Companies: 10,660     total market cap: $140.341 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
Reinsurance Group of America
RGA
#1487
Rank
$14.89 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$225.36
Share price
9.40%
Change (1 day)
-0.87%
Change (1 year)
๐Ÿฆ Insurance
Categories
  1. Reinsurance Group of America
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

Reinsurance Group of America - 10-Q quarterly report FY2019 Q3


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 September 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 October 31, 2019, 62,610,856 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)
September 30, 2019 and December 31, 2018
  
3
 
  
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended September 30, 2019 and 2018
  
4
 
  
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three and nine months ended September 30, 2019 and 2018
  
5
 
 
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
Three and nine months ended September 30, 2019 and 2018
 
6
 
  
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 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)
 
 
September 30,
2019
 
December 31,
2018
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $44,860,441 and $38,882,168)
 
$
49,481,267

 
$
39,992,346

Equity securities, at fair value (cost $150,384 and $107,721)
 
134,453

 
82,197

Mortgage loans on real estate (net of allowances of $11,775 and $11,286)
 
5,647,265

 
4,966,298

Policy loans
 
1,289,868

 
1,344,980

Funds withheld at interest
 
5,614,363

 
5,761,471

Short-term investments
 
107,503

 
142,598

Other invested assets
 
2,215,275

 
1,915,297

Total investments
 
64,489,994

 
54,205,187

Cash and cash equivalents
 
2,635,596

 
1,889,733

Accrued investment income
 
520,301

 
427,893

Premiums receivable and other reinsurance balances
 
2,817,709

 
3,017,868

Reinsurance ceded receivables
 
863,027

 
757,572

Deferred policy acquisition costs
 
3,411,481

 
3,397,770

Other assets
 
1,035,877

 
839,222

Total assets
 
$
75,773,985

 
$
64,535,245

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
27,085,728

 
$
25,285,400

Interest-sensitive contract liabilities
 
22,345,126

 
18,004,526

Other policy claims and benefits
 
6,147,432

 
5,642,755

Other reinsurance balances
 
512,883

 
487,177

Deferred income taxes
 
2,761,726

 
1,798,800

Other liabilities
 
1,405,704

 
1,396,200

Long-term debt
 
3,381,406

 
2,787,873

Collateral finance and securitization notes
 
610,246

 
681,961

Total liabilities
 
64,250,251

 
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 September 30, 2019 and December 31, 2018
 
791

 
791

Additional paid-in capital
 
1,927,943

 
1,898,652

Retained earnings
 
7,765,678

 
7,284,949

Treasury stock, at cost - 16,528,557 and 16,323,390 shares
 
(1,429,024
)
 
(1,370,602
)
Accumulated other comprehensive income
 
3,258,346

 
636,763

Total stockholders’ equity
 
11,523,734

 
8,450,553

Total liabilities and stockholders’ equity
 
$
75,773,985

 
$
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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,809,641

 
$
2,562,042

 
$
8,311,240

 
$
7,739,053

Investment income, net of related expenses
 
678,805

 
572,742

 
1,842,760

 
1,617,132

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(8,539
)
 
(10,705
)
 
(17,992
)
 
(14,055
)
Other investment related gains (losses), net
 
57,323

 
(9,312
)
 
87,036

 
(17,004
)
Total investment related gains (losses), net
 
48,784

 
(20,017
)
 
69,044

 
(31,059
)
Other revenues
 
90,335

 
112,764

 
291,960

 
272,020

Total revenues
 
3,627,565

 
3,227,531

 
10,515,004

 
9,597,146

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,469,981

 
2,209,920

 
7,493,516

 
6,851,614

Interest credited
 
226,262

 
143,292

 
517,293

 
333,068

Policy acquisition costs and other insurance expenses
 
321,855

 
310,639

 
894,081

 
987,817

Other operating expenses
 
209,348

 
200,262

 
634,330

 
586,495

Interest expense
 
45,927

 
33,290

 
129,383

 
107,769

Collateral finance and securitization expense
 
7,102

 
7,467

 
22,670

 
22,509

Total benefits and expenses
 
3,280,475

 
2,904,870

 
9,691,273

 
8,889,272

 Income before income taxes
 
347,090

 
322,661

 
823,731

 
707,874

Provision for income taxes
 
84,325

 
21,462

 
188,761

 
102,071

Net income
 
$
262,765

 
$
301,199

 
$
634,970

 
$
605,803

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
4.19

 
$
4.76

 
$
10.13

 
$
9.47

Diluted earnings per share
 
$
4.12

 
$
4.68

 
$
9.93

 
$
9.30

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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Comprehensive income (loss)
 
(Dollars in thousands)
Net income
 
$
262,765

 
$
301,199

 
$
634,970

 
$
605,803

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(34,465
)
 
25,462

 
11,524

 
(30,375
)
Net unrealized investment gains (losses)
 
656,656

 
(215,986
)
 
2,616,390

 
(1,218,309
)
Defined benefit pension and postretirement plan adjustments
 
(5,958
)
 
931

 
(6,331
)
 
431

Total other comprehensive income (loss), net of tax
 
616,233

 
(189,593
)
 
2,621,583

 
(1,248,253
)
Total comprehensive income (loss)
 
$
878,998

 
$
111,606

 
$
3,256,553

 
$
(642,450
)
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 September 30, 2019 and 2018
 
Common
Stock
 
Additional Paid In Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other Comprehensive Income
 
Total
Balance, June 30, 2019
$
791

 
$
1,920,144

 
$
7,549,737

 
$
(1,403,774
)
 
$
2,642,113

 
$
10,709,011

Net income
 
 
 
 
262,765

 
 
 
 
 
262,765

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
616,233

 
616,233

Dividends to stockholders, $0.70 per share
 
 
 
 
(43,886
)
 
 
 
 
 
(43,886
)
Purchase of treasury stock
 
 
 
 
 
 
(30,487
)
 
 
 
(30,487
)
Reissuance of treasury stock
 
 
7,799

 
(2,938
)
 
5,237

 
 
 
10,098

Balance, September 30, 2019
$
791

 
$
1,927,943

 
$
7,765,678

 
$
(1,429,024
)
 
$
3,258,346

 
$
11,523,734

Balance, June 30, 2018
$
791

 
$
1,887,336

 
$
6,952,170

 
$
(1,243,566
)
 
$
1,004,971

 
$
8,601,702

Adoption of new accounting standards
 
 
 
 
2,573

 
 
 
(2,573
)
 
—

Net income
 
 
 
 
301,199

 
 
 
 
 
301,199

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
(189,593
)
 
(189,593
)
Dividends to stockholders, $0.60 per share
 
 
 
 
(38,071
)
 
 
 
 
 
(38,071
)
Purchase of treasury stock
 
 
 
 
 
 
(108,804
)
 
 
 
(108,804
)
Reissuance of treasury stock
 
 
11,808

 
(2,345
)
 
3,427

 
 
 
12,890

Balance, September 30, 2018
$
791

 
$
1,899,144

 
$
7,215,526

 
$
(1,348,943
)
 
$
812,805

 
$
8,579,323


 
Nine months ended September 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
 
 
 
 
634,970

 
 
 
 
 
634,970

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
2,621,583

 
2,621,583

Dividends to stockholders, $1.90 per share
 
 
 
 
(119,233
)
 
 
 
 
 
(119,233
)
Purchase of treasury stock
 
 
 
 
 
 
(98,231
)
 
 
 
(98,231
)
Reissuance of treasury stock
 
 
29,291

 
(34,921
)
 
39,809

 
 
 
34,179

Balance, September 30, 2019
$
791

 
$
1,927,943

 
$
7,765,678

 
$
(1,429,024
)
 
$
3,258,346

 
$
11,523,734

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
 
 
 
 
553

 
 
 
(2,573
)
 
(2,020
)
Net income
 
 
 
 
605,803

 
 
 
 
 
605,803

Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
(1,248,253
)
 
(1,248,253
)
Dividends to stockholders, $1.60 per share
 
 
 
 
(102,441
)
 
 
 
 
 
(102,441
)
Purchase of treasury stock
 
 
 
 
 
 
(273,873
)
 
 
 
(273,873
)
Reissuance of treasury stock
 
 
28,238

 
(24,654
)
 
26,988

 
 
 
30,572

Balance, September 30, 2018
$
791

 
$
1,899,144

 
$
7,215,526

 
$
(1,348,943
)
 
$
812,805

 
$
8,579,323



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


6

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended September 30,
 
 
2019
 
2018
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
634,970

 
$
605,803

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(40,160
)
 
