Companies: 10,660     total market cap: $140.341 T
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Reinsurance Group of America
RGA
#1492
Rank
$14.80 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$225.36
Share price
9.40%
Change (1 day)
9.60%
Change (1 year)
๐Ÿฆ Insurance
Categories
  1. Reinsurance Group of America
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q2

Reinsurance Group of America - 10-Q quarterly report FY2019 Q2


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
 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 ☒  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 ☐     Emerging growth company ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒


Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01
 
RGA
 
New York Stock Exchange
6.20% Fixed-To-Floating Rate Subordinated Debentures due 2042
 
RZA
 
New York Stock Exchange
5.75% Fixed-To-Floating Rate Subordinated Debentures due 2056
 
RZB
 
New York Stock Exchange

As of July 31, 2019, 62,761,461 shares of the registrant’s common stock were outstanding.


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
 
Item
  
 
  
Page
 
 
 
 
  
PART I – FINANCIAL INFORMATION
  
 
 
 
 
1
  
Financial Statements
  
 
 
  
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2019 and December 31, 2018
  
3
 
  
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended June 30, 2019 and 2018
  
4
 
  
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three and six months ended June 30, 2019 and 2018
  
5
 
 
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
Three and six months ended June 30, 2019 and 2018
 
6
 
  
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2019 and 2018
  
7
 
  
Notes to Condensed Consolidated Financial Statements (Unaudited):
  
8
 
 
     1. Business and Basis of Presentation
 
8
 
 
     2. Earnings Per Share
 
8
 
 
     3. Equity
 
9
 
 
     4. Investments
 
11
 
 
     5. Derivative Instruments
 
20
 
 
     6. Fair Value of Assets and Liabilities
 
26
 
 
     7. Segment Information
 
36
 
 
     8. Commitments, Contingencies and Guarantees
 
38
 
 
     9. Income Tax
 
40
 
 
     10. Employee Benefit Plans
 
41
 
 
     11. Reinsurance
 
41
 
 
     12. Policy Claims and Benefits
 
42
 
 
     13. Financing Activities
 
42
 
 
     14. New Accounting Standards
 
43
2
  
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
  
45
3
  
Quantitative and Qualitative Disclosures About Market Risk
  
73
4
  
Controls and Procedures
  
73
 
 
 
 
  
PART II – OTHER INFORMATION
  
 
 
 
 
1
  
Legal Proceedings
  
73
1A
  
Risk Factors
  
73
2
  
Unregistered Sales of Equity Securities and Use of Proceeds
  
74
6
  
Exhibits
  
74
 
  
Index to Exhibits
  
75
 
  
Signatures
  
76

2

PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
June 30,
2019
 
December 31,
2018
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $42,457,618 and $38,882,168)
 
$
46,189,305

 
$
39,992,346

Equity securities, at fair value (cost $166,159 and $107,721)
 
146,755

 
82,197

Mortgage loans on real estate (net of allowances of $11,692 and $11,286)
 
5,405,422

 
4,966,298

Policy loans
 
1,319,722

 
1,344,980

Funds withheld at interest
 
5,696,217

 
5,761,471

Short-term investments
 
158,788

 
142,598

Other invested assets
 
2,121,406

 
1,915,297

Total investments
 
61,037,615

 
54,205,187

Cash and cash equivalents
 
2,287,526

 
1,889,733

Accrued investment income
 
470,074

 
427,893

Premiums receivable and other reinsurance balances
 
2,944,820

 
3,017,868

Reinsurance ceded receivables
 
851,380

 
757,572

Deferred policy acquisition costs
 
3,440,339

 
3,397,770

Other assets
 
1,012,062

 
839,222

Total assets
 
$
72,043,816

 
$
64,535,245

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
26,995,770

 
$
25,285,400

Interest-sensitive contract liabilities
 
19,748,683

 
18,004,526

Other policy claims and benefits
 
6,136,374

 
5,642,755

Other reinsurance balances
 
512,924

 
487,177

Deferred income taxes
 
2,443,429

 
1,798,800

Other liabilities
 
1,480,914

 
1,396,200

Long-term debt
 
3,381,411

 
2,787,873

Collateral finance and securitization notes
 
635,300

 
681,961

Total liabilities
 
61,334,805

 
56,084,692

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, 2019 and December 31, 2018
 
791

 
791

Additional paid-in capital
 
1,920,144

 
1,898,652

Retained earnings
 
7,549,737

 
7,284,949

Treasury stock, at cost - 16,379,267 and 16,323,390 shares
 
(1,403,774
)
 
(1,370,602
)
Accumulated other comprehensive income
 
2,642,113

 
636,763

Total stockholders’ equity
 
10,709,011

 
8,450,553

Total liabilities and stockholders’ equity
 
$
72,043,816

 
$
64,535,245

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

3

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,763,786

 
$
2,594,460

 
$
5,501,599

 
$
5,177,011

Investment income, net of related expenses
 
584,078

 
528,061

 
1,163,955

 
1,044,390

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
—

 
(3,350
)
 
(9,453
)
 
(3,350
)
Other investment related gains (losses), net
 
12,472

 
(7,222
)
 
29,713

 
(7,692
)
Total investment related gains (losses), net
 
12,472

 
(10,572
)
 
20,260

 
(11,042
)
Other revenues
 
107,072

 
83,959

 
201,625

 
159,256

Total revenues
 
3,467,408

 
3,195,908

 
6,887,439

 
6,369,615

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,515,211

 
2,279,593

 
5,023,535

 
4,641,694

Interest credited
 
157,842

 
109,327

 
291,031

 
189,776

Policy acquisition costs and other insurance expenses
 
260,345

 
320,276

 
572,226

 
677,178

Other operating expenses
 
223,499

 
194,959

 
424,982

 
386,233

Interest expense
 
43,283

 
37,025

 
83,456

 
74,479

Collateral finance and securitization expense
 
7,151

 
7,440

 
15,568

 
15,042

Total benefits and expenses
 
3,207,331

 
2,948,620

 
6,410,798

 
5,984,402

 Income before income taxes
 
260,077

 
247,288

 
476,641

 
385,213

Provision for income taxes
 
57,379

 
42,914

 
104,436

 
80,609

Net income
 
$
202,698

 
$
204,374

 
$
372,205

 
$
304,604

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
3.23

 
$
3.19

 
$
5.93

 
$
4.74

Diluted earnings per share
 
$
3.18

 
$
3.13

 
$
5.83

 
$
4.65

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

4

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Comprehensive income (loss)
 
(Dollars in thousands)
Net income
 
$
202,698

 
$
204,374

 
$
372,205

 
$
304,604

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
24,603

 
(54,677
)
 
45,989

 
(55,837
)
Net unrealized investment gains (losses)
 
851,523

 
(368,719
)
 
1,959,734

 
(1,002,323
)
Defined benefit pension and postretirement plan adjustments
 
22

 
(29
)
 
(373
)
 
(500
)
Total other comprehensive income (loss), net of tax
 
876,148

 
(423,425
)
 
2,005,350

 
(1,058,660
)
Total comprehensive income (loss)
 
$
1,078,846

 
$
(219,051
)
 
$
2,377,555

 
$
(754,056
)
See accompanying notes to condensed consolidated financial statements (unaudited).

5

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands except per share amounts)
(Unaudited)

 
Three months ended June 30, 2019 and 2018
 
Common
Stock
 
Additional Paid In Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other Comprehensive Income
 
Total
Balance, March 31, 2019
$
791

 
$
1,906,291

 
$
7,412,081

 
$
(1,415,020
)
 
$
1,765,965

 
$
9,670,108

Net income
 
 
 
 
202,698

 
 
 
 
 
202,698

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
876,148

 
876,148

Dividends to stockholders, $0.60 per share
 
 
 
 
(37,640
)
 
 
 
 
 
(37,640
)
Purchase of treasury stock
 
 
 
 
 
 
(18,692
)
 
 
 
(18,692
)
Reissuance of treasury stock
 
 
13,853

 
(27,402
)
 
29,938

 
 
 
16,389

Balance, June 30, 2019
$
791

 
$
1,920,144

 
$
7,549,737

 
$
(1,403,774
)
 
$
2,642,113

 
$
10,709,011

Balance, March 31, 2018
$
791

 
$
1,880,352

 
$
6,797,545

 
$
(1,098,823
)
 
$
1,428,396

 
$
9,008,261

Net income
 
 
 
 
204,374

 
 
 
 
 
204,374

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
(423,425
)
 
(423,425
)
Dividends to stockholders, $0.50 per share
 
 
 
 
(32,129
)
 
 
 
 
 
(32,129
)
Purchase of treasury stock
 
 
 
 
 
 
(162,453
)
 
 
 
(162,453
)
Reissuance of treasury stock
 
 
6,984

 
(17,620
)
 
17,710

 
 
 
7,074

Balance, June 30, 2018
$
791

 
$
1,887,336

 
$
6,952,170

 
$
(1,243,566
)
 
$
1,004,971

 
$
8,601,702


 
Six months ended June 30, 2019 and 2018
 
Common
Stock
 
Additional Paid In Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other Comprehensive Income
 
Total
Balance, December 31, 2018
$
791

 
$
1,898,652

 
$
7,284,949

 
$
(1,370,602
)
 
$
636,763

 
$
8,450,553

Adoption of new accounting standards
 
 
 
 
(87
)
 
 
 
 
 
(87
)
Net income
 
 
 
 
372,205

 
 
 
 
 
372,205

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
2,005,350

 
2,005,350

Dividends to stockholders, $1.20 per share
 
 
 
 
(75,347
)
 
 
 
 
 
(75,347
)
Purchase of treasury stock
 
 
 
 
 
 
(67,744
)
 
 
 
(67,744
)
Reissuance of treasury stock
 
 
21,492

 
(31,983
)
 
34,572

 
 
 
24,081

Balance, June 30, 2019
$
791

 
$
1,920,144

 
$
7,549,737

 
$
(1,403,774
)
 
$
2,642,113

 
$
10,709,011

Balance, December 31, 2017
$
791

 
$
1,870,906

 
$
6,736,265

 
$
(1,102,058
)
 
$
2,063,631

 
$
9,569,535

Adoption of new accounting standards
 
 
 
 
(2,020
)
 
 
 
 
 
(2,020
)
Net income
 
 
 
 
304,604

 
 
 
 
 
304,604

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
(1,058,660
)
 
(1,058,660
)
Dividends to stockholders, $1.00 per share
 
 
 
 
(64,370
)
 
 
 
 
 
(64,370
)
Purchase of treasury stock
 
 
 
 
 
 
(165,069
)
 
 
 
(165,069
)
Reissuance of treasury stock
 
 
16,430

 
(22,309
)
 
23,561

 
 
 
17,682

Balance, June 30, 2018
$
791

 
$
1,887,336

 
$
6,952,170

 
$
(1,243,566
)
 
$
1,004,971

 
$
8,601,702



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


6

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended June 30,
 
 
2019
 
2018
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
372,205

 
$
304,604

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(12,200
)
 
1,834

Premiums receivable and other reinsurance balances
 
84,599

 
(345,253
)
Deferred policy acquisition costs
 
(114,895
)
 
20,528

Reinsurance ceded receivable balances
 
(109,011
)
 
18,245

Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
736,251

 
598,015

Deferred income taxes
 
92,442

 
48,117

Other assets and other liabilities, net
 
(122,629
)
 
(98,807
)
Amortization of net investment premiums, discounts and other
 
(33,742
)
 
(25,713
)
Depreciation and amortization expense
 
22,163

 
21,554

Investment related (gains) losses, net
 
(20,260
)
 
11,042

Other, net
 
75,408

 
29,422

Net cash provided by operating activities
 
970,331

 
583,588

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
5,096,692

 
3,836,575

Maturities of fixed maturity securities available-for-sale
 
438,749

 
328,097

Sales of equity securities
 
36

 
29,099

Principal payments and sales of mortgage loans on real estate
 
166,483

 
213,691

Principal payments on policy loans
 
43,849

 
24,793

Purchases of fixed maturity securities available-for-sale
 
(5,689,268
)
 
(3,880,733
)
Purchases of equity securities
 
(56,732
)
 
(11,930
)
Cash invested in mortgage loans on real estate
 
(598,309
)
 
(376,470
)
Cash invested in policy loans
 
(4,940
)
 
(6,421
)
Cash invested in funds withheld at interest
 
(54,030
)
 
(42,761
)
Purchase of businesses, net of cash acquired of $27,374 and $4,938
 
3,561

 
(29,315
)
Purchases of property and equipment
 
(17,467
)
 
(14,573
)
Change in short-term investments
 
67,177

 
(9,843
)
Change in other invested assets
 
(160,204
)
 
(160,824
)
Net cash used in investing activities
 
(764,403
)
 
(100,615
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(75,347
)
 
(64,370
)
Repayment of collateral finance and securitization notes
 
(52,644
)
 
(53,102
)
Proceeds from long-term debt issuance
 
598,524

 
—

Debt issuance costs
 
(4,750
)
 
—

Principal payments of long-term debt
 
(1,387
)
 
(1,331
)
Purchases of treasury stock
 
(67,744
)
 
(165,069
)
Exercise of stock options, net
 
2,590

 
1,252

Change in cash collateral for derivative positions and other arrangements
 
(80,214
)
 
17,578

Deposits on universal life and other investment type policies and contracts
 
256,373

 
225,876

Withdrawals on universal life and other investment type policies and contracts
 
(390,295
)
 
(329,899
)
Net cash provided by (used in) financing activities
 
185,106

 
(369,065
)
Effect of exchange rate changes on cash
 
6,759

 
(19,753
)
Change in cash and cash equivalents
 
397,793

 
94,155

Cash and cash equivalents, beginning of period
 
1,889,733

 
1,303,524

Cash and cash equivalents, end of period
 
$
2,287,526

 
$
1,397,679

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
85,829

 
$
84,670

Income taxes paid, net of refunds
 
$
22,632

 
$
59,397

Non-cash investing activities:
 
 
 
 
Transfer of invested assets
 
$
3,420,531

 
$
604,374

Right-of-use assets acquired through operating losses
 
$
1,105

 
$
—

Purchase of businesses:
 
 
 
 
Assets acquired, excluding cash acquired
 
$
8,303

 
$
65,948

Liabilities assumed
 
(11,864
)
 
(36,633
)
Net cash (received) paid on purchase
 
$
(3,561
)
 
$
29,315

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

7

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.
Business and Basis of Presentation
Business
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. RGA and its subsidiaries (collectively, the “Company”) is engaged in providing traditional reinsurance, which includes individual and group life and health, disability, and critical illness reinsurance. The Company also provides financial solutions, which includes longevity reinsurance, financial reinsurance, stable value products and asset-intensive products, primarily annuities.
Basis of Presentation
The unaudited condensed consolidated financial statements of 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 of the Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s 2018 Annual Report on Form 10-K filed with the SEC on February 27, 2019 (the “2018 Annual Report”).
In the opinion of management, all adjustments, including normal recurring adjustments necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
Consolidation
These unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries and all intercompany accounts and transactions have been eliminated. Entities in which the Company has significant influence over the operating and financing decisions but are not required to be consolidated are reported under the equity method of accounting.
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,
 
 
2019
 
2018
 
2019
 
2018
Earnings:
 
 
 
 
 
 
 
 
Net income (numerator for basic and diluted calculations)
 
$
202,698

 
$
204,374

 
$
372,205

 
$
304,604

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
62,678

 
64,071

 
62,719

 
64,278

Equivalent shares from outstanding stock options
 
1,020

 
1,179

 
1,100

 
1,277

Denominator for diluted calculation
 
63,698

 
65,250

 
63,819

 
65,555

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
3.23

 
$
3.19

 
$
5.93

 
$
4.74

Diluted
 
$
3.18

 
$
3.13

 
$
5.83

 
$
4.65


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 thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Excluded from common equivalent shares:
 
 
 
 
 
 
 
 
Stock options
 
250

 
225

 
420

 
295

Performance contingent shares
 
242

 
229

 
171

 
217



8

3.
Equity
Common Stock
The changes in the number of common stock issued, held in treasury and outstanding are as follows for the periods indicated:
 
 
Issued
 
Held In Treasury
 
Outstanding
Balance, December 31, 2018
 
79,137,758

 
16,323,390

 
62,814,368

Common stock acquired
 
—

 
344,237

 
(344,237
)
Stock-based compensation (1)
 
—

 
(288,360
)
 
288,360

Balance, June 30, 2019
 
79,137,758

 
16,379,267

 
62,758,491

 
 
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

(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 2019, RGA’s board of directors authorized a 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. Repurchases would be made in accordance with applicable securities laws and would be made through market transactions, block trades, privately negotiated transactions or other means or a combination of these methods, with the timing and number of shares repurchased dependent on a variety of factors, including share price, corporate and regulatory requirements and market and business conditions. Repurchases may be commenced or suspended from time to time without prior notice. In connection with this new authorization, the board of directors terminated the stock repurchase authority granted in 2017. During the first six months of 2019, RGA repurchased 0.3 million shares of common stock under this program for $50.0 million. During the first six months of 2018, RGA repurchased 1.0 million shares of common stock under the 2017 repurchase program for $150.0 million.
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, 2019 and 2018 are as follows (dollars in thousands):
 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2018
 
$
(168,698
)
 
$
856,159

 
$
(50,698
)
 
$
636,763

Other comprehensive income (loss) before reclassifications
 
43,534

 
2,617,211

 
(3,369
)
 
2,657,376

Amounts reclassified to (from) AOCI
 
—

 
(98,502
)
 
2,893

 
(95,609
)
Deferred income tax benefit (expense)
 
2,455

 
(558,975
)
 
103

 
(556,417
)
Balance, June 30, 2019
 
$
(122,709
)
 
$
2,815,893

 
$
(51,071
)
 
$
2,642,113

 
 
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

(1)
Includes cash flow hedges of $(14,862) and $8,788 as of June 30, 2019 and December 31, 2018, respectively, and $22,656 and $2,619 as of June 30, 2018 and December 31, 2017, respectively. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.

