairment
 
9,706

 
9,384

Total valuation allowances
 
$
9,706

 
$
9,384


17

Table of Contents


Information regarding the Company’s loan valuation allowances for mortgage loans for the three and six months ended June 30, 2018 and 2017 is as follows (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
 
$
8,864

 
$
7,786

 
$
9,384

 
$
7,685

Provision (release)
 
845

 
366

 
329

 
467

Translation adjustment
 
(3
)
 
4

 
(7
)
 
4

Balance, end of period
 
$
9,706

 
$
8,156

 
$
9,706

 
$
8,156

Information regarding the portion of the Company’s mortgage loans that were impaired as of June 30, 2018 and December 31, 2017 is as follows (dollars in thousands):
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Carrying
Value
June 30, 2018:
 
 
 
 
 
 
 
 
Impaired mortgage loans with no valuation allowance recorded
 
$
30,690

 
$
30,653

 
$

 
$
30,653

Impaired mortgage loans with valuation allowance recorded
 

 

 

 

Total impaired mortgage loans
 
$
30,690

 
$
30,653

 
$

 
$
30,653

December 31, 2017:
 
 
 
 
 
 
 
 
Impaired mortgage loans with no valuation allowance recorded
 
$
6,427

 
$
5,858

 
$

 
$
5,858

Impaired mortgage loans with valuation allowance recorded
 

 

 

 

Total impaired mortgage loans
 
$
6,427

 
$
5,858

 
$

 
$
5,858

 
 
 
 
 
 
 
 
 
The Company’s average investment in impaired mortgage loans and the related interest income are reflected in the table below for the periods indicated (dollars in thousands):
 
 
Three months ended June 30,
 
 
2018
 
2017
 
 
Average
Recorded
Investment
(1)
 
Interest
Income
 
Average
Recorded
  Investment(1)
 
Interest
Income
Impaired mortgage loans with no valuation allowance recorded
 
$
27,038

 
$
247

 
$
2,088

 
$
33

Impaired mortgage loans with valuation allowance recorded
 

 

 

 

Total impaired mortgage loans
 
$
27,038

 
$
247

 
$
2,088

 
$
33

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
2018
 
2017
 
 
Average
Recorded
Investment
(1)
 
Interest
Income
 
Average
Recorded
Investment
(1)
 
Interest
Income
Impaired mortgage loans with no valuation allowance recorded
 
$
19,978

 
$
304

 
$
2,131

 
$
67

 Impaired mortgage loans with valuation allowance recorded
 

 

 

 

Total impaired mortgage loans
 
$
19,978

 
$
304

 
$
2,131

 
$
67

(1) Average recorded investment represents the average loan balances as of the beginning of period and all subsequent quarterly end of period balances.

The Company did not acquire any impaired mortgage loans during the six months ended June 30, 2018 and 2017. The Company had no mortgage loans that were on a nonaccrual status at June 30, 2018 and December 31, 2017.
Policy Loans
Policy loans comprised approximately 2.7% and 2.6% of the Company’s total investments as of June 30, 2018 and December 31, 2017, respectively, the majority of which are associated with one client. These policy loans present no credit risk because the amount of the loan cannot exceed the obligation due to the ceding company upon the death of the insured or surrender of the underlying policy. The provisions of the treaties in force and the underlying policies determine the policy loan interest rates. The Company earns a spread between the interest rate earned on policy loans and the interest rate credited to corresponding liabilities.

18

Table of Contents


Funds Withheld at Interest
Funds withheld at interest comprised approximately 11.8% of the Company’s total investments as of both June 30, 2018 and December 31, 2017. Of the $6.0 billion funds withheld at interest balance, net of embedded derivatives, as of June 30, 2018, $4.0 billion of the balance is associated with one client. For reinsurance agreements written on a modified coinsurance basis and certain agreements written on a coinsurance funds withheld basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company and are reflected as funds withheld at interest on the Company’s condensed consolidated balance sheets. In the event of a ceding company’s insolvency, the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances against amounts owed to the Company from the ceding company.
Other Invested Assets
Other invested assets include limited partnership interests, joint ventures (other than operating joint ventures), equity release mortgages, derivative contracts and fair value option (“FVO”) contractholder-directed unit-linked investments. Other invested assets also include Federal Home Loan Bank of Des Moines (“FHLB”) common stock which is included in other in the table below. Other invested assets represented approximately 3.2% and 2.9% of the Company’s total investments as of June 30, 2018 and December 31, 2017, respectively. Carrying values of these assets as of June 30, 2018 and December 31, 2017 are as follows (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
Limited partnership interests and real estate joint ventures
 
$
857,599

 
$
781,124

Equity release mortgages
 
311,723

 
219,940

Derivatives
 
137,315

 
137,613

FVO contractholder-directed unit-linked investments
 
212,202

 
218,541

Other
 
86,723

 
148,114

Total other invested assets
 
$
1,605,562

 
$
1,505,332



19

Table of Contents


5.    Derivative Instruments
Derivatives, except for embedded derivatives and longevity and mortality swaps, are carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value. Longevity and mortality swaps are included on the condensed consolidated balance sheets in other assets or other liabilities, at fair value. Embedded derivative assets and liabilities on modified coinsurance or funds withheld arrangements are included on the condensed 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 condensed 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 June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
Notional
 
Carrying Value/Fair Value
 
Notional
 
Carrying Value/Fair Value
 
 
Amount
 
Assets
 
Liabilities
 
Amount
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
1,084,555

 
$
43,439

 
$
2,514

 
$
996,204

 
$
59,809

 
$
2,372

Financial futures
 
348,874

 

 

 
412,438

 

 

Foreign currency forwards
 
4,512

 

 
8

 
6,030

 

 
28

Consumer price index swaps
 
328,190

 
1,126

 
199

 
221,932

 

 
2,160

Credit default swaps
 
928,300

 
6,725

 
122

 
961,200

 
8,319

 
1,651

Equity options
 
639,801

 
25,950

 

 
632,251

 
23,271

 

Longevity swaps
 
934,720

 
43,971

 

 
960,400

 
40,659

 

Mortality swaps
 
25,000

 

 
782

 

 

 
1,683

Synthetic guaranteed investment contracts
 
10,634,677

 

 

 
10,052,576

 

 

Embedded derivatives in:
 
 
 
 
 
 
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 

 
144,610

 

 

 
122,194

 

Indexed annuity products
 

 

 
806,436

 

 

 
861,758

Variable annuity products
 

 

 
122,361

 

 

 
152,470

Total non-hedging derivatives
 
14,928,629

 
265,821

 
932,422

 
14,243,031

 
254,252

 
1,022,122

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
435,000

 
204

 
19,699

 
435,000

 

 
20,389

Foreign currency swaps
 
580,036

 
58,294

 
2,598

 
672,921

 
65,207

 
8,496

Foreign currency forwards
 
718,177

 
18,428

 

 
553,175

 
1,265

 
7,720

Total hedging derivatives
 
1,733,213

 
76,926

 
22,297

 
1,661,096

 
66,472

 
36,605

Total derivatives
 
$
16,661,842

 
$
342,747

 
$
954,719

 
$
15,904,127

 
$
320,724

 
$
1,058,727

Netting Arrangements
Certain of the Company’s derivatives are subject to enforceable master netting arrangements and reported as a net asset or liability in the condensed consolidated balance sheets. The Company nets all derivatives that are subject to such arrangements.
The Company has elected to include all derivatives, except embedded derivatives, in the tables below, irrespective of whether they are subject to an enforceable master netting arrangement or a similar agreement. See Note 4 – “Investments” for information regarding the Company’s securities borrowing, lending, repurchase and repurchase/reverse repurchase programs. See “Embedded Derivatives” below for information regarding the Company’s bifurcated embedded derivatives.
The following table provides information relating to the Company’s derivative instruments as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
 
 
 
 
Gross Amounts Not
Offset in the Balance Sheet
 
 
 
 
Gross Amounts   
Recognized
 
Gross Amounts
Offset in the
Balance Sheet   
 
Net Amounts
Presented in the
Balance Sheet   
 
Financial Instruments (1)    
 
Cash Collateral   
Pledged/
Received
 
Net Amount   
June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
198,137

 
$
(16,851
)
 
$
181,286

 
$

 
$
(194,067
)
 
$
(12,781
)
Derivative liabilities
 
25,922

 
(16,851
)
 
9,071

 
(57,302
)
 
(9,030
)
 
(57,261
)
December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
198,530

 
$
(20,258
)
 
$
178,272

 
$
(862
)
 
$
(185,900
)
 
$
(8,490
)
Derivative liabilities
 
44,499

 
(20,258
)
 
24,241

 
(58,156
)
 
(22,221
)
 
(56,136
)
(1)
Includes initial margin posted to a central clearing partner.



20

Table of Contents


Accounting for Derivative Instruments and Hedging Activities
The Company does not enter into derivative instruments for speculative purposes. As discussed below under “Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging,” the Company uses various derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment. As of June 30, 2018 and December 31, 2017, the Company held interest rate swaps that were designated and qualified as cash flow hedges of interest rate risk, for variable rate liabilities and foreign currency assets, foreign currency swaps and foreign currency forwards that were designated and qualified as hedges of a portion of its net investment in its foreign operations, foreign currency swaps that were designated and qualified as fair value hedges of foreign currency risk, and derivative instruments that were not designated as hedging instruments. See Note 2 – “Summary of Significant Accounting Policies” of the Company’s 2017 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. Derivative instruments are carried at fair value and generally require an insignificant amount of cash at inception of the contracts.
Fair Value Hedges
The Company designates and reports certain foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item attributable to a change in foreign currency and the offsetting gain or loss on the related foreign currency swaps as of June 30, 2018 and 2017, were (dollars in thousands):
Type of Fair Value Hedge
 
Hedged Item
 
Gains (Losses) Recognized for Derivatives (1)
 
Gains (Losses) Recognized for Hedged Items (1)
For the three months ended June 30, 2018:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(1,134
)
 
$
4,942

For the three months ended June 30, 2017:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
905

 
$
(905
)
For the six months ended June 30, 2018:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(3,025
)
 
$
6,833

For the six months ended June 30, 2017:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
7,441

 
$
(7,441
)
 
(1)
The net amount represents the ineffective portion of the fair value hedges

Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The Company designates and accounts for the following as cash flows: (i) certain interest rate swaps, in which the cash flows of liabilities are variable based on a benchmark rate; (ii) certain interest rate swaps, in which the cash flows of assets are denominated in different currencies, commonly referred to as cross-currency swaps; and (iii) forward bond purchase commitments.
The following table presents the components of AOCI, before income tax, and the condensed consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

21

Table of Contents


 
 
Three months ended June 30,
 
 
2018
 
2017
Balance beginning of period
 
$
20,662

 
$
7,690

Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges
 
2,099

 
(6,417
)
Amounts reclassified to investment related (gains) losses, net
 

 
41

Amounts reclassified to investment income
 
(76
)
 
(183
)
Amounts reclassified to interest expense
 
(29
)
 

Balance end of period
 
$
22,656

 
$
1,131

 
 
 
 
 
 
 
Six months ended June 30,
 
 
2018
 
2017
Balance beginning of period
 
$
2,619

 
$
(2,496
)
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges
 
19,916

 
4,016

Amounts reclassified to investment related (gains) losses, net
 

 
41

Amounts reclassified to investment income
 
(221
)
 
(430
)
Amounts reclassified to interest expense
 
342

 

Balance end of period
 
$
22,656

 
$
1,131

As of June 30, 2018, the before-tax deferred net gains (losses) on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are approximately $0.4 million and $1.5 million in investment income and interest expense, respectively.
The following table presents the effective portion of derivatives in cash flow hedging relationships on the condensed consolidated statements of income and the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
 
Effective Portion
Derivative Type
 
Gain (Loss) Deferred in OCI
 
Gain (Loss) Reclassified into Income from OCI
 
 
 
 
Investment Related Gains (Losses)
 
Investment Income
 
Interest Expense
For the three months ended June 30, 2018:
 
 
 
 
 
 
 
 
Interest rate
 
$
4,742

 
$

 
$

 
$
29

Currency/Interest rate
 
(2,643
)
 

 
76

 

Total
 
$
2,099

 
$

 
$
76

 
$
29

For the three months ended June 30, 2017:
 
 
 
 
 
 
 
 
Interest rate
 
$
(7,643
)
 
$

 
$

 
$

Currency/Interest rate
 
1,226

 

 
132

 

Forward bond purchase commitments
 

 
(41
)
 
51

 

Total
 
$
(6,417
)
 
$
(41
)
 
$
183

 
$

 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2018:
 
 
 
 
 
 
 
 
Interest rate
 
$
19,727

 
$

 
$

 
$
(342
)
Currency/Interest rate
 
189

 

 
221

 

Total
 
$
19,916

 
$

 
$
221

 
$
(342
)
For the six months ended June 30, 2017:
 
 
 
 
 
 
 
 
Interest rate
 
$
(5,427
)
 
$

 
$

 
$

Currency/Interest rate
 
9,443

 

 
329

 

Forward bond purchase commitments
 

 
(41
)
 
101

 

Total
 
$
4,016

 
$
(41
)
 
$
430

 
$

For the three and six months ended June 30, 2018 and 2017, the ineffective portion of derivatives reported as cash flow hedges was not material to the Company’s results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

22

Table of Contents


Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps and foreign currency forwards to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following table illustrates the Company’s net investments in foreign operations (“NIFO”) hedges for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
 
 
Derivative Gains (Losses) Deferred in AOCI     
 
 
For the three months ended June 30,
 
For the six months ended June 30,
Type of NIFO Hedge (1) (2)
 
2018
 
2017
 
2018
 
2017
Foreign currency swaps
 
$
8,197

 
$
(17,919
)
 
$
17,002

 
$
(25,525
)
Foreign currency forwards
 
11,063

 
4,158

 
23,299

 
4,158

Total
 
$
19,260

 
$
(13,761
)
 
$
40,301

 
$
(21,367
)
 
(1)
There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.
(2)
There was no ineffectiveness recognized for the Company’s hedges of net investments in foreign operations.

The cumulative foreign currency translation gain recorded in AOCI related to these hedges was $154.0 million and $113.7 million at June 30, 2018 and December 31, 2017, respectively. If a hedged foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the condensed consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a hedged foreign operation.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), net in the condensed consolidated statements of income, except where otherwise noted.
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2018 and 2017 is as follows (dollars in thousands):

23

Table of Contents


 
 
 
 
Gain (Loss) for the three months ended
June 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2018
 
2017
Interest rate swaps
 
Investment related gains (losses), net
 
$
(8,600
)
 
$
14,289

Financial futures
 
Investment related gains (losses), net
 
(897
)
 
(6,442
)
Foreign currency forwards
 
Investment related gains (losses), net
 
(262
)
 
(351
)
CPI swaps
 
Investment related gains (losses), net
 
1,041

 
(4
)
Credit default swaps
 
Investment related gains (losses), net
 
1,084

 
3,879

Equity options
 
Investment related gains (losses), net
 
(8,007
)
 
(9,273
)
Longevity swaps
 
Other revenues
 
2,289

 
1,981

Mortality swaps
 
Other revenues
 
(799
)
 
(395
)
Subtotal
 
 
 
(14,151
)
 
3,684

Embedded derivatives in:
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
Investment related gains (losses), net
 
8,805

 
15,108

Indexed annuity products
 
Interest credited
 
6,519

 
(5,955
)
Variable annuity products
 
Investment related gains (losses), net
 
15,324

 
360

Total non-hedging derivatives
 
 
 
$
16,497

 
$
13,197

 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for the six months ended        
June 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2018
 
2017
Interest rate swaps
 
Investment related gains (losses), net
 
$
(35,171
)
 
$
11,677

Financial futures
 
Investment related gains (losses), net
 
(768
)
 
(19,217
)
Foreign currency forwards
 
Investment related gains (losses), net
 
61

 
553

CPI swaps
 
Investment related gains (losses), net
 
3,227

 
(9
)
Credit default swaps
 
Investment related gains (losses), net
 
682

 
11,237

Equity options
 
Investment related gains (losses), net
 
(5,414
)
 
(26,462
)
Longevity swaps
 
Other revenues
 
4,557

 
3,847

Mortality swaps
 
Other revenues
 
(799
)
 
(790
)
Subtotal
 
 
 
(33,625
)
 
(19,164
)
Embedded derivatives in:
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
Investment related gains (losses), net
 
22,416

 
83,810

Indexed annuity products
 
Interest credited
 
31,870

 
(22,357
)
Variable annuity products
 
Investment related gains (losses), net
 
30,109

 
22,723

Total non-hedging derivatives
 
 
 
$
50,770

 
$
65,012

Types of Derivatives Used by the Company
Interest Rate Swaps
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates, to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches) and to manage the risk of cash flows of liabilities that are variable based on a benchmark rate. With an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between two rates, which can be either fixed-rate or floating-rate interest amounts, tied to an agreed-upon notional principal amount. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments at each due date. The Company utilizes interest rate swaps in cash flow and non-qualifying hedging relationships.
Financial Futures
Exchange-traded futures are used primarily to economically hedge liabilities embedded in certain variable annuity products. With exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the relevant indices, and to post variation margin on a daily basis in an amount equal to the difference between the daily estimated fair values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange.

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Table of Contents


Equity Options
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products. To hedge against adverse changes in equity indices volatility, the Company buys put options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
Consumer Price Index Swaps
Consumer price index (“CPI”) swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products where value is directly affected by changes in a designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with another party to exchange the actual amount of inflation realized over a specified period of time for a fixed amount of inflation determined at inception. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments to be made by the counterparty at each due date. Most of these swaps will require a single payment to be made by one counterparty at the maturity date of the swap.
Foreign Currency Swaps
Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the termination of the currency swap by each party. The Company uses foreign currency swaps in hedges of net investments in foreign operations and non-qualifying hedge relationships.
Foreign Currency Forwards
Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date. The Company uses foreign currency forwards in hedges of net investments in foreign operations and non-qualifying hedge relationships.
Forward Bond Purchase Commitments
Forward bond purchase commitments have been used by the Company to hedge against the variability in the anticipated cash flows required to purchase securities. With forward bond purchase commitments, the forward price is agreed upon at the time of the contract and payment for such contract is made at the future specified settlement date of the securities.
Credit Default Swaps
The Company sells protection under single name credit default swaps and credit default swap index tranches to diversify its credit risk exposure in certain portfolios and, in combination with purchasing securities, to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for indexed reference entities and single name reference entities are defined in the contracts. The Company’s maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default of a referencing entity, the Company is typically required to pay the protection holder the full notional value less a recovery amount determined at auction.

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Table of Contents


The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of credit default swaps sold by the Company at June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
Rating Agency Designation of Referenced Credit Obligations(1)
 
Estimated Fair
Value of Credit  
Default Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps(2)
 
Weighted
Average
Years to
Maturity(3)
 
Estimated Fair
Value of Credit  
Default Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps(2)
 
Weighted
Average
Years to
Maturity(3)  
AAA/AA+/AA/AA-/A+/A/A-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
$
2,574

 
$
152,000

 
2.7
 
$
3,128

 
$
162,000

 
2.9
Subtotal
 
2,574

 
152,000

 
2.7
 
3,128

 
162,000

 
2.9
BBB+/BBB/BBB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
4,092

 
338,700

 
2.6
 
4,469

 
361,700

 
2.9
Credit default swaps referencing indices
 
(59
)
 
422,600

 
3.5
 
(55
)
 
422,600

 
4.0
Subtotal
 
4,033

 
761,300

 
3.1
 
4,414

 
784,300

 
3.5
BB+/BB/BB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
(4
)
 
15,000

 
1.2
 
30

 
5,000

 
1.5
Subtotal
 
(4
)
 
15,000

 
1.2
 
30

 
5,000

 
1.5
Total
 
$
6,603

 
$
928,300

 
3.0
 
$
7,572

 
$
951,300

 
3.4
 
(1)
The rating agency designations are based on ratings from Standard and Poor’s (“S&P”).
(2)
Assumes the value of the referenced credit obligations is zero.
(3)
The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts.
The Company also purchases credit default swaps to reduce its risk against a drop in bond prices due to credit concerns of certain bond issuers. If a credit event, as defined by the contract, occurs, the Company is able to put the bond back to the counterparty at par.
Longevity Swaps
The Company enters into longevity swaps in the form of out-of-the-money options, which provide protection against changes in mortality improvement to retirement plans and insurers of such plans. With a longevity swap transaction, the Company agrees with another party to exchange a proportion of a notional value. The proportion is determined by the difference between a predefined benefit, and the realized benefit plus the future expected benefit, calculated by reference to a population index for a fixed premium.
Mortality Swaps
Mortality swaps are used by the Company to hedge risk from changes in mortality experience associated with its reinsurance of life insurance risk. The Company agrees with another party to exchange, at specified intervals, a proportion of a notional value determined by the difference between a predefined expected and realized claim amount on a designated index of reinsured lives, for a fixed percentage (premium) each term.
Synthetic Guaranteed Investment Contracts
The Company sells fee-based synthetic guaranteed investment contracts to retirement plans which include investment-only, stable value contracts. The assets are owned by the trustees of such plans, who invest the assets under the terms of investment guidelines to which the Company agrees. The contracts contain a guarantee of a minimum rate of return on participant balances supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated plan cash flow requirements. These contracts are reported as derivatives and recorded at fair value.
Embedded Derivatives
The Company has certain embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a modified coinsurance (“modco”) or funds withheld basis. Additionally, the Company reinsures equity-indexed annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. The changes in fair values of embedded derivatives on equity-indexed annuities described below relate to changes in the fair value associated with capital market and other related assumptions. The Company’s utilization of a credit valuation adjustment (“CVA”) did not have a material effect on the change in fair value of its embedded derivatives for the three and six months ended June 30, 2018 and 2017.
The related gains (losses) and the effect on net income after amortization of deferred acquisition costs (“DAC”) and income taxes for the three and six months ended June 30, 2018 and 2017 are reflected in the following table (dollars in thousands):

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Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Embedded derivatives in modco or funds withheld arrangements included in investment related gains
$
8,805

 
$
15,108

 
$
22,416

 
$
83,810

After the associated amortization of DAC and taxes, the related amounts included in net income
5,987

 
2,941

 
12,836

 
28,785

Embedded derivatives in variable annuity contracts included in investment related gains
15,324

 
360

 
30,109

 
22,723

After the associated amortization of DAC and taxes, the related amounts included in net income
12,472

 
3,023

 
23,598

 
31,859

Amounts related to embedded derivatives in equity-indexed annuities included in benefits and expenses
6,519

 
(5,955
)
 
31,870

 
(22,357
)
After the associated amortization of DAC and taxes, the related amounts included in net income
3,966

 
(6,925
)
 
10,503

 
(28,322
)
Credit Risk
The Company manages its credit risk related to over-the-counter (“OTC”) derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination.
The credit exposure of the Company’s OTC derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions pursuant to master netting agreements that provide for a netting of payments and receipts with a single counterparty, and (ii) enter into agreements that allow the use of credit support annexes, which are bilateral rating-sensitive agreements that require collateral postings at established threshold levels. Certain of the Company’s OTC derivatives are cleared derivatives, which are bilateral transactions between the Company and a counterparty where the transactions are cleared through a clearinghouse, such that each derivative counterparty is only exposed to the default of the clearinghouse. These cleared transactions require initial and daily variation margin collateral postings and include certain interest rate swaps and credit default swaps entered into on or after June 10, 2013, related to guidelines implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2017, the Company followed the Chicago Mercantile Exchange amended rulebook to legally characterize variation margin payments as settlements of the derivative’s mark-to-market exposure and not collateral. Also, the Company enters into exchange-traded futures through regulated exchanges and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of non-performance by counterparties to such financial instruments.
The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that may vary depending on the posting party’s ratings. Additionally, a decline in the Company’s or the counterparty’s credit ratings to specified levels could result in potential settlement of the derivative positions under the Company’s agreements with its counterparties. The Company also has exchange-traded futures, which require the maintenance of a margin account. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties.
The Company’s credit exposure related to derivative contracts is generally limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. The Company’s credit exposure to mortality swaps is minimal, as they are fully collateralized by a counterparty. Information regarding the Company’s credit exposure related to its over-the-counter derivative contracts, centrally cleared derivative contracts and margin account for exchange-traded futures, excluding mortality swaps, at June 30, 2018 and December 31, 2017 are reflected in the following table (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
Estimated fair value of derivatives in net asset position
 
$
172,997

 
$
155,714

Cash provided as collateral(1)
 
9,030

 
22,221

Securities pledged to counterparties as collateral(2)
 
57,302

 
58,156

Cash pledged from counterparties as collateral(3)
 
(194,067
)
 
(185,900
)
Securities pledged from counterparties as collateral(4)
 

 
(862
)
Initial margin for cleared derivatives(2)
 
(57,302
)
 
(58,156
)
Net amount after application of master netting agreements and collateral
 
$
(12,040
)
 
$
(8,827
)
Margin account related to exchange-traded futures(5)
 
$
8,331

 
$
6,538

(1)
Consists of receivable from counterparty, included in other assets.
(2)
Included in available-for-sale securities, primarily consists of U.S. Treasury and government agency securities.
(3)
Included in cash and cash equivalents, with obligation to return cash collateral recorded in other liabilities.
(4)
Consists of U.S. Treasury and government securities.
(5)
Included in other assets.