23,473

Premiums receivable and other reinsurance balances
 
182,018

 
(519,107
)
Deferred policy acquisition costs
 
(130,305
)
 
23,682

Reinsurance ceded receivable balances
 
(124,290
)
 
37,468

Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
1,174,427

 
920,492

Deferred income taxes
 
200,653

 
(8,136
)
Other assets and other liabilities, net
 
(253,405
)
 
(47,978
)
Amortization of net investment premiums, discounts and other
 
(44,386
)
 
(55,154
)
Depreciation and amortization expense
 
33,624

 
32,153

Investment related (gains) losses, net
 
(69,044
)
 
31,059

Other, net
 
199,148

 
56,408

Net cash provided by operating activities
 
1,763,250

 
1,100,163

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
10,544,915

 
6,314,968

Maturities of fixed maturity securities available-for-sale
 
614,489

 
461,764

Sales of equity securities
 
35,840

 
44,952

Principal payments and sales of mortgage loans on real estate
 
308,694

 
290,450

Principal payments on policy loans
 
73,705

 
43,995

Purchases of fixed maturity securities available-for-sale
 
(11,377,473
)
 
(6,041,665
)
Purchases of equity securities
 
(77,553
)
 
(12,578
)
Cash invested in mortgage loans on real estate
 
(986,709
)
 
(671,956
)
Cash invested in policy loans
 
(4,942
)
 
(6,422
)
Cash invested in funds withheld at interest
 
(51,623
)
 
(61,969
)
Purchase of businesses, net of cash acquired of $27,374 and $4,938
 
3,561

 
(31,441
)
Purchases of property and equipment
 
(23,967
)
 
(20,478
)
Change in short-term investments
 
154,332

 
34,856

Change in other invested assets
 
(193,475
)
 
(313,464
)
Net cash provided by (used in) investing activities
 
(980,206
)
 
31,012

Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(119,233
)
 
(102,441
)
Repayment of collateral finance and securitization notes
 
(76,516
)
 
(75,146
)
Proceeds from long-term debt issuance
 
598,524

 
—

Debt issuance costs
 
(4,750
)
 
—

Principal payments of long-term debt
 
(2,091
)
 
(2,007
)
Purchases of treasury stock
 
(98,231
)
 
(273,873
)
Exercise of stock options, net
 
4,259

 
2,336

Change in cash collateral for derivative positions and other arrangements
 
(67,069
)
 
(21,288
)
Deposits on universal life and other investment type policies and contracts
 
318,510

 
320,871

Withdrawals on universal life and other investment type policies and contracts
 
(572,996
)
 
(520,649
)
Net cash used in financing activities
 
(19,593
)
 
(672,197
)
Effect of exchange rate changes on cash
 
(17,588
)
 
(32,013
)
Change in cash and cash equivalents
 
745,863

 
426,965

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

 
1,303,524

Cash and cash equivalents, end of period
 
$
2,635,596

 
$
1,730,489

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
124,154

 
$
124,575

Income taxes paid, net of refunds
 
$
14,115

 
$
99,554

Non-cash investing activities:
 
 
 
 
Transfer of invested assets
 
$
6,198,117

 
$
3,763,195

Right-of-use assets acquired through operating losses
 
$
986

 
$
—

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

 
$
69,853

Liabilities assumed
 
(11,864
)
 
(38,412
)
Net cash (received) paid on purchase
 
$
(3,561
)
 
$
31,441

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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Earnings:
 
 
 
 
 
 
 
 
Net income (numerator for basic and diluted calculations)
 
$
262,765

 
$
301,199

 
$
634,970

 
$
605,803

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
62,666

 
63,279

 
62,701

 
63,941

Equivalent shares from outstanding stock options
 
1,123

 
1,017

 
1,218

 
1,189

Denominator for diluted calculation
 
63,789

 
64,296

 
63,919

 
65,130

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
4.19

 
$
4.76

 
$
10.13

 
$
9.47

Diluted
 
$
4.12

 
$
4.68

 
$
9.93

 
$
9.30


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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Excluded from common equivalent shares:
 
 
 
 
 
 
 
 
Stock options
 
139

 
227

 
416

 
349

Performance contingent shares
 
258

 
276

 
182

 
256



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
 
—

 
546,614

 
(546,614
)
Stock-based compensation (1)
 
—

 
(341,447
)
 
341,447

Balance, September 30, 2019
 
79,137,758

 
16,528,557

 
62,609,201

 
 
Issued
 
Held In Treasury
 
Outstanding
Balance, December 31, 2017
 
79,137,758

 
14,685,663

 
64,452,095

Common stock acquired
 
—

 
1,750,295

 
(1,750,295
)
Stock-based compensation (1)
 
—

 
(249,068
)
 
249,068

Balance, September 30, 2018
 
79,137,758

 
16,186,890

 
62,950,868

(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 nine months of 2019, RGA repurchased 0.5 million shares of common stock under this program for $79.8 million. During the first nine months of 2018, RGA repurchased 1.8 million shares of common stock under the 2017 repurchase program for $258.5 million.
Accumulated Other Comprehensive Income (Loss)
The balance of and changes in each component of accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 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
 
16,155

 
3,526,151

 
(11,735
)
 
3,530,571

Amounts reclassified to (from) AOCI
 
—

 
(170,531
)
 
3,728

 
(166,803
)
Deferred income tax benefit (expense)
 
(4,631
)
 
(739,230
)
 
1,676

 
(742,185
)
Balance, September 30, 2019
 
$
(157,174
)
 
$
3,472,549

 
$
(57,029
)
 
$
3,258,346

 
 
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
 
(24,977
)
 
(1,638,146
)
 
(3,391
)
 
(1,666,514
)
Amounts reclassified to (from) AOCI
 
—

 
79,505

 
3,986

 
83,491

Deferred income tax benefit (expense)
 
(5,398
)
 
340,332

 
(164
)
 
334,770

Adoption of new accounting standard
 
(2,573
)
 
—

 
—

 
(2,573
)
Balance, September 30, 2018
 
$
(119,298
)
 
$
982,352

 
$
(50,249
)
 
$
812,805

(1)
Includes cash flow hedges of $(47,202) and $8,788 as of September 30, 2019 and December 31, 2018, respectively, and $29,043 and $2,619 as of September 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 nine months ended September 30, 2019 and 2018 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended September 30,
 
Nine months ended September 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
 
$
50,537

 
$
(21,249
)
 
$
70,513

 
$
(60,347
)
 
Investment related gains (losses), net
Cash flow hedges - Interest rate
 
255

 
234

 
1,107

 
(108
)
 
(1)
Cash flow hedges - Currency/Interest rate
 
(38
)
 
50

 
(19
)
 
270

 
(1)
Deferred policy acquisition costs attributed to unrealized gains and losses
 
21,275

 
(4,893
)
 
98,930

 
(19,320
)
 
(2)
Total
 
72,029

 
(25,858
)
 
170,531

 
(79,505
)
 
 
Provision for income taxes
 
(14,808
)
 
5,355

 
(35,087
)
 
16,978

 
 
Net unrealized gains (losses), net of tax
 
$
57,221

 
$
(20,503
)
 
$
135,444

 
$
(62,527
)
 
 
Amortization of defined benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
$
267

 
$
246

 
$
804

 
$
739

 
(3)
Actuarial gains/(losses)
 
(1,102
)
 
(1,866
)
 
(4,532
)
 
(4,725
)
 
(3)
Total
 
(835
)
 
(1,620
)
 
(3,728
)
 
(3,986
)
 
 
Provision for income taxes
 
175

 
340

 
783

 
837

 
 
Amortization of defined benefit plans, net of tax
 
$
(660
)
 
$
(1,280
)
 
$
(2,945
)
 
$
(3,149
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
56,561

 
$
(21,783
)
 
$
132,499

 
$
(65,676
)
 
 
(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 $29.3 million and $28.4 million in the first nine 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 September 30, 2019, 1.4 million share options at a weighted average strike price per share of $76.08 were vested and exercisable, with a remaining weighted average exercise period of 4.1 years. As of September 30, 2019, the total compensation cost of non-vested awards not yet recognized in the condensed consolidated financial statements was $26.5 million. It is estimated that these costs will vest over a weighted average period of 0.9 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 September 30, 2019 and December 31, 2018 (dollars in thousands):
September 30, 2019:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary Impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
28,154,301