9

The following table presents the amounts of AOCI reclassifications for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
Details about AOCI Components
 
2019
 
2018
 
2019
 
2018
 
Affected Line Item in 
Statements of Income
Net unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
$
20,249

 
$
(24,642
)
 
$
19,976

 
$
(39,098
)
 
Investment related gains (losses), net
Cash flow hedges - Interest rate
 
383

 
29

 
852

 
(342
)
 
(1)
Cash flow hedges - Currency/Interest rate
 
(6
)
 
76

 
19

 
221

 
(1)
Deferred policy acquisition costs attributed to unrealized gains and losses
 
63,182

 
(7,835
)
 
77,655

 
(14,427
)
 
(2)
Total
 
83,808

 
(32,372
)
 
98,502

 
(53,646
)
 
 
Provision for income taxes
 
(17,273
)
 
6,945

 
(20,279
)
 
11,623

 
 
Net unrealized gains (losses), net of tax
 
$
66,535

 
$
(25,427
)
 
$
78,223

 
$
(42,023
)
 
 
Amortization of defined benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
$
268

 
$
247

 
$
537

 
$
493

 
(3)
Actuarial gains/(losses)
 
(1,875
)
 
(1,267
)
 
(3,430
)
 
(2,859
)
 
(3)
Total
 
(1,607
)
 
(1,020
)
 
(2,893
)
 
(2,366
)
 
 
Provision for income taxes
 
338

 
214

 
608

 
497

 
 
Amortization of defined benefit plans, net of tax
 
$
(1,269
)
 
$
(806
)
 
$
(2,285
)
 
$
(1,869
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
65,266

 
$
(26,233
)
 
$
75,938

 
$
(43,892
)
 
 
(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 2018 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 $21.5 million and $16.6 million in the first six months of 2019 and 2018, respectively. In the first quarter of 2019, the Company granted 0.2 million stock appreciation rights at $145.25 weighted average exercise price per share and 0.1 million performance contingent units to employees. Additionally, non-employee directors were granted a total of 8,472 shares of common stock. As of June 30, 2019, 1.5 million share options at a weighted average strike price per share of $75.03 were vested and exercisable, with a remaining weighted average exercise period of 4.3 years. As of June 30, 2019, the total compensation cost of non-vested awards not yet recognized in the condensed consolidated financial statements was $28.2 million. It is estimated that these costs will vest over a weighted average period of 1.0 years.

10

4.
Investments
Fixed Maturity 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 tables provide information relating to investments in fixed maturity securities by sector as of June 30, 2019 and December 31, 2018 (dollars in thousands):
June 30, 2019:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary Impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
26,055,078

 
$
1,651,141

 
$
70,788

 
$
27,635,431

 
59.8
%
 
$
—

Canadian government
 
2,960,943

 
1,613,153

 
133

 
4,573,963

 
9.9

 
—

RMBS
 
2,214,963

 
64,629

 
3,077

 
2,276,515

 
4.9

 
—

ABS
 
2,482,012

 
25,714

 
13,062

 
2,494,664

 
5.4

 
275

CMBS
 
1,687,024

 
60,775

 
514

 
1,747,285

 
3.8

 
—

U.S. government
 
1,738,348

 
40,202

 
370

 
1,778,180

 
3.8

 
—

State and political subdivisions
 
1,221,461

 
83,621

 
1,508

 
1,303,574

 
2.9

 
—

Other foreign government
 
4,097,789

 
288,833

 
6,929

 
4,379,693

 
9.5

 
—

Total fixed maturity securities
 
$
42,457,618

 
$
3,828,068

 
$
96,381

 
$
46,189,305

 
100.0
%
 
$
275

December 31, 2018:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary Impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
24,006,407

 
$
530,804

 
$
555,092

 
$
23,982,119

 
59.9
%
 
$
—

Canadian government
 
2,768,466

 
1,126,227

 
2,308

 
3,892,385

 
9.7

 
—

RMBS
 
1,872,236

 
22,267

 
25,282

 
1,869,221

 
4.7

 
—

ABS
 
2,171,254

 
10,779

 
32,829

 
2,149,204

 
5.4

 
275

CMBS
 
1,428,115

 
9,153

 
18,234

 
1,419,034

 
3.5

 
—

U.S. government
 
2,233,537

 
10,204

 
57,867

 
2,185,874

 
5.5

 
—

State and political subdivisions
 
721,290

 
39,914

 
9,010

 
752,194

 
1.9

 
—

Other foreign government
 
3,680,863

 
109,320

 
47,868

 
3,742,315

 
9.4

 
—

Total fixed maturity securities
 
$
38,882,168

 
$
1,858,668

 
$
748,490

 
$
39,992,346

 
100.0
%
 
$
275


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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018 (dollars in thousands):
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities pledged as collateral
$
85,651

 
$
89,295

 
$
80,891

 
$
83,950

Fixed maturity securities received as collateral
n/a

 
687,071

 
n/a

 
616,584

Assets in trust held to satisfy collateral requirements
23,697,506

 
25,212,508

 
20,072,735

 
20,366,170



11

The Company monitors its concentrations of financial instruments on an ongoing basis and mitigates credit risk by maintaining a diversified investment portfolio that 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, 2019 and December 31, 2018 (dollars in thousands).
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities guaranteed or issued by:
 
 
 
 
 
 
 
Canadian province of Quebec
$
1,168,749

 
$
2,115,321

 
$
1,091,018

 
$
1,757,087

Canadian province of Ontario
978,025

 
1,361,749

 
913,642

 
1,187,526


The amortized cost and estimated fair value of fixed maturity securities classified as available-for-sale at June 30, 2019 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
 
$
1,305,265

 
$
1,314,533

Due after one year through five years
 
8,823,728

 
9,130,980

Due after five years through ten years
 
9,519,138

 
10,171,840

Due after ten years
 
16,425,488

 
19,053,488

Asset and mortgage-backed securities
 
6,383,999

 
6,518,464

Total
 
$
42,457,618

 
$
46,189,305


Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of June 30, 2019 and December 31, 2018 (dollars in thousands): 
June 30, 2019:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
9,865,739

 
$
10,385,443

 
37.6
%
Industrial
 
13,063,121

 
13,878,056

 
50.2

Utility
 
3,126,218

 
3,371,932

 
12.2

Total
 
$
26,055,078

 
$
27,635,431

 
100.0
%
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
Estimated
 
 
 
 
Amortized Cost
 
Fair Value
 
% of Total
Finance
 
$
8,793,742

 
$
8,730,568

 
36.3
%
Industrial
 
12,336,857

 
12,342,111

 
51.6

Utility
 
2,875,808

 
2,909,440

 
12.1

Total
 
$
24,006,407

 
$
23,982,119

 
100.0
%

Other-Than-Temporary Impairments - Fixed Maturity Securities
As discussed in Note 2 – “Significant Accounting Policies and Pronouncements” of the 2018 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 amount of pre-tax credit loss impairments on fixed maturity securities held by the Company, for which a portion of the OTTI loss was recognized in AOCI, was $3.7 million as of June 30, 2019 and 2018. There were no changes in these amounts from their respective prior-year ending balances.


12

Unrealized Losses for Fixed Maturity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 921 and 3,109 fixed maturity securities as of June 30, 2019 and December 31, 2018, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Gross
Unrealized
Losses
 
% of Total    
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
73,351

 
76.1
%
 
$
721,015

 
96.3
%
20% or more for less than six months
 
21,995

 
22.8

 
21,336

 
2.9

20% or more for six months or greater
 
1,035

 
1.1

 
6,139

 
0.8

Total
 
$
96,381

 
100.0
%
 
$
748,490

 
100.0
%

The Company’s determination of whether a decline in value is other-than-temporary includes an 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 tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 921 and 3,109 fixed maturity securities that have estimated fair values below amortized cost as of June 30, 2019 and December 31, 2018, respectively (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.
 
 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
June 30, 2019:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
780,802

 
$
8,757

 
$
1,276,130

 
$
28,924

 
$
2,056,932

 
$
37,681

Canadian government
 
2,535

 
2

 
17,555

 
131

 
20,090

 
133

RMBS
 
57,572

 
489

 
240,046

 
2,577

 
297,618

 
3,066

ABS
 
753,026

 
5,383

 
399,818

 
7,679

 
1,152,844

 
13,062

CMBS
 
79,372

 
240

 
37,442

 
274

 
116,814

 
514

U.S. government
 
257,328

 
36

 
76,098

 
334

 
333,426

 
370

State and political subdivisions
 
42,876

 
11

 
13,856

 
1,497

 
56,732

 
1,508

Other foreign government
 
90,066

 
2,565

 
110,341

 
2,697

 
200,407

 
5,262

Total investment grade securities
 
2,063,577

 
17,483

 
2,171,286

 
44,113

 
4,234,863

 
61,596

 
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
216,611

 
22,148

 
139,318

 
10,959

 
355,929

 
33,107

RMBS
 
—

 
—

 
976

 
11

 
976

 
11

Other foreign government
 
6,337

 
77

 
18,664

 
1,590

 
25,001

 
1,667

Total below investment grade securities
 
222,948

 
22,225

 
158,958

 
12,560

 
381,906

 
34,785

Total fixed maturity securities
 
$
2,286,525

 
$
39,708

 
$
2,330,244

 
$
56,673

 
$
4,616,769

 
$
96,381


13

 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
December 31, 2018:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
8,505,371

 
$
302,604

 
$
3,611,266

 
$
195,082

 
$
12,116,637

 
$
497,686

Canadian government
 
25,169

 
419

 
131,806

 
1,612

 
156,975

 
2,031

RMBS
 
269,558

 
2,488

 
836,741

 
22,760

 
1,106,299

 
25,248

ABS
 
1,102,677

 
24,271

 
381,609

 
8,523

 
1,484,286

 
32,794

CMBS
 
384,259

 
4,304

 
414,719

 
13,930

 
798,978

 
18,234

U.S. government
 
8,616

 
80

 
1,086,694

 
57,787

 
1,095,310

 
57,867

State and political subdivisions
 
103,504

 
1,538

 
157,330

 
7,472

 
260,834

 
9,010

Other foreign government
 
789,859

 
24,509

 
472,934

 
17,446

 
1,262,793

 
41,955

Total investment grade securities
 
11,189,013

 
360,213

 
7,093,099

 
324,612

 
18,282,112

 
684,825

Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
755,679

 
42,760

 
122,559

 
14,646

 
878,238

 
57,406

Canadian government
 
443

 
34

 
1,770

 
243

 
2,213

 
277

RMBS
 
—

 
—

 
1,026

 
34

 
1,026

 
34

ABS
 
—

 
—

 
1,063

 
35

 
1,063

 
35

Other foreign government
 
128,725

 
5,574

 
7,479

 
339

 
136,204

 
5,913

Total below investment grade securities
 
884,847

 
48,368

 
133,897

 
15,297

 
1,018,744

 
63,665

Total fixed maturity securities
 
$
12,073,860

 
$
408,581

 
$
7,226,996


$
339,909

 
$
19,300,856

 
$
748,490


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. Changes in unrealized losses are primarily 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,
 
2019
 
2018
 
2019
 
2018
Fixed maturity securities available-for-sale
$
427,841

 
$
373,624

 
$
842,928

 
$
742,827

Equity securities
645

 
709

 
1,891

 
2,391

Mortgage loans on real estate
60,509

 
50,460

 
120,071

 
100,659

Policy loans
14,394

 
14,775

 
28,503

 
29,555

Funds withheld at interest
65,972

 
86,417

 
127,706

 
161,862

Short-term investments and cash and cash equivalents
7,465

 
2,964

 
14,365

 
6,209

Other invested assets
31,910

 
20,785

 
74,146

 
44,613

Investment income
608,736

 
549,734

 
1,209,610

 
1,088,116

Investment expense
(24,658
)
 
(21,673
)
 
(45,655
)
 
(43,726
)
Investment income, net of related expenses
$
584,078

 
$
528,061

 
$
1,163,955

 
$
1,044,390



14

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,
 
2019
 
2018
 
2019
 
2018
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
$
—

 
$
(3,350
)
 
$
(9,453
)
 
$
(3,350
)
Gain on investment activity
20,384

 
21,140

 
48,429

 
32,106

Loss on investment activity
(6,870
)
 
(35,934
)
 
(25,593
)
 
(56,314
)
Equity securities:
 
 
 
 
 
 
 
Gain on investment activity
—

 
469

 
74

 
497

Loss on investment activity
—

 
—

 
(1
)
 
(950
)
Change in unrealized gains (losses) recognized in earnings
2,673

 
(6,966
)
 
6,417

 
(11,103
)
Other impairment losses and change in mortgage loan provision
(5,609
)
 
(1,357
)
 
(7,468
)
 
(1,669
)
Derivatives and other, net
1,894

 
15,426

 
7,855

 
29,741

Total investment related gains (losses), net
$
12,472

 
$
(10,572
)
 
$
20,260

 
$
(11,042
)

There were no fixed maturity impairments for the three months ended June 30, 2019. The fixed maturity impairments for the six months ended June 30, 2019 were primarily related to a U.S. utility company. The fixed maturity impairments for the three and six months ended June 30, 2018 were primarily related to high-yield corporate securities. The other impairment losses and change in mortgage loan provision for the three months ended June 30, 2019 includes impairments on limited partnerships. The other impairment losses and change in mortgage loan provision for the six months ended June 30, 2019 includes impairments on real estate joint ventures and limited partnerships. The other impairment losses and change in mortgage loan provision for the three months and six months ended June 30, 2018 includes impairments on real estate joint ventures. The fluctuations in investment related gains (losses) for derivatives and other for the three and six months ended June 30, 2019, compared to the same periods in 2018, are primarily due to changes in the fair value of embedded derivatives and interest rate swaps.
During the three months ended June 30, 2019 and 2018, the Company sold fixed maturity securities with fair values of $466.1 million and $1,174.4 million at losses of $6.9 million and $35.9 million, respectively. During the six months ended June 30, 2019 and 2018, the Company sold fixed maturity securities with fair values of $1,712.7 million and $2,438.0 million at losses of $25.6 million and $56.3 million, respectively. The Company did not sell any equity securities at losses during the three months ended June 30, 2019 and 2018. During the six months ended June 30, 2019, the Company sold equity securities for immaterial losses. During the six months ended June 30, 2018, the Company sold equity securities with fair values $28.4 million at losses of $1.0 million. The Company generally does not buy and sell securities on a short-term basis.

15

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, 2019 and December 31, 2018 (dollars in thousands).
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Borrowed securities
$
343,093

 
$
376,665

 
$
335,781

 
$
366,663

Securities lending:
 
 
 
 
 
 
 
Securities loaned
97,596

 
103,009

 
101,981

 
102,618

Securities received
n/a

 
107,000

 
n/a

 
112,000

Repurchase program/reverse repurchase program:
 
 
 
 
 
 
 
Securities pledged
576,381

 
596,412

 
554,806

 
554,589

Securities received
n/a

 
578,112

 
n/a

 
530,932


The Company also held cash collateral for repurchase/reverse repurchase programs of $28.6 million at both June 30, 2019 and December 31, 2018. No cash or securities have been pledged by the Company for its securities borrowing program as of June 30, 2019 and December 31, 2018.
The following tables present information on the Company’s securities lending and repurchase transactions as of June 30, 2019 and December 31, 2018 (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, 2019
 
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
$
—

 
$
—

 
$
—

 
$
103,009

 
$
103,009

Total
—

 
—

 
—

 
103,009

 
103,009

Repurchase transactions:
 
 
 
 
 
 
 
 
 
Corporate
—

 
—

 
—

 
289,659

 
289,659

U.S. government
—

 
—

 
—

 
209,581

 
209,581

Foreign government
—

 
—

 
—

 
97,172

 
97,172

Other
—

 
—

 
—

 
—

 
—

Total
—

 
—

 
—

 
596,412

 
596,412

Total borrowings
$
—

 
$
—

 
$
—

 
$
699,421

 
$
699,421

 
 
 
 
 
 
 
 
 
 
Gross amount of recognized liabilities for securities lending and repurchase transactions in preceding table
 
$
713,727

Amounts related to agreements not included in offsetting disclosure
 
$
14,306



16

 
December 31, 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
$
—

 
$
—

 
$
—

 
$
102,618

 
$
102,618

Total
$
—

 
$
—

 
$
—

 
$
102,618

 
$
102,618

Repurchase transactions:
 
 
 
 
 
 
 
 
 
Corporate
$
—

 
$
—

 
$
—

 
$
254,151

 
$
254,151

U.S. government
—

 
—

 
—

 
221,572

 
221,572

Foreign government
—

 
—

 
—

 
78,866

 
78,866

Total
—

 
—

 
—

 
554,589

 
554,589

Total borrowings
$
—

 
$
—

 
$
—

 
$
657,207

 
$
657,207

 
 
 
 
 
 
 
 
 
 
Gross amount of recognized liabilities for securities lending and repurchase transactions in preceding table
 
$
671,492

Amounts related to agreements not included in offsetting disclosure
 
$
14,285


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 $0.5 million and $0.4 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019 and December 31, 2018, 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 8.9% and 9.1% of the Company’s total investments as of June 30, 2019 and December 31, 2018. As of June 30, 2019, mortgage loans were geographically dispersed throughout the U.S. with the largest concentrations in California (16.8%), Texas (13.4%) and Washington (7.1%) and include loans secured by properties in Canada (2.9%) and United Kingdom (0.5%). 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, 2019 and December 31, 2018 (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
 Property type:
 
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
Office building
 
$
1,718,595

 
31.7
%
 
$
1,725,748

 
34.6
%
Retail
 
1,526,267

 
28.1

 
1,432,394

 
28.7

Industrial
 
1,112,460

 
20.5

 
961,924

 
19.3

Apartment
 
730,452

 
13.5

 
571,291

 
11.5

Other commercial
 
336,371

 
6.2

 
291,997

 
5.9

Recorded investment
 
5,424,145

 
100.0
%
 
4,983,354

 
100.0
%
Unamortized balance of loan origination fees and expenses
 
(7,031
)
 
 
 
(5,770
)
 
 
Valuation allowances
 
(11,692
)
 
 
 
(11,286
)
 
 
Total mortgage loans on real estate
 
$
5,405,422

 
 
 
$
4,966,298

 
 

The maturities of mortgage loans as of June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Due within five years
 
$
1,624,003

 
29.9
%
 
$
1,425,598

 
28.6
%
Due after five years through ten years
 
2,921,184

 
53.9

 
2,686,264

 
53.9

Due after ten years
 
878,958

 
16.2

 
871,492

 
17.5

Total
 
$
5,424,145

 
100.0
%
 
$
4,983,354

 
100.0
%

17

The following tables set forth certain key credit quality indicators of the Company’s recorded investment in mortgage loans as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
Recorded Investment
 
Debt Service Ratios
 
Construction Loans
 
 
 
 
 
>1.20x
 
1.00x - 1.20x
 
<1.00x
 
 
Total
 
% of Total
June 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
0% - 59.99%
$
2,570,786