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6.    Fair Value of Assets and Liabilities
Fair Value Measurement
General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. These principles also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and describes three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities are traded in active exchange markets.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions that use significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or 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. 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.
For a discussion of the Company’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2017 Annual Report.


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Table of Contents


Assets and Liabilities by Hierarchy Level
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 are summarized below (dollars in thousands):
June 30, 2018:
 
 
 
Fair Value Measurements Using:
 
 
Total    
 
Level 1        
 
Level 2    
 
Level 3    
Assets:
 
 
 
 
 
 
 
 
Fixed maturity securities – available-for-sale:
 
 
 
 
 
 
 
 
Corporate
 
$
22,503,507

 
$

 
$
21,136,353

 
$
1,367,154

Canadian government
 
4,062,843

 

 
3,490,145

 
572,698

RMBS
 
1,821,214

 

 
1,766,375

 
54,839

ABS
 
1,708,824

 

 
1,638,138

 
70,686

CMBS
 
1,242,509

 

 
1,240,642

 
1,867

U.S. government
 
1,525,150

 
1,405,485

 
98,930

 
20,735

State and political subdivisions
 
737,044

 

 
720,539

 
16,505

Other foreign government
 
3,183,863

 

 
3,178,819

 
5,044

Total fixed maturity securities – available-for-sale
 
36,784,954

 
1,405,485

 
33,269,941

 
2,109,528

Equity securities
 
108,070

 
65,133

 

 
42,937

Funds withheld at interest – embedded derivatives
 
144,610

 

 

 
144,610

Cash equivalents
 
424,601

 
409,242

 
15,359

 

Short-term investments
 
82,521

 
991

 
78,313

 
3,217

Other invested assets:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
36,170

 

 
36,170

 

Foreign currency forwards
 
18,428

 

 
18,428

 

CPI swaps
 
(42
)
 

 
(42
)
 

Credit default swaps
 
5,927

 

 
5,927

 

Equity options
 
21,136

 

 
21,136

 

Foreign currency swaps
 
55,696

 

 
55,696

 

FVO contractholder-directed unit-linked investments
 
212,202

 
211,141

 
1,061

 

Total other invested assets
 
349,517

 
211,141

 
138,376

 

Other assets - longevity swaps
 
43,971

 

 

 
43,971

Total
 
$
37,938,244

 
$
2,091,992

 
$
33,501,989

 
$
2,344,263

Liabilities:
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivatives
 
$
928,797

 
$

 
$

 
$
928,797

Other liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
14,740

 

 
14,740

 

Foreign currency forwards
 
8

 

 
8

 

CPI swaps
 
(969
)
 

 
(969
)
 

Credit default swaps
 
(676
)
 

 
(676
)
 

Equity options
 
(4,814
)
 

 
(4,814
)
 

Mortality swaps
 
782

 

 

 
782

Total
 
$
937,868

 
$

 
$
8,289

 
$
929,579


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Table of Contents


December 31, 2017:
 
 
 
Fair Value Measurements Using:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Fixed maturity securities – available-for-sale:
 
 
 
 
 
 
 
 
Corporate
 
$
23,210,968

 
$

 
$
21,873,696

 
$
1,337,272

Canadian government
 
4,220,076

 

 
3,626,134

 
593,942

RMBS
 
1,719,880

 

 
1,611,998

 
107,882

ABS
 
1,648,362

 

 
1,524,888

 
123,474

CMBS
 
1,303,387

 

 
1,300,153

 
3,234

U.S. government
 
1,943,592

 
1,818,006

 
103,075

 
22,511

State and political subdivisions
 
703,428

 

 
662,225

 
41,203

Other foreign government
 
3,401,127

 

 
3,396,035

 
5,092

Total fixed maturity securities – available-for-sale
 
38,150,820

 
1,818,006

 
34,098,204

 
2,234,610

Equity securities:
 
 
 
 
 
 
 
 
Non-redeemable preferred stock
 
39,806

 
39,806

 

 

Other equity securities
 
60,346

 
60,346

 

 

Funds withheld at interest – embedded derivatives
 
122,194

 

 

 
122,194

Cash equivalents
 
356,788

 
354,071

 
2,717

 

Short-term investments
 
50,746

 

 
47,650

 
3,096

Other invested assets:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
51,359

 

 
51,359

 

Foreign currency forwards
 
730

 

 
730

 

CPI swaps
 
(221
)
 

 
(221
)
 

Credit default swaps
 
5,908

 

 
5,908

 

Equity options
 
16,932

 

 
16,932

 

Foreign currency swaps
 
62,905

 

 
62,905

 

FVO contractholder-directed unit-linked investments
 
218,541

 
217,618

 
923

 

Total other invested assets
 
356,154

 
217,618

 
138,536

 

Other assets - longevity swaps
 
40,659

 

 

 
40,659

Total
 
$
39,177,513

 
$
2,489,847

 
$
34,287,107

 
$
2,400,559

Liabilities:
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivatives
 
$
1,014,228

 
$

 
$

 
$
1,014,228

Other liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
14,311

 

 
14,311

 

Foreign currency forwards
 
7,213

 

 
7,213

 

CPI swaps
 
1,939

 

 
1,939

 

Credit default swaps
 
(760
)
 

 
(760
)
 

Equity options
 
(6,339
)
 

 
(6,339
)
 

Foreign currency swaps
 
6,194

 

 
6,194

 

Mortality swaps
 
1,683

 

 

 
1,683

Total
 
$
1,038,469

 
$

 
$
22,558

 
$
1,015,911


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Table of Contents


Transfers between Levels 1 and 2
Transfers between Levels 1 and 2 are made to reflect changes in observability of inputs and market activity. There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2018. The Company recognizes transfers of assets and liabilities into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in circumstances that caused the transfer occurs. The following tables present the transfers between Level 1 and Level 2 during the three and six months ended June 30, 2017 (dollars in thousands):
 
 
2017
 
 
Transfers from    
Level 1 to
Level 2
 
Transfers from    
Level 2 to
Level 1
Three months ended June 30:
 
 
 
 
Fixed maturity securities - available-for-sale:
 
 
 
 
Corporate securities
 
$

 
$
49,999

 
 
 
 
 
Six months ended June 30:
 
 
 
 
Fixed maturity securities - available-for-sale:
 
 
 
 
Corporate securities
 
$

 
$
88,674



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Table of Contents


Quantitative Information Regarding Internally - Priced Level 3 Assets and Liabilities
The following table presents quantitative information about significant unobservable inputs used in Level 3 fair value measurements that are developed internally by the Company as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
Estimated Fair Value      
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted Average) 
June 30, 2018
 
December 31, 2017
 
 
 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
571,750

 
$
173,579

 
Market comparable securities
 
Liquidity premium
 
0-2% (1%)

 
0-2%  (1%)

 
 
 
 
 
 
 
EBITDA Multiple
 
5.9x-7.5x
(6.9x)

 

U.S. government
20,735

 
22,511

 
Market comparable securities
 
Liquidity premium
 
0-1% (1%)

 
0-1%  (1%)

State and political subdivisions
4,361

 
4,616

 
Market comparable securities    
 
Liquidity premium
 
1
%
 
1
%
Other foreign government
5,044

 

 
Market comparable securities
 
Liquidity premium
 
1
%
 

Equity securities
23,856

 

 
Market comparable securities
 
Liquidity premium
 
1
%
 

 
 
 
 
 
 
 
EBITDA Multiple
 
6.9x-13.1x
(7.9x)

 

Funds withheld at interest- embedded derivatives
144,610

 
122,194

 
Total return swap
 
Mortality
 
0-100%  (2%)

 
0-100%  (2%)

 
 
 
 
 
 
 
Lapse
 
0-35%  (9%)

 
0-35%  (9%)

 
 
 
 
 
 
 
Withdrawal
 
0-5%  (3%)

 
0-5%  (3%)

 
 
 
 
 
 
 
CVA
 
0-5%  (1%)

 
0-5%  (1%)

 
 
 
 
 
 
 
Crediting rate
 
2-4%  (2%)

 
2-4%  (2%)

Longevity swaps
43,971

 
40,659

 
Discounted cash flow
 
Mortality
 
0-100%  (2%)

 
0-100%  (2%)

 
 
 
 
 
 
 
Mortality improvement
 
(10%)-10%  (3%)

 
(10%)-10%   (3%)

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities- embedded derivatives- indexed annuities
806,436

 
861,758

 
Discounted cash flow
 
Mortality
 
0-100% (2%)

 
0-100% (2%)

 
 
 
 
 
 
 
Lapse
 
0-35% (9%)

 
0-35% (9%)

 
 
 
 
 
 
 
Withdrawal
 
0-5% (3%)

 
0-5% (3%)

 
 
 
 
 
 
 
Option budget projection
 
2-4% (2%)

 
2-4% (2%)

Interest sensitive contract liabilities- embedded derivatives- variable annuities
122,361

 
152,470

 
Discounted cash 
flow
 
Mortality
 
0-100% (1%)

 
0-100% (1%)

 
 
 
 
 
 
 
Lapse
 
0-25% (5%)

 
0-25% (5%)

 
 
 
 
 
 
 
Withdrawal
 
0-7% (4%)

 
0-7% (3%)

 
 
 
 
 
 
 
CVA
 
0-5% (1%)

 
0-5% (1%)

 
 
 
 
 
 
 
Long-term volatility
 
0-27% (14%)

 
0-27% (8%)

Mortality swaps
782

 
1,683

 
Discounted cash flow
 
Mortality
 
0-100%  (1%)

 
0-100%  (1%)


32

Table of Contents


Changes in Level 3 Assets and Liabilities
Assets and liabilities transferred into Level 3 are due to a lack of observable market transactions and price information. Assets and liabilities are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset or liability, a specific event, one or more significant input(s) becoming observable. Transfers out of Level 3 were primarily the result of the Company obtaining observable pricing information or a third party pricing quotation that appropriately reflects the fair value of those assets and liabilities. In addition, certain transfers out of Level 3 were also due to ratings upgrades on mortgage-backed securities that had previously had below investment-grade ratings. The Company also transferred equity securities with a fair value of approximately $38.9 million into Level 3 as a result of the adoption of the new accounting guidance for the recognition and measurement of equity securities.
For further information on the Company’s valuation processes, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2017 Annual Report.
The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (dollars in thousands):
For the three months ended June 30, 2018:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,299,264

 
$
572,747

 
$
120,614

 
$
130,706

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
(305
)
 
3,468

 
(43
)
 
76

Investment related gains (losses), net
 
(3,141
)
 

 
312

 
1,282

Included in other comprehensive income
 
2,178

 
(3,517
)
 
(671
)
 
(1,544
)
Purchases(1)
 
155,498

 

 
24,412

 

Sales(1)
 
(11,089
)
 

 
(4,961
)
 

Settlements(1)
 
(68,328
)
 

 
(1,572
)
 
(19,544
)
Transfers into Level 3
 

 

 
3,031

 
4,968

Transfers out of Level 3
 
(6,923
)
 

 
(86,283
)
 
(45,258
)
Fair value, end of period
 
$
1,367,154

 
$
572,698

 
$
54,839

 
$
70,686

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$
(304
)
 
$
3,468

 
$
(13
)
 
$
68

Investment related gains (losses), net
 
(3,141
)
 

 

 

For the three months ended June 30, 2018 (continued):
 
Fixed maturity securities available-for-sale
 
 
CMBS
 
U.S. government
 
State
and political
subdivisions
 
Other foreign government
Fair value, beginning of period
 
$
1,884

 
$
21,053

 
$
41,876

 
$
5,004

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 

 
(107
)
 
(10
)
 

Included in other comprehensive income
 
(16
)
 
(173
)
 
(110
)
 
40

Purchases(1)
 

 
118

 

 

Settlements(1)
 
(2
)
 
(156
)
 
(86
)
 

Transfers out of Level 3
 
1

 

 
(25,165
)
 

Fair value, end of period
 
$
1,867

 
$
20,735

 
$
16,505

 
$
5,044

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$

 
$
(108
)
 
$
(11
)
 
$


33

Table of Contents


For the three months ended June 30, 2018 (continued):
 
Equity securities
 
Funds withheld
at interest-
embedded
derivatives
 
Short-term Investments
 
Other assets - longevity swaps
 
Interest sensitive contract liabilities embedded derivatives
 
Other liabilities - mortality swaps
Fair value, beginning of period
 
$
36,152

 
$
135,805

 
$
3,217

 
$
44,011

 
$
(964,794
)
 
$
(1,683
)
Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 

 

 

 

 

 

Investment related gains (losses), net
 
(4,922
)
 
8,805

 

 

 
15,324

 

Claims & other policy benefits
 

 

 

 

 

 

Interest credited
 

 

 

 

 
6,519

 

Policy acquisition costs and other insurance expenses
 

 

 

 

 

 

Included in other comprehensive income
 

 

 
(21
)
 
(2,329
)
 

 

Other revenues
 

 

 

 
2,289

 

 
(799
)
Purchases(1)
 
12,248

 

 
335

 

 
(4,205
)
 

Sales(1)
 
(541
)
 

 

 

 

 

Settlements(1)
 

 

 
(314
)
 

 
18,359

 
1,700

Transfers into Level 3
 

 

 

 

 

 

Transfers out of Level 3
 

 

 

 

 

 

Fair value, end of period
 
$
42,937

 
$
144,610

 
$
3,217

 
$
43,971

 
$
(928,797
)
 
$
(782
)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 
$
(5,000
)
 
$
8,805

 
$

 
$

 
$
13,474

 
$

Other revenues
 

 

 

 
2,289

 

 
(799
)
Interest credited
 

 

 

 

 
(11,839
)
 

For the six months ended June 30, 2018:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,337,272

 
$
593,942

 
$
107,882

 
$
123,474

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
(666
)
 
6,912

 
(135
)
 
182

Investment related gains (losses), net
 
(3,141
)
 

 
312

 
1,284

Included in other comprehensive income
 
(30,674
)
 
(28,156
)
 
(1,781
)
 
(691
)
Purchases(1)
 
255,668

 

 
45,328

 
11,000

Sales(1)
 
(17,269
)
 

 
(4,961
)
 

Settlements(1)
 
(143,474
)
 

 
(4,535
)
 
(22,283
)
Transfers into Level 3
 
7,166

 

 
3,031

 
4,968

Transfers out of Level 3
 
(37,728
)
 

 
(90,302
)
 
(47,248
)
Fair value, end of period
 
$
1,367,154

 
$
572,698

 
$
54,839

 
$
70,686

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$
(665
)
 
$
6,912

 
$
(105
)
 
$
174

Investment related gains (losses), net
 
(3,141
)
 

 

 


34

Table of Contents


For the six months ended June 30, 2018 (continued):
 
Fixed maturity securities available-for-sale
 
 
CMBS
 
U.S. government
 
State
and political
subdivisions
 
Other foreign government
Fair value, beginning of period
 
$
3,234

 
$
22,511

 
$
41,203

 
$
5,092

Total gains/losses (realized/unrealized)
 
 
 
 
 

 

Included in earnings, net:
 
 
 
 
 

 

Investment income, net of related expenses
 

 
(217
)
 
(2
)
 

Included in other comprehensive income
 
(63
)
 
(513
)
 
590

 
(48
)
Purchases(1)
 

 
214

 

 

Settlements(1)
 
(3
)
 
(1,260
)
 
(121
)
 

Transfers out of Level 3
 
(1,301
)
 

 
(25,165
)
 

Fair value, end of period
 
$
1,867

 
$
20,735

 
$
16,505

 
$
5,044

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$

 
$
(218
)
 
$
(3
)
 
$


For the six months ended June 30, 2018 (continued):
 
Equity securities
 
Funds withheld
at interest-
embedded
derivatives
 
Short-term Investments
 
Other assets - longevity swaps
 
Interest sensitive contract liabilities embedded derivatives
 
Other liabilities - mortality swaps
Fair value, beginning of period
 
$

 
$
122,194

 
$
3,096

 
$
40,659

 
$
(1,014,228
)
 
$
(1,683
)
Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 
(7,599
)
 
22,416

 

 

 
30,109

 

Interest credited
 

 

 

 

 
31,870

 

Included in other comprehensive income
 

 

 
(46
)
 
(1,245
)
 

 

Other revenues
 

 

 

 
4,557

 

 
(799
)
Purchases(1)
 
12,248

 

 
481

 

 
(12,713
)
 

Sales(1)
 
(569
)
 

 

 

 

 

Settlements(1)
 
(48
)
 

 
(314
)
 

 
36,165

 
1,700

Transfers into Level 3
 
38,905

 

 

 

 

 

Fair value, end of period
 
$
42,937

 
$
144,610

 
$
3,217

 
$
43,971

 
$
(928,797
)
 
$
(782
)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 
$
(7,705
)
 
$
22,416

 
$

 
$

 
$
26,375

 
$

Other revenues
 

 

 

 
4,557

 

 
(799
)
Interest credited
 

 

 

 

 
(4,295
)
 


35

Table of Contents


For the three months ended June 30, 2017:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,263,925

 
$
483,560

 
$
143,430

 
$
208,436

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
(396
)
 
3,201

 
(29
)
 
511

Investment related gains (losses), net
 
8,427

 

 
115

 

Included in other comprehensive income
 
(4,548
)
 
46,509

 
1,962

 
1,136

Purchases(1)
 
104,087

 

 
29,318

 
34,366

Sales(1)
 
(23,174
)
 

 
(4,467
)
 

Settlements(1)
 
(74,531
)
 

 
(4,655
)
 
(27,569
)
Transfers into Level 3
 
17,264

 

 
5,423

 
3,500

Transfers out of Level 3
 

 

 
(22,412
)
 
(18,791
)
Fair value, end of period
 
$
1,291,054

 
$
533,270

 
$
148,685

 
$
201,589

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$
(396
)
 
$
3,201

 
$
(37
)
 
$
239

Investment related gains (losses), net
 
(1,495
)
 

 

 

For the three months ended June 30, 2017 (continued):
 
Fixed maturity securities available-for-sale
 
 
CMBS
 
U.S. government
 
State
and political
subdivisions
 
Other foreign government
Fair value, beginning of period
 
$
1,923

 
$
23,474

 
$
33,858

 
$
12,344

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 

 
(115
)
 
(6
)
 

Included in other comprehensive income
 
21

 
211

 
823

 
(12
)
Purchases(1)
 

 
132

 

 

Settlements(1)
 
(1
)
 
(135
)
 
(241
)
 
(338
)
Fair value, end of period
 
$
1,943

 
$
23,567

 
$
34,434

 
$
11,994

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$

 
$
(115
)
 
$
(6
)
 
$

For the three months ended June 30, 2017 (continued):
 
Short-term Investments
 
Funds withheld
at interest-
embedded
derivatives
 
Other assets - longevity swaps
 
Interest sensitive contract liabilities embedded derivatives
 
Other liabilities - mortality swaps
Fair value, beginning of period
 
$
3,276

 
$
46,173

 
$
29,170

 
$
(972,930
)
 
$
(2,857
)
Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 

 
15,108

 

 
360

 

Interest credited
 

 

 

 
(5,955
)
 

Included in other comprehensive income
 
(29
)
 

 
2,198

 

 

Other revenues
 

 

 
1,981

 

 
(395
)
Purchases(1)
 
324

 

 

 
(19,533
)
 

Settlements(1)
 
(23
)
 

 

 
23,427

 
1,700

Fair value, end of period
 
$
3,548

 
$
61,281

 
$
33,349

 
$
(974,631
)
 
$
(1,552
)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 
$

 
$
15,108

 
$

 
$
(1,794
)
 
$

Other revenues
 

 

 
1,981

 

 
(395
)
Interest credited
 

 

 

 
(29,382
)
 


36

Table of Contents


For the six months ended June 30, 2017:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,272,253

 
$
475,965

 
$
160,291

 
$
219,280

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
(819
)
 
6,271

 
(274
)
 
1,529

Investment related gains (losses), net
 
7,196

 

 
480

 

Included in other comprehensive income
 
400

 
51,034

 
2,612

 
6,903

Purchases(1)
 
150,001

 

 
45,817

 
45,215

Sales(1)
 
(23,174
)
 

 
(15,071
)
 

Settlements(1)
 
(146,001
)
 

 
(11,439
)
 
(45,723
)
Transfers into Level 3
 
31,198

 

 
5,500

 
38,758

Transfers out of Level 3
 

 

 
(39,231
)
 
(64,373
)
Fair value, end of period
 
$
1,291,054

 
$
533,270

 
$
148,685

 
$
201,589

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$
(819
)
 
$
6,271

 
$
(128
)
 
$
400

Investment related gains (losses), net
 
(2,788
)
 

 
(346
)
 

For the six months ended June 30, 2017 (continued):
 
Fixed maturity securities available-for-sale
 
 
CMBS
 
U.S. government
 
State
and political
subdivisions
 
Other foreign government
Fair value, beginning of period
 
$
21,145

 
$
24,488

 
$
41,666

 
$
12,869

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
709

 
(232
)
 
(94
)
 

Investment related gains (losses), net
 
(595
)
 

 

 

Included in other comprehensive income
 
(62
)
 
263

 
(20
)
 
(203
)
Purchases(1)
 

 
236

 

 

Sales(1)
 
(3,720
)
 

 

 

Settlements(1)
 
(5,402
)
 
(1,188
)
 
(274
)
 
(672
)
Transfers out of Level 3
 
(10,132
)
 

 
(6,844
)
 

Fair value, end of period
 
$
1,943

 
$
23,567

 
$
34,434

 
$
11,994

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
$

 
$
(232
)
 
$
(94
)
 
$



37

Table of Contents


For the six months ended June 30, 2017 (continued):
 
Short-term Investments
 
Funds withheld
at interest-
embedded
derivatives
 
Other assets - longevity swaps
 
Interest sensitive contract liabilities embedded derivatives
 
Other liabilities - mortality swaps
Fair value, beginning of period
 
$
3,346

 
$
(22,529
)
 
$
26,958

 
$
(990,308
)
 
$
(2,462
)
Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 

 
83,810

 

 
22,723

 

Interest credited
 

 

 

 
(22,357
)
 

Included in other comprehensive income
 
4

 

 
2,545

 

 

Other revenues
 

 

 
3,846

 

 
(790
)
Purchases(1)
 
356

 

 

 
(25,927
)
 

Settlements(1)
 
(158
)
 

 

 
41,238

 
1,700

Fair value, end of period
 
$
3,548

 
$
61,281

 
$
33,349

 
$
(974,631
)
 
$
(1,552
)
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 
$

 
$
83,810

 
$

 
$
18,505

 
$

Other revenues
 

 

 
3,846

 

 
(790
)
Interest credited
 

 

 

 
(63,596
)
 


(1)
The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period.