 
$
2,277,070

 
$
78,152

 
$
30,353,219

 
61.3
%
 
$
—

Canadian government
 
2,962,729

 
1,670,680

 
190

 
4,633,219

 
9.4

 
—

RMBS
 
2,360,691

 
81,367

 
2,216

 
2,439,842

 
4.9

 
—

ABS
 
2,809,008

 
27,621

 
13,994

 
2,822,635

 
5.7

 
275

CMBS
 
1,698,334

 
84,345

 
461

 
1,782,218

 
3.6

 
—

U.S. government
 
1,570,540

 
98,193

 
228

 
1,668,505

 
3.4

 
—

State and political subdivisions
 
1,078,019

 
113,684

 
1,600

 
1,190,103

 
2.4

 
—

Other foreign government
 
4,226,819

 
370,109

 
5,402

 
4,591,526

 
9.3

 
—

Total fixed maturity securities
 
$
44,860,441

 
$
4,723,069

 
$
102,243

 
$
49,481,267

 
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 September 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 September 30, 2019 and December 31, 2018 (dollars in thousands):
 
September 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities pledged as collateral
$
95,387

 
$
99,393

 
$
80,891

 
$
83,950

Fixed maturity securities received as collateral
n/a

 
696,435

 
n/a

 
616,584

Assets in trust held to satisfy collateral requirements
26,332,915

 
28,368,125

 
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 September 30, 2019 and December 31, 2018 (dollars in thousands).
 
September 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
$
1,167,744

 
$
2,153,434

 
$
1,091,018

 
$
1,757,087

Canadian province of Ontario
981,279

 
1,371,571

 
913,642

 
1,187,526


The amortized cost and estimated fair value of fixed maturity securities classified as available-for-sale at September 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
 
$
1,538,152

 
$
1,547,966

Due after one year through five years
 
8,318,044

 
8,656,979

Due after five years through ten years
 
9,485,912

 
10,275,538

Due after ten years
 
18,650,300

 
21,956,089

Asset and mortgage-backed securities
 
6,868,033

 
7,044,695

Total
 
$
44,860,441

 
$
49,481,267


Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of September 30, 2019 and December 31, 2018 (dollars in thousands): 
September 30, 2019:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
10,604,290

 
$
11,327,324

 
37.3
%
Industrial
 
14,099,496

 
15,213,256

 
50.1

Utility
 
3,450,515

 
3,812,639

 
12.6

Total
 
$
28,154,301

 
$
30,353,219

 
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 September 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 856 and 3,109 fixed maturity securities as of September 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):
 
 
September 30, 2019
 
December 31, 2018
 
 
Gross
Unrealized
Losses
 
% of Total    
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
75,658

 
74.0
%
 
$
721,015

 
96.3
%
20% or more for less than six months
 
10,064

 
9.8

 
21,336

 
2.9

20% or more for six months or greater
 
16,521

 
16.2

 
6,139

 
0.8

Total
 
$
102,243

 
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 856 and 3,109 fixed maturity securities that have estimated fair values below amortized cost as of September 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
September 30, 2019:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
1,570,113

 
$
25,598

 
$
410,462

 
$
11,576

 
$
1,980,575

 
$
37,174

Canadian government
 
867

 
10

 
17,509

 
180

 
18,376

 
190

RMBS
 
222,644

 
987

 
116,037

 
1,218

 
338,681

 
2,205

ABS
 
765,223

 
4,861

 
413,297

 
9,133

 
1,178,520

 
13,994

CMBS
 
48,699

 
218

 
32,638

 
232

 
81,337

 
450

U.S. government
 
2,758

 
7

 
65,220

 
221

 
67,978

 
228

State and political subdivisions
 
11,129

 
97

 
13,838

 
1,503

 
24,967

 
1,600

Other foreign government
 
198,170

 
3,474

 
45,430

 
761

 
243,600

 
4,235

Total investment grade securities
 
2,819,603

 
35,252

 
1,114,431

 
24,824

 
3,934,034

 
60,076

 
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
206,108

 
24,561

 
122,670

 
16,417

 
328,778

 
40,978

RMBS
 
—

 
—

 
939

 
11

 
939

 
11

CMBS
 
1,042

 
11

 
—

 
—

 
1,042

 
11

Other foreign government
 
12,914

 
290

 
13,173

 
877

 
26,087

 
1,167

Total below investment grade securities
 
220,064

 
24,862

 
136,782

 
17,305

 
356,846

 
42,167

Total fixed maturity securities
 
$
3,039,667

 
$
60,114

 
$
1,251,213

 
$
42,129

 
$
4,290,880

 
$
102,243


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 September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Fixed maturity securities available-for-sale
$
464,431

 
$
378,669

 
$
1,307,359

 
$
1,121,496

Equity securities
1,709

 
1,319

 
3,600

 
3,710

Mortgage loans on real estate
67,071

 
54,424

 
187,142

 
155,083

Policy loans
14,580

 
14,730

 
43,083

 
44,285

Funds withheld at interest
81,862

 
108,232

 
209,568

 
270,094

Short-term investments and cash and cash equivalents
6,152

 
3,067

 
20,517

 
9,276

Other invested assets
66,611

 
35,594

 
140,757

 
80,207

Investment income
702,416

 
596,035

 
1,912,026

 
1,684,151

Investment expense
(23,611
)
 
(23,293
)
 
(69,266
)
 
(67,019
)
Investment income, net of related expenses
$
678,805

 
$
572,742

 
$
1,842,760

 
$
1,617,132



14

Investment Related Gains (Losses), Net
Investment related gains (losses), net, consist of the following (dollars in thousands): 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Fixed maturity securities available-for-sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
$
(8,539
)
 
$
(10,705
)
 
$
(17,992
)
 
$
(14,055
)
Gain on investment activity
67,980

 
20,040

 
116,409

 
52,146

Loss on investment activity
(12,996
)
 
(37,880
)
 
(38,589
)
 
(94,194
)
Equity securities:
 
 
 
 
 
 
 
Gain on investment activity
432

 
3,932

 
506

 
4,429

Loss on investment activity
—

 
(174
)
 
(1
)
 
(1,124
)
Change in unrealized gains (losses) recognized in earnings
3,396

 
3,539

 
9,813

 
(7,564
)
Other impairment losses and change in mortgage loan provision
(4,030
)
 
(6,566
)
 
(11,498
)
 
(8,235
)
Derivatives and other, net
2,541

 
7,797

 
10,396

 
37,538

Total investment related gains (losses), net
$
48,784

 
$
(20,017
)
 
$
69,044

 
$
(31,059
)

The fixed maturity impairments for the three months ended September 30, 2019 and 2018 are primarily related to high-yield securities. The fixed maturity impairments for the nine months ended September 30, 2019 were primarily related to a U.S. utility company and high-yield securities. The fixed maturity impairments for the nine months ended September 30, 2018 were primarily related to high-yield securities. The other impairment losses and change in mortgage loan provision for the three months ended September 30, 2019 includes impairments on limited partnerships. The other impairment losses and change in mortgage loan provision for the three months ended September 30, 2018 includes impairments on real estate joint ventures and limited partnerships. The other impairment losses and change in mortgage loan provision for the nine months ended September 30, 2019 and 2018 includes impairments on real estate joint ventures and limited partnerships. The fluctuations in investment related gains (losses) for derivatives and other for the three and nine months ended September 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 September 30, 2019 and 2018, the Company sold fixed maturity securities with fair values of $1,313.7 million and $1,345.3 million at losses of $13.0 million and $37.9 million, respectively. During the nine months ended September 30, 2019 and 2018, the Company sold fixed maturity securities with fair values of $3,026.5 million and $3,783.3 million at losses of $38.6 million and $94.2 million, respectively. The Company did not sell any equity securities at losses during the three months ended September 30, 2019. During the three months ended September 30, 2018, the Company sold equity securities with fair values of $3.1 million at losses of $0.2 million. During the nine months ended September 30, 2019, the Company sold equity securities for immaterial losses. During the nine months ended September 30, 2018, the Company sold equity securities with fair values $31.5 million at losses of $1.1 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 September 30, 2019 and December 31, 2018 (dollars in thousands).
 