 
$
99,194

 
$
64,707

 
$
—

 
$
2,734,687

 
50.4
%
60% - 69.99%
1,786,531

 
108,392

 
41,680

 
39,432

 
1,976,035

 
36.4

70% - 79.99%
447,382

 
39,170

 
22,766

 
—

 
509,318

 
9.4

Greater than 80%
106,070

 
49,306

 
48,729

 
—

 
204,105

 
3.8

Total
$
4,910,769

 
$
296,062

 
$
177,882

 
$
39,432

 
$
5,424,145

 
100.0
%

 
Recorded Investment
 
Debt Service Ratios
 
Construction
Loans
 
 
 
 
 
>1.20x
 
1.00x - 1.20x
 
<1.00x
 
 
Total
 
% of Total
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
0% - 59.99%
$
2,410,556

 
$
61,246

 
$
38,177

 
$
13,691

 
$
2,523,670

 
50.6
%
60% - 69.99%
1,618,374

 
73,908

 
38,120

 
18,929

 
1,749,331

 
35.1

70% - 79.99%
414,269

 
48,438

 
54,440

 
—

 
517,147

 
10.4

Greater than 80%
117,978

 
49,668

 
25,560

 
—

 
193,206

 
3.9

Total
$
4,561,177

 
$
233,260

 
$
156,297

 
$
32,620

 
$
4,983,354

 
100.0
%

The age analysis of the Company’s past due recorded investments in mortgage loans as of June 30, 2019 and December 31, 2018 is as follows (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
31-60 days past due
 
$
11,715

 
$
—

Total past due
 
11,715

 
—

Current
 
5,412,430

 
4,983,354

Total
 
$
5,424,145

 
$
4,983,354


The following table presents the recorded investment in mortgage loans, by method of measuring impairment, and the related valuation allowances as of June 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
Mortgage loans:
 
 
 
 
Individually measured for impairment
 
$
17,014

 
$
30,635

Collectively measured for impairment
 
5,407,131

 
4,952,719

Recorded investment
 
$
5,424,145

 
$
4,983,354

Valuation allowances:
 
 
 
 
Individually measured for impairment
 
$
—

 
$
—

Collectively measured for impairment
 
11,692

 
11,286

Total valuation allowances
 
$
11,692

 
$
11,286


18

Information regarding the Company’s loan valuation allowances for mortgage loans for the three and six months ended June 30, 2019 and 2018 is as follows (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
 
$
11,218

 
$
8,864

 
$
11,286

 
$
9,384

Provision (release)
 
470

 
845

 
397

 
329

Translation adjustment
 
4

 
(3
)
 
9

 
(7
)
Balance, end of period
 
$
11,692

 
$
9,706

 
$
11,692

 
$
9,706


Information regarding the portion of the Company’s mortgage loans that were impaired as of June 30, 2019 and December 31, 2018 is as follows (dollars in thousands):
 
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Carrying
Value
June 30, 2019:
 
 
 
 
 
 
 
 
Impaired mortgage loans with no valuation allowance recorded
 
$
17,017

 
$
17,014

 
$
—

 
$
17,014

Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
17,017

 
$
17,014

 
$
—

 
$
17,014

December 31, 2018:
 
 
 
 
 
 
 
 
Impaired mortgage loans with no valuation allowance recorded
 
$
30,660

 
$
30,635

 
$
—

 
$
30,635

Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
30,660

 
$
30,635

 
$
—

 
$
30,635

 
 
 
 
 
 
 
 
 
The Company’s average investment balance of 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,
 
 
2019
 
2018
 
 
Average
Recorded
Investment(1)
 
Interest
Income
 
Average
Recorded
  Investment(1)
 
Interest
Income
Impaired mortgage loans with no valuation allowance recorded
 
$
17,047

 
$
171

 
$
27,038

 
$
247

Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
17,047

 
$
171

 
$
27,038

 
$
247

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
2019
 
2018
 
 
Average
Recorded
Investment(1)
 
Interest
Income
 
Average
Recorded
Investment(1)
 
Interest
Income
Impaired mortgage loans with no valuation allowance recorded
 
$
21,576

 
$
499

 
$
19,978

 
$
304

 Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
21,576

 
$
499

 
$
19,978

 
$
304


(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, 2019 and 2018. The Company had no mortgage loans that were on a nonaccrual status at June 30, 2019 and December 31, 2018.
Policy Loans
Policy loans comprised approximately 2.2% and 2.5% of the Company’s total investments as of June 30, 2019 and December 31, 2018, 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.

19

Funds Withheld at Interest
Funds withheld at interest comprised approximately 9.3% and 10.6% of the Company’s total investments as of June 30, 2019 and December 31, 2018, respectively. Of the $5.7 billion funds withheld at interest balance, net of embedded derivatives, as of June 30, 2019, $3.6 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 represented approximately 3.5% of the Company’s total investments as of June 30, 2019 and December 31, 2018. Carrying values of these assets as of June 30, 2019 and December 31, 2018 were as follows (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
Limited partnership interests and real estate joint ventures
 
$
1,008,571

 
$
965,094

Equity release mortgages
 
641,611

 
475,905

Derivatives
 
122,484

 
180,699

FVO contractholder-directed unit-linked investments
 
255,174

 
197,770

Other
 
93,566

 
95,829

Total other invested assets
 
$
2,121,406

 
$
1,915,297



5.    Derivative Instruments
Accounting for Derivative Instruments and Hedging Activities
See Note 2 – “Significant Accounting Policies and Pronouncements” of the Company’s 2018 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. See Note 6 – “Fair Value of Assets and Liabilities” for additional disclosures related to the fair value hierarchy for derivative instruments, including embedded derivatives.
Types of Derivatives Used by the Company
Commonly used derivative instruments include, but are not necessarily limited to: credit default swaps, financial futures, equity options, foreign currency swaps, foreign currency forwards, interest rate swaps, synthetic guaranteed investment contracts (“GICs”), consumer price index (“CPI”) swaps, longevity swaps, mortality swaps and embedded derivatives.
For detailed information on these derivative instruments and the related strategies, see Note 5 – “Derivative Instruments” of the Company’s 2018 Annual Report.

20

Summary of Derivative Positions
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 (“modco”) 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, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
Primary Underlying Risk
 
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
 
Interest rate
 
$
922,478

 
$
71,535

 
$
3,447

 
$
1,040,588

 
$
47,652

 
$
961

Financial futures
 
Equity
 
389,353

 
—

 
—

 
325,620

 
—

 
—

Foreign currency swaps
 
Foreign currency
 
149,698

 
—

 
12,194

 
149,698

 
504

 
4,659

Foreign currency forwards
 
Foreign currency
 
—

 
—

 
—

 
25,000

 
—

 
234

Consumer price index swaps
 
CPI
 
438,587

 
189

 
25,481

 
385,580

 
—

 
11,384

Credit default swaps
 
Credit
 
1,331,300

 
6,190

 
134

 
1,338,300

 
6,003

 
1,166

Equity options
 
Equity
 
371,869

 
14,644

 
—

 
439,158

 
42,836

 
—

Longevity swaps
 
Longevity
 
909,840

 
51,755

 
—

 
917,360

 
47,789

 
—

Mortality swaps
 
Mortality
 
25,000

 
—

 
853

 
25,000

 
—

 
369

Synthetic guaranteed investment contracts
 
Interest rate
 
13,526,503

 
—

 
—

 
13,397,729

 
—

 
—

Embedded derivatives in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
 
 
—

 
112,767

 
—

 
—

 
109,597

 
—

Indexed annuity products
 
 
 
—

 
—

 
740,683

 
—

 
—

 
776,940

Variable annuity products
 
 
 
—

 
—

 
167,808

 
—

 
—

 
167,925

Total non-hedging derivatives
 
 
 
18,064,628

 
257,080

 
950,600

 
18,044,033

 
254,381

 
963,638

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Foreign currency/Interest rate
 
535,000

 
825

 
27,560

 
435,000

 
—

 
27,257

Foreign currency swaps
 
Foreign currency
 
408,910

 
28,400

 
2,425

 
494,461

 
51,311

 
—

Foreign currency forwards
 
Foreign currency
 
987,606

 
27,532

 
653

 
911,197

 
50,974

 
—

Total hedging derivatives
 
 
 
1,931,516

 
56,757

 
30,638

 
1,840,658

 
102,285

 
27,257

Total derivatives
 
 
 
$
19,996,144

 
$
313,837

 
$
981,238

 
$
19,884,691

 
$
356,666

 
$
990,895



21

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, 2019 and 2018, were (dollars in thousands):
Type of Fair Value Hedge
 
Hedged Item
 
Gains (Losses) Recognized for Derivatives
 
Gains (Losses) Recognized for Hedged Items
 
 
 
 
Investment Related Gains (Losses)
For the three months ended June 30, 2019:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(3,718
)
 
$
1,118

For the three months ended June 30, 2018:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(1,134
)
 
$
4,942

For the six months ended June 30, 2019:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(4,426
)
 
$
415

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


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 flow hedges: (i) certain interest rate swaps, in which the cash flows of assets and liabilities are variable based on a benchmark rate; and (ii) certain interest rate swaps, in which the cash flows of assets are denominated in different currencies, commonly referred to as cross-currency swaps.
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, 2019 and 2018 (dollars in thousands):
 
 
Three months ended June 30,
 
 
2019
 
2018
Balance beginning of period
 
$
(1,902
)
 
$
20,662

Gains (losses) deferred in other comprehensive income (loss)
 
(12,583
)
 
2,099

Amounts reclassified to investment income
 
6

 
(76
)
Amounts reclassified to interest expense
 
(383
)
 
(29
)
Balance end of period
 
$
(14,862
)
 
$
22,656

 
 
 
 
 
 
 
Six months ended June 30,
 
 
2019
 
2018
Balance beginning of period
 
$
8,788

 
$
2,619

Gains (losses) deferred in other comprehensive income (loss)
 
(22,779
)
 
19,916

Amounts reclassified to investment income
 
(19
)
 
(221
)
Amounts reclassified to interest expense
 
(852
)
 
342

Balance end of period
 
$
(14,862
)
 
$
22,656


As of June 30, 2019, 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 $0.1 million and $(0.3) million in investment income and interest expense, respectively.

22

The following table presents the effect 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, 2019 and 2018 (dollars in thousands):
Derivative Type
 
Gain (Loss) Deferred in AOCI
 
Gain (Loss) Reclassified into Income from AOCI
 
 
 
 
Investment Income
 
Interest Expense
For the three months ended June 30, 2019:
 
 
 
 
 
 
Interest rate
 
$
(9,869
)
 
$
—

 
$
383

Currency/Interest rate
 
(2,714
)
 
(6
)
 
—

Total
 
$
(12,583
)
 
$
(6
)
 
$
383

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 six months ended June 30, 2019:
 
 
 
 
 
 
Interest rate
 
$
(21,970
)
 
$
—

 
$
852

Currency/Interest rate
 
(809
)
 
19

 
—

Total
 
$
(22,779
)
 
$
19

 
$
852

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

 
$
—

 
$
(342
)
Currency/Interest rate
 
189

 
221

 
—

Total
 
$
19,916

 
$
221

 
$
(342
)

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, 2019 and 2018 (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)
 
2019
 
2018
 
2019
 
2018
Foreign currency swaps
 
$
(2,486
)
 
$
8,197

 
$
(9,493
)
 
$
17,002

Foreign currency forwards
 
(5,984
)
 
11,063

 
(24,095
)
 
23,299

Total
 
$
(8,470
)
 
$
19,260

 
$
(33,588
)
 
$
40,301

 
(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.

The cumulative foreign currency translation gain recorded in AOCI related to these hedges was $167.4 million and $201.0 million at June 30, 2019 and December 31, 2018, 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.

23

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, 2019 and 2018 is as follows (dollars in thousands):
 
 
 
 
Gain (Loss) for the three months ended
June 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2019
 
2018
Interest rate swaps
 
Investment related gains (losses), net
 
$
33,404

 
$
(8,600
)
Financial futures
 
Investment related gains (losses), net
 
(7,685
)
 
(897
)
Foreign currency swaps
 
Investment related gains (losses), net
 
(6,380
)
 
—

Foreign currency forwards
 
Investment related gains (losses), net
 
(258
)
 
(262
)
CPI swaps
 
Investment related gains (losses), net
 
(6,812
)
 
1,041

Credit default swaps
 
Investment related gains (losses), net
 
5,078

 
1,084

Equity options
 
Investment related gains (losses), net
 
(4,828
)
 
(8,007
)
Longevity swaps
 
Other revenues
 
2,184

 
2,289

Mortality swaps
 
Other revenues
 
(1,342
)
 
(799
)
Subtotal
 
 
 
13,361

 
(14,151
)
Embedded derivatives in:
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
Investment related gains (losses), net
 
5,262

 
8,805

Indexed annuity products
 
Interest credited
 
(8,459
)
 
6,519

Variable annuity products
 
Investment related gains (losses), net
 
(18,044
)
 
15,324

Total non-hedging derivatives
 
 
 
$
(7,880
)
 
$
16,497

 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for the six months ended        
June 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2019
 
2018
Interest rate swaps
 
Investment related gains (losses), net
 
$
57,378

 
$
(35,171
)
Financial futures
 
Investment related gains (losses), net
 
(29,963
)
 
(768
)
Foreign currency swaps
 
Investment related gains (losses), net
 
(5,657
)
 
—

Foreign currency forwards
 
Investment related gains (losses), net
 
234

 
61

CPI swaps
 
Investment related gains (losses), net
 
(15,663
)
 
3,227

Credit default swaps
 
Investment related gains (losses), net
 
19,578

 
682

Equity options
 
Investment related gains (losses), net
 
(27,512
)
 
(5,414
)
Longevity swaps
 
Other revenues
 
4,327

 
4,557

Mortality swaps
 
Other revenues
 
(484
)
 
(799
)
Subtotal
 
 
 
2,238

 
(33,625
)
Embedded derivatives in:
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
Investment related gains (losses), net
 
3,170

 
22,416

Indexed annuity products
 
Interest credited
 
(5,389
)
 
31,870

Variable annuity products
 
Investment related gains (losses), net
 
117

 
30,109

Total non-hedging derivatives
 
 
 
$
136

 
$
50,770




24

Credit Derivatives
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, 2019 and December 31, 2018 (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
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
 
$
2,015

 
$
147,000

 
2.1
 
$
1,953

 
$
152,000

 
2.2
Subtotal
 
2,015

 
147,000

 
2.1
 
1,953

 
152,000

 
2.2
BBB+/BBB/BBB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
3,762

 
321,700

 
2.0
 
2,930

 
353,700

 
2.2
Credit default swaps referencing indices
 
288

 
852,600

 
4.8
 
(76
)
 
817,600

 
6.4
Subtotal
 
4,050

 
1,174,300

 
4.1
 
2,854

 
1,171,300

 
5.1
BB+/BB/BB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
(9
)
 
10,000

 
0.3
 
30

 
15,000

 
0.7
Subtotal
 
(9
)
 
10,000

 
0.3
 
30

 
15,000

 
0.7
Total
 
$
6,056

 
$
1,331,300

 
3.8
 
$
4,837

 
$
1,338,300

 
4.7
(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.
Netting Arrangements and Credit Risk
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.
The following table provides information relating to the Company’s derivative instruments as of June 30, 2019 and December 31, 2018 (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, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
201,070

 
$
(26,831
)
 
$
174,239

 
$
—

 
$
(189,265
)
 
$
(15,026
)
Derivative liabilities
 
72,747

 
(26,831
)
 
45,916

 
(72,803
)
 
(56,310
)
 
(83,197
)
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
247,069

 
$
(18,581
)
 
$
228,488

 
$
—

 
$
(235,611
)
 
$
(7,123
)
Derivative liabilities
 
46,030

 
(18,581
)
 
27,449

 
(71,376
)
 
(24,080
)
 
(68,007
)
(1)
Includes initial margin posted to a central clearing partner.

The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments with a positive fair value. 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 credit exposure related to its derivative contracts, as of June 30, 2019 and December 31, 2018, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts.
Derivatives may be exchange-traded or they may be privately negotiated contracts, which are referred to as over-the-counter (“OTC”) derivatives. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC cleared”) and others are bilateral contracts between two counterparties. The Company manages its credit risk related to 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 Company is only exposed to the default of the central clearing counterparties for OTC cleared derivatives, and these transactions require initial and daily variation margin collateral postings. Exchange-traded derivatives are

25

settled on a daily basis, thereby reducing the credit risk exposure in the event of non-performance by counterparties to such financial instruments.

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 that 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 what 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 2018 Annual Report.