Nonrecurring Fair Value Measurements
During the six months ended June 30, 2018, the Company did not have any adjustments to its assets or liabilities measured at fair value on a nonrecurring basis that are still held at the reporting date. The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the 2017 periods presented and still held at the reporting date (for example, when there is evidence of impairment). The estimated fair values for these assets were determined using significant unobservable inputs (Level 3).
 
Carrying Value After Measurement
 
Net Investment Gains (Losses)  
(dollars in thousands)
At June 30, 2017
 
Three months ended June 30, 2017
 
Six months ended June 30, 2017
Limited partnership interests(1)
$
3,690

 
$
(6,308
)
 
$
(6,308
)
(1)
The impaired limited partnership interests presented above were accounted for using the cost method. Impairments on these cost method investments were recognized at estimated fair value determined using the net asset values of the Company’s ownership interest as provided in the financial statements of the investees. The market for these investments has limited activity and price transparency.

Fair Value of Financial Instruments
The Company is required by general accounting principles for Fair Value Measurements and Disclosures to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis, as of June 30, 2018 and December 31, 2017 (dollars in thousands). For additional information regarding the methods and significant assumptions used by the Company to estimate these fair values, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2017 Annual Report. This table excludes any payables or receivables for collateral under repurchase agreements and other transactions. The estimated fair value of the excluded amount approximates carrying value as they equal the amount of cash collateral received/paid.

38

Table of Contents


June 30, 2018:
 
Carrying Value (1)    
 
Estimated 
Fair Value
 
Fair Value Measurement Using:
Level 1
 
Level 2
 
Level 3
 
NAV
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
 
$
4,558,669

 
$
4,461,317

 
$

 
$

 
$
4,461,317

 
$

Policy loans
 
1,339,252

 
1,339,252

 

 
1,339,252

 

 

Funds withheld at interest
 
5,836,373

 
6,057,217

 

 

 
6,057,217

 

Cash and cash equivalents
 
973,078

 
973,078

 
973,078

 

 

 

Short-term investments
 
40,507

 
40,507

 
40,507

 

 

 

Other invested assets
 
757,264

 
775,322

 
5,565

 
71,797

 
323,142

 
374,818

Accrued investment income
 
400,160

 
400,160

 

 
400,160

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive contract liabilities
 
$
13,072,239

 
$
12,972,203

 
$

 
$

 
$
12,972,203

 
$

Long-term debt
 
2,788,111

 
2,868,837

 

 

 
2,868,837

 

Collateral finance and securitization notes
 
724,998

 
666,356

 

 

 
666,356

 

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
Carrying Value (1)    
 
Estimated
Fair Value
 
Fair Value Measurement Using:
Level 1
 
Level 2
 
Level 3
 
NAV
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
 
$
4,400,533

 
$
4,477,654

 
$

 
$

 
$
4,477,654

 
$

Policy loans
 
1,357,624

 
1,357,624

 

 
1,357,624

 

 

Funds withheld at interest
 
5,955,092

 
6,275,623

 

 

 
6,275,623

 

Cash and cash equivalents
 
946,736

 
946,736

 
946,736

 

 

 

Short-term investments
 
42,558

 
42,558

 
42,558

 

 

 

Other invested assets
 
651,792

 
679,377

 
28,540

 
67,778

 
247,934

 
335,125

Accrued investment income
 
392,721

 
392,721

 

 
392,721

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive contract liabilities
 
$
12,683,872

 
$
12,917,243

 
$

 
$

 
$
12,917,243

 
$

Long-term debt
 
2,788,365

 
2,959,912

 

 

 
2,959,912

 

Collateral finance and securitization notes
 
783,938

 
722,145

 

 

 
722,145

 

 
(1)
Carrying values presented herein may differ from those in the Company’s condensed consolidated balance sheets because certain items within the respective financial statement captions may be measured at fair value on a recurring basis.

7.
Segment Information
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the 2017 Annual Report. The Company measures segment performance primarily based on profit or loss from operations before income taxes. There are no intersegment reinsurance transactions and the Company does not have any material long-lived assets.
The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in the Company’s businesses. As a result of the economic capital allocation process, a portion of investment income is attributed to the segments based on the level of allocated capital. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses.
The Company has geographic-based and business-based operational segments. Geographic-based operations are further segmented into traditional and financial solutions businesses. Information related to revenues, income (loss) before income taxes and total assets of the Company for each reportable segment are summarized below (dollars in thousands).

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Three months ended June 30,
 
Six months ended June 30,
Revenues:
 
2018
 
2017
 
2018
 
2017
U.S. and Latin America:
 
 
 
 
 
 
 
 
Traditional
 
$
1,564,147

 
$
1,522,698

 
$
3,053,841

 
$
3,011,201

Financial Solutions
 
229,948

 
271,976

 
443,300

 
570,822

Total
 
1,794,095

 
1,794,674

 
3,497,141

 
3,582,023

Canada:
 
 
 
 
 
 
 
 
Traditional
 
312,199

 
269,273

 
614,518

 
533,548

Financial Solutions
 
12,089

 
12,003

 
24,866

 
23,810

Total
 
324,288

 
281,276

 
639,384

 
557,358

Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
Traditional
 
372,538

 
345,920

 
766,320

 
664,006

Financial Solutions
 
100,675

 
73,405

 
188,818

 
153,394

Total
 
473,213

 
419,325

 
955,138

 
817,400

Asia Pacific:
 
 
 
 
 
 
 
 
Traditional
 
570,520

 
561,529

 
1,185,059

 
1,066,759

Financial Solutions
 
17,992

 
17,984

 
37,838

 
38,436

Total
 
588,512

 
579,513

 
1,222,897

 
1,105,195

Corporate and Other
 
15,800

 
54,488

 
55,055

 
76,040

Total
 
$
3,195,908

 
$
3,129,276

 
$
6,369,615

 
$
6,138,016

 
 
Three months ended June 30,
 
Six months ended June 30,
Income (loss) before income taxes:
 
2018
 
2017
 
2018
 
2017
U.S. and Latin America:
 
 
 
 
 
 
 
 
Traditional
 
$
71,978

 
$
90,594

 
$
74,870

 
$
120,554

Financial Solutions
 
82,388

 
106,985

 
149,809

 
210,571

Total
 
154,366

 
197,579

 
224,679

 
331,125

Canada:
 
 
 
 
 
 
 
 
Traditional
 
21,805

 
32,836

 
45,512

 
52,164

Financial Solutions
 
3,544

 
4,425

 
6,735

 
8,017

Total
 
25,349

 
37,261

 
52,247

 
60,181

Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
Traditional
 
6,468

 
11,354

 
21,889

 
25,330

Financial Solutions
 
65,369

 
28,905

 
104,533

 
60,823

Total
 
71,837

 
40,259

 
126,422

 
86,153

Asia Pacific:
 
 
 
 
 
 
 
 
Traditional
 
58,862

 
53,322

 
81,749

 
95,010

Financial Solutions
 
4,138

 
5,377

 
8,159

 
11,249

Total
 
63,000

 
58,699

 
89,908

 
106,259

Corporate and Other
 
(67,264
)
 
5,517

 
(108,043
)
 
(36,559
)
Total
 
$
247,288

 
$
339,315

 
$
385,213

 
$
547,159

Assets:
 
June 30, 2018
 
December 31, 2017
U.S. and Latin America:
 
 
 
 
Traditional
 
$
19,038,145

 
$
18,603,423

Financial Solutions
 
16,043,393

 
15,959,206

Total
 
35,081,538

 
34,562,629

Canada:
 
 
 
 
Traditional
 
4,203,344

 
4,161,452

Financial Solutions
 
141,581

 
126,372

Total
 
4,344,925

 
4,287,824

Europe, Middle East and Africa:
 
 
 
 
Traditional
 
3,335,264

 
3,099,495

Financial Solutions
 
4,829,194

 
5,274,993

Total
 
8,164,458

 
8,374,488

Asia Pacific:
 
 
 
 
Traditional
 
5,159,546

 
4,915,442

Financial Solutions
 
1,156,371

 
1,198,585

Total
 
6,315,917

 
6,114,027

Corporate and Other
 
5,859,659

 
7,175,850

Total
 
$
59,766,497

 
$
60,514,818

 

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8.    Commitments, Contingencies and Guarantees
Commitments
Funding of Investments
The Company’s commitments to fund investments as of June 30, 2018 and December 31, 2017 are presented in the following table (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Limited partnership interests and joint ventures
$
490,601

 
$
485,197

Commercial mortgage loans
113,992

 
40,815

Bank loans and private placements
98,652

 
60,472

Equity release mortgages
157,069

 
153,937

The Company anticipates that the majority of its current commitments will be invested over the next five years; however, these commitments could become due any time at the request of the counterparties. Bank loans and private placements are included in fixed maturity securities available-for-sale.
Contingencies
Litigation
The Company is subject to litigation in the normal course of its business. The Company currently has no material litigation. A legal reserve is established when the Company is notified of an arbitration demand or litigation or is notified that an arbitration demand or litigation is imminent, it is probable that the Company will incur a loss as a result and the amount of the probable loss is reasonably capable of being estimated.
Other Contingencies
The Company indemnifies its directors and officers as provided in its charters and by-laws. Since this indemnity generally is not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under this indemnity in the future.
Guarantees
Statutory Reserve Support
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 June 30, 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 June 30, 2018 (dollars in millions):
Commitment Period:
Maximum Potential Obligation
2023
$
500.0

2033
450.0

2034
2,000.0

2035
1,314.2

2036
1,932.0

2037
6,750.0

2038
800.0


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Other Guarantees
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts due under certain securities borrowing and repurchase arrangements, financing arrangements and office lease obligations, whereby, if a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment to fulfill the obligation. Additionally, in limited circumstances, treaty guarantees are granted to ceding companies in order to provide them additional security, particularly in cases where RGA’s subsidiary is relatively new, unrated, or not of a significant size, relative to the ceding company. Liabilities supported by the treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed party are reflected on the Company’s condensed consolidated balance sheets in future policy benefits. Potential guaranteed amounts of future payments will vary depending on production levels and underwriting results. Guarantees related to securities borrowing and repurchase arrangements provide additional security to third parties should a subsidiary fail to provide securities when due. RGA’s guarantees issued as of June 30, 2018 and December 31, 2017 are reflected in the following table (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Treaty guarantees
$
913,902

 
$
1,047,449

Treaty guarantees, net of assets in trust
802,073

 
926,393

Securities borrowing and repurchase arrangements
289,210

 
294,325

Financing arrangements
74,864

 
86,183

Lease obligations
1,137

 
1,662


9.
Income Tax
The Company's effective tax rates differed from the applicable U.S. federal income tax statutory rates of 21% and 35% as a result of the following for the three and six months ended June 30, 2018 and 2017, respectively (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Tax provision at U.S. statutory rate
 
$
51,931

 
$
118,760

 
$
80,895

 
$
191,506

Increase (decrease) in income taxes resulting from:
 
 
 
 
 
 
 
 
U.S. Tax Reform provisional adjustments
 
(4,314
)
 

 
(3,539
)
 

Foreign tax rate differing from U.S. tax rate
 
(330
)
 
(4,261
)
 
1,103

 
(10,413
)
Differences in tax bases in foreign jurisdictions
 
(1,132
)
 
(13,375
)
 
(6,892
)
 
(16,759
)
Deferred tax valuation allowance
 
3,079

 
13,031

 
10,501

 
14,213

Amounts related to tax audit contingencies
 
(2,036
)
 
(1,783
)
 
(1,201
)
 
(1,172
)
Corporate rate changes
 
145

 
44

 
417

 
(1,193
)
Subpart F
 
(348
)
 
1,140

 
310

 
1,326

Foreign tax credits
 
113

 
(1,938
)
 
(459
)
 
(2,064
)
Global intangible low-taxed income, net of credit
 
(119
)
 

 
4,291

 

Equity compensation excess benefit
 
(3,135
)
 
(2,609
)
 
(4,250
)
 
(4,464
)
Return to provision adjustments
 
(503
)
 
(633
)
 
(139
)
 
(403
)
Other, net
 
(437
)
 
(1,251
)
 
(428
)
 
(1,120
)
Total provision for income taxes
 
$
42,914

 
$
107,125

 
$
80,609

 
$
169,457

Effective tax rate
 
17.4
%
 
31.6
%
 
20.9
%
 
31.0
%
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) was signed into law. U.S. Tax Reform makes broad and complex changes to the U.S. tax code, including but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (5) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (6) establishing a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); and (7) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
Companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has not yet made a policy election to account for GILTI, but included an estimate of the current GILTI impact in the tax provision.

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As of June 30, 2018, the Company has not yet completed its accounting for the tax effects of the enactment of U.S. Tax Reform. The Company continues to gather additional information to account for the effects of U.S. Tax Reform such as information to more precisely compute the pretax deferred tax items upon which the change in rate was applied and refine the necessary valuation allowance. The Company also continues to monitor the issuance of new guidance in the form of Treasury Regulations which could impact the provisional balances recorded as of December 31, 2017.
The Company continues to evaluate the effects of the BEAT and is currently restructuring existing business flows to reduce the risk that the Company will be subject to the BEAT for 2018. The Company has estimated that the annual deductible payments to foreign affiliates as a percentage of annual estimated total deductions to be below the threshold for application of the BEAT; therefore, the Company has not established an additional BEAT liability as of June 30, 2018.
The effective tax rates for the second quarter and first six months of 2018 were lower than the U.S. Statutory rate of 21.0% primarily as a result of U.S. Tax Reform related adjustments, the effective settlement of an uncertain tax position, benefits from differences in bases in foreign jurisdictions and excess tax benefits related to equity compensation. These benefits were partially offset by valuation allowances established on losses in foreign jurisdictions. The effective tax rates for the second quarter and first six months of 2017 were lower than the U.S. Statutory rate of 35% primarily as a result of tax benefits from income in non-U.S. jurisdictions, mostly related to RGA Life Reinsurance Company of Canada and the United Kingdom Branch of RGA International Reinsurance Company dac, with statutory rates of 26.6% and 19.3%, respectively. Further, tax benefits derived from differences in tax bases in foreign jurisdictions and benefits related to the filing of an amended tax return also lowered the effective tax rate. These benefits were partially offset with a valuation allowance established related to the amended return filing.
10.    Employee Benefit Plans
The components of net periodic benefit costs, included in other operating expenses on the condensed consolidated statements of income, for the three and six months ended June 30, 2018 and 2017 were as follows (dollars in thousands):
 
 
Pension Benefits
 
Other Benefits
 
 
Three months ended June 30,
 
Three months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
3,570

 
$
2,819

 
$
636

 
$
721

Interest cost
 
1,357

 
1,431

 
529

 
565

Expected return on plan assets
 
(2,213
)
 
(1,823
)
 

 

Amortization of prior service cost (credit)
 
82

 
95

 
(329
)
 
(155
)
Amortization of prior actuarial losses
 
769

 
1,082

 
498

 
457

Settlements
 

 
256

 

 

Net periodic benefit cost
 
$
3,565

 
$
3,860

 
$
1,334

 
$
1,588

 
 
Pension Benefits
 
Other Benefits
 
 
Six months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
6,224

 
$
5,399

 
$
1,272

 
$
1,442

Interest cost
 
2,687

 
2,629

 
1,059

 
1,130

Expected return on plan assets
 
(3,767
)
 
(3,108
)
 

 

Amortization of prior service cost (credit)
 
165

 
169

 
(658
)
 
(311
)
Amortization of prior actuarial losses
 
1,863

 
2,163

 
996

 
914

Settlements
 

 
513

 

 

Net periodic benefit cost
 
$
7,172

 
$
7,765

 
$
2,669

 
$
3,175

The Company made $5.0 million in pension contributions during the first six months of 2018 and expects to make total pension contributions between $8.0 million and $10.0 million in 2018.
11.
Reinsurance
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 June 30, 2018 and December 31, 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 June 30, 2018 and December 31, 2017, all rated retrocession pool participants followed by the A.M. Best Company were rated “A- (excellent)” or better, except for 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

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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.
The following table presents information for the Company’s reinsurance ceded receivable assets, including the respective amount and A.M. Best rating for each reinsurer representing in excess of five percent of the total as of June 30, 2018 or December 31, 2017 (dollars in thousands):
 
 
 
 
June 30, 2018
 
December 31, 2017
Reinsurer
 
A.M. Best Rating
 
Amount
 
% of Total
 
Amount
 
% of Total
Reinsurer A
 
A+
 
$
312,405

 
39.6

 
$
301,478

 
38.6
%
Reinsurer B
 
A+
 
198,782

 
25.2

 
203,898

 
26.1

Reinsurer C
 
A
 
67,699

 
8.6

 
67,723

 
8.7

Reinsurer D
 
A+
 
41,807

 
5.3

 
40,528

 
5.2

Reinsurer E
 
A++
 
38,935

 
4.9

 
40,592

 
5.2

Other reinsurers
 
 
 
129,801

 
16.4

 
127,808

 
16.2

Total
 
 
 
$
789,429

 
100.0
%
 
$
782,027

 
100.0
%
Included in the total reinsurance ceded receivables balance were $271.2 million and $243.8 million of claims recoverable, of which $3.1 million and $1.9 million were in excess of 90 days past due, as of June 30, 2018 and December 31, 2017, respectively.
12.
New Accounting Standards
Changes to the general accounting principles are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates to the FASB Accounting Standards Codification™. Accounting standards updates not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s condensed consolidated financial statements.
Description
Date of Adoption
Effect on the financial statements or other significant matters
Standards adopted:
 
 
Reporting Comprehensive Income
This updated guidance requires reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the newly enacted U.S. federal corporate income tax rate. The amount of the reclassification would be the difference between the historical U.S. federal corporate income tax rate and the newly enacted 21 percent tax rate.
December 31, 2017

The Company adopted the new guidance by reclassifying certain income tax effects of items within accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act of 2017. The impact of adopting this standard was an increase in accumulated other comprehensive income and a reduction in retained earnings of approximately $156.4 million.
Stock Compensation
This updated guidance requires excess tax benefits and deficiencies from share-based payment awards be recorded in income tax expense in the income statement. Previously, excess tax benefits and deficiencies were recognized in shareholders’ equity or deferred taxes on the balance sheet depending on the tax situation of the Company. In addition, the updated guidance also changes the accounting for forfeitures and statutory tax withholding requirements, as well as the classification in the statement of cash flows.
January 1, 2017

Upon adoption, the Company recognized excess tax benefits of approximately $17.7 million in deferred tax assets that were previously not recognized in a cumulative-effect adjustment increasing retained earnings by $17.7 million. The Company also recorded excess tax benefits of approximately $10.5 million in the provision for income taxes for the year ended December 31, 2017. The number of weighted average diluted shares outstanding were also adjusted to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation resulting in an immaterial increase in the number of dilutive shares outstanding. The Company also elected to continue estimating forfeitures for purposes of recognizing share-based compensation. Other aspects of the adoption of the updated guidance did not have a material impact to the Company’s consolidated financial statements.
Financial Instruments - Recognition and Measurement
This guidance requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and also updates certain presentation and disclosure requirements.
January 1, 2018

This guidance required a cumulative-effect adjustment for certain items upon adoption. The adoption of the new guidance was not material to the Company's consolidated financial statements.