September 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Borrowed securities
$
335,408

 
$
372,617

 
$
335,781

 
$
366,663

Securities lending:
 
 
 
 
 
 
 
Securities loaned
97,606

 
104,191

 
101,981

 
102,618

Securities received
n/a

 
107,000

 
n/a

 
112,000

Repurchase program/reverse repurchase program:
 
 
 
 
 
 
 
Securities pledged
610,701

 
644,471

 
554,806

 
554,589

Securities received
n/a

 
624,348

 
n/a

 
530,932


The Company also held cash collateral for repurchase/reverse repurchase programs of $27.5 million and $28.6 million as of September 30, 2019 and December 31, 2018, respectively. No cash or securities have been pledged by the Company for its securities borrowing program as of September 30, 2019 and December 31, 2018.
The following tables present information on the Company’s securities lending and repurchase transactions as of September 30, 2019 and December 31, 2018, respectively (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.
 
September 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
$
—

 
$
—

 
$
—

 
$
104,191

 
$
104,191

Total
—

 
—

 
—

 
104,191

 
104,191

Repurchase transactions:
 
 
 
 
 
 
 
 
 
Corporate
—

 
—

 
—

 
324,033

 
324,033

U.S. government
—

 
—

 
66,264

 
142,124

 
208,388

Foreign government
—

 
—

 
—

 
112,050

 
112,050

Other
—

 
—

 
—

 
—

 
—

Total
—

 
—

 
66,264

 
578,207

 
644,471

Total borrowings
$
—

 
$
—

 
$
66,264

 
$
682,398

 
$
748,662

 
 
 
 
 
 
 
 
 
 
Gross amount of recognized liabilities for securities lending and repurchase transactions in preceding table
 
$
758,883

Amounts related to agreements not included in offsetting disclosure
 
$
10,221



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 September 30, 2019 and December 31, 2018, respectively. As of September 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 8.8% and 9.1% of the Company’s total investments as of September 30, 2019 and December 31, 2018. As of September 30, 2019, mortgage loans were geographically dispersed throughout the U.S. with the largest concentrations in California (17.0%), Texas (12.9%) and Washington (7.4%). In addition, the Company held mortgage 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 September 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
 Property type:
 
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
Office building
 
$
1,787,871

 
31.6
%
 
$
1,725,748

 
34.6
%
Retail
 
1,645,521

 
29.0

 
1,432,394

 
28.7

Industrial
 
1,137,598

 
20.1

 
961,924

 
19.3

Apartment
 
748,392

 
13.2

 
571,291

 
11.5

Other commercial
 
347,972

 
6.1

 
291,997

 
5.9

Recorded investment
 
5,667,354

 
100.0
%
 
4,983,354

 
100.0
%
Unamortized balance of loan origination fees and expenses
 
(8,314
)
 
 
 
(5,770
)
 
 
Valuation allowances
 
(11,775
)
 
 
 
(11,286
)
 
 
Total mortgage loans on real estate
 
$
5,647,265

 
 
 
$
4,966,298

 
 

The maturities of mortgage loans as of September 30, 2019 and December 31, 2018 are as follows (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Due within five years
 
$
1,750,771

 
30.9
%
 
$
1,425,598

 
28.6
%
Due after five years through ten years
 
3,001,527

 
53.0

 
2,686,264

 
53.9

Due after ten years
 
915,056

 
16.1

 
871,492

 
17.5

Total
 
$
5,667,354

 
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 September 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
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
0% - 59.99%
$
2,912,673

 
$
91,954

 
$
12,932

 
$
21,434

 
$
3,038,993

 
53.6
%
60% - 69.99%
1,889,981

 
83,814

 
37,321

 
—

 
2,011,116

 
35.5

70% - 79.99%
395,599

 
—

 
32,586

 
—

 
428,185

 
7.6

Greater than 80%
116,605

 
49,087

 
23,368

 
—

 
189,060

 
3.3

Total
$
5,314,858

 
$
224,855

 
$
106,207

 
$
21,434

 
$
5,667,354

 
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 September 30, 2019 and December 31, 2018 is as follows (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
31-60 days past due
 
$
21,065

 
$
—

Total past due
 
21,065

 
—

Current
 
5,646,289

 
4,983,354

Total
 
$
5,667,354

 
$
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 September 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
Mortgage loans:
 
 
 
 
Individually measured for impairment
 
$
17,016

 
$
30,635

Collectively measured for impairment
 
5,650,338

 
4,952,719

Recorded investment
 
$
5,667,354

 
$
4,983,354

Valuation allowances:
 
 
 
 
Individually measured for impairment
 
$
—

 
$
—

Collectively measured for impairment
 
11,775

 
11,286

Total valuation allowances
 
$
11,775

 
$
11,286


18

Information regarding the Company’s loan valuation allowances for mortgage loans for the three and nine months ended September 30, 2019 and 2018 is as follows (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
 
$
11,692

 
$
9,706

 
$
11,286

 
$
9,384

Provision (release)
 
88

 
656

 
485

 
986

Translation adjustment
 
(5
)
 
4

 
4

 
(4
)
Balance, end of period
 
$
11,775

 
$
10,366

 
$
11,775

 
$
10,366


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

 
$
17,016

 
$
—

 
$
17,016

Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
17,017

 
$
17,016

 
$
—

 
$
17,016

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 September 30,
 
 
2019
 
2018
 
 
Average
Recorded
Investment(1)
 
Interest
Income
 
Average
Recorded
  Investment(1)
 
Interest
Income
Impaired mortgage loans with no valuation allowance recorded
 
$
17,015

 
$
170

 
$
30,641

 
$
346

Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
17,015

 
$
170

 
$
30,641

 
$
346

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
2019
 
2018
 
 
Average
Recorded
Investment(1)
 
Interest
Income
 
Average
Recorded
Investment(1)
 
Interest
Income
Impaired mortgage loans with no valuation allowance recorded
 
$
20,436

 
$
669

 
$
22,641

 
$
650

 Impaired mortgage loans with valuation allowance recorded
 
—

 
—

 
—

 
—

Total impaired mortgage loans
 
$
20,436

 
$
669

 
$
22,641

 
$
650


(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 nine months ended September 30, 2019 and 2018. The Company had no mortgage loans that were on a nonaccrual status at September 30, 2019 and December 31, 2018.
Policy Loans
Policy loans comprised approximately 2.0% and 2.5% of the Company’s total investments as of September 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 8.7% and 10.6% of the Company’s total investments as of September 30, 2019 and December 31, 2018, respectively. Of the $5.6 billion funds withheld at interest balance, net of embedded derivatives, as of September 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 3.4% and 3.5% of the Company’s total investments as of September 30, 2019 and December 31, 2018, respectively. Carrying values of these assets as of September 30, 2019 and December 31, 2018 were as follows (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
Limited partnership interests and real estate joint ventures
 
$
1,059,025

 
$
965,094

Lifetime mortgages
 
669,981

 
475,905

Derivatives
 
142,099

 
180,699

FVO contractholder-directed unit-linked investments
 
252,277

 
197,770

Other
 
91,893

 
95,829

Total other invested assets
 
$
2,215,275

 
$
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 September 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
 
September 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
 
$
929,963

 
$
84,306

 
$
2,778

 
$
1,040,588

 
$
47,652

 
$
961

Financial futures
 
Equity
 
361,030

 
—

 
—

 
325,620

 
—

 
—

Foreign currency swaps
 
Foreign currency
 
149,698

 
—

 
12,454

 
149,698

 
504

 
4,659

Foreign currency forwards
 
Foreign currency
 
125,000

 
337

 
—

 
25,000

 
—

 
234

Consumer price index swaps
 
CPI
 
422,068

 
360

 
33,245

 
385,580

 
—

 
11,384

Credit default swaps
 
Credit
 
1,337,800

 
5,888

 
139

 
1,338,300

 
6,003

 
1,166

Equity options
 
Equity
 
386,536

 
24,844

 
—

 
439,158

 
42,836

 
—

Longevity swaps
 
Longevity
 
871,920

 
51,620

 
—

 
917,360

 
47,789

 
—

Mortality swaps
 
Mortality
 
25,000

 
—

 
853

 
25,000

 
—

 
369

Synthetic guaranteed investment contracts
 
Interest rate
 
13,919,866

 
—

 
—

 
13,397,729

 
—

 
—

Embedded derivatives in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
 
 
—

 
121,275

 
—

 
—

 
109,597

 
—

Indexed annuity products
 
 
 
—

 
—

 
779,128

 
—

 
—

 
776,940

Variable annuity products
 
 
 
—

 
—

 
210,041

 
—

 
—

 
167,925

Total non-hedging derivatives
 
 
 