26

Assets and Liabilities by Hierarchy Level
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 are summarized below (dollars in thousands):
June 30, 2019:
 
 
 
Fair Value Measurements Using:
 
 
Total    
 
Level 1        
 
Level 2    
 
Level 3    
Assets:
 
 
 
 
 
 
 
 
Fixed maturity securities – available-for-sale:
 
 
 
 
 
 
 
 
Corporate
 
$
27,635,431

 
$
—

 
$
25,991,067

 
$
1,644,364

Canadian government
 
4,573,963

 
—

 
3,902,936

 
671,027

RMBS
 
2,276,515

 
—

 
2,260,483

 
16,032

ABS
 
2,494,664

 
—

 
2,384,342

 
110,322

CMBS
 
1,747,285

 
—

 
1,747,266

 
19

U.S. government
 
1,778,180

 
1,651,425

 
109,349

 
17,406

State and political subdivisions
 
1,303,574

 
—

 
1,293,719

 
9,855

Other foreign government
 
4,379,693

 
—

 
4,364,007

 
15,686

Total fixed maturity securities – available-for-sale
 
46,189,305

 
1,651,425

 
42,053,169

 
2,484,711

Equity securities
 
146,755

 
101,948

 
—

 
44,807

Funds withheld at interest – embedded derivatives
 
112,767

 
—

 
—

 
112,767

Cash equivalents
 
755,129

 
737,286

 
17,843

 
—

Short-term investments
 
126,468

 
17,963

 
80,118

 
28,387

Other invested assets:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
61,298

 
—

 
61,298

 
—

Foreign currency forwards
 
27,532

 
—

 
27,532

 
—

Credit default swaps
 
(6,696
)
 
—

 
(6,696
)
 
—

Equity options
 
14,375

 
—

 
14,375

 
—

Foreign currency swaps
 
25,975

 
—

 
25,975

 
—

FVO contractholder-directed unit-linked investments
 
255,174

 
205,805

 
49,369

 
—

Total other invested assets
 
377,658

 
205,805

 
171,853

 
—

Other assets - longevity swaps
 
51,755

 
—

 
—

 
51,755

Total
 
$
47,759,837

 
$
2,714,427

 
$
42,322,983

 
$
2,722,427

Liabilities:
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivatives
 
$
908,491

 
$
—

 
$
—

 
$
908,491

Other liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
19,945

 
—

 
19,945

 
—

Foreign currency swaps - non-hedged
 
12,194

 
—

 
12,194

 
—

Foreign currency forwards
 
653

 
—

 
653

 
—

CPI swaps
 
25,292

 
—

 
25,292

 
—

Credit default swaps
 
(12,752
)
 
—

 
(12,752
)
 
—

Equity options
 
(269
)
 
—

 
(269
)
 
—

Mortality swaps
 
853

 
—

 
—

 
853

Total
 
$
954,407

 
$
—

 
$
45,063

 
$
909,344


27

December 31, 2018:
 
 
 
Fair Value Measurements Using:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Fixed maturity securities – available-for-sale:
 
 
 
 
 
 
 
 
Corporate
 
$
23,982,119

 
$
—

 
$
22,651,194

 
$
1,330,925

Canadian government
 
3,892,385

 
—

 
3,364,261

 
528,124

RMBS
 
1,869,221

 
—

 
1,862,366

 
6,855

ABS
 
2,149,204

 
—

 
2,053,632

 
95,572

CMBS
 
1,419,034

 
—

 
1,419,012

 
22

U.S. government
 
2,185,874

 
2,067,529

 
100,320

 
18,025

State and political subdivisions
 
752,194

 
—

 
741,992

 
10,202

Other foreign government
 
3,742,315

 
—

 
3,737,309

 
5,006

Total fixed maturity securities – available-for-sale
 
39,992,346

 
2,067,529

 
35,930,086

 
1,994,731

Equity securities
 
82,197

 
48,737

 
—

 
33,460

Funds withheld at interest – embedded derivatives
 
109,597

 
—

 
—

 
109,597

Cash equivalents
 
485,167

 
473,509

 
11,658

 
—

Short-term investments
 
105,991

 
4,989

 
98,774

 
2,228

Other invested assets:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
37,976

 
—

 
37,976

 
—

Foreign currency forwards
 
50,740

 
—

 
50,740

 
—

Credit default swaps
 
4,466

 
—

 
4,466

 
—

Equity options
 
36,206

 
—

 
36,206

 
—

Foreign currency swaps
 
51,311

 
—

 
51,311

 
—

FVO contractholder-directed unit-linked investments
 
197,770

 
196,781

 
989

 
—

Total other invested assets
 
378,469

 
196,781

 
181,688

 
—

Other assets - longevity swaps
 
47,789

 
—

 
—

 
47,789

Total
 
$
41,201,556

 
$
2,791,545

 
$
36,222,206

 
$
2,187,805

Liabilities:
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivatives
 
$
944,865

 
$
—

 
$
—

 
$
944,865

Other liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
18,542

 
—

 
18,542

 
—

Foreign currency swaps - non-hedged
 
4,155

 
—

 
4,155

 
—

CPI swaps
 
11,384

 
—

 
11,384

 
—

Credit default swaps
 
(371
)
 
—

 
(371
)
 
—

Equity options
 
(6,630
)
 
—

 
(6,630
)
 
—

Mortality swaps
 
369

 
—

 
—

 
369

Total
 
$
972,314

 
$
—

 
$
27,080

 
$
945,234




28

Transfers between Levels 1 and 2
Transfers between Levels 1 and 2 are made to reflect changes in observability of inputs and market activity. 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. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2019 or 2018.
Quantitative Information Regarding Internally - Priced 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, 2019 and December 31, 2018 (dollars in thousands):
 
Estimated Fair Value      
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted Average) 
June 30, 2019
 
December 31, 2018
 
 
 
June 30, 2019
 
December 31, 2018
Assets:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
808,416

 
$
642,647

 
Market comparable securities
 
Liquidity premium
 
0-5% (1%)

 
0-5%  (1%)

 
 
 
 
 
 
 
EBITDA Multiple
 
5.9x

 
5.9x-7.5x (6.5x)

ABS
97,055

 
77,842

 
Market comparable securities
 
Liquidity premium
 
0-4% (1%)

 
0-1%  (1%)

U.S. government
17,406

 
18,025

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

 
0-1%  (1%)

Other foreign government
15,686

 
5,006

 
Market comparable securities
 
Liquidity premium
 
1
%
 
1
%
Equity securities
31,617

 
25,007

 
Market comparable securities
 
Liquidity premium
 
4
%
 
4
%
 
 
 
 
 
 
 
EBITDA Multiple
 
6.9x-12.3x (8.2x)

 
6.9x-12.3x (7.9x)

 
 
 
 
 
 
 
 
 
 
 
 
Funds withheld at interest- embedded derivatives
112,767

 
109,597

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

 
0-100%  (2%)

 
 
 
 
 
 
 
Lapse
 
0-35%  (12%)

 
0-35%  (10%)

 
 
 
 
 
 
 
Withdrawal
 
0-5%  (3%)

 
0-5%  (3%)

 
 
 
 
 
 
 
CVA
 
0-5%  (1%)

 
0-5%  (1%)

 
 
 
 
 
 
 
Crediting rate
 
2-4%  (2%)

 
2-4%  (2%)

Longevity swaps
51,755

 
47,789

 
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
740,683

 
776,940

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

 
0-100% (2%)

 
 
 
 
 
 
 
Lapse
 
0-35% (12%)

 
0-35% (10%)

 
 
 
 
 
 
 
Withdrawal
 
0-5% (3%)

 
0-5% (3%)

 
 
 
 
 
 
 
Option budget projection
 
2-4% (2%)

 
2-4% (2%)

Interest sensitive contract liabilities- embedded derivatives- variable annuities
167,808

 
167,925

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

 
0-100% (1%)

 
 
 
 
 
 
 
Lapse
 
0-25% (5%)

 
0-25% (5%)

 
 
 
 
 
 
 
Withdrawal
 
0-7% (5%)

 
0-7% (5%)

 
 
 
 
 
 
 
CVA
 
0-5% (1%)

 
0-5% (1%)

 
 
 
 
 
 
 
Long-term volatility
 
0-27% (13%)

 
0-27% (13%)

Mortality swaps
853

 
369

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

 
0-100%  (1%)



29

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. Transfers out of Level 3 are 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 2018, the Company 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 (see “New Accounting Pronouncements - Financial Instruments - Recognition and Measurement” in Note 2 - “Significant Accounting Policies and Pronouncements” in the Notes to Consolidated Financial Statements included in the Company’s 2018 Annual Report).
For further information on the Company’s valuation processes, see Note 6 in the Notes to Consolidated Financial Statements included in the Company’s 2018 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, 2019:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,530,755

 
$
607,791

 
$
6,522

 
$
113,787

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
27

 
3,569

 
(21
)
 
5

Investment related gains (losses), net
 
15

 
—

 
—

 
110

Included in other comprehensive income
 
16,728

 
59,667

 
70

 
1,048

Purchases(1)
 
176,431

 
—

 
3,018

 
8,425

Sales(1)
 
(13,925
)
 
—

 
—

 
—

Settlements(1)
 
(80,213
)
 
—

 
(1,239
)
 
(13,053
)
Transfers into Level 3
 
16,041

 
—

 
7,682

 
—

Transfers out of Level 3
 
(1,495
)
 
—

 
—

 
—

Fair value, end of period
 
$
1,644,364

 
$
671,027

 
$
16,032

 
$
110,322

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
 
$
70

 
$
3,569

 
$
(21
)
 
$
4

For the three months ended June 30, 2019 (continued):
 
Fixed maturity securities available-for-sale
 
 
 
 
CMBS
 
U.S. government
 
State
and political
subdivisions
 
Other foreign government
 
Equity securities
Fair value, beginning of period
 
$
21

 
$
17,209

 
$
10,162

 
$
5,066

 
$
40,422

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

 
(86
)
 
5

 
—

 
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
1,785

Included in other comprehensive income
 
—

 
322

 
39

 
620

 
—

Purchases(1)
 
—

 
102

 
—

 
10,000

 
2,600

Settlements(1)
 
(2
)
 
(141
)
 
(351
)
 
—

 
—

Fair value, end of period
 
$
19

 
$
17,406

 
$
9,855

 
$
15,686

 
$
44,807

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
 
$
—

 
$
(86
)
 
$
5

 
$
—

 
$
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
1,785


30

For the three months ended June 30, 2019 (continued):
 
Funds withheld
at interest-
embedded
derivatives
 
Cash equivalents
 
Short-term Investments
 
Other assets - longevity swaps
 
Interest sensitive contract liabilities embedded derivatives
 
Other liabilities - mortality swaps
Fair value, beginning of period
 
$
107,506

 
$
19

 
$
29,202

 
$
48,869

 
$
(903,935
)
 
$
489

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

 
—

 
56

 
—

 
—

 
—

Investment related gains (losses), net
 
5,261

 
—

 
17

 
—

 
(18,044
)
 
—

Claims & other policy benefits
 
—

 
—

 
—

 
—

 
—

 
—

Interest credited
 
—

 
—

 
—

 
—

 
(8,459
)
 
—

Policy acquisition costs and other insurance expenses
 
—

 
—

 
—

 
—

 
—

 
—

Included in other comprehensive income
 
—

 
—

 
(67
)
 
702

 
—

 
—

Other revenues
 
—

 
—

 
—

 
2,184

 
2,585

 
(1,342
)
Purchases(1)
 
—

 
—

 
1,265

 
—

 
—

 
—

Sales(1)
 
—

 
—

 
(1,517
)
 
—

 
—

 
—

Settlements(1)
 
—

 
—

 
(547
)
 
—

 
19,362

 
—

Transfers out of Level 3
 
—

 
(19
)
 
(22
)
 
—

 
—

 
—

Fair value, end of period
 
$
112,767

 
$
—

 
$
28,387

 
$
51,755

 
$
(908,491
)
 
$
(853
)
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
 
$
—

 
$
—

 
$
56

 
$
—

 
$
—

 
$
—

Investment related gains (losses), net
 
5,261

 
—

 
—

 
—

 
(19,842
)
 
—

Other revenues
 
—

 
—

 
—

 
2,184

 
—

 
(1,342
)
Interest credited
 
—

 
—

 
—

 
—

 
(27,820
)
 
—

For the six months ended June 30, 2019:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,330,925

 
$
528,124

 
$
6,855

 
$
95,572

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
160

 
7,062

 
(19
)
 
22

Investment related gains (losses), net
 
15

 
—

 
—

 
110

Included in other comprehensive income
 
36,132

 
135,841

 
71

 
2,023

Purchases(1)
 
390,872

 
—

 
3,018

 
39,747

Sales(1)
 
(24,637
)
 
—

 
—

 
—

Settlements(1)
 
(103,649
)
 
—

 
(1,575
)
 
(27,152
)
Transfers into Level 3
 
16,041

 
—

 
7,682

 
—

Transfers out of Level 3
 
(1,495
)
 
—

 
—

 
—

Fair value, end of period
 
$
1,644,364

 
$
671,027

 
$
16,032

 
$
110,322

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
 
$
236

 
$
7,062

 
$
(19
)
 
$
21


31

For the six months ended June 30, 2019 (continued):
 
Fixed maturity securities available-for-sale
 
 
 
 
CMBS
 
U.S. government
 
State
and political
subdivisions
 
Other foreign government
 
Equity securities
Fair value, beginning of period
 
$
22

 
$
18,025

 
$
10,202

 
$
5,006

 
$
33,460

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

 
(175
)
 
10

 
—

 
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
5,547

Included in other comprehensive income
 
—

 
589

 
32

 
680

 
—

Purchases(1)
 
—

 
186

 
—

 
10,000

 
5,800

Settlements(1)
 
(3
)
 
(1,219
)
 
(389
)
 
—

 
—

Fair value, end of period
 
$
19


$
17,406

 
$
9,855

 
$
15,686

 
$
44,807

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
 
$
—

 
$
(175
)
 
$
10

 
$
—

 
$
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
5,547


For the six months ended June 30, 2019 (continued):
 
Funds withheld
at interest-
embedded
derivatives
 
Cash equivalents
 
Short-term Investments
 
Other assets - longevity swaps
 
Interest sensitive contract liabilities embedded derivatives
 
Other liabilities - mortality swaps
Fair value, beginning of period
 
$
109,597

 
$
—

 
$
2,228

 
$
47,789

 
$
(944,865
)
 
$
(369
)
Total gains/losses (realized/unrealized)
 
 
 

 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 

 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
—

 
—

 
88

 
—

 
—

 
—

Investment related gains (losses), net
 
3,170

 
—

 
17

 
—

 
117

 
—

Interest credited
 
—

 
—

 
—

 
—

 
(5,389
)
 
—

Included in other comprehensive income
 
—

 
—

 
132

 
(361
)
 
—

 
—

Other revenues
 
—

 
—

 
—

 
4,327

 
—

 
(484
)
Purchases(1)
 
—

 
19

 
28,008

 
—

 
3,983

 
—

Sales(1)
 
—

 
—

 
(1,517
)
 
—

 
—

 
—

Settlements(1)
 
—

 
—

 
(547
)
 
—

 
37,663

 
—

Transfers out of Level 3
 
—

 
(19
)
 
(22
)
 
—

 
—

 
—

Fair value, end of period
 
$
112,767

 
$
—

 
$
28,387

 
$
51,755

 
$
(908,491
)
 
$
(853
)
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
 
$
—

 
$
—

 
$
88

 
$
—

 
$
—

 
$
—

Investment related gains (losses), net
 
3,170

 
—

 
—

 
—

 
(3,076
)
 
—

Other revenues
 
—

 
—

 
—

 
4,327

 
—

 
(484
)
Interest credited
 
—

 
—

 
—

 
—

 
(43,052
)
 
—



32

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
)
 
$
—

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

 
—

 
—

 
15,324

 
—

Interest credited
 
—

 
—

 
—

 
—

 
6,519

 
—

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

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
)
 
—



33

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
)
 
—

 
—

 
—

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
)
 
$
—



34

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
)
 
—


(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
The following table (dollars in thousands) presents information for assets measured at an estimated fair value on a nonrecurring basis during the 2019 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). The Company did not have any adjustments to financial instruments measured at fair value on a non-recurring basis that were still held as of June 30, 2018.
 
 
Carrying Value After Measurement
 
Investment Related Gains (Losses), Net
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
At June 30, 2019
 
2019
 
2019
Limited partnership interests (1)
 
$
5,694

 
$
(5,049
)
 
$
(5,049
)
(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, 2019 and December 31, 2018 (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 2018 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.

35

June 30, 2019:
 
Carrying Value (1)    
 
Estimated 
Fair Value
 
Fair Value Measurement Using:
Level 1
 
Level 2
 
Level 3
 
NAV
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
 
$
5,405,422

 
$
5,598,551

 
$
—

 
$
—

 
$
5,598,551

 
$
—

Policy loans
 
1,319,722

 
1,319,722

 
—

 
1,319,722

 
—

 
—

Funds withheld at interest
 
5,576,162

 
5,882,101

 
—

 
—

 
5,882,101

 
—

Cash and cash equivalents
 
1,532,397

 
1,532,397

 
1,532,397

 
—

 
—

 
—

Short-term investments
 
32,320

 
32,320

 
32,320

 
—

 
—

 
—

Other invested assets
 
1,122,777

 
1,151,725

 
5,317

 
83,680

 
661,289

 
401,439

Accrued investment income
 
470,074

 
470,074

 
—

 
470,074

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive contract liabilities
 
$
16,367,006

 
$
17,283,769

 
$
—

 
$
—

 
$
17,283,769

 
$
—

Long-term debt
 
3,381,411

 
3,508,853

 
—

 
—

 
3,508,853

 
—

Collateral finance and securitization notes
 
635,300

 
584,310

 
—

 
—

 
584,310

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
Carrying Value (1)    
 
Estimated
Fair Value
 
Fair Value Measurement Using:
Level 1
 
Level 2
 
Level 3
 
NAV
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
 
$
4,966,298

 
$
4,917,416

 
$
—

 
$
—

 
$
4,917,416

 
$
—

Policy loans
 
1,344,980

 
1,344,980

 
—

 
1,344,980

 
—

 
—

Funds withheld at interest
 
5,655,055

 
5,802,518

 
—

 
—

 
5,802,518

 
—

Cash and cash equivalents
 
1,404,566

 
1,404,566

 
1,404,566

 
—

 
—

 
—

Short-term investments
 
36,607

 
36,607

 
36,607

 
—

 
—

 
—

Other invested assets
 
945,731

 
941,449

 
4,640

 
83,203

 
477,214

 
376,392

Accrued investment income
 
427,893

 
427,893

 
—

 
427,893

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive contract liabilities
 
$
14,547,436

 
$
14,611,011

 
$
—

 
$
—

 
$
14,611,011

 
$
—

Long-term debt
 
2,787,873

 
2,752,047

 
—

 
—

 
2,752,047

 
—

Collateral finance and securitization notes
 
681,961

 
626,731

 
—

 
—

 
626,731

 
—

 
(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 Significant Accounting Policies and Pronouncements in Note 2 of the consolidated financial statements accompanying the 2018 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.

36

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).
 