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Standards not yet adopted:
 
 
Leases
This new standard, based on the principle that entities should recognize assets and liabilities arising from leases, does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The new standard’s primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term of operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting is largely unchanged from the previous accounting standard. In addition, the new standard expands the disclosure requirements of lease arrangements. Early adoption is permitted.
January 1, 2019

This new standard will be adopted by applying a modified retrospective transition approach, which includes a number of practical expedients. The Company is currently evaluating the impact of this amendment on its consolidated financial statements; however, it does not expect the adoption of the new standard to have a material impact on its results of operations or balance sheet as a result of the recognition of right-to-use assets and lease liabilities related to operating leases. Contractual obligations related to operating leases totaled approximately $38.2 million as of December 31, 2017.
Derivatives and Hedging
This updated guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting in current GAAP related to the assessment of hedge effectiveness. Early adoption is permitted.
January 1, 2019

This new guidance will be adopted by applying a modified retrospective approach to existing hedging relationships as of the date of adoption. The Company is currently evaluating the impact of this updated guidance on its consolidated financial statements.
Financial Instruments - Credit Losses
This guidance adds to U.S. GAAP an impairment model, known as current expected credit loss (“CECL”) model that is based on expected losses rather than incurred losses. For traditional and other receivables, held-to-maturity debt securities, loans and other instruments entities will be required to use the new forward-looking “expected loss” model that generally will result in earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses similar to what they do today, except the losses will be recognized as allowances rather than reduction to the amortized cost of the securities. Early adoption is permitted.
January 1, 2020

This guidance will be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is currently evaluating the impact of this amendment on its consolidated financial statements.



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ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, among others, statements relating to projections of the strategies, earnings, revenues, income or loss, ratios, future financial performance, and growth potential of the Company. The words “intend,” “expect,” “project,” “estimate,” “predict,” “anticipate,” “should,” “believe,” and other similar expressions also are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.
Numerous important factors could cause actual results and events to differ materially from those expressed or implied by forward-looking statements including, without limitation, (1) adverse capital and credit market conditions and their impact on the Company’s liquidity, access to capital and cost of capital, (2) the impairment of other financial institutions and its effect on the Company’s business, (3) requirements to post collateral or make payments due to declines in market value of assets subject to the Company’s collateral arrangements, (4) the fact that the determination of allowances and impairments taken on the Company’s investments is highly subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6) changes in the Company’s financial strength and credit ratings and the effect of such changes on the Company’s future results of operations and financial condition, (7) inadequate risk analysis and underwriting, (8) general economic conditions or a prolonged economic downturn affecting the demand for insurance and reinsurance in the Company’s current and planned markets, (9) the availability and cost of collateral necessary for regulatory reserves and capital, (10) market or economic conditions that adversely affect the value of the Company’s investment securities or result in the impairment of all or a portion of the value of certain of the Company’s investment securities, that in turn could affect regulatory capital, (11) market or economic conditions that adversely affect the Company’s ability to make timely sales of investment securities, (12) risks inherent in the Company’s risk management and investment strategy, including changes in investment portfolio yields due to interest rate or credit quality changes, (13) fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (14) adverse litigation or arbitration results, (15) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and discontinued lines of business, (16) the stability of and actions by governments and economies in the markets in which the Company operates, including ongoing uncertainties regarding the amount of U.S. sovereign debt and the credit ratings thereof, (17) competitive factors and competitors’ responses to the Company’s initiatives, (18) the success of the Company’s clients, (19) successful execution of the Company’s entry into new markets, (20) successful development and introduction of new products and distribution opportunities, (21) the Company’s ability to successfully integrate acquired blocks of business and entities, (22) action by regulators who have authority over the Company’s reinsurance operations in the jurisdictions in which it operates, (23) the Company’s dependence on third parties, including those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party investment managers and others, (24) the threat of natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (25) interruption or failure of the Company’s telecommunication, information technology or other operational systems, or the Company’s failure to maintain adequate security to protect the confidentiality or privacy of personal or sensitive data stored on such systems, (26) changes in laws, regulations, and accounting standards applicable to the Company, its subsidiaries, or its business, (27) the benefits or burdens associated with the Tax Cuts and Jobs Act of 2017 may be different than expected, (28) the effect of the Company’s status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its debt obligations, and (29) other risks and uncertainties described in this document and in the Company’s other filings with the SEC.
Forward-looking statements should be evaluated together with the many risks and uncertainties that affect the Company’s business, including those mentioned in this document and described in the periodic reports the Company files with the SEC. These forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligations to update these forward-looking statements, even though the Company’s situation may change in the future. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A – “Risk Factors” in the 2017 Annual Report.
Overview
The Company is among the leading global providers of life reinsurance and financial solutions, with $3.3 trillion of life reinsurance in force. Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, and financial reinsurance. The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, fee income from financial solutions business and income earned on invested assets.
Historically, the Company’s primary business has been traditional life reinsurance, which involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. Each year, however, a portion of the business under existing treaties terminates due to, among other

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things, lapses or voluntary surrenders of underlying policies, deaths of insureds, and the exercise of recapture options by ceding companies. The Company has expanded its financial solutions business, including significant asset-intensive and longevity risk transactions, which allow its clients to take advantage of growth opportunities and manage their capital, longevity and investment risk.
The Company’s long-term profitability largely depends on the volume and amount of death- and health-related claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. Additionally, the Company generates profits on investment spreads associated with the reinsurance of investment type contracts and generates fees from financial reinsurance transactions which are typically shorter duration than its traditional life reinsurance business. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis.
As is customary in the reinsurance business, clients continually update, refine, and revise reinsurance information provided to the Company. Such revised information is used by the Company in preparation of its condensed consolidated financial statements and the financial effects resulting from the incorporation of revised data are reflected in the current period.
Segment Presentation    
The Company has geographic-based and business-based operational segments. Geographic-based operations are further segmented into traditional and financial solutions businesses. The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a consistent basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in RGA’s businesses.
As a result of the economic capital allocation process, a portion of investment income is credited to the segments based on the level of allocated capital. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses. Segment investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.
Segment revenue levels can be significantly influenced by currency fluctuations, large transactions, mix of business and reporting practices of ceding companies, and therefore may fluctuate from period to period. Although reasonably predictable over a period of years, segment claims experience can be volatile over shorter periods. See “Results of Operations by Segment” below for further information about the Company’s segments.
Consolidated Results of Operations
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,594,460

 
$
2,480,451

 
$
5,177,011

 
$
4,846,147

Investment income, net of related expenses
 
528,061

 
518,538

 
1,044,390

 
1,032,902

Investment related gains (losses), net
 
(10,572
)
 
56,295

 
(11,042
)
 
116,818

Other revenues
 
83,959

 
73,992

 
159,256

 
142,149

Total revenues
 
3,195,908

 
3,129,276

 
6,369,615

 
6,138,016

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,279,593

 
2,164,363

 
4,641,694

 
4,270,508

Interest credited
 
109,327

 
115,285

 
189,776

 
222,969

Policy acquisition costs and other insurance expenses
 
320,276

 
319,832

 
677,178

 
699,221

Other operating expenses
 
194,959

 
154,356

 
386,233

 
312,862

Interest expense
 
37,025

 
29,352

 
74,479

 
71,754

Collateral finance and securitization expense
 
7,440

 
6,773

 
15,042

 
13,543

Total benefits and expenses
 
2,948,620

 
2,789,961

 
5,984,402

 
5,590,857

 Income before income taxes
 
247,288

 
339,315

 
385,213

 
547,159

Provision for income taxes
 
42,914

 
107,125

 
80,609

 
169,457

Net income
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
3.19

 
$
3.60

 
$
4.74

 
$
5.86

Diluted earnings per share
 
$
3.13

 
$
3.54

 
$
4.65

 
$
5.76

Dividends declared per share
 
$
0.50

 
$
0.41

 
$
1.00

 
$
0.82


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Consolidated income before income taxes decreased $92.0 million, or 27.1%, and $161.9 million, or 29.6%, for the three and six months ended June 30, 2018, respectively, as compared to the same periods in 2017. The decrease in income for the second quarter of 2018 was primarily due to unfavorable claims experience in the U.S. group and individual mortality businesses and an increase in operating expenses related to the Company’s strategic initiatives. In addition, the decrease in income for the first six months of 2018 reflects an unfavorable change in investment related gains (losses) largely due to changes in the fair value of embedded derivatives on modco or funds withheld treaties within the U.S. segment primarily related to changes in interest rates and credit spreads. The effect of the change in fair value of these embedded derivatives on income is discussed below. Foreign currency fluctuations relative to the prior year resulted in an increase in income before income taxes by approximately $6.0 million and $14.8 million for the second quarter and first six months of 2018, as compared to the same periods in 2017.
The Company recognizes in consolidated income, any changes in the fair value of embedded derivatives on modco or funds withheld treaties, equity-indexed annuity treaties (“EIAs”) and variable annuities with guaranteed minimum benefit riders. The Company utilizes freestanding derivatives to minimize the income statement volatility due to changes in the fair value of embedded derivatives associated with guaranteed minimum benefit riders. The following table presents the effect of embedded derivatives and related freestanding derivatives on income before income taxes for the periods indicated (dollars in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Modco/Funds withheld:
 
 
 
 
 
 
 
Unrealized gains (losses)
$
8,805

 
$
15,108

 
$
22,416

 
$
83,810

Deferred acquisition costs/retrocession
405

 
(10,585
)
 
(2,668
)
 
(39,526
)
Net effect
9,210

 
4,523

 
19,748

 
44,284

EIAs:
 
 
 
 
 
 
 
Unrealized gains (losses)
(565
)
 
7,340

 
27,998

 
35,298

Deferred acquisition costs/retrocession
(418
)
 
(4,699
)
 
(15,711
)
 
(21,214
)
Net effect
(983
)
 
2,641

 
12,287

 
14,084

Guaranteed minimum benefit riders:
 
 
 
 
 
 
 
Unrealized gains (losses)
15,324

 
360

 
30,109

 
22,723

Deferred acquisition costs/retrocession
3,864

 
4,291

 
6,195

 
26,292

Net effect
19,188

 
4,651

 
36,304

 
49,015

Related freestanding derivatives
(18,805
)
 
(2,730
)
 
(41,304
)
 
(51,706
)
Net effect after related freestanding derivatives
383

 
1,921

 
(5,000
)
 
(2,691
)
 
 
 
 
 
 
 
 
Total net effect of embedded derivatives
27,415

 
11,815

 
68,339

 
107,383

Related freestanding derivatives
(18,805
)
 
(2,730
)
 
(41,304
)
 
(51,706
)
Total net effect after freestanding derivatives
$
8,610

 
$
9,085

 
$
27,035

 
$
55,677

Consolidated net premiums increased $114.0 million, or 4.6%, and $330.9 million, or 6.8%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017, primarily due to growth in life reinsurance in force. Additionally, foreign currency fluctuations contributed to the increases in net premiums by approximately $40.9 million and $120.2 million for the second quarter and first six months of 2018, as compared to the same periods in 2017. Consolidated assumed life insurance in force increased to $3,340.6 billion as of June 30, 2018 from $3,233.1 billion as of June 30, 2017 due to new business production and in force transactions. The Company added new business production, measured by face amount of insurance in force, of $99.7 billion and $122.5 billion during the second quarter of 2018 and 2017, respectively, and $196.4 billion and $214.1 billion during the first six months of 2018 and 2017, respectively.
Consolidated investment income, net of related expenses, increased $9.5 million, or 1.8%, and $11.5 million, or 1.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases are primarily attributable to an increase in the average invested asset base largely offset by a decrease in the average investment yield, lower variable investment income and an unfavorable change in the fair value of the Company’s funds withheld at interest assets associated with the reinsurance of certain EIA products. The re-measurement of these funds withheld assets decreased investment income by $19.2 million and $62.5 million in the second quarter and first six months of 2018, respectively, as compared to the same periods in 2017. The effect on investment income of the EIA's market value changes is substantially offset by a corresponding change in interest credited to policyholder account balances resulting in an insignificant effect on net income.
Average invested assets at amortized cost, excluding spread related business, for the six months ended June 30, 2018 totaled $26.8 billion, a 7.0% increase over June 30, 2017. The average yield earned on investments, excluding spread related business, was 4.32% and 4.60% for the second quarter of 2018 and 2017, respectively, and 4.39% and 4.50% for the six months ended June 30,

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2018 and 2017, respectively. The average yield will vary from quarter to quarter and year to year depending on a number of variables, including the prevailing interest rate and credit spread environment, prepayment fees and make-whole premiums, changes in the mix of the underlying investments and cash balances, and the timing of dividends and distributions on certain investments. A continued low interest rate environment is expected to put downward pressure on this yield in future reporting periods.
Total investment related gains (losses), net were $(10.6) million and $56.3 million for the second quarter of 2018 and 2017, respectively, and $(11.0) million and $116.8 million for the first six months of 2018 and 2017, respectively. The unfavorable changes are largely due to asset repositioning related to reinsurance transactions occurring in late 2017 and early 2018. A portion of the investment related gains (losses) are due to changes in the value of embedded derivatives related to reinsurance treaties written on a modco or funds withheld basis, reflecting the impact of changes in interest rates and credit spreads on the calculation of fair value. Changes in the fair value of these embedded derivatives increased investment related gains by $8.8 million and $15.1 million for the second quarter of 2018 and 2017, respectively, and $22.4 million and $83.8 million for the first six months of 2018 and 2017, respectively. In addition, impairments on fixed maturity securities decreased by $17.2 million in the first six months of 2018, as compared to the same period in 2017. See Note 4 - “Investments” and Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for additional information on the impairment losses and derivatives.
The effective tax rate on a consolidated basis was 17.4% and 31.6% for the second quarter 2018 and 2017, respectively, and 20.9% and 31.0% for the first six months of 2018 and 2017, respectively. The 2018 effective tax rates reflect changes to the U.S. tax code related to the Tax Cuts and Jobs Act of 2017. See Note 9 - “Income Tax” in the Notes to Condensed Consolidated Financial Statements for additional information on the Company’s consolidated effective tax rates.


Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the condensed consolidated financial statements could change significantly.
Management believes the critical accounting policies relating to the following areas are most dependent on the application of estimates and assumptions:
Premiums receivable;
Deferred acquisition costs;
Liabilities for future policy benefits and incurred but not reported claims;
Valuation of investments and other-than-temporary impairments to specific investments;
Valuation of embedded derivatives; and
Income taxes.
A discussion of each of the critical accounting policies may be found in the Company’s 2017 Annual Report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”


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Results of Operations by Segment

U.S. and Latin America Operations
The U.S. and Latin America operations include business generated by its offices in the U.S., Mexico and Brazil. The offices in Mexico and Brazil provide services to clients in other Latin American countries. U.S. and Latin America operations consist of two major segments: Traditional and Financial Solutions. The Traditional segment primarily specializes in individual mortality-risk reinsurance and to a lesser extent, group, health and long-term care reinsurance. The Financial Solutions segment consists of Asset-Intensive and Financial Reinsurance. Asset-Intensive within the Financial Solutions segment provides coinsurance of annuities and corporate-owned life insurance policies and to a lesser extent also issues fee-based synthetic guaranteed investment contracts, which include investment-only, stable value contracts. Financial Reinsurance within the Financial Solutions segment primarily involves assisting ceding companies in meeting applicable regulatory requirements by enhancing the ceding companies’ financial strength and regulatory surplus position through relatively low risk reinsurance transactions. Due to the low-risk nature of financial reinsurance transactions, they typically do not qualify as reinsurance under GAAP, so only the related net fees are reflected in other revenues on the condensed consolidated statements of income.
For the three months ended June 30, 2018:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
1,373,548

 
$
6,699

 
$

 
$
1,380,247

Investment income, net of related expenses
 
180,478

 
171,810

 
1,504

 
353,792

Investment related gains (losses), net
 
3,725

 
776

 

 
4,501

Other revenues
 
6,396

 
24,065

 
25,094

 
55,555

Total revenues
 
1,564,147

 
203,350

 
26,598

 
1,794,095

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,255,007

 
22,590

 

 
1,277,597

Interest credited
 
20,992

 
74,810

 

 
95,802

Policy acquisition costs and other insurance expenses
 
182,064

 
37,939

 
2,609

 
222,612

Other operating expenses
 
34,106

 
7,171

 
2,441

 
43,718

Total benefits and expenses
 
1,492,169

 
142,510

 
5,050

 
1,639,729

Income before income taxes
 
$
71,978

 
$
60,840

 
$
21,548

 
$
154,366

 
 
 
 
 
 
 
 
 
For the three months ended June 30, 2017:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
1,335,316

 
$
7,128

 
$

 
$
1,342,444

Investment income, net of related expenses
 
183,713

 
177,957

 
1,853

 
363,523

Investment related gains (losses), net
 
(654
)
 
32,626

 

 
31,972

Other revenues
 
4,323

 
26,211

 
26,201

 
56,735

Total revenues
 
1,522,698

 
243,922

 
28,054

 
1,794,674

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,194,917

 
24,503

 

 
1,219,420

Interest credited
 
20,838

 
87,664

 

 
108,502

Policy acquisition costs and other insurance expenses
 
186,375

 
38,211

 
5,619

 
230,205

Other operating expenses
 
29,974

 
6,542

 
2,452

 
38,968

Total benefits and expenses
 
1,432,104

 
156,920

 
8,071

 
1,597,095

Income before income taxes
 
$
90,594

 
$
87,002

 
$
19,983

 
$
197,579


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For the six months ended June 30, 2018:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
2,672,970

 
$
11,891

 
$

 
$
2,684,861

Investment income, net of related expenses
 
363,538

 
329,722

 
3,326

 
696,586

Investment related gains (losses), net
 
5,408

 
1,452

 

 
6,860

Other revenues
 
11,925

 
47,024

 
49,885

 
108,834

Total revenues
 
3,053,841

 
390,089

 
53,211

 
3,497,141

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,509,968

 
38,535

 

 
2,548,503

Interest credited
 
41,272

 
129,022

 

 
170,294

Policy acquisition costs and other insurance expenses
 
359,704

 
99,974

 
6,609

 
466,287

Other operating expenses
 
68,027

 
14,456

 
4,895

 
87,378

Total benefits and expenses
 
2,978,971

 
281,987

 
11,504

 
3,272,462

Income before income taxes
 
$
74,870

 
$
108,102

 
$
41,707

 
$
224,679

 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2017:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
2,639,661

 
$
11,763

 
$

 
$
2,651,424

Investment income, net of related expenses
 
362,708

 
365,110

 
3,517

 
731,335

Investment related gains (losses), net
 
1,311

 
90,397

 

 
91,708

Other revenues
 
7,521

 
49,425

 
50,610

 
107,556

Total revenues
 
3,011,201

 
516,695

 
54,127

 
3,582,023

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,420,557

 
42,039

 

 
2,462,596

Interest credited
 
41,127

 
166,821

 

 
207,948

Policy acquisition costs and other insurance expenses
 
367,185

 
121,864

 
11,560

 
500,609

Other operating expenses
 
61,778

 
13,199

 
4,768

 
79,745

Total benefits and expenses
 
2,890,647

 
343,923

 
16,328

 
3,250,898

Income before income taxes
 
$
120,554

 
$
172,772

 
$
37,799

 
$
331,125

Income before income taxes decreased by $43.2 million, or 21.9%, and $106.4 million, or 32.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decrease in income before income taxes for the second quarter was primarily due to a decrease in investment related gains and unfavorable claims experience in the group disability and healthcare excess lines of business. The decrease in income before income taxes for the first six months was primarily due to the aforementioned unfavorable claims experience from group business and the individual mortality business due partially to a severe influenza season in 2018. Also contributing to the year over year decline in income were lower investment related gains and changes in the value of the embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis.
Traditional Reinsurance
Income before income taxes for the U.S. and Latin America Traditional segment decreased by $18.6 million, or 20.5%, and $45.7 million, or 37.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decrease in the second quarter and first six months is primarily due to unfavorable claims experience in the group disability and healthcare excess lines of business and higher individual mortality claims. Mortality claims increased significantly in the first quarter of 2018 due to a severe influenza season.
Net premiums increased $38.2 million, or 2.9%, and $33.3 million, or 1.3%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in net premiums in the second quarter and first six months were reduced by $28.8 million and $51.8 million, respectively, due to the restructure of a health treaty. After adjusting for the treaty restructure, net premiums increased 5.1% and 3.3% in the second quarter and first six months of 2018, respectively, compared to the same periods in 2017, due to expected organic growth mainly in the Mortality and Group lines of business. The segment added new individual life business production, measured by face amount of insurance in force of $29.3 billion and $23.5 billion for the second quarter and $52.6 billion and $50.3 billion for the first six months of 2018 and 2017, respectively.

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Net investment income decreased $3.2 million, or 1.8%, and increased by $0.8 million, or 0.2%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decrease in the second quarter was primarily due to lower variable investment income. For the first six months, investment income was relatively flat as the effect of less variable investment income was offset by growth in the asset base. Investment related gains (losses), net increased $4.4 million and $4.1 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 91.4% and 89.5% for the second quarter and 93.9% and 91.7%, for the six months ended June 30, 2018 and 2017, respectively. The increases in the loss ratios for the second quarter and first six months of 2018, as compared to the same periods in 2017 were primarily due to unfavorable claims experience in both the group and mortality lines of business. Management believes a portion of the unfavorable variance is the normal volatility associated with influenza season.
Interest credited expense remained flat for the three and six months ended June 30, 2018, as compared to the same periods in 2017. Interest credited in this segment relates to amounts credited on cash value products which also have a significant mortality component. Income before income taxes is affected by the spread between the investment income and the interest credited on the underlying products.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.3% and 14.0% for the second quarter and 13.5% and 13.9% for the six months ended June 30, 2018 and 2017, respectively. While these ratios are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels within coinsurance-type arrangements. In addition, the amortization pattern of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary. Also, the mix of first year coinsurance business versus yearly renewable term business can cause the percentage to fluctuate from period to period
Other operating expenses increased $4.1 million, or 13.8%, and $6.2 million, or 10.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in operating expenses, for both periods, is primarily related to expense growth associated with key business line initiatives focused on enhancing the services and reinsurance options for clients. Other operating expenses, as a percentage of net premiums were 2.5% and 2.2% for the second quarter and 2.5% and 2.3% first six months of 2018 and 2017, respectively. The expense ratio tends to fluctuate only slightly from period to period due to the maturity and scale of this segment.
Financial Solutions - Asset-Intensive Reinsurance
Asset-Intensive reinsurance within the U.S. and Latin America Financial Solutions segment primarily involves assuming investment risk within underlying annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance with funds withheld or modco. The Company recognizes profits or losses primarily from the spread between the investment income earned and the interest credited on the underlying deposit liabilities, income associated with longevity risk, and fees associated with variable annuity account values and guaranteed investment contracts.
Impact of certain derivatives:
Income from the asset-intensive business tends to be volatile due to changes in the fair value of certain derivatives, including embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis, as well as embedded derivatives associated with the Company’s reinsurance of equity-indexed annuities and variable annuities with guaranteed minimum benefit riders. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including risk-free rates and credit spreads), implied volatility, the Company’s own credit risk and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives, net of related hedging activity, and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues), and interest credited. These fluctuations are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties.
The following table summarizes the asset-intensive results and quantifies the impact of these embedded derivatives for the periods presented. Revenues before certain derivatives, benefits and expenses before certain derivatives, and income before income taxes and certain derivatives, should not be viewed as substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income before income taxes.