18,528,881

 
288,630

 
1,038,638

 
18,044,033

 
254,381

 
963,638

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

 
—

 
34,467

 
435,000

 
—

 
27,257

Foreign currency swaps
 
Foreign currency
 
366,193

 
26,384

 
7,615

 
494,461

 
51,311

 
—

Foreign currency forwards
 
Foreign currency
 
1,025,548

 
43,441

 
—

 
911,197

 
50,974

 
—

Total hedging derivatives
 
 
 
1,826,741

 
69,825

 
42,082

 
1,840,658

 
102,285

 
27,257

Total derivatives
 
 
 
$
20,355,622

 
$
358,455

 
$
1,080,720

 
$
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 September 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 September 30, 2019:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(5,995
)
 
$
4,088

For the three months ended September 30, 2018:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(2,258
)
 
$
2,832

For the nine months ended September 30, 2019:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(10,422
)
 
$
4,503

For the nine months ended September 30, 2018:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(5,284
)
 
$
9,666


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 nine months ended September 30, 2019 and 2018 (dollars in thousands):
 
 
Three months ended September 30,
 
 
2019
 
2018
Balance beginning of period
 
$
(14,862
)
 
$
22,656

Gains (losses) deferred in other comprehensive income (loss)
 
(32,123
)
 
6,671

Amounts reclassified to investment income
 
38

 
(50
)
Amounts reclassified to interest expense
 
(255
)
 
(234
)
Balance end of period
 
$
(47,202
)
 
$
29,043

 
 
 
 
 
 
 
Nine months ended September 30,
 
 
2019
 
2018
Balance beginning of period
 
$
8,788

 
$
2,619

Gains (losses) deferred in other comprehensive income (loss)
 
(54,902
)
 
26,586

Amounts reclassified to investment income
 
19

 
(270
)
Amounts reclassified to interest expense
 
(1,107
)
 
108

Balance end of period
 
$
(47,202
)
 
$
29,043


As of September 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 $(0.8) 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 nine months ended September 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 September 30, 2019:
 
 
 
 
 
 
Interest rate
 
$
(24,846
)
 
$
—

 
$
255

Currency/Interest rate
 
(7,277
)
 
(38
)
 
—

Total
 
$
(32,123
)
 
$
(38
)
 
$
255

For the three months ended September 30, 2018:
 
 
 
 
 
 
Interest rate
 
$
7,490

 
$
—

 
$
234

Currency/Interest rate
 
(819
)
 
50

 
—

Total
 
$
6,671

 
$
50

 
$
234

 
 
 
 
 
 
 
For the nine months ended September 30, 2019:
 
 
 
 
 
 
Interest rate
 
$
(46,816
)
 
$
—

 
$
1,107

Currency/Interest rate
 
(8,086
)
 
(19
)
 
—

Total
 
$
(54,902
)
 
$
(19
)
 
$
1,107

For the nine months ended September 30, 2018:
 
 
 
 
 
 
Interest rate
 
$
27,217

 
$
—

 
$
(108
)
Currency/Interest rate
 
(631
)
 
270

 
—

Total
 
$
26,586

 
$
270

 
$
(108
)

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 nine months ended September 30, 2019 and 2018 (dollars in thousands):
 
 
 
Derivative Gains (Losses) Deferred in AOCI     
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
Type of NIFO Hedge (1)
 
2019
 
2018
 
2019
 
2018
Foreign currency swaps
 
$
3,930

 
$
(5,877
)
 
$
(5,563
)
 
$
11,125

Foreign currency forwards
 
16,427

 
(11,562
)
 
(7,669
)
 
11,737

Total
 
$
20,357

 
$
(17,439
)
 
$
(13,232
)
 
$
22,862

 
(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 $187.8 million and $201.0 million at September 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 nine months ended September 30, 2019 and 2018 is as follows (dollars in thousands):
 
 
 
 
Gain (Loss) for the three months ended
September 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2019
 
2018
Interest rate swaps
 
Investment related gains (losses), net
 
$
38,701

 
$
(12,228
)
Financial futures
 
Investment related gains (losses), net
 
322

 
(6,544
)
Foreign currency swaps
 
Investment related gains (losses), net
 
867

 
—

Foreign currency forwards
 
Investment related gains (losses), net
 
337

 
(58
)
CPI swaps
 
Investment related gains (losses), net
 
(8,235
)
 
(4,223
)
Credit default swaps
 
Investment related gains (losses), net
 
1,961

 
4,689

Equity options
 
Investment related gains (losses), net
 
243

 
(9,793
)
Longevity swaps
 
Other revenues
 
2,063

 
2,426

Mortality swaps
 
Other revenues
 
—

 
473

Subtotal
 
 
 
36,259

 
(25,258
)
Embedded derivatives in:
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
Investment related gains (losses), net
 
8,508

 
(2,081
)
Indexed annuity products
 
Interest credited
 
(44,972
)
 
(25,347
)
Variable annuity products
 
Investment related gains (losses), net
 
(42,233
)
 
32,133

Total non-hedging derivatives
 
 
 
$
(42,438
)
 
$
(20,553
)
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for the nine months ended        
September 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2019
 
2018
Interest rate swaps
 
Investment related gains (losses), net
 
$
96,079

 
$
(47,399
)
Financial futures
 
Investment related gains (losses), net
 
(29,641
)
 
(7,312
)
Foreign currency swaps
 
Investment related gains (losses), net
 
(4,790
)
 
—

Foreign currency forwards
 
Investment related gains (losses), net
 
571

 
3

CPI swaps
 
Investment related gains (losses), net
 
(23,898
)
 
(996
)
Credit default swaps
 
Investment related gains (losses), net
 
21,539

 
5,371

Equity options
 
Investment related gains (losses), net
 
(27,269
)
 
(15,207
)
Longevity swaps
 
Other revenues
 
6,390

 
6,983

Mortality swaps
 
Other revenues
 
(484
)
 
(326
)
Subtotal
 
 
 
38,497

 
(58,883
)
Embedded derivatives in:
 
 
 
 
 
 
Modified coinsurance or funds withheld arrangements
 
Investment related gains (losses), net
 
11,678

 
20,335

Indexed annuity products
 
Interest credited
 
(50,361
)
 
6,523

Variable annuity products
 
Investment related gains (losses), net
 
(42,116
)
 
62,242

Total non-hedging derivatives
 
 
 
$
(42,302
)
 
$
30,217




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 September 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
September 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
 
$
1,018

 
$
117,500

 
1.6
 
$
1,953

 
$
152,000

 
2.2
Credit default swaps referencing indices
 
342

 
240,000

 
10.2
 
—

 
—

 
0.0
Subtotal
 
1,360

 
357,500

 
7.4
 
1,953

 
152,000

 
2.2
BBB+/BBB/BBB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
4,103

 
337,700

 
2.0
 
2,930

 
353,700

 
2.2
Credit default swaps referencing indices
 
111

 
632,600

 
2.9
 
(76
)
 
817,600

 
6.4
Subtotal
 
4,214

 
970,300

 
2.6
 
2,854

 
1,171,300

 
5.1
BB+/BB/BB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
175

 
10,000

 
2.7
 
30

 
15,000

 
0.7
Subtotal
 
175

 
10,000

 
2.7
 
30

 
15,000

 
0.7
Total
 
$
5,749

 
$
1,337,800

 
3.9
 
$
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 September 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   
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
237,180

 
$
(43,461
)
 
$
193,719

 
$
—

 
$
(205,890
)
 
$
(12,171
)
Derivative liabilities
 
91,551

 
(43,461
)
 
48,090

 
(81,090
)
 
(60,080
)
 
(93,080
)
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 September 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 September 30, 2019 and December 31, 2018 are summarized below (dollars in thousands):
September 30, 2019:
 
 
 
Fair Value Measurements Using:
 
 
Total    
 
Level 1        
 
Level 2    
 
Level 3    
Assets:
 
 
 
 
 
 
 
 
Fixed maturity securities – available-for-sale:
 
 
 
 
 
 
 
 
Corporate
 
$
30,353,219

 
$
—

 
$
28,547,959

 
$
1,805,260

Canadian government
 
4,633,219

 
—

 
3,942,376

 
690,843

RMBS
 
2,439,842

 
—

 
2,416,762

 
23,080

ABS
 
2,822,635

 
—

 
2,719,526

 
103,109

CMBS
 
1,782,218

 
—

 
1,752,250

 
29,968

U.S. government
 
1,668,505

 
1,541,294

 
110,070

 
17,141

State and political subdivisions
 
1,190,103

 
—

 
1,180,150

 
9,953

Other foreign government
 
4,591,526

 
—

 
4,575,383

 
16,143

Total fixed maturity securities – available-for-sale
 
49,481,267

 
1,541,294

 
45,244,476

 
2,695,497

Equity securities
 
134,453

 
86,968

 
—

 
47,485

Funds withheld at interest – embedded derivatives
 
121,275

 
—

 
—

 
121,275

Cash equivalents
 
927,175

 
922,291

 
4,884

 
—

Short-term investments
 
89,130

 
17,375

 
68,898

 
2,857

Other invested assets:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
73,085