 
Three months ended June 30,
 
Six months ended June 30,
Revenues:
 
2019
 
2018
 
2019
 
2018
U.S. and Latin America:
 
 
 
 
 
 
 
 
Traditional
 
$
1,584,676

 
$
1,564,147

 
$
3,125,342

 
$
3,053,841

Financial Solutions
 
301,257

 
229,948

 
555,917

 
443,300

Total
 
1,885,933

 
1,794,095

 
3,681,259

 
3,497,141

Canada:
 
 
 
 
 
 
 
 
Traditional
 
318,142

 
312,199

 
630,475

 
614,518

Financial Solutions
 
23,929

 
12,089

 
47,503

 
24,866

Total
 
342,071

 
324,288

 
677,978

 
639,384

Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
Traditional
 
369,499

 
372,538

 
753,505

 
766,320

Financial Solutions
 
113,986

 
100,675

 
223,407

 
188,818

Total
 
483,485

 
473,213

 
976,912

 
955,138

Asia Pacific:
 
 
 
 
 
 
 
 
Traditional
 
633,417

 
570,520

 
1,306,589

 
1,185,059

Financial Solutions
 
59,558

 
17,992

 
114,086

 
37,838

Total
 
692,975

 
588,512

 
1,420,675

 
1,222,897

Corporate and Other
 
62,944

 
15,800

 
130,615

 
55,055

Total
 
$
3,467,408

 
$
3,195,908

 
$
6,887,439

 
$
6,369,615


 
 
Three months ended June 30,
 
Six months ended June 30,
Income (loss) before income taxes:
 
2019
 
2018
 
2019
 
2018
U.S. and Latin America:
 
 
 
 
 
 
 
 
Traditional
 
$
55,175

 
$
71,978

 
$
66,829

 
$
74,870

Financial Solutions
 
92,018

 
82,388

 
175,295

 
149,809

Total
 
147,193

 
154,366

 
242,124

 
224,679

Canada:
 
 
 
 
 
 
 
 
Traditional
 
46,259

 
21,805

 
96,538

 
45,512

Financial Solutions
 
3,813

 
3,544

 
5,161

 
6,735

Total
 
50,072

 
25,349

 
101,699

 
52,247

Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
Traditional
 
16,121

 
6,468

 
31,545

 
21,889

Financial Solutions
 
51,801

 
65,369

 
90,191

 
104,533

Total
 
67,922

 
71,837

 
121,736

 
126,422

Asia Pacific:
 
 
 
 
 
 
 
 
Traditional
 
34,775

 
58,862

 
71,399

 
81,749

Financial Solutions
 
1,918

 
4,138

 
8,001

 
8,159

Total
 
36,693

 
63,000

 
79,400

 
89,908

Corporate and Other
 
(41,803
)
 
(67,264
)
 
(68,318
)
 
(108,043
)
Total
 
$
260,077

 
$
247,288

 
$
476,641

 
$
385,213



37

Assets:
 
June 30, 2019
 
December 31, 2018
U.S. and Latin America:
 
 
 
 
Traditional
 
$
19,142,106

 
$
19,235,781

Financial Solutions
 
22,698,262

 
19,870,388

Total
 
41,840,368

 
39,106,169

Canada:
 
 
 
 
Traditional
 
4,198,875

 
4,200,792

Financial Solutions
 
133,642

 
154,000

Total
 
4,332,517

 
4,354,792

Europe, Middle East and Africa:
 
 
 
 
Traditional
 
3,755,356

 
3,643,174

Financial Solutions
 
5,916,625

 
4,737,529

Total
 
9,671,981

 
8,380,703

Asia Pacific:
 
 
 
 
Traditional
 
6,339,047

 
5,680,978

Financial Solutions
 
1,618,609

 
1,180,745

Total
 
7,957,656

 
6,861,723

Corporate and Other
 
8,241,294

 
5,831,858

Total
 
$
72,043,816

 
$
64,535,245


 
8.    Commitments, Contingencies and Guarantees
Commitments
Funding of Investments
The Company’s commitments to fund investments as of June 30, 2019 and December 31, 2018 are presented in the following table (dollars in thousands):
 
June 30, 2019
 
December 31, 2018
Limited partnership interests and joint ventures
$
625,286

 
$
523,903

Commercial mortgage loans
146,553

 
22,605

Bank loans and private placements
90,052

 
137,076

Equity release mortgages
53,252

 
264,858


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.

38

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, 2019, 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, 2019 (dollars in millions):
Commitment Period:
Maximum Potential Obligation
2023
$
500.0

2034
2,000.0

2035
1,314.2

2036
2,658.0

2037
5,750.0

2038
1,800.0

2039
1,750.0


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 of 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, 2019 and December 31, 2018 are reflected in the following table (dollars in thousands):
 
June 30, 2019
 
December 31, 2018
Treaty guarantees
$
1,500,220

 
$
1,392,352

Treaty guarantees, net of assets in trust
1,402,737

 
1,291,445

Securities borrowing and repurchase arrangements
274,555

 
269,980

Financing arrangements
50,666

 
61,273

Lease obligations
156

 
392




39

9.
Income Tax

The provision for income tax expense differed from the amounts computed by applying the U.S. federal income tax statutory rate of 21.0% to pre-tax income as a result of the following for the three and six months ended June 30, 2019 and 2018, respectively (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Tax provision at U.S. statutory rate
 
$
54,616

 
$
51,931

 
$
100,095

 
$
80,895

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
 
627

 
(330
)
 
1,292

 
1,103

Differences in tax bases in foreign jurisdictions
 
(5,997
)
 
(1,132
)
 
(21,076
)
 
(6,892
)
Deferred tax valuation allowance
 
4,662

 
3,079

 
23,207

 
10,501

Amounts related to tax audit contingencies
 
2,404

 
(2,036
)
 
2,964

 
(1,201
)
Corporate rate changes
 
94

 
145

 
(1,737
)
 
417

Subpart F
 
301

 
(348
)
 
466

 
310

Foreign tax credits
 
(415
)
 
113

 
(107
)
 
(459
)
Global intangible low-taxed income, net of credit
 
—

 
(119
)
 
—

 
4,291

Equity compensation excess benefit
 
(3,694
)
 
(3,135
)
 
(5,155
)
 
(4,250
)
Return to provision adjustments
 
3,376

 
(503
)
 
3,596

 
(139
)
Other, net
 
1,405

 
(437
)
 
891

 
(428
)
Total provision for income taxes
 
$
57,379

 
$
42,914

 
$
104,436

 
$
80,609

Effective tax rate
 
22.1
%
 
17.4
%
 
21.9
%
 
20.9
%

The effective tax rates for the second quarter and first six months of 2019 were higher than the U.S. Statutory rate of 21.0% primarily as a result of valuation allowances established on losses in foreign jurisdictions, accrual of uncertain tax positions, and return to provision adjustments. These expenses were partially offset by benefits from differences in bases in foreign jurisdictions and excess tax benefits related to equity compensation.
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.


40

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, 2019 and 2018 were as follows (dollars in thousands):
 
 
Pension Benefits
 
Other Benefits
 
 
Three months ended June 30,
 
Three months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
3,169

 
$
3,570

 
$
757

 
$
636

Interest cost
 
1,931

 
1,357

 
579

 
529

Expected return on plan assets
 
(1,692
)
 
(2,213
)
 
—

 
—

Amortization of prior service cost (credit)
 
61

 
82

 
(329
)
 
(329
)
Amortization of prior actuarial losses
 
1,231

 
769

 
644

 
498

Net periodic benefit cost
 
$
4,700

 
$
3,565

 
$
1,651

 
$
1,334


 
 
Pension Benefits
 
Other Benefits
 
 
Six months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
6,307

 
$
6,224

 
$
1,514

 
$
1,272

Interest cost
 
3,317

 
2,687

 
1,159

 
1,059

Expected return on plan assets
 
(3,576
)
 
(3,767
)
 
—

 
—

Amortization of prior service cost (credit)
 
121

 
165

 
(658
)
 
(658
)
Amortization of prior actuarial losses
 
2,142

 
1,863

 
1,288

 
996

Net periodic benefit cost
 
$
8,311

 
$
7,172

 
$
3,303

 
$
2,669


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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, all rated retrocession pool participants followed by the A.M. Best Company were rated “A- (excellent)” or better. 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 trust assets has been posted. In addition, the Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance.
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, 2019 or December 31, 2018 (dollars in thousands):
 
 
 
 
June 30, 2019
 
December 31, 2018
Reinsurer
 
A.M. Best Rating
 
Amount
 
% of Total
 
Amount
 
% of Total
Reinsurer A
 
A+
 
$
347,916

 
40.9
%
 
$
303,036

 
40.0
%
Reinsurer B
 
A+
 
201,983

 
23.7

 
193,324

 
25.5

Reinsurer C
 
A
 
74,214

 
8.7

 
69,885

 
9.2

Reinsurer D
 
A++
 
59,796

 
7.0

 
36,600

 
4.8

Reinsurer E
 
A+
 
40,253

 
4.7

 
40,004

 
5.3

Other reinsurers
 
 
 
127,218

 
15.0

 
114,723

 
15.2

Total
 
 
 
$
851,380

 
100.0
%
 
$
757,572

 
100.0
%

Included in the total reinsurance ceded receivables balance were $211.6 million and $242.8 million of claims recoverable, of which $5.7 million and $17.4 million were in excess of 90 days past due, as of June 30, 2019 and December 31, 2018, respectively.

41

12.
Policy Claims and Benefits
The liability for unpaid claims is reported in future policy benefits and other policy-related balances within the Company’s consolidated balance sheet. Activity associated with unpaid claims is summarized below (dollars in thousands):
 
 
Six months ended June 30,
 
 
2019
 
2018
Balance at beginning of year
 
$
6,584,668

 
$
5,896,469

Less: reinsurance recoverable
 
(432,582
)
 
(455,547
)
Net balance at beginning of year
 
6,152,086

 
5,440,922

Incurred:
 
 
 
 
Current year
 
5,457,193

 
5,046,146

Prior years
 
58,249

 
66,022

Total incurred
 
5,515,442

 
5,112,168

Payments:
 
 
 
 
Current year
 
(1,063,092
)
 
(1,097,105
)
Prior years
 
(3,978,853
)
 
(3,518,791
)
Total payments
 
(5,041,945
)
 
(4,615,896
)
Other changes:
 
 
 
 
Interest accretion
 
13,185

 
12,299

Foreign exchange adjustments
 
2,663

 
(117,352
)
Total other changes
 
15,848

 
(105,053
)
 
 
 
 
 
Net balance at end the period
 
6,641,431

 
5,832,141

Plus: reinsurance recoverable
 
524,808

 
439,568

Balance at end of the period
 
$
7,166,239

 
$
6,271,709


Incurred claims related to prior years reflected in the table above, resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid claims were originally estimated.  These trends have been considered in establishing the current year liability for unpaid claims.
 

13.
Financing Activities
On May 15, 2019, RGA issued 3.9% Senior Notes due May 15, 2029 with a face amount of $600.0 million. The net proceeds were approximately $593.8 million and will be used in part to repay upon maturity the Company’s $400.0 million 6.45% Senior Notes that mature in November 2019. The remainder will be used for general corporate purposes. Capitalized issue costs were approximately $4.8 million.


42

14.
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:
 
 
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 financial position.
Compensation - Retirement Benefits - Defined Benefit Plans - General
This guidance is part of the FASB’s disclosure framework project and eliminates certain disclosure requirements for defined benefit pension and other postretirement plans. Early adoption is permitted.

December 31, 2018

This guidance was applied retrospectively to all periods presented in the year of adoption. The adoption of the new guidance was not material to the Company’s financial position.
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 guidance was adopted by applying the optional transition method. The adoption of the standard did not have a material impact on the Company’s results of operations or financial position. The adoption of the updated guidance resulted in the Company recognizing a right-to-use asset and lease liability of $55.2 million included in other assets and other liabilities, respectively, in the condensed consolidated balance sheets.
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 guidance was adopted by applying a modified retrospective approach to existing hedging relationships as of the date of adoption. The adoption of the new standard did not have a material impact on the Company’s results of operations or financial position. Upon adoption of the guidance, the Company recorded an immaterial adjustment to retained earnings as of the beginning of the first reporting period in which the guidance was effective and modified some disclosures.


43

Description
Anticipated Date of Adoption
Effect on the financial statements or other significant matters
Standards not yet adopted:
 
 
Financial Services - Insurance
This guidance significantly changes how insurers account for long-duration insurance contracts. The new guidance also significantly expands the disclosure requirements of long-duration insurance contracts. On July 17, 2019, the FASB tentatively agreed to defer the original effective date by one year. If finalized, the new guidance will be effective for annual and interim reporting periods beginning January 1, 2022. Below are the most significant areas of change:

January 1, 2022

See each significant area of change below for the method of adoption and impact to the Company’s results of operations and financial position.
Cash flow assumptions for measuring liability for future policy benefits The new guidance requires insurers to review, and if necessary, update the cash flow assumptions used to measure liabilities for future policy benefits periodically. The change in the liability estimate as a result of updating cash flow assumptions will be recognized in net income.
 
Cash flow assumptions for measuring liability for future policy benefits The Company will likely adopt this guidance on a modified retrospective basis as of the earliest period presented in the year of adoption. The Company is currently evaluating the impact of this amendment on its results of operations and financial position but anticipates the updated guidance will likely have a material impact.
Discount rate assumption for measuring liability for future policy benefits The new guidance requires insurers to update the discount rate assumption used to measure liabilities for future policy benefits at each reporting period, and the discount rate utilized must be based on an upper-medium grade fixed income instrument yield. The change in the liability estimate as a result of updating the discount rate assumption will be recognized in other comprehensive income.


 
Discount rate assumption for measuring liability for future policy benefits The Company will likely adopt this guidance on a modified retrospective basis as of the earliest period presented in the year of adoption. The Company is currently evaluating the impact of this amendment on its results of operations and financial position but anticipates the updated guidance will likely have a material impact.
Market risk benefits The new guidance created a new category of benefit features called market risk benefits that will be measured at fair value with changes in fair value attributable to a change in the instrument-specific credit risk recognized in other comprehensive income.
 
Market risk benefits The Company will adopt this guidance on a retrospective basis as of the earliest period presented in the year of adoption. The Company is currently evaluating the impact of this amendment on its results of operations and financial position but anticipates the updated guidance will likely have a material impact.
Amortization of deferred acquisition costs (“DAC”) and other balances The new guidance requires DAC and other balances to be amortized on a constant level basis over the expected term of the related contracts.
 
Amortization of deferred acquisition costs (“DAC”) and other balances The Company will likely adopt this guidance on a modified retrospective basis as of the earliest period presented in the year of adoption. The Company is currently evaluating the impact of this amendment on its results of operations and financial position but anticipates the updated guidance will likely have a material impact.
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

For asset classes within the scope of the CECL model, 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). For available-for-sale debt securities, this guidance will be applied prospectively. The Company is in the process of finalizing its CECL models, and it anticipates an immaterial adjustment to retained earnings upon adoption of this new standard. The magnitude of the adjustment will depend upon the nature and characteristics of the Company’s loan portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date.
Fair Value Measurement
This guidance is part of the FASB’s disclosure framework project and eliminates certain disclosure requirements for fair value measurement, requires entities to disclose new information and modifies existing disclosure requirements. Early adoption is permitted.

January 1, 2020

Certain disclosure changes in this guidance will be applied prospectively in the year of adoption. The remaining changes in this guidance will be applied retrospectively to all periods presented in the year of adoption. The Company does not expect the adoption of this guidance to have a material impact on its financial position.




44

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 future operations, strategies, earnings, revenues, income or loss, ratios, financial performance and growth potential of the Company. Forward-looking statements often contain words and phrases such as “intend,” “expect,” “project,” “estimate,” “predict,” “anticipate,” “should,” “believe” and other similar expressions. Forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements are not a guarantee of future performance and are 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 changes in mortality, morbidity, lapsation or claims experience, (2) inadequate risk analysis and underwriting, (3) adverse capital and credit market conditions and their impact on the Company’s liquidity, access to capital and cost of capital, (4) 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, (5) the availability and cost of collateral necessary for regulatory reserves and capital, (6) requirements to post collateral or make payments due to declines in market value of assets subject to the Company’s collateral arrangements, (7) action by regulators who have authority over the Company’s reinsurance operations in the jurisdictions in which it operates, (8) the effect of the Company parent’s status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its debt obligations, (9) general economic conditions or a prolonged economic downturn affecting the demand for insurance and reinsurance in the Company’s current and planned markets, (10) the impairment of other financial institutions and its effect on the Company’s business, (11) fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (12) 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, (13) market or economic conditions that adversely affect the Company’s ability to make timely sales of investment securities, (14) 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, (15) the fact that the determination of allowances and impairments taken on the Company’s investments is highly subjective, (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) 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, (18) financial performance of the Company’s clients, (19) the threat of natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (20) competitive factors and competitors’ responses to the Company’s initiatives, (21) development and introduction of new products and distribution opportunities, (22) execution of the Company’s entry into new markets, (23) integration of acquired blocks of business and entities, (24) 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, (25) adverse litigation or arbitration results, (26) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and discontinued lines of business, (27) changes in laws, regulations, and accounting standards applicable to the Company or its business, (28) the effects of the Tax Cuts and Jobs Act of 2017 may be different than expected and (29) other risks and uncertainties described in this document and in the Company’s other filings with the Securities and Exchange Commission (“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 obligation 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 2018 Annual Report.
Overview
The Company is among the leading global providers of life reinsurance and financial solutions, with $3.4 trillion of life reinsurance in force and assets of $72.0 billion as of June 30, 2019. Traditional reinsurance includes individual and group life and health, disability, and critical illness reinsurance. Financial solutions includes longevity reinsurance, asset-intensive reinsurance, financial reinsurance and stable value products. 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.

45

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 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. For longevity business, the Company’s profitability depends on the lifespan of the underlying contract holders and the investment performance for certain contracts. 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.


46

Consolidated Results of Operations
The following table summarizes net income for the periods presented.
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,763,786

 
$
2,594,460

 
$
5,501,599

 
$
5,177,011

Investment income, net of related expenses
 
584,078

 
528,061

 
1,163,955

 
1,044,390

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
—

 
(3,350
)
 
(9,453
)
 
(3,350
)
Other investment related gains (losses), net
 
12,472

 
(7,222
)
 
29,713

 
(7,692
)
Investment related gains (losses), net
 
12,472

 
(10,572
)
 
20,260

 
(11,042
)
Other revenues
 
107,072

 
83,959

 
201,625

 
159,256

Total revenues
 
3,467,408

 
3,195,908

 
6,887,439

 
6,369,615

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,515,211

 
2,279,593

 
5,023,535

 
4,641,694

Interest credited
 
157,842

 
109,327

 
291,031

 
189,776

Policy acquisition costs and other insurance expenses
 
260,345

 
320,276

 
572,226

 
677,178

Other operating expenses
 
223,499

 
194,959

 
424,982

 
386,233

Interest expense
 
43,283

 
37,025

 
83,456

 
74,479

Collateral finance and securitization expense
 
7,151

 
7,440

 
15,568

 
15,042

Total benefits and expenses
 
3,207,331

 
2,948,620

 
6,410,798

 
5,984,402

 Income before income taxes
 
260,077

 
247,288

 
476,641

 
385,213

Provision for income taxes
 
57,379

 
42,914

 
104,436

 
80,609

Net income
 
$
202,698

 
$
204,374

 
$
372,205

 
$
304,604

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
3.23

 
$
3.19

 
$
5.93

 
$
4.74

Diluted earnings per share
 
$
3.18

 
$
3.13

 
$
5.83

 
$
4.65

Consolidated income before income taxes increased $12.8 million, or 5.2%, and $91.4 million, or 23.7%, for the three and six months ended June 30, 2019, respectively, as compared to the same periods in 2018. The increase in income for the second quarter of 2019 was primarily due to improved claims experience in the Canada Traditional segment and favorable experience in the various Financial Solutions segments and was partially offset by unfavorable results in the U.S. and Latin America and Asia Pacific Traditional segments. In addition, the increase in income for the first six months of 2019 reflects favorable changes in investment related gain (losses) resulting from changes in the fair value of embedded derivatives on modco or funds withheld treaties within the U.S. segment due 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 decreased income before income taxes by $4.7 million in the second quarter and decreased income by $13.9 million in the first six months of 2019, as compared to the same periods in 2018.