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(dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Total revenues
 
$
203,350

 
$
243,922

 
$
390,089

 
$
516,695

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
5,039

 
15,762

 
16,957

 
82,500

Guaranteed minimum benefit riders and related free standing derivatives
 
2,077

 
3,017

 
(2,512
)
 
(3,877
)
Revenues before certain derivatives
 
196,234

 
225,143

 
375,644

 
438,072

Benefits and expenses:
 
 
 
 
 
 
 
 
Total benefits and expenses
 
142,510

 
156,920

 
281,987

 
343,923

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
(405
)
 
10,585

 
2,668

 
39,526

Guaranteed minimum benefit riders and related free standing derivatives
 
1,694

 
1,096

 
2,488

 
(1,186
)
Equity-indexed annuities
 
983

 
(2,641
)
 
(12,287
)
 
(14,084
)
Benefits and expenses before certain derivatives
 
140,238

 
147,880

 
289,118

 
319,667

Income before income taxes:
 
 
 
 
 
 
 
 
Income before income taxes
 
60,840

 
87,002

 
108,102

 
172,772

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
5,444

 
5,177

 
14,289

 
42,974

Guaranteed minimum benefit riders and related free standing derivatives
 
383

 
1,921

 
(5,000
)
 
(2,691
)
Equity-indexed annuities
 
(983
)
 
2,641

 
12,287

 
14,084

Income before income taxes and certain derivatives
 
$
55,996

 
$
77,263

 
$
86,526

 
$
118,405

Embedded Derivatives - Modco/Funds Withheld Treaties - Represents the change in the fair value of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis. The fair value changes of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. The Company’s utilization of a credit valuation adjustment did not have a material effect on the change in fair value of these embedded derivatives for the six months ended June 30, 2018 and 2017.
The change in fair value of the embedded derivatives - modco/funds withheld treaties increased income before income taxes by $5.4 million and $5.2 million for the second quarter and $14.3 million and $43.0 million for the six months ended June 30, 2018 and 2017, respectively. The increase in income for the second quarter of 2018 was primarily the result of interest rate movements, partially offset by repositioning in the funds withheld portfolio. The increase in income for the second quarter of 2017 and for the first six months ended June 30, 2018 and 2017 were primarily due to tightening credit spreads.
Guaranteed Minimum Benefit Riders - Represents the impact related to guaranteed minimum benefits associated with the Company’s reinsurance of variable annuities. The fair value changes of the guaranteed minimum benefits along with the changes in fair value of the free standing derivatives (interest rate swaps, financial futures and equity options), purchased by the Company to substantially hedge the liability are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. The Company’s utilization of a credit valuation adjustment did not have a material effect on the change in fair value of these embedded derivatives for the six months ended June 30, 2018 and 2017.
The change in fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing derivatives, increased income before income taxes by $0.4 million and $1.9 million for the second quarter and decreased by $5.0 million and $2.7 million for the six months ended June 30, 2018 and 2017, respectively. The increases in income for the second quarter of 2018 and 2017 were primarily due to favorable hedging results. The decrease in income for the first six months ended June 30, 2018 was primarily the result of interest rate movements. The decrease in income for the first six months of2017 was primarily the result of lower policyholder lapses.
Equity-Indexed Annuities - Represents changes in the liability for equity-indexed annuities in excess of changes in account value, after adjustments for related deferred acquisition expenses. The change in fair value of embedded derivative liabilities associated with equity-indexed annuities increased (decreased) income before income taxes by $(1.0) million and $2.6 million for the second quarter and $12.3 million and $14.1 million for the six months ended June 30, 2018 and 2017, respectively.  The decrease in income for the second quarter of 2018 was primarily the result of interest rate movements. The increase in income for the first six months of 2018 was primarily due to lower policyholder lapses and withdrawals. The increase in income for the second quarter and first six months of 2017 was primarily due to changes in the domestic equity markets.

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The changes in derivatives discussed above are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including benchmark rates and credit spreads), credit valuation adjustments, implied volatility and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues) and interest credited.
Discussion and analysis before certain derivatives:
Income before income taxes and certain derivatives decreased by $21.3 million and $31.9 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in the second quarter and first six months were primarily due to lower investment related gains (losses), net of the corresponding impact to deferred acquisition costs, associated with coinsurance portfolios.
Revenue before certain derivatives decreased by $28.9 million and $62.4 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in the second quarter and first six months were primarily due to the change in fair value of equity options associated with the reinsurance of EIAs and lower investment related gains (losses) associated with coinsurance portfolios. The effect on investment income related to equity options is substantially offset by a corresponding change in interest credited.
Benefits and expenses before certain derivatives decreased by $7.6 million and $30.5 million for the three and six months ended June 30, 2018, as compared to the same period in 2017. The decreases in the second quarter and first six months were primarily due to lower interest credited associated with the reinsurance of EIAs. The effect on interest credited related to equity options is substantially offset by a corresponding change in investment income.
The invested asset base supporting this segment increased to $15.8 billion as of June 30, 2018 from $15.7 billion as of June 30, 2017. As of June 30, 2018, $4.0 billion of the invested assets were funds withheld at interest, of which greater than 90% is associated with one client.
Financial Solutions - Financial Reinsurance
Financial Reinsurance within the U.S. and Latin America Financial Solutions segment income before income taxes consists primarily of net fees earned on financial reinsurance transactions. Additionally, a portion of the business is brokered business in which the Company does not participate in the assumption of risk. The fees earned from financial reinsurance contracts and brokered business are reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance expenses.
Income before income taxes increased $1.6 million, or 7.8%, and $3.9 million, or 10.3%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases were primarily due to growth in new transactions.
At June 30, 2018 and 2017, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial structures was $13.7 billion and $12.4 billion, respectively. The increase was primarily due to new transactions, as well as organic growth on existing transactions. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period.

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Canada Operations
The Company conducts reinsurance business in Canada primarily through RGA Canada, which assists clients with capital management activity and mortality and morbidity risk management. The Canada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, as well as creditor, group life and health, critical illness and disability reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional individual life insurance. The Canada Financial Solutions segment consists of longevity and financial reinsurance.
(dollars in thousands)
Three months ended June 30,
 
2018
 
2017
Revenues:
Traditional
 
Financial Solutions
 
Total Canada
 
Traditional
 
Financial Solutions
 
Total Canada
Net premiums
$
260,750

 
$
10,955

 
$
271,705

 
$
221,380

 
$
9,314

 
$
230,694

Investment income, net of related expenses
49,535

 
330

 
49,865

 
44,830

 
1,351

 
46,181

Investment related gains (losses), net
446

 

 
446

 
2,598

 

 
2,598

Other revenues
1,468

 
804

 
2,272

 
465

 
1,338

 
1,803

Total revenues
312,199

 
12,089

 
324,288

 
269,273

 
12,003

 
281,276

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
223,935

 
7,915

 
231,850

 
181,197

 
7,099

 
188,296

Interest credited
21

 

 
21

 
5

 

 
5

Policy acquisition costs and other insurance expenses
58,541

 
292

 
58,833

 
47,597

 
206

 
47,803

Other operating expenses
7,897

 
338

 
8,235

 
7,638

 
273

 
7,911

Total benefits and expenses
290,394

 
8,545

 
298,939

 
236,437

 
7,578

 
244,015

Income before income taxes
$
21,805

 
$
3,544

 
$
25,349

 
$
32,836

 
$
4,425

 
$
37,261

(dollars in thousands)
Six months ended June 30,
 
2018
 
2017
Revenues:
Traditional
 
Financial Solutions
 
Total Canada
 
Traditional
 
Financial Solutions
 
Total Canada
Net premiums
$
513,473

 
$
22,260

 
$
535,733

 
$
437,142

 
$
18,724

 
$
455,866

Investment income, net of related expenses
100,119

 
445

 
100,564

 
89,336

 
2,395

 
91,731

Investment related gains (losses), net
(285
)
 

 
(285
)
 
6,441

 

 
6,441

Other revenues
1,211

 
2,161

 
3,372

 
629

 
2,691

 
3,320

Total revenues
614,518

 
24,866

 
639,384

 
533,548

 
23,810

 
557,358

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
436,760

 
17,030

 
453,790

 
372,249

 
14,718

 
386,967

Interest credited
26

 

 
26

 
9

 

 
9

Policy acquisition costs and other insurance expenses
115,573

 
388

 
115,961

 
93,279

 
350

 
93,629

Other operating expenses
16,647

 
713

 
17,360

 
15,847

 
725

 
16,572

Total benefits and expenses
569,006

 
18,131

 
587,137

 
481,384

 
15,793

 
497,177

Income before income taxes
$
45,512

 
$
6,735

 
$
52,247

 
$
52,164

 
$
8,017

 
$
60,181

Income before income taxes decreased by $11.9 million, or 32.0%, and $7.9 million, or 13.2%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in income for the second quarter and first six months are primarily due to unfavorable traditional individual life mortality experience as compared to the same periods in 2017. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in income before income taxes of $0.7 million and $2.3 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Traditional Reinsurance
Income before income taxes for the Canada Traditional segment decreased by $11.0 million, or 33.6%, and $6.7 million, or 12.8%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in income before income taxes for the second quarter and first six months were primarily due to unfavorable traditional individual life mortality experience. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in income before income taxes of $0.6 million and $2.0 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.

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Net premiums increased $39.4 million, or 17.8%, and $76.3 million, or 17.5%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in net premiums were primarily due to a new in force block transaction during the first quarter of 2018. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in net premiums of approximately $10.2 million and $21.1 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net investment income increased $4.7 million, or 10.5%, and $10.8 million, or 12.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in investment income for the second quarter and the first six months were primarily the result of an increase in the invested asset base due to growth in the underlying business volume and an increase in investment yields from a higher level of variable investment income in the first quarter. Additionally, foreign currency exchange fluctuation in the Canadian dollar resulted in an increase in net investment income of approximately $2.0 million and $4.2 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Other revenues increased by $1.0 million and $0.6 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017. These variances are primarily due to gains and losses related to foreign currency transactions.
Loss ratios for this segment were 85.9% and 81.8% for the second quarter and 85.1% and 85.2% for the six months ended June 30, 2018 and 2017, respectively. The increase in the loss ratio for the three months of 2018, as compared to the same period in 2017, is due to unfavorable traditional individual life mortality experience. Loss ratios for the traditional individual life mortality business were 97.8% and 94.3% for the second quarter and 94.6% and 98.3% for the first six months ended June 30, 2018 and 2017, respectively. Historically, the loss ratio increased primarily as the result of several large permanent level premium in force blocks assumed in 1997 and 1998. These blocks are mature blocks of long-term permanent level premium business in which mortality as a percentage of net premiums is expected to be higher than historical ratios. The nature of permanent level premium policies requires the Company to set up actuarial liabilities and invest the amounts received in excess of early-year claims costs to fund claims in later years when premiums, by design, continue to be level as compared to expected increasing mortality or claim costs. As such, investment income becomes a more significant component of profitability of these in force blocks. Excluding creditor business, claims and other policy benefits, as a percentage of net premiums and investment income were 77.5% and 74.6% for the second quarter and 76.3% and 77.7% for the six months ended June 30, 2018 and 2017, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 22.5% and 21.5% for the second quarter and 22.5% and 21.3% for the six months ended June 30, 2018 and 2017, respectively. Overall, while these ratios are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels and product mix. In addition, the amortization patterns of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary.
Other operating expenses increased $0.3 million, or 3.4%, and $0.8 million, or 5.0%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. Other operating expenses as a percentage of net premiums were 3.0% and 3.5% for the second quarter and 3.2% and 3.6% for the six month periods ended June 30, 2018 and 2017, respectively.
Financial Solutions Reinsurance
Income before income taxes decreased by $0.9 million, or 19.9%, and $1.3 million, or 16.0%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in income for both the three and six month periods are primarily due to a decrease in net investment income as a result of a decrease in the invested asset base partially offset by favorable experience on longevity business. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in income before income taxes of $0.1 million and $0.3 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net premiums increased $1.6 million, or 17.6%, and $3.5 million, or 18.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases were primarily due to longevity business, where the premium structure generally increases over time. Foreign currency exchange fluctuations in the Canadian dollar resulted in an increase in net premiums of approximately $0.4 million and $0.9 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net investment income decreased $1.0 million, or 75.6%, and $2.0 million, or 81.4%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017 primarily due to a decrease in the invested asset base.
Claims and other policy benefits increased $0.8 million, or 11.5%, and $2.3 million, or 15.7%, for the three and six months ended June 30, 2018 as compared to the same periods in 2017. The increases for the second quarter and first six months were primarily a result of normal aging of the longevity block of business.

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Europe, Middle East and Africa Operations
The Europe, Middle East and Africa (“EMEA”) operations include business generated by its offices principally in the United Kingdom (“UK”), South Africa, France, Germany, Ireland, Italy, the Netherlands, Poland, Spain and the Middle East region. EMEA consists of two major segments: Traditional and Financial Solutions. The Traditional segment primarily provides reinsurance through yearly renewable term and coinsurance agreements on a variety of life, health and critical illness products. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and, in some markets, group risks. The Financial Solutions segment consists of reinsurance and other transactions associated with longevity closed blocks, payout annuities, capital management solutions and financial reinsurance.
(dollars in thousands)
Three months ended June 30,
 
2018
 
2017
Revenues:
Traditional
 
Financial Solutions
 
Total EMEA
 
Traditional
 
Financial Solutions
 
Total EMEA
Net premiums
$
354,534

 
$
49,135

 
$
403,669

 
$
330,850

 
$
38,520

 
$
369,370

Investment income, net of related expenses
17,087

 
40,330

 
57,417

 
13,585

 
28,029

 
41,614

Investment related gains (losses), net

 
5,858

 
5,858

 

 
2,458

 
2,458

Other revenues
917

 
5,352

 
6,269

 
1,485

 
4,398

 
5,883

Total revenues
372,538

 
100,675

 
473,213

 
345,920

 
73,405

 
419,325

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
310,187

 
21,854

 
332,041

 
295,004

 
36,797

 
331,801

Interest credited

 
4,127

 
4,127

 

 
(291
)
 
(291
)
Policy acquisition costs and other insurance expenses
29,961

 
1,054

 
31,015

 
15,349

 
454

 
15,803

Other operating expenses
25,922

 
8,271

 
34,193

 
24,213

 
7,540

 
31,753

Total benefits and expenses
366,070

 
35,306

 
401,376

 
334,566

 
44,500

 
379,066

Income before income taxes
$
6,468

 
$
65,369

 
$
71,837

 
$
11,354

 
$
28,905

 
$
40,259

(dollars in thousands)
Six months ended June 30,
 
2018
 
2017
Revenues:
Traditional
 
Financial Solutions
 
Total EMEA
 
Traditional
 
Financial Solutions
 
Total EMEA
Net premiums
$
730,263

 
$
97,114

 
$
827,377

 
$
635,522

 
$
80,515

 
$
716,037

Investment income, net of related expenses
32,851

 
72,262

 
105,113

 
26,305

 
57,710

 
84,015

Investment related gains (losses), net
9

 
9,210

 
9,219

 
7

 
7,033

 
7,040

Other revenues
3,197

 
10,232

 
13,429

 
2,172

 
8,136

 
10,308

Total revenues
766,320

 
188,818

 
955,138

 
664,006

 
153,394

 
817,400

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
636,989

 
64,325

 
701,314

 
561,405

 
72,733

 
634,138

Interest credited

 
1,475

 
1,475

 

 
3,822

 
3,822

Policy acquisition costs and other insurance expenses
55,513

 
2,134

 
57,647

 
30,512

 
743

 
31,255

Other operating expenses
51,929

 
16,351

 
68,280

 
46,759

 
15,273

 
62,032

Total benefits and expenses
744,431

 
84,285

 
828,716

 
638,676

 
92,571

 
731,247

Income before income taxes
$
21,889

 
$
104,533

 
$
126,422

 
$
25,330

 
$
60,823

 
$
86,153

Income before income taxes increased by $31.6 million, or 78.4%, and increased by $40.3 million, or 46.7%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in income before income taxes were primarily due to favorable performance in the closed block longevity and payout annuity businesses partly offset by unfavorable mortality experience. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $4.3 million and $10.4 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Traditional Reinsurance
Income before income taxes decreased by $4.9 million, or 43.0%, and $3.4 million, or 13.6%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decrease in income for the second quarter was primarily due to unfavorable individual life mortality experience. The decrease in income for the first six months was primarily due to unfavorable individual life mortality experience. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $1.0 million and $2.8 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.

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Net premiums increased $23.7 million, or 7.2%, and $94.7 million, or 14.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in net premiums for the three and six months were primarily due to increased individual life and health business volumes. Foreign currency exchange fluctuations increased net premiums by approximately $18.7 million and $59.0 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage, primarily in the UK. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Net premiums earned from this coverage totaled $47.9 million and $49.2 million for the second quarter and $96.7 million and $95.2 million for the first six months of 2018 and 2017, respectively.
Net investment income increased $3.5 million, or 25.8%, and $6.5 million, or 24.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in net investment income were primarily due to an increase in the invested asset base resulting from business growth. Foreign currency exchange fluctuations resulted in an increase in net investment income of approximately $1.0 million and $2.7 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Loss ratios for this segment were 87.5% and 89.2% for the second quarter and 87.2% and 88.3% for the first six months ended June 30, 2018 and 2017, respectively. The decreases in loss ratios were primarily due to changes in business mix and normal claims variability.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 8.5% and 4.6% for the second quarter and 7.6% and 4.8% for the first six months ended June 30, 2018 and 2017, respectively. The increases in policy acquisition cost ratios are due primarily to variations in the mixture of business. A small number of recent larger new treaties have included higher than average ceding allowances.
Other operating expenses increased $1.7 million, or 7.1%, and $5.2 million, or 11.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in the second quarter and first six months was primarily due to foreign currency fluctuations, which resulted in an increase in operating expenses of approximately $1.4 million and $4.3 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017. Other operating expenses as a percentage of net premiums totaled 7.3% and 7.3% for the second quarter and 7.1% and 7.4% for the first six months ended June 30, 2018 and 2017, respectively.
Financial Solutions Reinsurance
Income before income taxes increased by $36.5 million, or 126.2%, and $43.7 million, or 71.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in income before income taxes were primarily due to favorable performance in the closed block longevity and payout annuity businesses. Foreign currency exchange fluctuations resulted in an increase in income before income taxes totaling $3.3 million and $7.7 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net premiums increased by $10.6 million, or 27.6%, and $16.6 million, or 20.6%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in net premiums were due to increased volumes of closed block longevity business. Foreign currency exchange fluctuations increased net premiums by approximately $3.0 million and $8.4 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net investment income increased $12.3 million, or 43.9%, and $14.6 million, or 25.2%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in investment income were due to an increased invested asset base resulting from business growth. Foreign currency exchange fluctuations resulted in an increase in net investment income of approximately $2.3 million and $5.7 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Other revenues increased by $1.0 million, or 21.7%, and $2.1 million, or 25.8%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases in fees earned from this business are due to new transactions. Fees earned can vary significantly depending on the size of the transactions and the timing of their completion and, therefore, can fluctuate from period to period. Foreign currency exchange fluctuations resulted in an increase in other revenues of approximately $0.3 million and $0.9 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Claims and other policy benefits decreased $14.9 million, or 40.6%, and $8.4 million, or 11.6%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in the second quarter and first six months were primarily due to the closed block longevity business resulting from higher terminations. Foreign currency exchange fluctuations resulted in an increase in claims and other policy benefits of approximately $1.8 million and $6.5 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.

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Interest credited expense increased by $4.4 million and decreased by $2.3 million or the three and six months ended June 30, 2018, as compared to the same periods in 2017. Interest credited in this segment relates to amounts credited to the contractholders of unit-linked products. The effect on interest credited related to unit-linked products is substantially offset by a corresponding change in investment income.
Other operating expenses increased $0.7 million, or 9.7%, and $1.1 million, or 7.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases are primarily due to foreign currency exchange fluctuations, which resulted in an increase in operating expenses of approximately $0.5 million and $1.5 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Asia Pacific Operations
The Asia Pacific operations include business generated by its offices principally in Australia, China, Hong Kong, India, Japan, Malaysia, New Zealand, Singapore, South Korea and Taiwan. The Traditional segment’s principal types of reinsurance include individual and group life and health, critical illness, disability and superannuation. Superannuation is the Australian government mandated compulsory retirement savings program. Superannuation funds accumulate retirement funds for employees, and, in addition, typically offer life and disability insurance coverage. The Financial Solutions segment includes financial reinsurance, asset-intensive and certain disability and life blocks. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and in some markets, group risks.