 
—

 
73,085

 
—

Foreign currency forwards
 
43,654

 
—

 
43,654

 
—

Credit default swaps
 
(7,174
)
 
—

 
(7,174
)
 
—

Equity options
 
6,150

 
—

 
6,150

 
—

Foreign currency swaps
 
26,384

 
—

 
26,384

 
—

FVO contractholder-directed unit-linked investments
 
252,277

 
197,195

 
55,082

 
—

Total other invested assets
 
394,376

 
197,195

 
197,181

 
—

Other assets - longevity swaps
 
51,620

 
—

 
—

 
51,620

Total
 
$
51,199,296

 
$
2,765,123

 
$
45,515,439

 
$
2,918,734

Liabilities:
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivatives
 
$
989,170

 
$
—

 
$
—

 
$
989,170

Other liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Interest rate swaps
 
26,024

 
—

 
26,024

 
—

Foreign currency swaps - non-hedged
 
12,454

 
—

 
12,454

 
—

Foreign currency forwards
 
(124
)
 
—

 
(124
)
 
—

CPI swaps
 
32,885

 
—

 
32,885

 
—

Credit default swaps
 
(12,923
)
 
—

 
(12,923
)
 
—

Equity options
 
(18,694
)
 
—

 
(18,694
)
 
—

Foreign currency swaps
 
7,615

 
—

 
7,615

 
—

Mortality swaps
 
853

 
—

 
—

 
853

Total
 
$
1,037,260

 
$
—

 
$
47,237

 
$
990,023


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 nine months ended September 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 September 30, 2019 and December 31, 2018 (dollars in thousands):
 
Estimated Fair Value      
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted Average) 
September 30, 2019
 
December 31, 2018
 
 
 
September 30, 2019
 
December 31, 2018
Assets:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
888,946

 
$
642,647

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

 
0-5%  (1%)

 
 
 
 
 
 
 
EBITDA Multiple
 
5.2x-6.1x (5.8x)

 
5.9x-7.5x (6.5x)

ABS
102,027

 
77,842

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

 
0-1%  (1%)

U.S. government
17,141

 
18,025

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

 
0-1%  (1%)

Other foreign government
16,143

 
5,006

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

 
1
%
Equity securities
30,681

 
25,007

 
Market comparable securities
 
Liquidity premium
 
4
%
 
4
%
 
 
 
 
 
 
 
EBITDA Multiple
 
6.9x-9.3x (7.9x)

 
6.9x-12.3x (7.9x)

 
 
 
 
 
 
 
 
 
 
 
 
Funds withheld at interest- embedded derivatives
121,275

 
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
51,620

 
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
779,128

 
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
210,041

 
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% (12%)

 
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 September 30, 2019:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,644,364

 
$
671,027

 
$
16,032

 
$
110,322

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
318

 
3,713

 
(113
)
 
3

Included in other comprehensive income
 
17,090

 
16,103

 
150

 
(51
)
Purchases(1)
 
214,025

 
—

 
—

 
10,764

Sales(1)
 
(34,363
)
 
—

 
—

 
—

Settlements(1)
 
(63,216
)
 
—

 
(2,370
)
 
(17,929
)
Transfers into Level 3
 
27,042

 
—

 
15,421

 
—

Transfers out of Level 3
 
—

 
—

 
(6,040
)
 
—

Fair value, end of period
 
$
1,805,260

 
$
690,843

 
$
23,080

 
$
103,109

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
 
$
344

 
$
3,713

 
$
(113
)
 
$
3

For the three months ended September 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
 
$
19

 
$
17,406

 
$
9,855

 
$
15,686

 
$
44,807

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

 
(90
)
 
6

 
—

 
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
2,737

Included in other comprehensive income
 
(975
)
 
79

 
132

 
457

 
—

Purchases(1)
 
1,155

 
104

 
—

 
—

 
821

Sales(1)
 
—

 
—

 
—

 
—

 
(880
)
Settlements(1)
 
(3
)
 
(358
)
 
(40
)
 
—

 
—

Transfers into Level 3
 
29,772

 
—

 
—

 
—

 
—

Fair value, end of period
 
$
29,968

 
$
17,141

 
$
9,953

 
$
16,143

 
$
47,485

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
 
$
—

 
$
(90
)
 
$
6

 
$
—

 
$
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
2,638


30

For the three months ended September 30, 2019 (continued):
 
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
 
$
112,767

 
$
28,387

 
$
51,755

 
$
(908,491
)
 
$
(853
)
Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
—

 
133

 
—

 
—

 
—

Investment related gains (losses), net
 
8,508

 
—

 
—

 
(42,233
)
 
—

Interest credited
 
—

 
—

 
—

 
(44,972
)
 
—

Included in other comprehensive income
 
—

 
(266
)
 
(2,198
)
 
—

 
—

Other revenues
 
—

 
—

 
2,063

 
—

 
—

Purchases(1)
 
—

 
1,656

 
—

 
(16,887
)
 
—

Sales(1)
 
—

 
—

 
—

 
—

 
—

Settlements(1)
 
—

 
(11
)
 
—

 
23,413

 
—

Transfers out of Level 3
 
—

 
(27,042
)
 
—

 
—

 
—

Fair value, end of period
 
$
121,275

 
$
2,857

 
$
51,620

 
$
(989,170
)
 
$
(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
 
$
—

 
$
133

 
$
—

 
$
—

 
$
—

Investment related gains (losses), net
 
8,508

 
—

 
—

 
(44,965
)
 
—

Other revenues
 
—

 
—

 
2,063

 
—

 
—

Interest credited
 
—

 
—

 
—

 
(68,385
)
 
—

For the nine months ended September 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
 
478

 
10,775

 
(132
)
 
25

Investment related gains (losses), net
 
15

 
—

 
—

 
110

Included in other comprehensive income
 
53,222

 
151,944

 
221

 
1,972

Purchases(1)
 
604,897

 
—

 
3,018

 
50,511

Sales(1)
 
(59,000
)
 
—

 
—

 
—

Settlements(1)
 
(166,865
)
 
—

 
(3,945
)
 
(45,081
)
Transfers into Level 3
 
43,083

 
—

 
23,103

 
—

Transfers out of Level 3
 
(1,495
)
 
—

 
(6,040
)
 
—

Fair value, end of period
 
$
1,805,260

 
$
690,843

 
$
23,080

 
$
103,109

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
 
$
580

 
$
10,775

 
$
(132
)
 
$
24


31

For the nine months ended September 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
 
—

 
(265
)
 
16

 
—

 
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
8,284

Included in other comprehensive income
 
(975
)
 
668

 
164

 
1,137

 
—

Purchases(1)
 
1,155

 
290

 
—

 
10,000

 
6,621

Sales(1)
 
—

 
—

 
—

 
—

 
(880
)
Settlements(1)
 
(6
)
 
(1,577
)
 
(429
)
 
—

 
—

Transfers into Level 3
 
29,772

 
—

 
—

 
—

 
—

Fair value, end of period
 
$
29,968


$
17,141

 
$
9,953

 
$
16,143

 
$
47,485

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
 
$
—

 
$
(265
)
 
$
16

 
$
—

 
$
—

Investment related gains (losses), net
 
—

 
—

 
—

 
—

 
8,185


For the nine months ended September 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
 
—

 
—

 
221

 
—

 
—

 
—

Investment related gains (losses), net
 
11,678

 
—

 
17

 
—

 
(42,116
)
 
—

Interest credited
 
—

 
—

 
—

 
—

 
(50,361
)
 
—

Included in other comprehensive income
 
—

 
—

 
(134
)
 
(2,559
)
 
—

 
—

Other revenues
 
—

 
—

 
—

 
6,390

 
—

 
(484
)
Purchases(1)
 
—

 
19

 
29,664

 
—

 
(12,904
)
 
—

Sales(1)
 
—

 
—

 
(1,517
)
 
—

 
—

 
—

Settlements(1)
 
—

 
—

 
(558
)
 
—

 
61,076

 
—

Transfers out of Level 3
 
—

 
(19
)
 