47

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,
 
2019
 
2018
 
2019
 
2018
Modco/Funds withheld:
 
 
 
 
 
 
 
Unrealized gains (losses)
$
5,262

 
$
8,805

 
$
3,170

 
$
22,416

Deferred acquisition costs/retrocession
(5,560
)
 
405

 
(8,417
)
 
(2,668
)
Net effect
(298
)
 
9,210

 
(5,247
)
 
19,748

EIAs:
 
 
 
 
 
 
 
Unrealized gains (losses)
(18,539
)
 
(565
)
 
(20,057
)
 
27,998

Deferred acquisition costs/retrocession
9,635

 
(418
)
 
10,511

 
(15,711
)
Net effect
(8,904
)
 
(983
)
 
(9,546
)
 
12,287

Guaranteed minimum benefit riders:
 
 
 
 
 
 
 
Unrealized gains (losses)
(18,044
)
 
15,324

 
117

 
30,109

Deferred acquisition costs/retrocession
(6,074
)
 
3,864

 
(22,850
)
 
6,195

Net effect
(24,118
)
 
19,188

 
(22,733
)
 
36,304

Related freestanding derivatives
27,490

 
(18,805
)
 
24,913

 
(41,304
)
Net effect after related freestanding derivatives
3,372

 
383

 
2,180

 
(5,000
)
 
 
 
 
 
 
 
 
Total net effect of embedded derivatives
(33,320
)
 
27,415

 
(37,526
)
 
68,339

Related freestanding derivatives
27,490

 
(18,805
)
 
24,913

 
(41,304
)
Total net effect after freestanding derivatives
$
(5,830
)
 
$
8,610

 
$
(12,613
)
 
$
27,035

Consolidated net premiums increased $169.3 million, or 6.5%, and $324.6 million, or 6.3%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018, primarily due to growth in life reinsurance in force. Foreign currency fluctuations decreased net premiums by $60.0 million and $138.8 million in the second quarter and the first six months of 2019, as compared to the same periods in 2018. Consolidated assumed life insurance in force increased to $3,377.2 billion as of June 30, 2019 from $3,340.6 billion as of June 30, 2018 due to new business production and in force transactions. The Company added new business production, measured by face amount of insurance in force, of $70.4 billion and $99.7 billion during the second quarter of 2019 and 2018, respectively, and $149.7 billion and $196.4 billion during the first six months of 2019 and 2018, respectively.
Consolidated investment income, net of related expenses, increased $56.0 million, or 10.6%, and $119.6 million, or 11.4%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases are primarily attributable to an increase in the average invested asset base and higher variable investment income. Investment income is affected by changes 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 $3.7 million in the second quarter and decreased investment income by $10.1 million in the first six months of 2019, respectively, as compared to the same periods in 2018. 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, 2019 were $28.1 billion, a 4.9% increase over June 30, 2018. The average yield earned on investments, excluding spread related business, was 4.38% and 4.32% for the second quarter of 2019 and 2018, respectively, and 4.43% and 4.39% for the six months ended June 30, 2019 and 2018, 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, make-whole premiums and 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 $12.5 million and $(10.6) million for the second quarter of 2019 and 2018, respectively, and $20.3 million and $(11.0) million for the first six months of 2019 and 2018, respectively. A portion of the increase in investment related gains (losses) was offset by 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

48

of fair value. Changes in the fair value of these embedded derivatives increased investment related gains by $5.3 million and $8.8 million for the second quarter of 2019 and 2018, respectively, and $3.2 million and $22.4 million for the first six months of 2019 and 2018, respectively. In addition, impairments on fixed maturity securities decreased by $3.4 million in the second quarter and increased by $6.1 million in the first six months of 2019, respectively, as compared to the same periods in 2018. 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 22.1% and 17.4% for the second quarter 2019 and 2018, respectively, and 21.9% and 20.9% for the first six months of 2019 and 2018, respectively. 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 2018 Annual Report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”


49

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 the reinsurance of individual mortality-risk, health and long-term care and to a lesser extent, group reinsurance. The Financial Solutions segment consists of Asset-Intensive and Financial Reinsurance. Asset-Intensive within the Financial Solutions segment includes coinsurance of annuities and corporate-owned life insurance policies and to a lesser extent 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, 2019:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
1,410,503

 
$
8,220

 
$
—

 
$
1,418,723

Investment income, net of related expenses
 
173,310

 
203,894

 
1,029

 
378,233

Investment related gains (losses), net
 
(3,950
)
 
17,500

 
—

 
13,550

Other revenues
 
4,813

 
50,242

 
20,372

 
75,427

Total revenues
 
1,584,676

 
279,856

 
21,401

 
1,885,933

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,292,852

 
48,663

 
—

 
1,341,515

Interest credited
 
19,517

 
123,786

 
—

 
143,303

Policy acquisition costs and other insurance expenses
 
179,947

 
25,657

 
(815
)
 
204,789

Other operating expenses
 
37,185

 
9,056

 
2,892

 
49,133

Total benefits and expenses
 
1,529,501

 
207,162

 
2,077

 
1,738,740

Income before income taxes
 
$
55,175

 
$
72,694

 
$
19,324

 
$
147,193

 
 
 
 
 
 
 
 
 
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


50

For the six months ended June 30, 2019:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
2,767,385

 
$
15,430

 
$
—

 
$
2,782,815

Investment income, net of related expenses
 
358,844

 
401,115

 
2,045

 
762,004

Investment related gains (losses), net
 
(10,422
)
 
18,546

 
—

 
8,124

Other revenues
 
9,535

 
72,916

 
45,865

 
128,316

Total revenues
 
3,125,342

 
508,007

 
47,910

 
3,681,259

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,592,917

 
96,762

 
—

 
2,689,679

Interest credited
 
39,391

 
212,496

 
—

 
251,887

Policy acquisition costs and other insurance expenses
 
355,950

 
44,890

 
4,561

 
405,401

Other operating expenses
 
70,255

 
16,207

 
5,706

 
92,168

Total benefits and expenses
 
3,058,513

 
370,355

 
10,267

 
3,439,135

Income before income taxes
 
$
66,829

 
$
137,652

 
$
37,643

 
$
242,124

 
 
 
 
 
 
 
 
 
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

Income before income taxes decreased by $7.2 million, or 4.6%, and increased by $17.4 million, or 7.8%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in income before income taxes for the second quarter was primarily due to changes in the value of the embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis combined with lower investment income and higher expenses related to an increase in incentive based compensation. Offsetting this somewhat was contributions from new asset-intensive transactions executed since the second half of 2018 and favorable longevity experience. The increase in income before income taxes for the first six months was primarily due to the impact of higher investment related gains (losses) in the Asset-Intensive segment as well as contributions from new asset-intensive deals entered into since the second half of 2018. Additionally, the Traditional segment saw improved claims experience.
Traditional Reinsurance
Income before income taxes for the U.S. and Latin America Traditional segment decreased by $16.8 million, or 23.3%, and $8.0 million, or 10.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in the second quarter was primarily due to changes in the value of embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis. Additionally, the segment reported lower investment income in part due to lower variable investment income. General expenses were also higher due to incentive-based compensation. Unfavorable individual mortality experience quarter over quarter was partially offset by improved claim experience in both the Group and Individual Health lines of business.
Net premiums increased $37.0 million, or 2.7%, and $94.4 million, or 3.5%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in net premiums in the second quarter and first six months were due to organic growth as well as new sales. The segment added new individual life business production, measured by face amount of insurance in force of $24.7 billion and $29.3 billion for the second quarter and $53.5 billion and $52.6 billion for the first six months of 2019 and 2018, respectively.

51

Net investment income decreased $7.2 million, or 4.0%, and $4.7 million, or 1.3%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decreases in the second quarter and first six months were primarily due to lower variable investment income partially offset by an increase in the asset base across all segments. Investment related gains (losses), net decreased $7.7 million and $15.8 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 91.7% and 91.4% for the second quarter and 93.7% and 93.9%, for the six months ended June 30, 2019 and 2018, respectively. The increase in the loss ratio for the second quarter was primarily due to moderately unfavorable claims experience and impacts from client reporting adjustments in the mortality line of business. The decrease in the loss ratio for the first six months of 2019 compared to the same period in 2018 was primarily due to improved claim experience within the Group business offset somewhat by unfavorable claims experience in the mortality business.
Interest credited expense decreased $1.5 million, or 7.0%, and $1.9 million, or 4.6%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. 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 12.8% and 13.3% for the second quarter and 12.9% and 13.5% for the six months ended June 30, 2019 and 2018, 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 $3.1 million, or 9.0%, and $2.2 million, or 3.3%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in operating expenses, for both periods, is primarily related to expected expense levels needed to support the business as well as increased incentive-based compensation. Other operating expenses, as a percentage of net premiums were 2.6% and 2.5% for the second quarter and 2.5% and 2.5% first six months of 2019 and 2018, 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.

52

(dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Total revenues
 
$
279,856

 
$
203,350

 
$
508,007

 
$
390,089

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
9,256

 
5,039

 
13,640

 
16,957

Guaranteed minimum benefit riders and related free standing derivatives
 
3,912

 
2,077

 
1,076

 
(2,512
)
Revenues before certain derivatives
 
266,688

 
196,234

 
493,291

 
375,644

Benefits and expenses:
 
 
 
 
 
 
 
 
Total benefits and expenses
 
207,162

 
142,510

 
370,355

 
281,987

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
5,560

 
(405
)
 
8,418

 
2,668

Guaranteed minimum benefit riders and related free standing derivatives
 
540

 
1,694

 
(1,104
)
 
2,488

Equity-indexed annuities
 
8,904

 
983

 
9,546

 
(12,287
)
Benefits and expenses before certain derivatives
 
192,158

 
140,238

 
353,495

 
289,118

Income before income taxes:
 
 
 
 
 
 
 
 
Income before income taxes
 
72,694

 
60,840

 
137,652

 
108,102

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
3,696

 
5,444

 
5,222

 
14,289

Guaranteed minimum benefit riders and related free standing derivatives
 
3,372

 
383

 
2,180

 
(5,000
)
Equity-indexed annuities
 
(8,904
)
 
(983
)
 
(9,546
)
 
12,287

Income before income taxes and certain derivatives
 
$
74,530

 
$
55,996

 
$
139,796

 
$
86,526

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, 2019 and 2018.
The change in fair value of the embedded derivatives - modco/funds withheld treaties increased income before income taxes by $3.7 million and $5.4 million for the second quarter and $5.2 million and $14.3 million for the six months ended June 30, 2019 and 2018, respectively. The decrease in income for the second quarter and first six months of 2019 was primarily the result of lower policyholder lapses and withdrawals.
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, 2019 and 2018.
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 $3.4 million and $0.4 million for the second quarter and increased (decreased) by $2.2 million and $(5.0) million for the six months ended June 30, 2019 and 2018, respectively. The increases in income for the second quarter and for the first six months of June 30, 2019 were primarily due to favorable hedging results. The increase in income for the second quarter of 2018 was 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.
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 $(8.9) million and $(1.0) million for the second quarter and $(9.5) million and $12.3 million for the six months ended June 30, 2019 and 2018, respectively.  The decreases in income for the second quarter and first six months of 2019 were primarily due to interest rate movements. 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.

53

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 increased by $18.5 million and $53.3 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in the second quarter was primarily due to contribution from transactions executed since the second half of 2018 and favorable longevity experience. The increase in the first six months was primarily due to contributions from transactions executed since the second half of 2018.
Revenue before certain derivatives increased by $70.5 million and $117.6 million for the three and six months ended June 30, 2019, respectively, as compared to the same periods in 2018. The increase in the second quarter was primarily due to contribution from transactions executed since the second half of 2018 and favorable longevity experience. The increase in the first six months was primarily due to contributions from transactions executed since the second half of 2018. 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 increased by $51.9 million and $64.4 million for the three and six months ended June 30, 2019, as compared to the same period in 2018. The increase in the second quarter was primarily due to contributions from transactions executed since the second half of 2018, partially offset by favorable longevity experience. The increase in the first six months was primarily due to contributions from transactions executed since the second half of 2018. 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 $22.1 billion as of June 30, 2019 from $15.8 billion as of June 30, 2018. As of June 30, 2019, $3.6 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 decreased $2.2 million, or 10.3%, and $4.1 million, or 9.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decreases in the second quarter and first six months were primarily due to the termination of certain agreements.
At June 30, 2019 and 2018, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial structures was $15.8 billion and $13.7 billion, respectively. The increase was primarily due to a number of new transactions offsetting the termination of certain agreements, 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.

54

Canada Operations
The Company conducts reinsurance business in Canada primarily through RGA Canada. The Canada operations are primarily engaged in Traditional reinsurance, which consists mainly of traditional individual life reinsurance, and to a lesser extent 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,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Canada
 
Traditional
 
Financial Solutions
 
Total Canada
Net premiums
$
264,182

 
$
22,456

 
$
286,638

 
$
260,750

 
$
10,955

 
$
271,705

Investment income, net of related expenses
50,002

 
788

 
50,790

 
49,535

 
330

 
49,865

Investment related gains (losses), net
2,564

 
—

 
2,564

 
446

 
—

 
446

Other revenues
1,394

 
685

 
2,079

 
1,468

 
804

 
2,272

Total revenues
318,142

 
23,929

 
342,071

 
312,199

 
12,089

 
324,288

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
206,272

 
19,222

 
225,494

 
223,935

 
7,915

 
231,850

Interest credited
73

 
—

 
73

 
21

 
—

 
21

Policy acquisition costs and other insurance expenses
57,049

 
447

 
57,496

 
58,541

 
292

 
58,833

Other operating expenses
8,489

 
447

 
8,936

 
7,897

 
338

 
8,235

Total benefits and expenses
271,883

 
20,116

 
291,999

 
290,394

 
8,545

 
298,939

Income before income taxes
$
46,259

 
$
3,813

 
$
50,072

 
$
21,805

 
$
3,544

 
$
25,349

(dollars in thousands)
Six months ended June 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Canada
 
Traditional
 
Financial Solutions
 
Total Canada
Net premiums
$
519,439

 
$
44,445

 
$
563,884

 
$
513,473

 
$
22,260

 
$
535,733

Investment income, net of related expenses
99,695

 
1,506

 
101,201

 
100,119

 
445

 
100,564

Investment related gains (losses), net
9,968

 
—

 
9,968

 
(285
)
 
—

 
(285
)
Other revenues
1,373

 
1,552

 
2,925

 
1,211

 
2,161

 
3,372

Total revenues
630,475

 
47,503

 
677,978

 
614,518

 
24,866

 
639,384

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
406,128

 
40,375

 
446,503

 
436,760

 
17,030

 
453,790

Interest credited
128

 
—

 
128

 
26

 
—

 
26

Policy acquisition costs and other insurance expenses
110,957

 
896

 
111,853

 
115,573

 
388

 
115,961

Other operating expenses
16,724

 
1,071

 
17,795

 
16,647

 
713

 
17,360

Total benefits and expenses
533,937

 
42,342

 
576,279

 
569,006

 
18,131

 
587,137

Income before income taxes
$
96,538

 
$
5,161

 
$
101,699

 
$
45,512

 
$
6,735

 
$
52,247

Income before income taxes increased by $24.7 million, or 97.5%, and $49.5 million, or 94.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in income for the second quarter and first six months are primarily due to favorable traditional individual life mortality experience as compared to the same period in 2018. Foreign currency exchange fluctuations in the Canadian dollar resulted in a decrease in income before income taxes of $1.7 million and $4.4 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Traditional Reinsurance
Income before income taxes for the Canada Traditional segment increased by $24.5 million, or 112.1%, and $51.0 million, or 112.1%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in income before income taxes for the second quarter and first six months were primarily due to favorable traditional individual life mortality experience as compared to the same periods in 2018. Foreign currency exchange fluctuations in the Canadian dollar resulted in a decrease in income before income taxes of $1.6 million and $4.2 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.