(dollars in thousands)
Three months ended June 30,
 
2018
 
2017
Revenues:
Traditional
 
Financial Solutions
 
Total Asia Pacific
 
Traditional
 
Financial Solutions
 
Total Asia Pacific
Net premiums
$
538,799

 
$
30

 
$
538,829

 
$
537,352

 
$
549

 
$
537,901

Investment income, net of related expenses
24,076

 
10,184

 
34,260

 
22,345

 
8,570

 
30,915

Investment related gains (losses), net

 
1,904

 
1,904

 

 
3,582

 
3,582

Other revenues
7,645

 
5,874

 
13,519

 
1,832

 
5,283

 
7,115

Total revenues
570,520

 
17,992

 
588,512

 
561,529

 
17,984

 
579,513

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
435,592

 
2,405

 
437,997

 
423,294

 
1,565

 
424,859

Interest credited

 
6,660

 
6,660

 

 
5,572

 
5,572

Policy acquisition costs and other insurance expenses
37,584

 
728

 
38,312

 
51,259

 
1,541

 
52,800

Other operating expenses
38,482

 
4,061

 
42,543

 
33,654

 
3,929

 
37,583

Total benefits and expenses
511,658

 
13,854

 
525,512

 
508,207

 
12,607

 
520,814

Income (loss) before income taxes
$
58,862

 
$
4,138

 
$
63,000

 
$
53,322

 
$
5,377

 
$
58,699

(dollars in thousands)
Six months ended June 30,
 
2018
 
2017
Revenues:
Traditional
 
Financial Solutions
 
Total Asia Pacific
 
Traditional
 
Financial Solutions
 
Total Asia Pacific
Net premiums
$
1,128,312

 
$
708

 
$
1,129,020

 
$
1,020,659

 
$
2,075

 
$
1,022,734

Investment income, net of related expenses
48,676

 
20,578

 
69,254

 
44,247

 
14,106

 
58,353

Investment related gains (losses), net
8

 
5,371

 
5,379

 

 
10,767

 
10,767

Other revenues
8,063

 
11,181

 
19,244

 
1,853

 
11,488

 
13,341

Total revenues
1,185,059

 
37,838

 
1,222,897

 
1,066,759

 
38,436

 
1,105,195

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
930,786

 
6,873

 
937,659

 
778,733

 
8,060

 
786,793

Interest credited

 
13,054

 
13,054

 

 
8,569

 
8,569

Policy acquisition costs and other insurance expenses
96,366

 
1,925

 
98,291

 
124,116

 
3,458

 
127,574

Other operating expenses
76,158

 
7,827

 
83,985

 
68,900

 
7,100

 
76,000

Total benefits and expenses
1,103,310

 
29,679

 
1,132,989

 
971,749

 
27,187

 
998,936

Income before income taxes
$
81,749

 
$
8,159

 
$
89,908

 
$
95,010

 
$
11,249

 
$
106,259


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Income before income taxes increased by $4.3 million, or 7.3%, and decreased by $16.4 million, or 15.4%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in income before income taxes for the second quarter was due to business growth across the region. The decrease in income before income taxes for the first six months was primarily due to unfavorable claims experience, notably in Australia and new business mix. Foreign currency exchange fluctuations had a negligible effect on income before income taxes for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Traditional Reinsurance
Income before income taxes increased by $5.5 million, or 10.4%, and decreased by $13.3 million, or 14.0%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in income before income taxes in the second quarter was primarily due to business growth across the region. The decrease in income before income taxes for the first six months was primarily due to unfavorable claims experience, largely in Australia, and new business mix. Foreign currency exchange fluctuations had a negligible effect on income before income taxes for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net premiums increased by $1.4 million, or 0.3%, and $107.7 million, or 10.5%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases were driven by new business written in Asian markets and currency fluctuations. Foreign currency exchange fluctuations resulted in an increase in net premiums of approximately $9.2 million and $30.5 million for the three and six months of 2018, as compared to the same periods in 2017.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of critical illness in the segment is offered primarily in South Korea, Australia and Hong Kong. Net premiums earned from this coverage totaled $180.9 million and $174.3 million for the second quarter and $416.6 million and $316.2 million for the first six months ended June 30, 2018 and 2017, respectively.
Net investment income increased $1.7 million, or 7.7%, and $4.4 million, or 10.0%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increases were primarily due to a higher invested asset base. Foreign currency exchange fluctuations resulted in an increase in net investment income of approximately $0.2 million and $1.0 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Other revenues increased by $5.8 million, or 317.3%, and $6.2 million, or 335.1%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. These variances are primarily due to gains and losses related to foreign currency transactions.
Loss ratios for this segment were 80.8% and 78.8% for the second quarter and 82.5% and 76.3% for the first six months ended June 30, 2018 and 2017, respectively. The increases in the loss ratios for the second quarter and first six months of 2018 were primarily due to unfavorable claims experience, largely in Australia and new business mix.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 7.0% and 9.5% for the second quarter and 8.5% and 12.2% for the six months ended June 30, 2018 and 2017, respectively. These percentages fluctuate due to timing of client company reporting, premium refunds, variations in the mixture of business and the relative maturity of the business. In addition, as the segment grows, renewal premiums, which have lower allowances than first-year premiums, represent a greater percentage of the total net premiums.
Other operating expenses increased $4.8 million, or 14.3%, and $7.3 million, or 10.5%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017 mainly due to growth in operations in Asia and consultant expenditures. Other operating expenses as a percentage of net premiums totaled 7.1% and 6.3% for the second quarter and 6.7% and 6.8% for the first six months ended June 30, 2018 and 2017, respectively. The timing of premium flows and the level of costs associated with the entrance into and development of new markets within the segment may cause other operating expenses as a percentage of net premiums to fluctuate over periods of time.
Financial Solutions Reinsurance
Income before income taxes decreased by $1.2 million, or 23.0%, and $3.1 million, or 27.5%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases in income before income taxes were primarily due to a decline in investment related gains (losses) associated with a closed treaty in Japan. Foreign currency exchange fluctuations had a negligible effect on income before income taxes for the three and six months ended June 30, 2018, as compared to the same periods in 2017.

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Net premiums decreased $0.5 million or 94.5%, and $1.4 million, or 65.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decreases for the second quarter and first six months were due to policy lapses on a closed treaty in Japan. Foreign currency exchange fluctuations had a negligible effect on net premiums for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Net investment income increased $1.6 million, or 18.8%, and $6.5 million, or 45.9%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017 mainly due to growth in the invested asset base. Foreign currency exchange fluctuations had a negligible effect on net investment income for the three and six months ended June 30, 2018, as compared to the same periods in 2017.
Other revenues increased by $0.6 million, or 11.2%, and decreased by $0.3 million, or 2.7%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. At June 30, 2018 and 2017, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was $2.8 billion and $1.4 billion, respectively. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and, therefore, can fluctuate from period to period.
Claims and other policy benefits increased by $0.8 million, or 53.7%, and decreased by $1.2 million, or 14.7%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in the second quarter was primarily due to new treaties in Asia entered in the second quarter of 2018. The decrease in the first six months is attributable to lower lapses on the aforementioned closed treaty in Japan, partially offset by higher claims and policy benefits from new business.
Other operating expenses increased by $0.1 million, or 3.4%, and decreased by $0.7 million, or 10.2%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017, respectively. The timing of transactions and the level of costs associated with the entrance into and development of new markets within the segment may cause other operating expenses to fluctuate over periods of time.
Corporate and Other
Corporate and Other revenues primarily include investment income from unallocated invested assets and investment related gains and losses. Corporate and Other expenses consist of the offset to capital charges allocated to the operating segments within the policy acquisition costs and other insurance income line item, unallocated overhead and executive costs, interest expense related to debt, and the investment income and expense associated with the Company’s collateral finance and securitization transactions. Additionally, Corporate and Other includes results from certain wholly-owned subsidiaries, such as RGAx, and joint ventures that, among other activities, develop and market technology, and provide consulting and outsourcing solutions for the insurance and reinsurance industries.
(dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
10

 
$
42

 
$
20

 
$
86

Investment income, net of related expenses
 
32,727

 
36,305

 
72,873

 
67,468

Investment related gains (losses), net
 
(23,281
)
 
15,685

 
(32,215
)
 
862

Other revenues
 
6,344

 
2,456

 
14,377

 
7,624

Total revenues
 
15,800

 
54,488

 
55,055

 
76,040

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
108

 
(13
)
 
428

 
14

Interest credited
 
2,717

 
1,497

 
4,927

 
2,621

Policy acquisition costs and other insurance income
 
(30,496
)
 
(26,779
)
 
(61,008
)
 
(53,846
)
Other operating expenses
 
66,270

 
38,141

 
129,230

 
78,513

Interest expense
 
37,025

 
29,352

 
74,479

 
71,754

Collateral finance and securitization expense
 
7,440

 
6,773

 
15,042

 
13,543

Total benefits and expenses
 
83,064

 
48,971

 
163,098

 
112,599

Income (loss) before income taxes
 
$
(67,264
)
 
$
5,517

 
$
(108,043
)
 
$
(36,559
)
Loss before income taxes increased by $72.8 million and $71.5 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in loss before income taxes for the second quarter and the first six months is primarily due to decreased net investment related gains and higher other operating expenses partially offset by increased other revenue.

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Net investment income decreased by $3.6 million, or 9.9%, and increased by $5.4 million, or 8.0%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The decrease in the second quarter was mainly due to lower investment yields. The increase in the first six months was related to an increase in unallocated invested assets and higher investment yields.
Net investment related gains (losses) decreased by $39.0 million and $33.1 million for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The unfavorable change in the second quarter was largely caused by an increase in net losses on the sale of securities of $40.0 million and a $6.9 million reduction in fair value of equity securities, which was partially offset by a $7.2 million decrease in impairments on fixed maturity securities and other investments. The decrease in the first six months was primarily due to a $43.0 million increase in net losses on the sale of securities and an $11.1 million decrease in fair value of equity securities, which was partially offset by a $21.0 million reduction in other-than-temporary impairments on fixed maturity securities and other investments.
Other revenues increased by $3.9 million, or 158.3%, and $6.8 million, or 88.6%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in the second quarter was mainly due to the Company’s January 2018 acquisition of LOGiQ3 Inc., a group of companies providing technology, consulting and outsourcing solutions primarily to the North American life insurance and reinsurance industry, which contributed $5.2 million to other revenues in the current quarter. The acquisition of LOGiQ3 Inc. contributed $10.0 million to other revenues in the first six months.
Policy acquisition costs and other insurance income increased by $3.7 million, or 13.9%, and $7.2 million, or 13.3%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. Fluctuations period over period were attributable to the offset to capital charges allocated to the operating segments.
Other operating expenses increased by $28.1 million, or 73.8%, and $50.7 million, or 64.6%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in operating expenses, for both periods presented, was primarily related to increased consulting and compensation expenses due to increased compliance costs, strategic initiatives, acquisitions and increased incentive-based compensation. The aforementioned acquisition of LOGiQ3 Inc. contributed $7.1 million and $13.9 million of other operating expenses in the current quarter and first six months, respectively.
Interest expense increased by $7.7 million, or 26.1%, and $2.7 million, or 3.8%, for the three and six months ended June 30, 2018, as compared to the same periods in 2017. The increase in interest expense for both periods presented was primarily caused by a lower reduction in tax-related interest expense, which, specifically for the six month period, was partially offset by the repayment of $300.0 million of long-term debt in 2017.
Liquidity and Capital Resources
Overview
The Company believes that cash flows from the source of funds available to it will provide sufficient cash flows for the next twelve months to satisfy the current liquidity requirements of RGA, Inc. and its subsidiaries under various scenarios that include the potential risk of early recapture of reinsurance treaties, market events and higher than expected claims. The Company performs periodic liquidity stress testing to ensure its asset portfolio includes sufficient high quality liquid assets that could be utilized to bolster its liquidity position under stress scenarios. These assets could be utilized as collateral for secured borrowing transactions with various third parties or by selling the securities in the open market if needed. The Company’s liquidity requirements have been and will continue to be funded through net cash flows from operations. However, in the event of significant unanticipated cash requirements beyond normal liquidity needs, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing of the liquidity need. These alternatives include borrowings under committed credit facilities, secured borrowings, the ability to issue long-term debt, preferred securities or common equity and, if necessary, the sale of invested assets subject to market conditions.
Current Market Environment
The current low interest rate environment in select markets, primarily the U.S. and Canada, continues to put downward pressure on the Company’s investment yield. The Company’s average investment yield, excluding spread business, for the six months ended June 30, 2018 was 4.39%, 11 basis points below the same period in 2017. The Company’s insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Due to recent increases in risk free interest rates, gross unrealized gains on fixed maturity securities available-for-sale decreased from $2,982.8 million at December 31, 2017 to $2,143.2 million at June 30, 2018. Gross unrealized losses increased from $113.3 million at December 31, 2017 to $592.2 million at June 30, 2018.

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The Company continues to be in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer. As indicated above, gross unrealized gains on fixed maturity securities of $2,143.2 million remain well in excess of gross unrealized losses of $592.2 million as of June 30, 2018. The Company does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future.
The Company projects its reserves to be sufficient, and it would not expect to write down deferred acquisition costs or be required to take any actions to augment capital, even if interest rates remain at current levels for the next five years, assuming all other factors remain constant. While the Company has felt the pressures of sustained low interest rates and volatile equity markets and may continue to do so, its business operations are not overly sensitive to these risks. Although management believes the Company’s current capital base is adequate to support its business at current operating levels, it continues to monitor new business opportunities and any associated new capital needs that could arise from the changing financial landscape.
The Holding Company
RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness. The primary sources of RGA’s liquidity include proceeds from its capital-raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes with RGA Reinsurance, RCM and Rockwood Re and dividends from operating subsidiaries. As the Company continues its expansion efforts, RGA will continue to be dependent upon these sources of liquidity. The following tables provide comparative information for RGA (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest expense
 
$
47,250

 
$
37,100

 
$
92,694

 
$
87,321

Capital contributions to subsidiaries
 
12,000

 
11,000

 
23,000

 
18,500

Dividends to shareholders
 
32,129

 
26,434

 
64,370

 
52,815

Interest and dividend income
 
232,473

 
27,748

 
264,020

 
52,281

 
 
June 30, 2018
 
December 31, 2017
Cash and invested assets
 
$
644,472

 
$
779,996

See Item 15, Schedule II - “Condensed Financial Information of the Registrant” in the 2017 Annual Report for additional financial information related to RGA.
The undistributed earnings of substantially all of the Company’s foreign subsidiaries have been reinvested indefinitely in those non-U.S. operations, as described in Note 9 - “Income Tax” of the Notes to Consolidated Financial Statements in the 2017 Annual Report. As U.S. Tax Reform generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, the Company does not expect to incur material income taxes if these funds are repatriated.
RGA endeavors to maintain a capital structure that provides financial and operational flexibility to its subsidiaries, credit ratings that support its competitive position in the financial services marketplace, and shareholder returns. As part of the Company’s capital deployment strategy, it has in recent years repurchased shares of RGA common stock and paid dividends to RGA shareholders, as authorized by the board of directors. RGA’s current share repurchase program, which was approved by the board of directors in January 2017, authorizes the repurchase of up to $400.0 million of common stock. The pace of repurchase activity depends on various factors such as the level of available cash, an evaluation of the costs and benefits associated with alternative uses of excess capital, such as acquisitions and in force reinsurance transactions, and RGA’s stock price.
Details underlying dividend and share repurchase program activity were as follows (in thousands, except share data):
 
Six months ended June 30,
 
2018
 
2017
Dividends to shareholders
$
64,370

 
$
52,815

Repurchases of treasury stock
150,000

 

Total amount paid to shareholders
$
214,370

 
$
52,815

 
 
 
 
Number of shares repurchased
991,477

 

Average price per share
$
151.29

 
$


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In July 2018, RGA’s board of directors declared a quarterly dividend of $0.60 per share. All future payments of dividends are at the discretion of RGA’s board of directors and will depend on the Company’s earnings, capital requirements, insurance regulatory conditions, operating conditions, and other such factors as the board of directors may deem relevant. The amount of dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries. See Note 3 - “Equity” in the Notes to Condensed Consolidated Financial Statements for information on the Company’s share repurchase program.
Debt
Certain of the Company’s debt agreements contain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of consolidated net worth, maximum ratios of debt to capitalization and change of control provisions. The Company is required to maintain a minimum consolidated net worth, as defined in the debt agreements, of $3.5 billion, calculated as of the last day of each fiscal quarter. Also, consolidated indebtedness, calculated as of the last day of each fiscal quarter, cannot exceed 35% of the sum of the Company’s consolidated indebtedness plus adjusted consolidated stockholders’ equity. A material ongoing covenant default could require immediate payment of the amount due, including principal, under the various agreements. Additionally, the Company’s debt agreements contain cross-default covenants, which would make outstanding borrowings immediately payable in the event of a material uncured covenant default under any of the agreements, including, but not limited to, non-payment of indebtedness when due for an amount in excess of $100.0 million, bankruptcy proceedings, or any other event which results in the acceleration of the maturity of indebtedness.
As of June 30, 2018 and December 31, 2017, the Company had $2.8 billion in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As of June 30, 2018 and December 31, 2017, the average net interest rate on long-term debt outstanding was 5.24%. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, available liquidity at the holding company, and the Company’s ability to raise additional funds.
The Company enters into derivative agreements with counterparties that reference either the Company’s debt rating or its financial strength rating. If either rating is downgraded in the future, it could trigger certain terms in the Company’s derivative agreements, which could negatively affect overall liquidity. For the majority of the Company’s derivative agreements, there is a termination event, at the Company’s option, should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody’s) or the financial strength ratings drop below either A- (S&P) or A3 (Moody’s).
The Company may borrow up to $850.0 million in cash and obtain letters of credit in multiple currencies on its revolving credit facility that matures in September 2019. As of June 30, 2018, the Company had no cash borrowings outstanding and $80.4 million in issued, but undrawn, letters of credit under this facility.
Based on the historic cash flows and the current financial results of the Company, management believes RGA’s cash flows will be sufficient to enable RGA to meet its obligations for at least the next 12 months.
Credit and Committed Facilities
At June 30, 2018, the Company maintained an $850.0 million syndicated revolving credit facility and certain committed letter of credit facilities aggregating $1,263.8 million. See Note 13 - “Debt” in the Notes to Consolidated Financial Statements in the 2017 Annual Report for further information about these facilities.
The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements and allow ceding companies to take statutory reserve credits. Certain of these letters of credit contain financial covenant restrictions similar to those described in the “Debt” discussion above. At June 30, 2018, there were approximately $103.7 million of outstanding bank letters of credit in favor of third parties. Additionally, in accordance with applicable regulations, the Company utilizes letters of credit to secure statutory reserve credits when it retrocedes business to its affiliated subsidiaries. The Company cedes business to its affiliates to help reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the UK. The Company believes the capital required to support the business in the affiliates reflects more realistic expectations than the original jurisdiction of the business, where capital requirements are often considered to be quite conservative. As of June 30, 2018, $1.4 billion in letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the Company.
Cash Flows
The Company’s principal cash inflows from its reinsurance operations include premiums and deposit funds received from ceding companies. The primary liquidity concerns with respect to these cash flows are early recapture of the reinsurance contract by the ceding company and lapses of annuity products reinsured by the Company. The Company’s principal cash inflows from its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concerns with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. The Company manages these risks very closely. See “Investments” and “Interest Rate Risk” below.

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Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash and equivalents on hand include selling short-term investments or fixed maturity securities and drawing funds under a revolving credit facility, under which the Company had availability of $769.6 million as of June 30, 2018. The Company also has $1.1 billion of funds available through collateralized borrowings from the FHLB as of June 30, 2018. As of June 30, 2018, the Company could have borrowed these additional amounts without violating any of its existing debt covenants.
The Company’s principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, dividends to shareholders, purchases of treasury stock and principal and interest under debt and other financing obligations. 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 enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2, “Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements in the 2017 Annual Report). The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires nor to the recoverability of future claims. The Company’s management believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months.
Summary of Primary Sources and Uses of Liquidity and Capital
The Company’s primary sources and uses of liquidity and capital are summarized as follows:
 
 
For the six months ended June 30,
 
 
2018
 
2017
 
 
(Dollars in thousands)
Sources:
 
 
 
 
Net cash provided by operating activities
$
583,588

 
$
655,974

 
Exercise of stock options, net
1,252

 
2,527

 
Change in cash collateral for derivative positions and other arrangements
17,578

 

 
Cash provided by changes in universal life and other
 
 
 
 
investment type policies and contracts

 
515,147

 
Effect of exchange rate changes on cash

 
34,137

 
Total sources
602,418

 
1,207,785

 
 
 
 
 
Uses:
 
 
 
 
Net cash used in investing activities
100,615

 
889,675

 
Dividends to stockholders
64,370

 
52,815

 
Repayment of collateral finance and securitization notes
53,102

 
23,761

 
Principal payments of long-term debt
1,331

 
301,278

 
Repurchase and repayment of collateral finance facility securities

 

 
Purchases of treasury stock
165,069

 
10,578

 
Change in cash collateral for derivatives and other arrangements

 
7,046

 
Cash used for changes in universal life and other
 
 
 
 
investment type policies and contracts
104,023

 

 
Effect of exchange rate changes on cash
19,753

 

 
Total uses
508,263

 
1,285,153

Net change in cash and cash equivalents
$
94,155

 
$
(77,368
)
Cash Flows from Operations - The principal cash inflows from the Company’s reinsurance activities come from premiums, investment and fee income, annuity considerations and deposit funds. The principal cash outflows relate to the liabilities associated with various life and health insurance, annuity and disability products, operating expenses, income tax payments and interest on outstanding debt obligations. The primary liquidity concern with respect to these cash flows is the risk of shortfalls in premiums and investment income, particularly in periods with abnormally high claims levels.
Cash Flows from Investments - The principal cash inflows from the Company’s investment activities come from repayments of principal on invested assets, proceeds from maturities of invested assets, sales of invested assets and settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments, issuances of policy loans and settlements of freestanding derivatives. The Company typically has a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with its asset/liability management discipline to fund insurance liabilities. The Company closely monitors and manages these risks through its credit risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption, which could make it difficult for the Company to sell investments.
Financing Cash Flows - The principal cash inflows from the Company’s financing activities come from issuances of RGA debt and equity securities, and deposit funds associated with universal life and other investment type policies and contracts. The principal