(27,064
)
 
—

 
—

 
—

Fair value, end of period
 
$
121,275

 
$
—

 
$
2,857

 
$
51,620

 
$
(989,170
)
 
$
(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
 
$
—

 
$
—

 
$
221

 
$
—

 
$
—

 
$
—

Investment related gains (losses), net
 
11,678

 
—

 
—

 
—

 
(48,041
)
 
—

Other revenues
 
—

 
—

 
—

 
6,390

 
—

 
(484
)
Interest credited
 
—

 
—

 
—

 
—

 
(111,436
)
 
—



32

For the three months ended September 30, 2018:
 
Fixed maturity securities - available-for-sale
 
 
Corporate
 
Canadian government
 
RMBS
 
ABS
Fair value, beginning of period
 
$
1,367,154

 
$
572,698

 
$
54,839

 
$
70,686

Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
Investment income, net of related expenses
 
(156
)
 
3,520

 
3

 
20

Investment related gains (losses), net
 
239

 
—

 
—

 
626

Included in other comprehensive income
 
(4,858
)
 
(27,476
)
 
(1
)
 
(130
)
Purchases(1)
 
123,808

 
—

 
—

 
11,099

Sales(1)
 
(62,047
)
 
—

 
—

 
(462
)
Settlements(1)
 
(101,868
)
 
—

 
(3
)
 
(24,166
)
Transfers into Level 3
 
2,782

 
—

 
—

 
64,009

Transfers out of Level 3
 
(69,119
)
 
—

 
(54,838
)
 
(38,915
)
Fair value, end of period
 
$
1,255,935

 
$
548,742

 
$
—

 
$
82,767

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
 
$
(180
)
 
$
3,520

 
$
—

 
$
13

Investment related gains (losses), net
 
(1,430
)
 
—

 
—

 
—

For the three months ended September 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
 
$
1,867

 
$
20,735

 
$
16,505

 
$
5,044

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

 
(107
)
 
6

 
—

Included in other comprehensive income
 
7

 
(122
)
 
(544
)
 
(32
)
Purchases(1)
 
—

 
120

 
—

 
—

Settlements(1)
 
(1
)
 
(374
)
 
(37
)
 
—

Transfers into Level 3
 
1,752

 
—

 
9,859

 
—

Transfers out of Level 3
 
(1,843
)
 
—

 
(12,144
)
 
—

Fair value, end of period
 
$
1,782

 
$
20,252

 
$
13,645

 
$
5,012

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
 
$
—

 
$
(107
)
 
$
6

 
$
—

For the three months ended September 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
 
$
42,937

 
$
144,610

 
$
3,217

 
$
43,971

 
$
(928,797
)
 
$
(782
)
Total gains/losses (realized/unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, net:
 
 
 
 
 
 
 
 
 
 
 
 
Investment related gains (losses), net
 
5,532

 
(2,081
)
 
—

 
—

 
32,133

 
—

Interest credited
 
—

 
—

 
—

 
—

 
(25,348
)
 
—

Included in other comprehensive income
 
—

 
—

 
47

 
(307
)
 
—

 
1

Other revenues
 
—

 
—

 
—

 
2,426

 
—

 
473

Purchases(1)
 
863

 
—

 
1,721

 
—

 
(4,231
)
 
—

Sales(1)
 
(5,847
)
 
—

 
—

 
—

 
—

 
—

Settlements(1)
 
—

 
—

 
—

 
—

 
20,044

 
—

Transfers out of Level 3
 
—

 
—

 
(2,782
)
 
—

 
—

 
—

Fair value, end of period
 
$
43,485

 
$
142,529

 
$
2,203

 
$
46,090

 
$
(906,199
)
 
$
(308
)
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
 
$
2,178

 
$
(2,081
)
 
$
—

 
$
—

 
$
30,433

 
$
—

Other revenues
 
—

 
—

 
—

 
2,426

 
—

 
473

Interest credited
 
—

 
—

 
—

 
—

 
(45,393
)
 
—


33

For the nine months ended September 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
 
(822
)
 
10,432

 
(132
)
 
202

Investment related gains (losses), net
 
(2,902
)
 
—

 
312

 
1,910

Included in other comprehensive income
 
(35,532
)
 
(55,632
)
 
(1,782
)
 
(821
)
Purchases(1)
 
379,476

 
—

 
45,328

 
22,099

Sales(1)
 
(79,316
)
 
—

 
(4,961
)
 
(462
)
Settlements(1)
 
(245,342
)
 
—

 
(4,538
)
 
(46,449
)
Transfers into Level 3
 
9,948

 
—

 
3,031

 
68,977

Transfers out of Level 3
 
(106,847
)
 
—

 
(145,140
)
 
(86,163
)
Fair value, end of period
 
$
1,255,935

 
$
548,742

 
$
—

 
$
82,767

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
 
$
(845
)
 
$
10,432

 
$
—

 
$
187

Investment related gains (losses), net
 
(4,571
)
 
—

 
—

 
—

For the nine months ended September 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
 
—

 
(324
)
 
4

 
—

Included in other comprehensive income
 
(56
)
 
(635
)
 
46

 
(80
)
Purchases(1)
 
—

 
334

 
—

 
—

Settlements(1)
 
(4
)
 
(1,634
)
 
(158
)
 
—

Transfers into Level 3
 
1,752

 
—

 
9,859

 
—

Transfers out of Level 3
 
(3,144
)
 
—

 
(37,309
)
 
—

Fair value, end of period
 
$
1,782

 
$
20,252

 
$
13,645

 
$
5,012

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
 
$
—

 
$
(325
)
 
$
3

 
$
—



34

For the nine months ended September 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
 
(2,067
)
 
20,335

 
—

 
—

 
62,242

 
—

Interest credited
 
—

 
—

 
—

 
—

 
6,523

 
—

Included in other comprehensive income
 
—

 
—

 
1

 
(1,552
)
 
—

 
1

Other revenues
 
—

 
—

 
—

 
6,983

 
—

 
(326
)
Purchases(1)
 
13,111

 
—

 
2,202

 
—

 
(16,946
)
 
—

Sales(1)
 
(6,416
)
 
—

 
—

 
—

 
—

 
—

Settlements(1)
 
(48
)
 
—

 
(314
)
 
—

 
56,210

 
1,700

Transfers into Level 3
 
38,905

 
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
 
—

 
—

 
(2,782
)
 
—

 
—

 
—

Fair value, end of period
 
$
43,485

 
$
142,529

 
$
2,203

 
$
46,090

 
$
(906,199
)
 
$
(308
)
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
 
$
(5,527
)
 
$
20,335

 
$
—

 
$
—

 
$
56,808

 
$
—

Other revenues
 
—

 
—

 
—

 
6,983

 
—

 
(326
)
Interest credited
 
—

 
—

 
—

 
—

 
(49,688
)
 
—


(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 and 2018 periods presented and still held at the reporting date (for example, when there is evidence of impairment). The estimated fair values for these assets were determined using significant unobservable inputs (Level 3).
 
 
Carrying Value After Measurement
 
Investment Related Gains (Losses), Net
 
 
At September 30,
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Limited partnership interests (1)
 
$
17,785

 
$
2,246

 
$
(3,537
)
 
$
(1,860
)
 
$
(8,586
)
 
$
(1,860
)
(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 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 September 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

September 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
 
$
5,647,265

 
$
5,936,051

 
$
—

 
$
—

 
$
5,936,051

 
$
—

Policy loans
 
1,289,868

 
1,289,868

 
—

 
1,289,868

 
—

 
—

Funds withheld at interest
 
5,476,148

 
5,873,575

 
—

 
—

 
5,873,575

 
—

Cash and cash equivalents
 
1,708,421

 
1,708,421

 
1,708,421

 
—

 
—

 
—

Short-term investments
 
18,373

 
18,373

 
18,373

 
—

 
—

 
—

Other invested assets
 
1,147,167

 
1,205,284

 
5,208

 
82,360

 
737,064

 
380,652

Accrued investment income
 
520,301

 
520,301

 
—

 
520,301

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive contract liabilities
 
$
18,747,630

 
$
20,446,240

 
$
—

 
$
—

 
$
20,446,240

 
$
—

Long-term debt
 
3,381,406

 
3,564,595

 
—

 
—

 
3,564,595

 
—

Collateral finance and securitization notes
 
610,246

 
561,011

 
—

 
—

 
561,011

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30,
 
Nine months ended September 30,
Revenues:
 