55

Net premiums increased $3.4 million, or 1.3%, and $6.0 million, or 1.2%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in net premiums in 2019 were primarily due to a new in force block transaction during the last quarter of 2018. Foreign currency exchange fluctuations in the Canadian dollar resulted in a decrease in net premiums of $9.4 million and $22.1 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net investment income increased $0.5 million, or 0.9%, and decreased $0.4 million, or 0.4%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in net investment income for the three months ended June 30, 2019 is primarily a result of an increase in the invested asset base due to growth in the underlying business volume and an increase in investment yields, partially offset by foreign currency exchange fluctuations. The decrease in investment income in the first six months ended June 30, 2019 is primarily a result of foreign currency exchange fluctuation in the Canadian dollar partially offset by an increase in the invested asset base due to growth in the underlying business volume and an increase in investment yields. Foreign currency exchange fluctuation in the Canadian dollar resulted in a decrease in net investment income of $1.8 million and $4.3 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Other revenues decreased by $0.1 million and increased $0.2 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. These variances are primarily due to gains and losses related to foreign currency transactions.
Loss ratios for this segment were 78.1% and 85.9% for the second quarter and 78.2% and 85.1% for the six months ended June 30, 2019 and 2018, respectively. The decrease in the loss ratios for the three and six months ended June 30, 2019, as compared to the same periods in 2018, is due to favorable traditional individual life mortality experience. Loss ratios for the traditional individual life mortality business were 83.2% and 97.8% for the second quarter and 83.3% and 94.6% for the first six months ended June 30, 2019 and 2018, respectively. Excluding creditor business, claims as a percentage of net premiums for this segment were 67.5% and 74.7% for the second quarter and 70.3% and 75.9% for the six months ended June 30, 2019 and 2018, respectively. Excluding creditor business, claims and other policy benefits, as a percentage of net premiums and investment income were 69.4% and 77.5% for the second quarter and 69.7% and 76.3% for the six months ended June 30, 2019 and 2018, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 21.6% and 22.5% for the second quarter and 21.4% and 22.5% for the six months ended June 30, 2019 and 2018, 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 $0.6 million, or 7.5%, and $0.1 million, or 0.5%, for the three and six months ended June 30, 2019, respectively, as compared to the same periods in 2018. Other operating expenses as a percentage of net premiums were 3.2% and 3.0% for the second quarter and 3.2% and 3.2% for the six month periods ended June 30, 2019 and 2018, respectively.
Financial Solutions Reinsurance
Income before income taxes increased by $0.3 million, or 7.6%, and decreased by $1.6 million, or 23.4%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in income for the second quarter was primarily due to favorable experience on longevity business. The decrease in income for the six months ended June 30, 2019 was primarily due to more favorable experience on longevity business in 2018 compared to 2019. Foreign currency exchange fluctuations in the Canadian dollar resulted in a decrease in income before income taxes of $0.1 million and $0.2 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net premiums increased $11.5 million, or 105.0%, and $22.2 million, or 99.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases were primarily due to a new transaction completed in the first three months of 2019. Foreign currency exchange fluctuations in the Canadian dollar resulted in a decrease in net premiums of $0.8 million and $1.8 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net investment income increased $0.5 million, or 138.8%, and $1.1 million, or 238.4%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018 primarily due to an increase in the invested asset base.
Claims and other policy benefits increased $11.3 million, or 142.9%, and $23.3 million, or 137.1%, for the three and six months ended June 30, 2019 as compared to the same periods in 2018. The increases for the second quarter and first six months were primarily a result of the aforementioned new transaction completed in the first three months of 2019.
Europe, Middle East and Africa Operations
The Europe, Middle East and Africa (“EMEA”) operations include business generated by its offices principally in France, Germany, Ireland, Italy, the Middle East, the Netherlands, Poland, South Africa, Spain and the United Kingdom (“UK”). 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

56

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,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total EMEA
 
Traditional
 
Financial Solutions
 
Total EMEA
Net premiums
$
350,884

 
$
56,660

 
$
407,544

 
$
354,534

 
$
49,135

 
$
403,669

Investment income, net of related expenses
17,945

 
46,593

 
64,538

 
17,087

 
40,330

 
57,417

Investment related gains (losses), net
112

 
2,550

 
2,662

 
—

 
5,858

 
5,858

Other revenues
558

 
8,183

 
8,741

 
917

 
5,352

 
6,269

Total revenues
369,499

 
113,986

 
483,485

 
372,538

 
100,675

 
473,213

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
295,661

 
47,551

 
343,212

 
310,187

 
21,854

 
332,041

Interest credited
—

 
2,280

 
2,280

 
—

 
4,127

 
4,127

Policy acquisition costs and other insurance expenses
27,594

 
1,181

 
28,775

 
29,961

 
1,054

 
31,015

Other operating expenses
30,123

 
11,173

 
41,296

 
25,922

 
8,271

 
34,193

Total benefits and expenses
353,378

 
62,185

 
415,563

 
366,070

 
35,306

 
401,376

Income before income taxes
$
16,121

 
$
51,801

 
$
67,922

 
$
6,468

 
$
65,369

 
$
71,837

(dollars in thousands)
Six months ended June 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total EMEA
 
Traditional
 
Financial Solutions
 
Total EMEA
Net premiums
$
714,768

 
$
108,761

 
$
823,529

 
$
730,263

 
$
97,114

 
$
827,377

Investment income, net of related expenses
36,747

 
95,258

 
132,005

 
32,851

 
72,262

 
105,113

Investment related gains (losses), net
112

 
5,914

 
6,026

 
9

 
9,210

 
9,219

Other revenues
1,878

 
13,474

 
15,352

 
3,197

 
10,232

 
13,429

Total revenues
753,505

 
223,407

 
976,912

 
766,320

 
188,818

 
955,138

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
607,796

 
96,429

 
704,225

 
636,989

 
64,325

 
701,314

Interest credited
—

 
14,622

 
14,622

 
—

 
1,475

 
1,475

Policy acquisition costs and other insurance expenses
57,547

 
1,812

 
59,359

 
55,513

 
2,134

 
57,647

Other operating expenses
56,617

 
20,353

 
76,970

 
51,929

 
16,351

 
68,280

Total benefits and expenses
721,960

 
133,216

 
855,176

 
744,431

 
84,285

 
828,716

Income before income taxes
$
31,545

 
$
90,191

 
$
121,736

 
$
21,889

 
$
104,533

 
$
126,422

Income before income taxes decreased by $3.9 million, or 5.4%, and $4.7 million, or 3.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decreases in income before income taxes were primarily due to the normalization of performance on closed longevity blocks after favorable performance in 2018 and foreign exchange fluctuations partly offset by improved performance in Traditional business. Foreign currency exchange fluctuations resulted in a decrease in income before income taxes of $3.9 million and $8.4 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Traditional Reinsurance
Income before income taxes increased by $9.7 million, or 149.2%, and $9.7 million, or 44.1%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in income were primarily due to an improvement in morbidity experience. Foreign currency exchange fluctuations resulted in a decrease in income before income taxes of $1.0 million and $2.7 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net premiums decreased $3.7 million, or 1.0%, and $15.5 million, or 2.1%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in net premiums for the three and six months was primarily due to foreign currency exchange fluctuations. Foreign currency exchange fluctuations decreased net premiums by $23.3 million and $55.9 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.

57

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 $43.1 million and $47.9 million for the second quarter and $87.5 million and $96.7 million for the first six months of 2019 and 2018, respectively.
Net investment income increased $0.9 million, or 5.0%, and $3.9 million, or 11.9%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in net investment income for the three months was primarily due to an increase in the invested asset base resulting from business growth. The increase in net investment income for the six months was primarily due to an increase in the invested asset base and increased invested asset yield. Foreign currency exchange fluctuations resulted in a decrease in net investment income of $1.4 million and $3.0 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Loss ratios for this segment were 84.3% and 87.5% for the second quarter and 85.0% and 87.2% for the first six months ended June 30, 2019 and 2018, respectively. The decreases in loss ratios were due to normal claims variability and changes in business mix.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 7.9% and 8.5% for the second quarter and 8.1% and 7.6% for the first six months ended June 30, 2019 and 2018, respectively. The decrease in policy acquisition cost ratio for the second quarter was primarily due to changes in the mix of business reflecting business volumes with lower allowances. The increase in the percentage for the first six months is due primarily to variations in the mixture of business.
Other operating expenses increased $4.2 million, or 16.2%, and $4.7 million, or 9.0%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase is in line with expected expense levels needed to support the business as well as higher incentive-based compensation. Foreign currency fluctuations resulted in a decrease in operating expenses of $2.1 million and $4.4 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. Other operating expenses as a percentage of net premiums totaled 8.6% and 7.3% for the second quarter and 7.9% and 7.1% for the first six months ended June 30, 2019 and 2018, respectively.
Financial Solutions Reinsurance
Income before income taxes decreased by $13.6 million, or 20.8%, and $14.3 million, or 13.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decreases in income before income taxes were primarily due to the normalization of performance on closed longevity blocks after a positive 2018. Foreign currency exchange fluctuations resulted in a decrease in income before income taxes of $2.9 million and $5.7 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net premiums increased by $7.5 million, or 15.3%, and $11.6 million, or 12.0%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in net premiums were due to higher new business volumes of closed longevity business. Foreign currency exchange fluctuations decreased net premiums by $3.4 million and $7.0 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net investment income increased $6.3 million, or 15.5%, and $23.0 million, or 31.8%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in investment income for the three months was due to an increased invested asset yield and a premium received for the early redemption of a security. The increase for the six months was due to an increase in investment income associated with unit-linked policies which fluctuate with market performance, a premium received for the early redemption of a security and an increase in invested asset yield. The effect on investment income related to unit-linked products is substantially offset by a corresponding change in interest credited. Foreign currency exchange fluctuations resulted in a decrease in net investment income of $2.6 million and $6.2 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Other revenues increased by $2.8 million, or 52.9%, and $3.2 million, or 31.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in other revenues for the second quarter and first six months of 2019 was primarily due to fees related to the acquisition of a new closed block annuity transaction. Foreign currency exchange fluctuations resulted in a decrease in other revenues of $0.6 million and $1.2 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Claims and other policy benefits increased $25.7 million, or 117.6%, and $32.1 million, or 49.9%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in the second quarter and the first six months was primarily due to increased volumes of closed longevity block business as well as a normalization of performance compared to favorable performance in 2018. Foreign currency exchange fluctuations resulted in a decrease in claims and other policy benefits of $3.0 million and $6.3 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.

58

Interest credited expense decreased by $1.8 million and increased by $13.1 million or the three and six months ended June 30, 2019, as compared to the same periods in 2018. 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 $2.9 million, or 35.1%, and $4.0 million, or 24.5%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018 due to normal growth in operations and an increase in acquisition related costs. Foreign currency exchange fluctuations resulted in a decrease in operating expenses of $0.7 million and $1.4 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
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 and asset-intensive transactions including certain disability, life and health blocks with significant investment risk. 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,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Asia Pacific
 
Traditional
 
Financial Solutions
 
Total Asia Pacific
Net premiums
$
606,418

 
$
44,453

 
$
650,871

 
$
538,799

 
$
30

 
$
538,829

Investment income, net of related expenses
24,732

 
10,383

 
35,115

 
24,076

 
10,184

 
34,260

Investment related gains (losses), net
—

 
(816
)
 
(816
)
 
—

 
1,904

 
1,904

Other revenues
2,267

 
5,538

 
7,805

 
7,645

 
5,874

 
13,519

Total revenues
633,417

 
59,558

 
692,975

 
570,520

 
17,992

 
588,512

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
567,994

 
37,107

 
605,101

 
435,592

 
2,405

 
437,997

Interest credited
—

 
6,730

 
6,730

 
—

 
6,660

 
6,660

Policy acquisition costs and other insurance expenses
(11,584
)
 
9,530

 
(2,054
)
 
37,584

 
728

 
38,312

Other operating expenses
42,232

 
4,273

 
46,505

 
38,482

 
4,061

 
42,543

Total benefits and expenses
598,642

 
57,640

 
656,282

 
511,658

 
13,854

 
525,512

Income (loss) before income taxes
$
34,775

 
$
1,918

 
$
36,693

 
$
58,862

 
$
4,138

 
$
63,000

(dollars in thousands)
Six months ended June 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Asia Pacific
 
Traditional
 
Financial Solutions
 
Total Asia Pacific
Net premiums
$
1,253,159

 
$
78,248

 
$
1,331,407

 
$
1,128,312

 
$
708

 
$
1,129,020

Investment income, net of related expenses
50,067

 
20,652

 
70,719

 
48,676

 
20,578

 
69,254

Investment related gains (losses), net
8

 
3,253

 
3,261

 
8

 
5,371

 
5,379

Other revenues
3,355

 
11,933

 
15,288

 
8,063

 
11,181

 
19,244

Total revenues
1,306,589

 
114,086

 
1,420,675

 
1,185,059

 
37,838

 
1,222,897

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
1,114,448

 
68,826

 
1,183,274

 
930,786

 
6,873

 
937,659

Interest credited
—

 
13,432

 
13,432

 
—

 
13,054

 
13,054

Policy acquisition costs and other insurance expenses
38,739

 
14,909

 
53,648

 
96,366

 
1,925

 
98,291

Other operating expenses
82,003

 
8,918

 
90,921

 
76,158

 
7,827

 
83,985

Total benefits and expenses
1,235,190

 
106,085

 
1,341,275

 
1,103,310

 
29,679

 
1,132,989

Income before income taxes
$
71,399

 
$
8,001

 
$
79,400

 
$
81,749

 
$
8,159

 
$
89,908


59

Income before income taxes decreased by $26.3 million, or 41.8%, and $10.5 million, or 11.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in income before income taxes for the second quarter was due to less favorable claims experience in Asia compared to prior year combined with unfavorable claims experience in Australia. The decrease in income before income taxes for the six months ended June 30, 2019 was due to unfavorable claims experience in Australia. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $0.8 million and a decrease of $1.2 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Traditional Reinsurance
Income before income taxes decreased by $24.1 million, or 40.9%, and $10.4 million, or 12.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in income before income taxes for the second quarter was due to less favorable claims experience in Asia compared to prior year combined with unfavorable claims experience in Australia. The decrease in income before income taxes for the six months ended June 30, 2019 was primarily due to unfavorable claims experience in Australia. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $0.5 million and a decrease of $1.6 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net premiums increased by $67.6 million, or 12.5%, and $124.8 million, or 11.1%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases were driven by new business written in Asia as well as inforce growth across the segment. Foreign currency exchange fluctuations resulted in a decrease in net premiums of $23.2 million and $50.4 million for the three and six months of 2019, as compared to the same periods in 2018.
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, China and Hong Kong. Net premiums earned from this coverage totaled $242.8 million and $180.9 million for the second quarter and $494.9 million and $416.6 million for the first six months ended June 30, 2019 and 2018, respectively.
Net investment income increased by $0.7 million, or 2.7%, and $1.4 million, or 2.9%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases were due to an increase in invested asset base, partially offset by a lower investment yield and foreign currency exchange fluctuations. Foreign currency exchange fluctuations resulted in a decrease in net investment income of $1.2 million and $2.8 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Other revenues decreased by $5.4 million, or 70.3%, and $4.7 million, or 58.4%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decreases primarily relate to recapture fee income recognized in the second quarter of 2018 as well as variances in foreign currency gains and losses recognized in each period. Foreign currency exchange fluctuations resulted in a decrease in other revenues of $0.4 million and $0.4 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Loss ratios for this segment were 93.7% and 80.8% for the second quarter and 88.9% and 82.5% for the first six months ended June 30, 2019 and 2018, respectively. The increase in the loss ratios for the second quarter was primarily due to new business mix, less favorable claims experience and experience adjustments in Asia. The increase in loss ratios for the six months ended June 30, 2019 was primarily due to new business mix and unfavorable claims experience in Australia, as well as the impact of experience adjustments in Asia.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were (1.9)% and 7.0% for the second quarter and 3.1% and 8.5% for the six months ended June 30, 2019 and 2018, 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. Experience adjustments in Asia resulted in reduced policy acquisition costs and other insurance expenses in the second quarter of 2019, resulting in a benefit rather than expense for the quarter. The favorable adjustment to policy acquisition costs and other insurance expenses was offset by an increase to claims and other policy benefits.
Other operating expenses increased $3.8 million, or 9.7%, and $5.8 million, or 7.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018 mainly due to growth in operations in Asia and consultant expenditures. Other operating expenses as a percentage of net premiums totaled 7.0% and 7.1% for the second quarter and 6.5% and 6.7% for the first six months ended June 30, 2019 and 2018, 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.


60

Financial Solutions Reinsurance
Income before income taxes decreased by $2.2 million, or 53.6%, and $0.2 million, or 1.9%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in income before income taxes for the three months ended June 30, 2019 was primarily due to unfavorable fair value fluctuations on derivatives, partially offset by higher income from new deals in Asia. Foreign currency exchange fluctuations had a negligible effect on income before income taxes for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Net premiums increased $44.4 million and $77.5 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase for the second quarter and first six months was due to new asset intensive deals in Asia. Foreign currency exchange fluctuations had a negligible effect on net premiums for the three months ended June 30, 2019, as compared to the same period in 2018. Foreign currency exchange fluctuations decreased net premiums by $1.3 million for the six months ended June 30, 2019, as compared to the same period in 2018.
Net investment income increased $0.2 million, or 2.0%, and $0.1 million, or 0.4%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018 mainly due to an increase in invested asset base, partially offset by a lower investment yield and foreign currency exchange fluctuations. Foreign currency exchange fluctuations resulted in a decrease in net investment income of $0.3 million and $0.8 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
Other revenues increased by $0.3 million, or 5.7%, and $0.8 million, or 6.7%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. At June 30, 2019 and 2018, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was $3.1 billion and $2.8 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 $34.7 million and $62.0 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in the second quarter and first six months were attributable to new asset-intensive deals in Asia.
Other operating expenses increased by $0.2 million, or 5.2%, and $1.1 million, or 13.9%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018, respectively. The timing of transactions and the level of costs associated with the entrance into and development of new markets and new transactions 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, investment related gains and losses and service fees. 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 and service business expenses. 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. In the past two years, the Company has increased its investment and expenditures in this area in an effort to both support its clients and generate new future revenue streams.