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cash outflows come from repayments of debt, payments of dividends to stockholders, purchases of treasury stock, and withdrawals associated with universal life and other investment type policies and contracts. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder withdrawal.
Contractual Obligations
There were no material changes in the Company’s contractual obligations from those previously reported in the 2017 Annual Report.
Asset / Liability Management
The Company actively manages its cash and invested assets using an approach that is intended to balance quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and duration basis.
The Company has established target asset portfolios for its operating segments, which represent the investment strategies intended to profitably fund its liabilities within acceptable risk parameters. These strategies include objectives and limits for effective duration, yield curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Company’s asset-intensive products are primarily supported by investments in fixed maturity securities reflected on the Company’s balance sheet and under funds withheld arrangements with the ceding company. Investment guidelines are established to structure the investment portfolio based upon the type, duration and behavior of products in the liability portfolio so as to achieve targeted levels of profitability. The Company manages the asset-intensive business to provide a targeted spread between the interest rate earned on investments and the interest rate credited to the underlying interest-sensitive contract liabilities. The Company periodically reviews models projecting different interest rate scenarios and their effect on profitability. Certain of these asset-intensive agreements, primarily in the U.S. and Latin America Financial Solutions operating segment, are generally funded by fixed maturity securities that are withheld by the ceding company.
The Company’s liquidity position (cash and cash equivalents and short-term investments) was $1,520.7 million and $1,396.8 million at June 30, 2018 and December 31, 2017, respectively. Cash and cash equivalents includes cash collateral received from derivative counterparties of $194.1 million and $185.9 million as of June 30, 2018 and December 31, 2017, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in other liabilities in the Company’s condensed consolidated balance sheets. Liquidity needs are determined from valuation analyses conducted by operational units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs.
See “Securities Borrowing, Lending and Other” in Note 4 - “Investments” in the Notes to Condensed Consolidated Financial Statements for information related to the Company’s securities borrowing, lending and repurchase/reverse repurchase programs. In addition to its security agreements with third parties, certain RGA’s subsidiaries have entered into intercompany securities lending agreements to more efficiently source securities for lending to third parties and to provide for more efficient regulatory capital management.
The Company is a member of the FHLB and holds $71.8 million of FHLB common stock, which is included in other invested assets on the Company’s condensed consolidated balance sheets. Membership provides the Company access to borrowing arrangements (“advances”) and funding agreements, discussed below, with the FHLB. The Company did not have any advances from the FHLB at June 30, 2018 and December 31, 2017. The Company had no outstanding balance of advances during the second quarter and the first six months of 2018, respectively, and was $39.5 million and $21.4 million during the second quarter and the first six months of 2017, respectively. Interest on advances is reflected in interest expense on the Company’s condensed consolidated statements of income.
In addition, the Company has also entered into funding agreements with the FHLB under guaranteed investment contracts whereby the Company has issued the funding agreements in exchange for cash and for which the FHLB has been granted a blanket lien on the Company’s commercial and residential mortgage-backed securities and commercial mortgage loans used to collateralize the Company’s obligations under the funding agreements. The Company maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and the related security agreements represented by this blanket lien provide that upon any event of default by the Company, the FHLB’s recovery is limited to the amount of the Company’s liability under the outstanding funding agreements. The amount of the Company’s liability for the funding agreements with the FHLB under guaranteed investment contracts was $1.5 billion and $1.4 billion at June 30, 2018 and December 31, 2017, respectively, which is included in interest sensitive contract liabilities on the Company’s condensed consolidated balance sheets. The advances on these agreements are collateralized primarily by commercial and residential

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mortgage-backed securities, commercial mortgage loans, and U.S. Treasury and government agency securities. The amount of collateral exceeds the liability and is dependent on the type of assets collateralizing the guaranteed investment contracts.
Investments
Management of Investments
The Company’s investment and derivative strategies involve matching the characteristics of its reinsurance products and other obligations and to seek to closely approximate the interest rate sensitivity of the assets with estimated interest rate sensitivity of the reinsurance liabilities. The Company achieves its income objectives through strategic and tactical asset allocations, security and derivative strategies within an asset/liability management and disciplined risk management framework. Derivative strategies are employed within the Company’s risk management framework to help manage duration, currency, and other risks in assets and/or liabilities and to replicate the credit characteristics of certain assets. For a discussion of the Company’s risk management process see “Market and Credit Risk” in the “Enterprise Risk Management” section below.
The Company’s portfolio management groups work with the Enterprise Risk Management function to develop the investment policies for the assets of the Company’s domestic and international investment portfolios. All investments held by the Company, directly or in a funds withheld at interest reinsurance arrangement, are monitored for conformance with the Company’s stated investment policy limits as well as any limits prescribed by the applicable jurisdiction’s insurance laws and regulations. See Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for additional information regarding the Company’s investments.
Portfolio Composition
The Company had total cash and invested assets of $51.9 billion and $53.0 billion at June 30, 2018 and December 31, 2017, respectively, as illustrated below (dollars in thousands):
 
 
June 30, 2018
 
% of Total
 
December 31, 2017
 
% of Total
Fixed maturity securities, available-for-sale
 
$
36,784,954

 
70.9
%
 
$
38,150,820

 
71.9
%
Equity securities
 
108,070

 
0.2

 
100,152

 
0.2

Mortgage loans on real estate
 
4,558,669

 
8.8

 
4,400,533

 
8.3

Policy loans
 
1,339,252

 
2.6

 
1,357,624

 
2.6

Funds withheld at interest
 
5,981,092

 
11.5

 
6,083,388

 
11.5

Short-term investments
 
123,028

 
0.2

 
93,304

 
0.2

Other invested assets
 
1,605,562

 
3.1

 
1,505,332

 
2.8

Cash and cash equivalents
 
1,397,679

 
2.7

 
1,303,524

 
2.5

Total cash and invested assets
 
$
51,898,306

 
100.0
%
 
$
52,994,677

 
100.0
%

Investment Yield
The following table presents consolidated average invested assets at amortized cost, net investment income and investment yield, excluding spread related business. Spread related business is primarily associated with contracts on which the Company earns an interest rate spread between assets and liabilities. To varying degrees, fluctuations in the yield on other spread related business is generally subject to corresponding adjustments to the interest credited on the liabilities (dollars in thousands).
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
  Increase/  
  (Decrease)  
 
2018
 
2017
 
  Increase/  
  (Decrease)  
Average invested assets at amortized cost
$
26,899,416

 
$
25,172,367

 
6.9
%
 
$
26,816,599

 
$
25,052,849

 
7.0
%
Net investment income
285,832

 
284,884

 
0.3
%
 
582,305

 
558,092

 
4.3
%
Investment yield (ratio of net investment income to average invested assets)
4.32
%
 
4.60
%
 
(28 bps)

 
4.39
%
 
4.50
%
 
(11 bps)


Investment yield decreased for the three months ended June 30, 2018 in comparison to the same period in the prior year primarily due to decreased income from limited partnership and joint venture investments, both of which are included in other invested assets on the condensed consolidated balance sheets, and the effect of the low interest rate environment. Investment yield decreased for the six months ended June 30, 2018 in comparison to the same period in the prior year primarily due to decreased income from make-whole premiums and the effect of the low interest rate environment.

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Fixed Maturity and Equity Securities Available-for-Sale
See “Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables that provide the amortized cost, unrealized gains and losses, estimated fair value of these securities, and the other-than-temporary impairments in AOCI by sector as of June 30, 2018 and December 31, 2017.
The Company holds various types of fixed maturity securities available-for-sale and classifies them as corporate securities (“Corporate”), Canadian and Canadian provincial government securities (“Canadian government”), residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), U.S. government and agencies (“U.S. government”), state and political subdivisions, and other foreign government, supranational and foreign government-sponsored enterprises (“Other foreign government”). As of June 30, 2018 and December 31, 2017, approximately 95.5% and 95.6%, respectively, of the Company’s consolidated investment portfolio of fixed maturity securities were investment grade.
Important factors in the selection of investments include diversification, quality, yield, call protection and total rate of return potential. The relative importance of these factors is determined by market conditions and the underlying reinsurance liability and existing portfolio characteristics. The largest asset class in which fixed maturity securities were invested was corporate securities, which represented approximately 61.2% and 60.9% of total fixed maturity securities as of June 30, 2018 and December 31, 2017, respectively. See “Corporate Fixed Maturity Securities” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables showing the major industry types, which comprise the corporate fixed maturity holdings at June 30, 2018 and December 31, 2017.
As of June 30, 2018, the Company’s investments in Canadian and Canadian provincial government securities represented 11.0% of the fair value of total fixed maturity securities compared to 11.1% of the fair value of total fixed maturity securities at December 31, 2017. These assets are primarily high quality, long duration provincial strips, the valuation of which is closely linked to the interest rate curve. These assets are longer in duration and held primarily for asset/liability management to meet Canadian regulatory requirements. See “Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables showing the various sectors as of June 30, 2018 and December 31, 2017.
The Company references rating agency designations in some of its investments disclosures. These designations are based on the ratings from nationally recognized statistical rating organizations, primarily Moody’s, S&P and Fitch. Structured securities (mortgage-backed and asset-backed securities) held by the Company’s insurance subsidiaries that maintain the NAIC statutory basis of accounting utilize the NAIC rating methodology. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency designation). NAIC designations in classes 3 through 6 are generally considered below investment grade (BB or lower rating agency designation).
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, at June 30, 2018 and December 31, 2017 was as follows (dollars in thousands):
 
 
 
 
 
June 30, 2018
 
December 31, 2017
NAIC
  Designation  
 
Rating Agency
Designation
 
Amortized Cost 
 
Estimated
Fair Value
 
% of Total     
 
Amortized Cost 
 
Estimated
     Fair  Value     
 
% of Total     
1
 
AAA/AA/A
 
$
23,206,331

 
$
24,697,276

 
67.2
%
 
$
23,534,574

 
$
25,762,103

 
67.5
%
2
 
BBB
 
10,309,842

 
10,413,893

 
28.3

 
10,115,008

 
10,709,170

 
28.1

3
 
BB
 
1,165,503

 
1,136,259

 
3.1

 
1,139,200

 
1,173,639

 
3.1

4
 
B
 
501,101

 
488,648

 
1.3

 
408,990

 
420,284

 
1.1

5
 
CCC and lower
 
45,696

 
42,876

 
0.1

 
78,143

 
79,747

 
0.2

6
 
In or near default
 
5,497

 
6,002

 

 
5,497

 
5,877

 

 
 
Total
 
$
35,233,970

 
$
36,784,954

 
100.0
%
 
$
35,281,412

 
$
38,150,820

 
100.0
%


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The Company’s fixed maturity portfolio includes structured securities. The following table shows the types of structured securities the Company held at June 30, 2018 and December 31, 2017 (dollars in thousands): 
 
 
June 30, 2018
 
December 31, 2017
 
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
RMBS:
 
 
 
 
 
 
 
 
Agency
 
$
840,284

 
$
833,587

 
$
878,559

 
$
896,977

Non-agency
 
997,032

 
987,627

 
816,567

 
822,903

Total RMBS
 
1,837,316

 
1,821,214

 
1,695,126

 
1,719,880

CMBS
 
1,249,616

 
1,242,509

 
1,285,594

 
1,303,387

ABS
 
1,711,099

 
1,708,824

 
1,634,758

 
1,648,362

Total
 
$
4,798,031

 
$
4,772,547

 
$
4,615,478

 
$
4,671,629

The Company’s RMBS include agency-issued pass-through securities and collateralized mortgage obligations. A majority of the agency-issued pass-through securities are guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or the Government National Mortgage Association. The principal risks inherent in holding mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase in principal payments from the expected, primarily as a result of owner refinancing. Extension risk relates to the unexpected slowdown in principal payments from the expected. In addition, non-agency mortgage-backed securities face credit risk should the borrower be unable to pay the contractual interest or principal on their obligation. The Company monitors its mortgage-backed securities to mitigate exposure to the cash flow uncertainties associated with these risks.
The Company’s ABS include credit card receivables, railcar leasing, student loans, single-family rentals, home equity loans and collateralized debt obligations (primarily collateralized loan obligations). The Company owns floating rate securities that represent approximately 15.5% and 13.8% of the total fixed maturity securities at June 30, 2018 and December 31, 2017, respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to the floating rate nature of the interest payments. The Company holds these investments to match specific floating rate liabilities primarily reflected in the condensed consolidated balance sheets as collateral finance notes, as well as to enhance asset management strategies. In addition to the risks associated with floating rate securities, principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the securities’ cash flow priority in the capital structure and the inherent prepayment sensitivity of the underlying collateral. Credit risks include the adequacy and ability to realize proceeds from the collateral. Credit risks are mitigated by credit enhancements which include excess spread, over-collateralization and subordination. Capital market risks include general level of interest rates and the liquidity for these securities in the marketplace.
The Company monitors its fixed maturity securities to determine impairments in value and evaluates factors such as financial condition of the issuer, payment performance, the length of time and the extent to which the market value has been below amortized cost, compliance with covenants, general market and industry sector conditions, current intent and ability to hold securities, and various other subjective factors. Based on management’s judgment, securities determined to have an other-than-temporary impairment in value are written down to fair value. See “Investments – Other-than-Temporary Impairment” in Note 2 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the 2017 Annual Report for additional information. The table below summarizes other-than-temporary impairments and changes in the mortgage loan provision for the three and six months ended June 30, 2018 and 2017 (dollars in thousands).
 
Three months ended June 30,
 
Six months ended June 30,
2018
 
2017
 
2018
 
2017
Impairment losses on fixed maturity securities
$
3,350

 
$
3,401

 
$
3,350

 
$
20,590

Other impairment losses
512

 
6,309

 
1,340

 
6,307

Change in mortgage loan provision
845

 
366

 
329

 
467

Total
$
4,707

 
$
10,076

 
$
5,019

 
$
27,364

The fixed maturity impairments for the three and six months ended June 30, 2018 and 2017 were largely related to high-yield corporate securities. In addition, other impairment losses for the three and six months ended June 30, 2018 were primarily due to impairments on real estate joint ventures. Other impairment losses for the three and six months ended June 30, 2017 were primarily due to impairments on limited partnerships.

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At June 30, 2018 and December 31, 2017, the Company had $592.2 million and $113.3 million, respectively, of gross unrealized losses related to its fixed maturity securities. The distribution of the gross unrealized losses related to these securities is shown below.
 
 
June 30, 2018
 
December 31, 2017
Sector:
 
 
 
 
Corporate
 
69.2
%
 
48.8
%
Canadian government
 
0.7

 
1.5

RMBS
 
5.8

 
10.5

ABS
 
2.3

 
4.6

CMBS
 
2.7

 
4.3

U.S. government
 
11.2

 
19.4

State and political subdivisions
 
1.6

 
3.8

Other foreign government
 
6.5

 
7.1

Total
 
100.0
%
 
100.0
%
Industry:
 
 
 
 
Finance
 
25.0
%
 
15.8
%
Asset-backed
 
2.3

 
4.6

Industrial
 
37.6

 
30.0

Mortgage-backed
 
8.5

 
14.8

Government
 
20.0

 
31.8

Utility
 
6.6

 
3.0

Total
 
100.0
%
 
100.0
%
See “Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the total gross unrealized losses for these securities at June 30, 2018 and December 31, 2017, respectively, where the estimated fair value had declined and remained below amortized cost by less than 20% or more than 20%.
The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment. In the Company’s impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration given the lack of contractual cash flows and the deferability features of these securities.
See “Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for tables that present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for these securities that have estimated fair values below amortized cost, by class and grade security, as well as the length of time the related market value has remained below amortized cost as of June 30, 2018 and December 31, 2017.
As of June 30, 2018 and December 31, 2017, the Company classified approximately 5.7% and 5.9%, respectively, of its fixed maturity securities in the Level 3 category (refer to Note 6 – “Fair Value of Assets and Liabilities” in the Notes to Condensed Consolidated Financial Statements for additional information). These securities primarily consist of private placement corporate securities, bank loans, Canadian provincial strips, below investment grade mortgage-backed securities and subprime asset-backed securities with inactive trading markets.
See “Securities Borrowing, Lending and Other” in Note 4 - “Investments” in the Notes to Condensed Consolidated Financial Statements for information related to the Company’s securities borrowing, repurchase and repurchase/reverse repurchase programs.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 8.8% and 8.3% of the Company’s cash and invested assets as of June 30, 2018 and December 31, 2017, respectively. The Company’s mortgage loan portfolio consists of U.S. and Canadian based investments primarily in commercial offices, light industrial properties and retail locations. The mortgage loan portfolio is diversified by geographic region and property type. Additional information on geographic concentration and property type can be found under “Mortgage Loans on Real Estate” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements.

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As of June 30, 2018 and December 31, 2017, the Company’s mortgage loans, gross of unamortized deferred loan origination fees and expenses and valuation allowances, were distributed geographically as follows (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
U.S. Region:
 
 
 
 
 
 
 
 
Pacific
 
$
1,331,967

 
29.0
%
 
$
1,258,753

 
28.6
%
South Atlantic
 
926,086

 
20.3

 
896,117

 
20.3

Mountain
 
625,485

 
13.7

 
694,324

 
15.7

East North Central
 
530,002

 
11.6

 
527,316

 
11.9

West North Central
 
314,855

 
6.9

 
309,326

 
7.0

West South Central
 
452,282

 
9.9

 
387,151

 
8.8

Middle Atlantic
 
171,788

 
3.8

 
137,600

 
3.1

East South Central
 
95,836

 
2.1

 
96,887

 
2.2

New England
 
5,664

 
0.1

 
5,700

 
0.1

Subtotal - U.S.
 
4,453,965

 
97.4

 
4,313,174

 
97.7

Canada
 
118,598

 
2.6

 
99,997

 
2.3

Total
 
$
4,572,563

 
100.0
%
 
$
4,413,171

 
100.0
%
Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The valuation allowances are established after management considers, among other things, the value of underlying collateral and payment capabilities of debtors. Any subsequent adjustments to the valuation allowances will be treated as investment gains or losses. See “Mortgage Loans on Real Estate” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for information regarding valuation allowances and impairments.
Policy Loans
Policy loans comprised approximately 2.6% of the Company’s cash and invested assets as of June 30, 2018 and December 31, 2017, the majority of which are associated with one client. These policy loans present no credit risk because the amount of the loan cannot exceed the obligation due the ceding company upon the death of the insured or surrender of the underlying policy. The provisions of the treaties in force and the underlying policies determine the policy loan interest rates. The Company earns a spread between the interest rate earned on policy loans and the interest rate credited to corresponding liabilities.
Funds Withheld at Interest
Funds withheld at interest comprised approximately 11.5% of the Company’s cash and invested assets as of June 30, 2018 and December 31, 2017. For reinsurance agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company, and are reflected as funds withheld at interest on the Company’s condensed consolidated balance sheets. In the event of a ceding company’s insolvency, the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances against amounts owed by the ceding company. Interest accrues to the total funds withheld at interest assets at rates defined by the treaty terms. Additionally, under certain treaties the Company is subject to the investment performance on the withheld assets, although it does not directly control them. These assets are primarily fixed maturity investment securities and pose risks similar to the fixed maturity securities the Company owns. To mitigate this risk, the Company helps set the investment guidelines followed by the ceding company and monitors compliance. Ceding companies with funds withheld at interest had an average financial strength rating of “A” at June 30, 2018 and December 31, 2017. Certain ceding companies maintain segregated portfolios for the benefit of the Company.
Other Invested Assets
Other invested assets include limited partnership interests, joint ventures (other than operating joint ventures), equity release mortgages, derivative contracts, FVO contractholder-directed unit-linked investments and FHLB common stock. Other invested assets represented approximately 3.1% and 2.8% of the Company’s cash and invested assets as of June 30, 2018 and December 31, 2017, respectively. See “Other Invested Assets” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the carrying value of the Company’s other invested assets by type as of June 30, 2018 and December 31, 2017.

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The Company utilizes derivative financial instruments to protect the Company against possible changes in the fair value of its investment portfolio as a result of interest rate changes, to hedge against risk of changes in the purchase price of securities, to hedge liabilities associated with the reinsurance of variable annuities with guaranteed living benefits and to manage the portfolio’s effective yield, maturity and duration. In addition, the Company utilizes derivative financial instruments to reduce the risk associated with fluctuations in foreign currency exchange rates. The Company uses both exchange-traded, centrally cleared, and customized over-the-counter derivative financial instruments.
See Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the notional amounts and fair value of investment related derivative instruments held at June 30, 2018 and December 31, 2017.
The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. Generally, the credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. The Company had no net credit exposure related to its derivative contracts, excluding futures and mortality swaps, at June 30, 2018 and December 31, 2017, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts.
The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties. See Note 5 - “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for more information regarding the Company’s derivative instruments.
Enterprise Risk Management
RGA maintains a dedicated Enterprise Risk Management (“ERM”) function that is responsible for analyzing and reporting the Company’s risks on an aggregated basis; facilitating monitoring to ensure the Company’s risks remain within its appetites and limits; and ensuring, on an ongoing basis, that RGA’s ERM objectives are met. This includes ensuring proper risk controls are in place; risks are effectively identified, assessed, and managed; and key risks to which the Company is exposed are disclosed to appropriate stakeholders. The ERM function plays an important role in fostering the Company’s risk management culture and practices.
Enterprise Risk Management Structure and Governance
The Board of Directors (“the Board”) oversees enterprise risk through its standing committees. The Finance, Investments, and Risk Management (“FIRM”) Committee of the Board oversees the management of the Company’s ERM program and policies. The FIRM receives regular reports and assessments which describe the Company’s key risk exposures and include quantitative and qualitative assessments and information about breaches, exceptions, and waivers.
The Company’s Global Chief Risk Officer (“CRO”) leads the dedicated ERM function. The CRO reports to the Chief Executive Officer (“CEO”) and has direct access to the Board through the FIRM Committee with formal reporting occurring quarterly. The CRO is supported by a network of Business Unit Chief Risk Officers and Risk Management Officers throughout the business who are responsible for the analysis and management of risks within their scope. A Lead Risk Management Officer is assigned to each risk to take overall responsibility to monitor and assess the risk consistently across all markets.
In addition to leading the ERM function, the CRO also chairs the Company’s Risk Management Steering Committee (“RMSC”), which is made up of senior management executives, including the CEO, the Chief Financial Officer (“CFO”), and the Chief Operating Officer, among others. The RMSC provides oversight for the Insurance, Market and Credit, Capital, and Operational risk committees and retains direct risk oversight responsibilities for the following:
Company’s global ERM framework, activities, and issues.
Identification, assessments, and management of all known, new and emerging strategic risk exposures.
Risk appetite statement, including the ongoing alignment of the risk appetite statement with the Company’s strategy and capital plans.
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 risks areas including the identification, assessments, and management of known, new and emerging risk exposures and the review and approval of RGA group-level risk limits
To ensure appropriate oversight of enterprise-wide risk management issues without unnecessary duplication, as well as to foster cross-committee communication and coordination regarding risk issues, risk committee chairs attend RMSC meetings. In addition

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to the risk committees, their sub-committees and working groups, some RGA operating entities have risk management committees that oversee relevant risks related to segment-level risk limits.
Enterprise Risk Management Framework
RGA’s ERM framework provides a platform to assess the risk / return profiles of risks throughout the organization to enable enhanced decision making by business leaders. The ERM framework also guides the development and implementation of mitigation strategies to reduce exposures to these risks to acceptable levels.
RGA’s ERM framework includes the following elements:
1.
Risk Culture: Risk management is an integral part of the Company’s culture and is embedded in RGA’s business processes in accordance with RGA’s risk philosophy. As the cornerstone of the ERM framework, a culture of prudent risk management reinforced by senior management plays a preeminent role in the effective management of risks assumed by RGA.
2.
Risk Appetite Statement: A general and high level overview of the risk profile RGA aims to achieve to meet its strategic objectives. This statement is then supported by more granular risk limits guiding the businesses to achieve this Risk Appetite Statement.
3.
Risk Limits: Risk Limits establish the maximum amount of defined risk that the Company is willing to assume to remain within the Company’s overall risk appetite. These risks have been identified by the management of the Company as relevant to manage the overall risk profile of the Company while allowing achievement of strategic objectives.
4.
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.
5.
Business Specific Limits/Controls: These limits/controls provide additional safeguards against undesired risk exposures and are embedded in business processes. Examples include maximum retention limits, pricing and underwriting reviews, per issuer limits, concentration limits, and standard treaty language.
Proactive risk monitoring and reporting enable early detection and mitigation of emerging risks. The RMSC and its subcommittees monitor adherence to risk limits through the ERM function, which reports regularly to the RMSC and FIRM Committee. The frequency of monitoring is tailored to the volatility assessment and relative priority of each risk. Risk escalation channels coupled with open communication lines enhance the mitigants explained above. The Company has devoted significant resources to developing its ERM program and expects to continue to do so in the future. Nonetheless, the Company’s policies and procedures to identify, manage, and monitor risks may not be fully effective. Many of the Company’s methods for managing risk are based on historical information, which may not be a good predictor of future risk exposures, such as the risk of a pandemic causing a large number of deaths. Management of operational, legal, and regulatory risk relies on policies and procedures which may not be fully effective under all scenarios.
Risk Categories
The Company groups its risks into the following categories: Insurance risk, Market and Credit risk, Capital risk, Operational risk and Strategic risk. Specific risk assessments and descriptions can be found below and in Item 1A – “Risk Factors” of the 2017 Annual Report.
Insurance Risk
Insurance risk is the risk of lower or negative earnings and potentially a reduction in enterprise value due to a greater amount of benefits and related expenses paid than expected, or from non-market related adverse policyholder or client behavior. The Company uses multiple approaches to managing insurance risk: active insurance risk assessment and pricing appropriately for the risks assumed, transferring undesired risks, and managing the retained exposure prudently. These strategies are explained below.
Insurance Risk Assessment and Pricing
The Company has developed extensive expertise in assessing insurance risks which ultimately forms an integral part of ensuring that it is compensated commensurately for the risks it assumes and that it does not overpay for the risks it transfers to third parties. This expertise includes a vast array of market and product knowledge supported by a large information database of historical experience which is closely monitored. Analysis and experience studies derived from this database help form the basis for the Company’s pricing assumptions which are used in developing rates for new risks. If actual mortality or morbidity experience is materially adverse, some reinsurance treaties allow for increases to future premium rates.

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Misestimation of any key risk can threaten the long term viability of the enterprise. Further, the pricing process is a key operational risk and significant effort is applied to ensuring the appropriateness of pricing assumptions. Some of the safeguards the Company uses to ensure proper pricing are: experience studies, strict underwriting, sensitivity and scenario testing, pricing guidelines and controls, authority limits and internal and external pricing reviews. In addition, the ERM function provides pricing oversight which includes periodic pricing audits.
Risk Transfer
To minimize volatility in financial results and reduce the impact of large losses, the Company transfers some of its insurance risk to third parties using vehicles such as retrocession and catastrophe coverage.
Individual Exposure Retrocession
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 claims paid by ceding reinsurance to other insurance enterprises (or retrocessionaires) under excess coverage and coinsurance contracts. In individual life markets, the Company retains a maximum of $8.0 million of coverage per individual life. In certain limited situations the Company has retained more than $8.0 million per individual life. 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 coverages provided by the Company in addition to individual life, such as group life, disability and health, under certain circumstances, the Company could potentially incur claims totaling more than $8.0 million per individual life.
Catastrophic Excess Loss Retrocession
The Company seeks to limit its exposure to loss on its assumed catastrophic excess of loss reinsurance agreements by ceding a portion of its exposure to multiple retrocessionaires through retrocession line slips or directly to retrocession markets. The Company’s policy is to retain a maximum of $20.0 million of catastrophic loss exposure per agreement and to retrocede up to $30.0 million additional loss exposures to the retrocession markets. The Company limits its exposure on a country-by-country (and state-by-state in the U.S.) basis by managing its total exposure to all catastrophic excess of loss agreements bound within a given country to established maximum aggregate exposures. The maximum exposures are established and managed both on gross amounts issued prior to including retrocession and for amounts net of exposures retroceded.
Catastrophe Coverage
The Company accesses the markets each year for annual catastrophic coverages and reviews current coverage and pricing of current and alternate designs. The coverage may vary from year to year based on the Company’s perceived value of such protection. The current policy covers events involving 8 or more insured deaths from a single occurrence and covers $100.0 million of claims in excess of the Company’s $25.0 million deductible.
Managing Retained Exposure
The Company retains most of the inbound insurance risk. The Company manages the retained exposure proactively using various mitigating factors such as diversification and limits. Diversification is the primary mitigating factor of short term volatility risk, but it also mitigates adverse impacts of changes in long term trends and catastrophic events. The Company’s insured populations are dispersed globally, diversifying the insurance exposure because factors that cause actual experience to deviate materially from expectations do not affect all areas uniformly and synchronously or in close sequence. A variety of limits mitigate retained insurance risk. Examples of these limits include geographic exposure limits, which set the maximum amount of business that can be written in a given country, and jumbo limits, which prevent excessive coverage on a given individual.
In the event that mortality or morbidity experience develops in excess of expectations, some reinsurance treaties allow for increases to future premium rates. Other treaties include experience refund provisions, which may also help reduce RGA’s mortality risk.
RGA has various methods to manage its insurance risks, including access to the capital and reinsurance markets.
Market and Credit Risk
Market and Credit risk is the risk of lower or negative earnings and potentially a reduction in enterprise value due to changes in the market prices of asset and liabilities.
Interest Rate Risk
Interest Rate risk is risk that changes in the level and volatility of nominal interest rates affect the profitability, value or solvency position of the Company. This includes credit spread changes and inflation but excludes credit quality deterioration. This risk arises from many of the Company’s primary activities, as the Company invests substantial funds in interest-sensitive assets, primarily fixed maturity securities, and also has certain interest-sensitive contract liabilities. A prolonged period where market yields are significantly below the book yields of the Company’s asset portfolio puts downward pressure on portfolio book yields.

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The Company has been proactive in its investment strategies, reinsurance structures and overall asset-liability management practices to reduce the risk of unfavorable consequences in this type of environment.
The Company manages interest rate risk to optimize the return on the Company’s capital and to preserve the value created by its business operations within certain constraints. For example, certain management and monitoring processes are designed to minimize the effect of sudden and/or sustained changes in interest rates on fair value, cash flows, and net interest income. The Company manages its exposure to interest rates principally by managing the relative matching of the cash flows of its liabilities and assets.
The Company’s exposure to interest rate price risk and interest rate cash flow risk is reviewed on a quarterly basis. Interest rate price risk exposure is measured using interest rate sensitivity analysis to determine the change in fair value of the Company’s financial instruments in the event of a hypothetical change in interest rates. Interest rate cash flow risk exposure is measured using interest rate sensitivity analysis to determine the Company’s variability in cash flows in the event of a hypothetical change in interest rates.
In order to reduce the exposure to changes in fair values from interest rate fluctuations, the Company has developed strategies to manage the net interest rate sensitivity of its assets and liabilities. In addition, from time to time, the Company has utilized the swap market to manage the sensitivity of fair values to interest rate fluctuations.
Inflation can also have direct effects on the Company’s assets and liabilities. The primary direct effect of inflation is the increase in operating expenses. A large portion of the Company’s operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of inflation.
The Company reinsures annuities with benefits indexed to the cost of living. Some of these benefits are hedged with a combination of CPI swaps and indexed bonds when material.
Long Term Care products have an inflation component linked to the future cost of such services. If health care costs increase at a much larger rate than what is prevalent in the nominal interest rates available in the markets, the Company may not earn enough investment yield to pay future claims on such products.
Foreign Currency Risk
Foreign currency risk is the risk of changes in level and volatility of currency exchange rates affect the profitability, value or solvency position of the Company. The Company manages its exposure to currency principally by currency matching invested assets with the underlying liabilities to the extent possible. The Company has in place net investment hedges for a portion of its investments in its Canadian operations to reduce excess exposure to these currencies. Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are reflected in stockholders’ equity on the condensed consolidated balance sheets.
The Company generally does not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). However, the Company has entered into cross currency swaps to manage exposure to specific currencies. The majority of the Company’s foreign currency transactions are denominated in Australian dollars, British pounds, Canadian dollars, Euros, Japanese yen, Korean won, and the South African rand. The maximum amount of assets held in a specific currency (with the exception of the U.S. dollar) is measured relative to risk targets and is monitored regularly.
Real Estate Risk
Real Estate risk is the risk that changes in the level and volatility of real estate market valuations may impact the profitability, value or solvency position of the Company. The Company has investments in direct real estate equity and debt instruments collateralized by real estate (“real estate loans”). Real estate equity risks include significant reduction in valuations, which could be caused by downturns in the broad economy or in specific geographic regions or sectors. In addition, real estate loan risks include defaults, borrower or tenant bankruptcy and reduced liquidity. Real estate loan risks are partially mitigated by the excess of the value of the property over the loan principle, which provides a buffer should the value of the real estate decrease. The Company manages its real estate loan risk by diversifying by property type and geography and through exposure limits.
Equity Risk
Equity risk is the risk that changes in the level and volatility of equity market valuations affect the profitability, value or solvency position of the Company. This risk includes Variable Annuity and other equity linked exposures and asset related equity exposure. The Company assumes equity risk from alternative investments, fixed indexed annuities and variable annuities. The Company uses derivatives to hedge its exposure to movements in equity markets that have a direct correlation with certain of its reinsurance products.

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Alternative Investments
Alternative investments are investments in non-traditional asset classes that primarily back the Company’s capital and surplus. The Company generally restricts the alternative investments portfolio to non-liability supporting assets: that is, free surplus. Alternative investments generally encompass: hedge funds, emerging markets debt, distressed debt, commodities, infrastructure, tax credits, and equities, both public and private. The Company mitigates its exposure to alternative investments by limiting the size of the alternative investments holding and using per-issuer investment limits.
Fixed Indexed Annuities
The Company reinsures fixed indexed annuities (“FIAs”). Credits for FIAs are affected by changes in equity markets. Thus the fair value of the benefit is primarily a function of index returns and volatility. The Company hedges most of the underlying FIA equity exposure with derivatives.
Variable Annuities
The Company reinsures variable annuities including those with guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”). Strong equity markets, increases in interest rates and decreases in equity market volatility will generally decrease the fair value of the liabilities underlying the benefits. Conversely, a decrease in the equity markets along with a decrease in interest rates and an increase in equity market volatility will generally result in an increase in the fair value of the liabilities underlying the benefits, which has the effect of increasing reserves and lowering earnings. The Company maintains a customized dynamic hedging program that is designed to substantially mitigate the risks associated with income volatility around the change in reserves on guaranteed benefits, ignoring the Company’s own credit risk assessment. However, the hedge positions may not fully offset the changes in the carrying value of the guarantees due to, among other things, time lags, high levels of volatility in the equity and derivative markets, extreme swings in interest rates, unexpected contract holder behavior, and divergence between the performance of the underlying funds and hedging indices. These factors, individually or collectively, may have a material adverse effect on the Company’s net income, financial condition or liquidity. The table below provides a summary of variable annuity account values and the fair value of the guaranteed benefits as of June 30, 2018 and December 31, 2017.
(dollars in millions)
 
June 30, 2018
 
December 31, 2017
No guaranteed minimum benefits
 
$
877

 
$
950

GMDB only
 
177

 
182

GMIB only
 
24

 
24

GMAB only
 
13

 
22

GMWB only
 
1,268

 
1,366

GMDB / WB
 
318

 
343

Other
 
24

 
31

Total variable annuity account values
 
$
2,701

 
$
2,918

Fair value of liabilities associated with living benefit riders
 
$
122

 
$
152

Credit Risk
Credit risk, which includes default risk, is risk of loss due to credit quality deterioration of an individual financial asset, derivative or non-derivative contract or instrument. Credit quality deterioration may or may not be accompanied by a ratings downgrade. Generally, the credit exposure for an asset is limited to the fair value, net of any collateral received, at the reporting date.
Investment Credit Risk
Investment credit risk is credit risk related to invested assets. The Company manages investment credit risk using per-issuer investment limits. In addition to per-issuer limits, the Company also limits the total amounts of investments per rating category. An automated compliance system checks for compliance for all investment positions and sends warning messages when there is a breach. The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because futures are transacted through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.

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The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that vary depending on the posting party’s financial strength ratings. Additionally, a decrease in the Company’s financial strength rating to a specified level results in potential settlement of the derivative positions under the Company’s agreements with its counterparties. A committee is responsible for setting rules and approving and overseeing all transactions requiring collateral. See “Credit Risk” in Note 5 – “Derivative Instruments” in the Notes to Condensed Consolidated Financial Statements for additional information on credit risk related to derivatives.
Counterparty Risk
Counterparty risk is the potential for the Company to incur losses due to a client, retrocessionaire, or partner becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk.
Run-on-the-Bank
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.
Collection Risk
For clients and retrocessionaires, this includes their inability to satisfy a reinsurance agreement because the right of offset is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination of the contract; and/or the security supporting the transaction becomes unavailable to RGA.
The Company manages counterparty risk by limiting the total exposure to a single counterparty and by only initiating contracts with creditworthy counterparties. In addition, some of the counterparties have set up trusts and letters of credit, reducing the Company’s exposure to these counterparties.
Generally, RGA’s insurance subsidiaries retrocede amounts in excess of their retention to certain other RGA insurance subsidiaries. External retrocessions are arranged through the Company’s retrocession pools for amounts in excess of its retention. As of June 30, 2018, all retrocession pool members in this excess retention pool rated by the A.M. Best Company were rated “A-” or better, except for one pool member that was rated “B++”. 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 given as additional security. In addition, the Company performs annual financial and in force reviews of its retrocessionaires to evaluate financial stability and performance.
The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any material difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires or as to the recoverability of any such claims.
Aggregate Counterparty Limits
In addition to investment credit limits and counterparty limits, there are aggregate counterparty risk limits which include counterparty exposures from reinsurance, financing and investment activities at an aggregated level to control total exposure to a single counterparty. Counterparty risk aggregation is important because it enables the Company to capture risk exposures at a comprehensive level and under more extreme circumstances compared to analyzing the components individually.
All counterparty exposures are calculated on a quarterly basis, reviewed by management and monitored by the ERM function.
Capital Risk
Capital risk is the risk of lower/negative earnings, potential reduction in enterprise value, and/or the loss of ability to conduct business due to insufficient financial capacity, including not having the appropriate amount of group or entity-level capital to conduct business today or in the future. The Company monitors capital risk exposure using relevant bases of measurement including but not limited to economic, rating agency, and local regulatory methodologies. Additionally, the Company regularly assesses risk related to collateral, financing, liquidity and tax.
Collateral Risk
Collateral risk is the risk that collateral will not be available at expected costs or in the capacity required to meet current and future needs. The Company monitors risks related to interest rate movement, collateral requirements and position and capital markets environment. Collateral demands and resources continue to be actively managed with available collateral sources being more than sufficient to cover stress level collateral demands.

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Financing Risk
Financing risk is the risk that capital will not be available at expected costs or in the capacity required. The Company continues to monitor financing risks related to regulatory financing, contingency financing, and debt capital and sees no immediate issues with its current structures, capacity and plans.
Liquidity Risk
Liquidity risk is the risk that the Company is unable to meet payment obligations at expected costs or in the capacity required. The Company’s traditional liquidity demands include items such as claims, expenses, debt financing and investment purchases which are largely known or can be reasonably forecasted. The Company regularly performs liquidity risk modeling, including both market and Company specific stresses, to assess the sufficiency of available resources.
Tax Risk
Tax risk is the risk that current and future tax positions are different than expected. The Company monitors tax risks related to the evolving tax and regulatory environment, business transactions, legal entity reorganizations, tax compliance obligations, and financial reporting.
Operational Risk
Operational risk is the risk of lower/negative earnings and a potential reduction in enterprise value caused by unexpected losses associated with inadequacy or failure on the part of internal processes, people and systems, or from external events.  The Company regularly monitors and assesses the risks related to business conduct and governance, fraud, privacy and security, business disruption, and business operations. Various insurance, market and credit, capital, and strategy risk obligations and concerns often intersect with the Company’s core operational process risk areas.  Given the scope of the Company’s business and the number of countries in which it operates, this set of risks has the potential to affect the business locally, regionally, or globally. Operational risks are core to managing the Company’s brand and market confidence as well as maintaining its ability to acquire and retain the appropriate expertise to execute and operate the business.
Business Conduct and Governance
Business conduct and governance is the risk related to management oversight, compliance, market conduct, and legal matters. The Company’s Compliance Risk Management Program facilitates a proactive evaluation of present and potential compliance risks associated with both local and enterprise-wide regulatory requirements as well as compliance with Company policies and procedures.
Fraud Risk
Fraud risk is the risk related to the deliberate abuse of and/or taking of Company assets in order to secure gain for the perpetrator or inflict harm on the Company or other victim. Ongoing monitoring and an annual fraud risk assessment enables the Company to continually evaluate potential fraud risks within the organization. 
Privacy and Security Risk
Privacy and security risk is the risk of theft, loss, or unauthorized disclosure of physical or electronic assets resulting in a loss of asset value, confidentiality, or intellectual property. The Company’s privacy and security programs, processes, and procedures are designed to prevent unauthorized physical and electronic theft and the disclosure of confidential and personal data related to its customers, insured individuals or its employees. The Company employs technology, administrative related processes and procedural controls, security measures and other preventative actions to reduce the risk of such incidents.
Business Disruption Risk
Business disruption risk is the risk of impairment to operational capabilities due to the unavailability of people, systems, and/or facilities. The Company’s global business continuity process enables associates to identify potential impacts that threaten operations by providing the framework, policies and procedures and required recurring training for how the Company will recover and restore interrupted critical functions, within a predetermined time, after a disaster or extended disruption, until its normal facilities are restored.
Business Operations Risk
Business operations risk is the risk related to business processes and procedures. Business operations risk includes risk associated with the processing of transactions, data use and management, monitoring and reporting, the integrity and accuracy of models and the use of third party and advisory services.

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Human Capital Risk
Human capital risk is related to workforce management, including talent acquisition, development, retention, and employment relations/regulations. The Company actively monitors human capital risks using multiple practices which include but are not limited to human resource and compliance policies and procedures, regularly reviewing key risk indicators, performance evaluations, compensation and benefits benchmarking, succession planning, employee engagement surveys and associate exit interviews.
Strategic Risk
Strategic risk relates to the planning, implementation, and management of the Company’s business plans and strategies, including the risks associated with: the global environment in which it operates; future law and regulation changes; political risks; and relationships with key external parties.
Strategy Risk
Strategy risk is the risk related to the design and execution of the Company’s strategic plan, including risks associated with merger and acquisition activity. Strategy risks are addressed by a multi-year planning process, regular business unit level assessments of strategy execution and active benchmarking of key performance and risk indicators across the Company’s portfolios of businesses. The Company’s risk appetites and limits are set consistently with strategic objectives.
External Environment Risk
External environment risk relates to external competition, macro trends, and client needs. Macro characteristics that drive market opportunities, risk and growth potential, the competitive landscape and client feedback are closely monitored.
Key Relationships Risk
Key relationships risk relates to areas of important interactions with parties external to the Company. The Company’s reputation is a critical asset in successfully conducting business and therefore relationships with its primary stakeholders (including but not limited to business partners, shareholders, clients, rating agencies, and regulators) are all carefully monitored.
Political and Regulatory Risk
Political and regulatory risk relates to future law and regulation changes and the impact of political changes or instability on the Company’s ability to achieve its objectives. Regulatory and political developments and related risks that may affect the Company are identified, assessed and monitored as part of regular oversight activities.
New Accounting Standards
See Note 12 — “New Accounting Standards” in the Notes to Condensed Consolidated Financial Statements.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in the Company’s quantitative or qualitative aspects of market risk during the quarter ended June 30, 2018 from that disclosed in the 2017 Annual Report. See “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market and Credit Risk”, which is included herein, for additional information.

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ITEM 4.  Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION
ITEM 1.  Legal Proceedings
The Company is subject to litigation in the normal course of its business. The Company currently has no material litigation. A legal reserve is established when the Company is notified of an arbitration demand or litigation or is notified that an arbitration demand or litigation is imminent, it is probable that the Company will incur a loss as a result and the amount of the probable loss is reasonably capable of being estimated.
ITEM 1A.  Risk Factors
There were no material changes from the risk factors disclosed in the 2017 Annual Report.
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes RGA’s repurchase activity of its common stock during the quarter ended June 30, 2018:
 
 
 
Total Number of Shares
Purchased (1)
 
Average Price Paid per   
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (1)
 
Maximum Number (or
Approximate Dollar
Value) of Shares that May
Yet Be Purchased Under
the Plan or Program
April 1, 2018 -
April 30, 2018
 
5,794

 
$
153.58

 

 
$
373,103,074

May 1, 2018 -
May 31, 2018
 
1,039,976

 
$
151.22

 
972,503

 
$
225,943,473

June 1, 2018 -
June 30, 2018
 
29,014

 
$
148.26

 
18,974

 
$
223,103,279

 
(1)
RGA repurchased 972,503 and 18,974 shares of common stock under its share repurchase program for $147.2 million and $2.8 million during May and June 2018, respectively. The Company net settled - issuing 16,084, 189,507 and 25,067 shares from treasury and repurchasing from recipients 5,794, 67,473 and 10,040 shares in April, May and June 2018, respectively, in settlement of income tax withholding requirements incurred by the recipients of an equity incentive award.
In January 2017, RGA’s board of directors authorized a share repurchase program, with no expiration date, for up to $400.0 million of RGA’s outstanding common stock.
ITEM 6.  Exhibits
See index to exhibits.

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INDEX TO EXHIBITS
 
 
 
 
Exhibit
Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Reinsurance Group of America, Incorporated
 
 
Date: August 3, 2018
 
By: 
/s/ Anna Manning
 
 
 
Anna Manning
 
 
 
President & Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date: August 3, 2018
 
By:
/s/ Todd C. Larson
 
 
 
Todd C. Larson
 
 
 
Senior Executive Vice President & Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)

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