61

(dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
10

 
$
10

 
$
(36
)
 
$
20

Investment income, net of related expenses
 
55,402

 
32,727

 
98,026

 
72,873

Investment related gains (losses), net
 
(5,488
)
 
(23,281
)
 
(7,119
)
 
(32,215
)
Other revenues
 
13,020

 
6,344

 
39,744

 
14,377

Total revenues
 
62,944

 
15,800

 
130,615

 
55,055

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
(111
)
 
108

 
(146
)
 
428

Interest credited
 
5,456

 
2,717

 
10,962

 
4,927

Policy acquisition costs and other insurance income
 
(28,661
)
 
(30,496
)
 
(58,035
)
 
(61,008
)
Other operating expenses
 
77,629

 
66,270

 
147,128

 
129,230

Interest expense
 
43,283

 
37,025

 
83,456

 
74,479

Collateral finance and securitization expense
 
7,151

 
7,440

 
15,568

 
15,042

Total benefits and expenses
 
104,747

 
83,064

 
198,933

 
163,098

Income (loss) before income taxes
 
$
(41,803
)
 
$
(67,264
)
 
$
(68,318
)
 
$
(108,043
)
Loss before income taxes decreased by $25.5 million and $39.7 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decreases in loss before income taxes for the second quarter and the first six months are primarily due to decreased net investment related losses and higher investment income partially offset by increased other operating expenses.
Net investment income increased by $22.7 million, or 69.3%, and $25.2 million, or 34.5%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in the second quarter and the first six months were largely attributable to increases in unallocated invested assets and a higher average investment yield.
Net investment related losses decreased by $17.8 million and $25.1 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The decrease in the second quarter was primarily due to an increase in net gains on the sale of fixed maturity securities of $22.1 million and an increase in the fair value of equity securities of $9.7 million, which were offset by a $2.6 million increase in investment impairments. The decrease in the first six months of 2019 was primarily due to an increase in net gains on the sale of fixed maturity securities of $27.2 million and an increase in the fair value of equity securities of $17.8 million, which were offset by a $6.4 million increase in other-than-temporary impairments on fixed maturity securities and other investments.
Other revenues increased by $6.7 million and $25.4 million for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase in the second quarter was mainly related to the Company’s RGAx operations, which contributed $3.6 million to other revenues. The increase in the first six months of 2019 was mainly due to a recapture of a collateral finance transaction, which resulted in a $12.9 million gain. In addition, the Company’s RGAX operations contributed $21.8 million to other revenues in the first six months of 2019 compared to $13.6 million in the same period in 2018.
Policy acquisition costs and other insurance income decreased by $1.8 million, or 6.0%, and $3.0 million, or 4.9%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. Fluctuations period over period were attributable to the offset to capital charges allocated to the operating segments.
Other operating expenses increased by $11.4 million, or 17.1%, and $17.9 million, or 13.8%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in other operating expenses, were primarily due to growth in strategic initiatives, such as RGAX, and increased incentive-based compensation.
Interest expense increased by $6.3 million, or 16.9%, and $9.0 million, or 12.1%, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increases in interest expense resulted primarily from the issuance of $600.0 million in long-term debt in May 2019 and the variability in tax-related interest expense.
Liquidity and Capital Resources
Overview
The Company believes that cash flows from the various sources of funds available to it will provide sufficient cash flows for the next twelve months to satisfy the current liquidity requirements of the Company 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

62

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., Canada and Europe, 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, 2019 was 4.43%, 4 basis points above the same period in 2018. The Company’s insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Gross unrealized gains on fixed maturity securities available-for-sale increased from $1,858.7 million at December 31, 2018 to $3,828.1 million at June 30, 2019. Similarly, gross unrealized losses decreased from $748.5 million at December 31, 2018 to $96.4 million at June 30, 2019.
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 $3,828.1 million remain well in excess of gross unrealized losses of $96.4 million as of June 30, 2019. 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 growth 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,
 
 
2019
 
2018
 
2019
 
2018
Interest expense
 
$
51,548

 
$
47,250

 
$
99,998

 
$
92,694

Capital contributions to subsidiaries
 
18,268

 
12,000

 
38,768

 
23,000

Dividends to shareholders
 
37,640

 
32,129

 
75,347

 
64,370

Interest and dividend income
 
35,806

 
232,473

 
65,918

 
264,020

Issuance of unaffiliated debt
 
598,543

 
—

 
598,543

 
—

 
 
June 30, 2019
 
December 31, 2018
Cash and invested assets
 
$
864,100

 
$
658,850

See Item 15, Schedule II - “Condensed Financial Information of the Registrant” in the 2018 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 2018 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

63

of directors in January 2019, 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,
 
2019
 
2018
Dividends to shareholders
$
75,347

 
$
64,370

Repurchases of treasury stock
50,000

 
150,000

Total amount paid to shareholders
$
125,347

 
$
214,370

 
 
 
 
Number of shares repurchased
344,237

 
991,477

Average price per share
$
145.25

 
$
151.29

In July 2019, RGA’s board of directors declared a quarterly dividend of $0.70 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 $5.3 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 the amounts set forth in those agreements, bankruptcy proceedings, or any other event that results in the acceleration of the maturity of indebtedness.
As of June 30, 2019 and December 31, 2018, the Company had $3.4 billion and $2.8 billion, respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. As of June 30, 2019 and December 31, 2018, the average net interest rate on long-term debt outstanding was 5.01% and 5.24%, respectively. 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.
On May 15, 2019, RGA issued 3.9% Senior Notes due May 15, 2029 with a face amount of $600.0 million. This security has been registered with the Securities and Exchange Commission. The net proceeds were approximately $593.8 million and will be used in part to repay upon maturity the Company’s $400.0 million 6.45% Senior Notes that mature in November 2019. The remainder will be used for general corporate purposes. Capitalized issue costs were approximately $4.8 million.
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 August 2023. As of June 30, 2019, the Company had no cash borrowings outstanding and $19.6 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.


64

Credit and Committed Facilities
At June 30, 2019, the Company maintained an $850.0 million syndicated revolving credit facility and certain committed letter of credit facilities aggregating to $1,074.9 million. See Note 13 - “Debt” in the Notes to Consolidated Financial Statements in the 2018 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, 2019, there were approximately $95.2 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, 2019, $1.2 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.
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 $830.4 million as of June 30, 2019. The Company also has $865.9 million of funds available through collateralized borrowings from the FHLB as of June 30, 2019. As of June 30, 2019, 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, “Significant Accounting Policies and Pronouncements” in the Notes to Consolidated Financial Statements in the 2018 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.

65

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,
 
 
2019
 
2018
 
 
(Dollars in thousands)
Sources:
 
 
 
 
Net cash provided by operating activities
$
970,331

 
$
583,588

 
Proceeds from long-term debt issuance
598,524

 
—

 
Exercise of stock options, net
2,590

 
1,252

 
Change in cash collateral for derivative positions and other arrangements
—

 
17,578

 
Effect of exchange rate changes on cash
6,759

 
—

 
Total sources
1,578,204

 
602,418

 
 
 
 
 
Uses:
 
 
 
 
Net cash used in investing activities
764,403

 
100,615

 
Dividends to stockholders
75,347

 
64,370

 
Repayment of collateral finance and securitization notes
52,644

 
53,102

 
Debt issuance costs
4,750

 
—

 
Principal payments of long-term debt
1,387

 
1,331

 
Purchases of treasury stock
67,744

 
165,069

 
Change in cash collateral for derivatives and other arrangements
80,214

 
—

 
Cash used for changes in universal life and other
 
 
 
 
investment type policies and contracts
133,922

 
104,023

 
Effect of exchange rate changes on cash
—

 
19,753

 
Total uses
1,180,411

 
508,263

Net change in cash and cash equivalents
$
397,793

 
$
94,155

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 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
The Company’s obligation for long-term debt, including interest, increased by $755.9 million since December 31, 2018 primarily related to the May 2019 issuance of senior notes as previously discussed. There were no other material changes in the Company’s contractual obligations from those reported in the 2018 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.

66

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 $2,446.3 million and $2,032.3 million at June 30, 2019 and December 31, 2018, respectively. 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 $83.7 million of FHLB common stock, which is included in other invested assets on the Company’s condensed consolidated balance sheets.
The Company has 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 $1.7 billion at June 30, 2019 and December 31, 2018, 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 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 of the Company’s 2018 Annual Report.
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.

67

Portfolio Composition
The Company had total cash and invested assets of $63.3 billion and $56.1 billion at June 30, 2019 and December 31, 2018, respectively, as illustrated below (dollars in thousands):
 
 
June 30, 2019
 
% of Total
 
December 31, 2018
 
% of Total
Fixed maturity securities, available-for-sale
 
$
46,189,305

 
72.9
%
 
$
39,992,346

 
71.3
%
Equity securities
 
146,755

 
0.2

 
82,197

 
0.1

Mortgage loans on real estate
 
5,405,422

 
8.5

 
4,966,298

 
8.8

Policy loans
 
1,319,722

 
2.1

 
1,344,980

 
2.4

Funds withheld at interest
 
5,696,217

 
9.0

 
5,761,471

 
10.3

Short-term investments
 
158,788

 
0.3

 
142,598

 
0.3

Other invested assets
 
2,121,406

 
3.4

 
1,915,297

 
3.4

Cash and cash equivalents
 
2,287,526

 
3.6

 
1,889,733

 
3.4

Total cash and invested assets
 
$
63,325,141

 
100.0
%
 
$
56,094,920

 
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,
 
2019
 
2018
 
  Increase/  
  (Decrease)  
 
2019
 
2018
 
  Increase/  
  (Decrease)  
Average invested assets at amortized cost
$
28,486,745

 
$
26,899,416

 
5.9
%
 
$
28,137,502

 
$
26,816,599

 
4.9
%
Net investment income
306,805

 
285,832

 
7.3
%
 
617,034

 
582,305

 
6.0
%
Investment yield (ratio of net investment income to average invested assets)
4.38
%
 
4.32
%
 
 6 bps

 
4.43
%
 
4.39
%
 
4 bps

Investment yield increased for the three and six months ended June 30, 2019 in comparison to the same periods in the prior year primarily due to increased income from limited partnerships, which is included in other invested assets on the condensed consolidated balance sheets.
Fixed Maturity Securities Available-for-Sale
See “Fixed Maturity 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, 2019 and December 31, 2018.
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, 2019 and December 31, 2018, approximately 95.8% 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 Company owns floating rate securities that represent approximately 16.6% and 16.0% of the total fixed maturity securities at June 30, 2019 and December 31, 2018, 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.
The largest asset class in which fixed maturity securities were invested was corporate securities, which represented approximately 59.8% and 59.9% of total fixed maturity securities as of June 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018.

68

As of June 30, 2019, the Company’s investments in Canadian government securities represented 9.9% of the fair value of total fixed maturity securities compared to 9.7% of the fair value of total fixed maturities at December 31, 2018. 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 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, 2019 and December 31, 2018.
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 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, 2019 and December 31, 2018 was as follows (dollars in thousands):
 
 
 
 
 
June 30, 2019
 
December 31, 2018
NAIC
  Designation  
 
Rating Agency
Designation
 
Amortized Cost 
 
Estimated
Fair Value
 
% of Total     
 
Amortized Cost 
 
Estimated
     Fair  Value     
 
% of Total     
1
 
AAA/AA/A
 
$
27,571,234

 
$
30,513,833

 
66.1
%
 
$
24,904,526

 
$
26,180,440

 
65.5
%
2
 
BBB
 
12,941,492

 
13,705,079

 
29.7

 
12,141,601

 
12,023,426

 
30.1

3
 
BB
 
1,389,207

 
1,407,595

 
3.0

 
1,409,235

 
1,371,328

 
3.4

4
 
B
 
489,829

 
495,219

 
1.1

 
395,694

 
385,670

 
1.0

5
 
CCC and lower
 
15,120

 
15,890

 
—

 
13,183

 
12,860

 
—

6
 
In or near default
 
50,736

 
51,689

 
0.1

 
17,929

 
18,622

 
—

 
 
Total
 
$
42,457,618

 
$
46,189,305

 
100.0
%
 
$
38,882,168

 
$
39,992,346

 
100.0
%

The Company’s fixed maturity portfolio includes structured securities. The following table shows the types of structured securities the Company held at June 30, 2019 and December 31, 2018 (dollars in thousands): 
 
 
June 30, 2019
 
December 31, 2018
 
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
RMBS:
 

 
 
 

 
 
Agency
 
$
893,169

 
$
928,931

 
$
811,044

 
$
814,568

Non-agency
 
1,321,794

 
1,347,584

 
1,061,192

 
1,054,653

Total RMBS
 
2,214,963

 
2,276,515

 
1,872,236

 
1,869,221

CMBS
 
1,687,024

 
1,747,285

 
1,428,115

 
1,419,034

ABS
 
2,482,012

 
2,494,664

 
2,171,254

 
2,149,204

Total
 
$
6,383,999

 
$
6,518,464

 
$
5,471,605

 
$
5,437,459

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, the 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 portfolio primarily consists of collateralized loan obligations among other collateral types. The principal risks in holding asset-backed securities are structural, credit, capital market and interest rate 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 that 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.

69

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 – “Significant Accounting Policies and Pronouncements” in the Notes to Consolidated Financial Statements in the 2018 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, 2019 and 2018 (dollars in thousands).
 
Three months ended June 30,
 
Six months ended June 30,
2019
 
2018
 
2019
 
2018
 


 


 


 


Impairment losses on fixed maturity securities
$
—

 
$
3,350

 
$
9,453

 
$
3,350

Other impairment losses
5,139

 
512

 
7,071

 
1,340

Change in mortgage loan provision
470

 
845

 
397

 
329

Total
$
5,609

 
$
4,707

 
$
16,921

 
$
5,019

There were no fixed maturity securities impairments for the three months ended June 30, 2019. The fixed maturity securities impairments for the six months ended June 30, 2019 were primarily related to a U.S. utility company. The fixed maturity securities impairments for the three and six months ended June 30, 2018 were primarily related to high-yield corporate securities. In addition, other impairment losses for the three months ended June 30, 2019 were primarily due to impairments on limited partnerships. Other impairment losses for the six months ended June 30, 2019 were primarily due to impairments on real estate joint ventures and limited partnerships. Other impairment losses for the three and six months ended June 30, 2018 were primarily due to impairments on real estate joint ventures.
At June 30, 2019 and December 31, 2018, the Company had $96.4 million and $748.5 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, 2019
 
December 31, 2018
Sector:
 
 
 
 
Corporate
 
73.4
%
 
74.2
%
Canadian government
 
0.1

 
0.3

RMBS
 
3.2

 
3.4

ABS
 
13.6

 
4.4

CMBS
 
0.5

 
2.4

U.S. government
 
0.4

 
7.7

State and political subdivisions
 
1.6

 
1.2

Other foreign government
 
7.2

 
6.4

Total
 
100.0
%
 
100.0
%
Industry:
 
 
 
 
Finance
 
20.0
%
 
27.5
%
Asset-backed
 
13.6

 
4.4

Industrial
 
47.4

 
38.2

Mortgage-backed
 
3.7

 
5.8

Government
 
9.3

 
15.6

Utility
 
6.0

 
8.5

Total
 
100.0
%
 
100.0
%
See “Unrealized Losses for Fixed Maturity 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, 2019 and December 31, 2018, where the estimated fair value had declined and remained below amortized cost by less than 20% or more than 20%.

70

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.
See “Unrealized Losses for Fixed Maturity 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, 2019 and December 31, 2018.
As of June 30, 2019 and December 31, 2018, the Company classified approximately 5.4% and 5.0%, 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, and Canadian provincial strips 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, lending, repurchase and repurchase/reverse repurchase programs.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 8.5% and 8.8% of the Company’s cash and invested assets as of June 30, 2019 and December 31, 2018, respectively. The Company’s mortgage loan portfolio consists of U.S., Canada and United Kingdom based investments primarily in commercial offices, light industrial properties and retail locations. The mortgage loan portfolio is diversified by geographic region and property type. The mortgage loan portfolio was diversified by geographic region and property type discussed further under “Mortgage Loans on Real Estate” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements.
As of June 30, 2019 and December 31, 2018, 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, 2019
 
December 31, 2018
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
U.S. Region:
 
 
 
 
 
 
 
 
Pacific
 
$
1,389,504

 
25.5
%
 
$
1,396,346

 
28.0
%
South Atlantic
 
993,143

 
18.3

 
964,174

 
19.3

Mountain
 
772,054

 
14.2

 
693,281

 
13.9

East North Central
 
694,241

 
12.8

 
605,608

 
12.2

West North Central
 
296,537

 
5.5

 
288,949

 
5.8

West South Central
 
751,789

 
13.9

 
567,541

 
11.4

Middle Atlantic
 
200,513

 
3.7

 
202,235

 
4.1

East South Central
 
138,580

 
2.6

 
117,588

 
2.4

New England
 
5,554

 
0.1

 
5,609

 
0.1

Subtotal - U.S.
 
5,241,915

 
96.6

 
4,841,331

 
97.2

Canada
 
155,651

 
2.9

 
135,394

 
2.7

United Kingdom
 
26,579

 
0.5

 
6,629

 
0.1

Total
 
$
5,424,145

 
100.0
%
 
$
4,983,354

 
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.

71

Policy Loans
Policy loans comprised approximately 2.1% and 2.4% of the Company’s cash and invested assets as of June 30, 2019 and December 31, 2018, 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 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 9.0% and 10.3% of the Company’s cash and invested assets as of June 30, 2019 and December 31, 2018, respectively. 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. 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, 2019 and December 31, 2018. 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 3.4% of the Company’s cash and invested assets as of both June 30, 2019 and December 31, 2018. 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, 2019 and December 31, 2018.
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 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 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, 2019 and December 31, 2018.
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 credit exposure related to its derivative contracts, excluding futures and mortality swaps, at June 30, 2019 and December 31, 2018, 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.
The Company holds beneficial interests in equity release mortgages in the United Kingdom. Equity release mortgages represent loans provided to individuals 55 years of age and older secured by the borrower’s residence. Equity release mortgages are comparable to a home equity loan by allowing the borrower to utilize the equity in their home as collateral. The amount of the loan is dependent on the appraised value of the home at the time of origination, the borrower's age and interest rate. Unlike a home equity loan, no payment of principal or interest is required until the death of the borrower or sale of the home. Equity release mortgages may be fully funded at origination, or the borrower can request periodic funding similar to a line of credit. Equity release mortgages are subject to risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks.

72

Other invested assets include $641.6 million and $475.9 million of equity release mortgages as of June 30, 2019 and December 31, 2018, respectively. Equity release mortgage investment income was $8.4 million and $3.9 million for the three months ended June 30, 2019 and 2018, respectively, and $15.7 million and $7.2 million for the six months ended June 30, 2019 and 2018, respectively.

New Accounting Standards
See Note 14 — “New Accounting Standards” in the Notes to Condensed Consolidated Financial Statements.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, the Company products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and the Company’s strategies for managing this risk, vary by product.  As of June 30, 2019, there have been no material changes in the Company’s economic exposure to market risk or the Company’s Enterprise Risk Management function from December 31, 2018, a description of which may be found in its Annual Report on Form 10-K, for the year ended December 31, 2018, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission.
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, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 2018 Annual Report.

73

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, 2019:
 
 
 
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, 2019 -
April 30, 2019
 
6,746

 
$
150.39

 
—

 
$
39,579,388

May 1, 2019 -
May 31, 2019
 
97,139

 
$
149.46

 
—

 
$
39,579,388

June 1, 2019 -
June 30, 2019
 
1,154

 
$
151.66

 
—

 
$
39,579,388

 
(1)
RGA had no repurchases of common stock under its share repurchase program for the second quarter of 2019. The Company net settled - issuing 19,838, 266,451 and 3,714 shares from treasury and repurchased from recipients 6,746, 97,139 and 1,154 shares in April, May and June 2019, respectively, in settlement of income tax withholding requirements incurred by the recipients of equity incentive awards.
On January 24, 2019, 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.

74

INDEX TO EXHIBITS
 
 
 
 
Exhibit
Number
 
Description
 
 
3.1
 
Amended and Restated Articles of Incorporation, as amended by Amendment of Articles of Incorporation, effective as of May 23, 2018, incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the period ended June 30, 2018, filed on August 3, 2018.
 
 
3.2
 
Amended and Restated Bylaws, effective as of May 23, 2018, incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed on May 24, 2018.
 
 
 
10.1
 
First Amendment to Letter of Credit Reimbursement Agreement, dated as of June 14, 2019, by and between Reinsurance Group of America, Incorporated and Crédit Agricole Corporate and Investment Bank, incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 18, 2019.
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


75

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 2, 2019
 
By: 
/s/ Anna Manning
 
 
 
Anna Manning
 
 
 
President & Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date: August 2, 2019
 
By:
/s/ Todd C. Larson
 
 
 
Todd C. Larson
 
 
 
Senior Executive Vice President & Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)

76

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