2019
 
2018
 
2019
 
2018
U.S. and Latin America:
 
 
 
 
 
 
 
 
Traditional
 
$
1,609,866

 
$
1,547,790

 
$
4,735,208

 
$
4,601,631

Financial Solutions
 
382,672

 
290,848

 
938,589

 
734,148

Total
 
1,992,538

 
1,838,638

 
5,673,797

 
5,335,779

Canada:
 
 
 
 
 
 
 
 
Traditional
 
324,851

 
295,962

 
955,326

 
910,480

Financial Solutions
 
24,204

 
12,168

 
71,707

 
37,034

Total
 
349,055

 
308,130

 
1,027,033

 
947,514

Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
Traditional
 
378,110

 
357,059

 
1,131,615

 
1,123,379

Financial Solutions
 
116,800

 
91,664

 
340,207

 
280,482

Total
 
494,910

 
448,723

 
1,471,822

 
1,403,861

Asia Pacific:
 
 
 
 
 
 
 
 
Traditional
 
685,886

 
578,035

 
1,992,475

 
1,763,094

Financial Solutions
 
45,702

 
16,167

 
159,788

 
54,005

Total
 
731,588

 
594,202

 
2,152,263

 
1,817,099

Corporate and Other
 
59,474

 
37,838

 
190,089

 
92,893

Total
 
$
3,627,565

 
$
3,227,531

 
$
10,515,004

 
$
9,597,146


 
 
Three months ended September 30,
 
Nine months ended September 30,
Income (loss) before income taxes:
 
2019
 
2018
 
2019
 
2018
U.S. and Latin America:
 
 
 
 
 
 
 
 
Traditional
 
$
112,542

 
$
116,328

 
$
179,371

 
$
191,198

Financial Solutions
 
118,876

 
87,073

 
294,171

 
236,882

Total
 
231,418

 
203,401

 
473,542

 
428,080

Canada:
 
 
 
 
 
 
 
 
Traditional
 
43,684

 
21,149

 
140,222

 
66,661

Financial Solutions
 
3,108

 
1,646

 
8,269

 
8,381

Total
 
46,792

 
22,795

 
148,491

 
75,042

Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
Traditional
 
25,342

 
18,370

 
56,887

 
40,259

Financial Solutions
 
61,246

 
56,205

 
151,437

 
160,738

Total
 
86,588

 
74,575

 
208,324

 
200,997

Asia Pacific:
 
 
 
 
 
 
 
 
Traditional
 
21,453

 
62,007

 
92,852

 
143,756

Financial Solutions
 
1,886

 
206

 
9,887

 
8,365

Total
 
23,339

 
62,213

 
102,739

 
152,121

Corporate and Other
 
(41,047
)
 
(40,323
)
 
(109,365
)
 
(148,366
)
Total
 
$
347,090

 
$
322,661

 
$
823,731

 
$
707,874



37

Assets:
 
September 30, 2019
 
December 31, 2018
U.S. and Latin America:
 
 
 
 
Traditional
 
$
19,035,387

 
$
19,235,781

Financial Solutions
 
25,522,131

 
19,870,388

Total
 
44,557,518

 
39,106,169

Canada:
 
 
 
 
Traditional
 
4,248,447

 
4,200,792

Financial Solutions
 
81,684

 
154,000

Total
 
4,330,131

 
4,354,792

Europe, Middle East and Africa:
 
 
 
 
Traditional
 
3,774,565

 
3,643,174

Financial Solutions
 
6,094,334

 
4,737,529

Total
 
9,868,899

 
8,380,703

Asia Pacific:
 
 
 
 
Traditional
 
6,440,974

 
5,680,978

Financial Solutions
 
1,671,502

 
1,180,745

Total
 
8,112,476

 
6,861,723

Corporate and Other
 
8,904,961

 
5,831,858

Total
 
$
75,773,985

 
$
64,535,245


 
8.    Commitments, Contingencies and Guarantees
Commitments
Funding of Investments
The Company’s commitments to fund investments as of September 30, 2019 and December 31, 2018 are presented in the following table (dollars in thousands):
 
September 30, 2019
 
December 31, 2018
Limited partnership interests and joint ventures
$
619,582

 
$
523,903

Commercial mortgage loans
111,110

 
22,605

Bank loans and private placements
188,648

 
137,076

Lifetime mortgages
44,910

 
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 September 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 September 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 September 30, 2019 and December 31, 2018 are reflected in the following table (dollars in thousands):
 
September 30, 2019
 
December 31, 2018
Treaty guarantees
$
1,764,146

 
$
1,392,352

Treaty guarantees, net of assets in trust
902,008

 
1,291,445

Securities borrowing and repurchase arrangements
273,295

 
269,980

Financing arrangements
41,246

 
61,273

Lease obligations
—

 
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 nine months ended September 30, 2019 and 2018, respectively (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Tax provision at U.S. statutory rate
 
$
72,889

 
$
67,759

 
$
172,984

 
$
148,654

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

 
664

 
—

 
(2,685
)
U.S. Tax Reform valuation allowance adjustments
 
—

 
(58,949
)
 
—

 
(59,139
)
Foreign tax rate differing from U.S. tax rate
 
84

 
7,537

 
1,373

 
8,795

Differences in tax bases in foreign jurisdictions
 
(9,550
)
 
(2,371
)
 
(30,626
)
 
(9,264
)
Deferred tax valuation allowance
 
27,721

 
(5,334
)
 
50,607

 
5,357

Amounts related to tax audit contingencies
 
3,259

 
1,851

 
6,223

 
650

Corporate rate changes
 
116

 
(166
)
 
(1,621
)
 
30

Subpart F
 
(26
)
 
(99
)
 
440

 
211

Foreign tax credits
 
(651
)
 
(544
)
 
(759
)
 
(1,003
)
Global intangible low-taxed income, net of credit
 
—

 
7,624

 
—

 
11,916

Equity compensation excess benefit
 
(1,034
)
 
(817
)
 
(6,189
)
 
(5,067
)
Return to provision adjustments
 
(8,362
)
 
4,213

 
(4,400
)
 
4,108

Other, net
 
(121
)
 
94

 
729

 
(492
)
Total provision for income taxes
 
$
84,325

 
$
21,462

 
$
188,761

 
$
102,071

Effective tax rate
 
24.3
%
 
6.7
%
 
22.9
%
 
14.4
%

The effective tax rates for the third quarter and first nine months of 2019 were higher than the U.S. Statutory rate of 21.0% primarily as a result of valuation allowances established on deferred tax assets in foreign jurisdictions and the accrual of uncertain tax positions, which was partially offset by differences in tax bases of foreign jurisdictions, return to provision adjustments, and tax benefits related to equity compensation.
The effective tax rates for the third quarter and first nine months of 2018 were lower than the U.S. Statutory rate of 21.0% primarily as a result of the release of a valuation allowance on foreign tax credits, which was partially offset by income earned in jurisdictions with statutory rate higher than the U.S. tax rate and a tax expense related to global intangible low-taxed income. During the third quarter of 2018 the Company released an uncertain tax position due to the expiration of the statute of limitations and established a new position. The foreign tax credits were used to offset the new uncertain tax liability, resulting in a valuation allowance no longer being necessary. $58.9 million of the release of the valuation allowance was previously established as part of U.S. Tax Reform.


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 nine months ended September 30, 2019 and 2018 were as follows (dollars in thousands):
 
 
Pension Benefits
 
Other Benefits
 
 
Three months ended September 30,
 
Three months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
3,158

 
$
3,106

 
$
461

 
$
999

Interest cost
 
1,662

 
1,341

 
827

 
680

Expected return on plan assets
 
(1,788
)
 
(1,884
)
 
—

 
—

Amortization of prior service cost (credit)
 
61

 
82

 
(328
)
 
(328
)
Amortization of prior actuarial losses
 
1,073

 
929

 
29

 
937

Net periodic benefit cost
 
$
4,166

 
$
3,574

 
$
989

 
$
2,288


 
 
Pension Benefits
 
Other Benefits
 
 
Nine months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
9,465

 
$
9,330

 
$
1,975

 
$
2,271

Interest cost
 
4,979

 
4,028

 
1,986

 
1,739

Expected return on plan assets
 
(5,364
)
 
(5,651
)
 
—

 
—

Amortization of prior service cost (credit)
 
182

 
247

 
(986
)
 
(986
)
Amortization of prior actuarial losses
 
3,215

 
2,792

 
1,317

 
1,933

Net periodic benefit cost
 
$
12,477

 
$
10,746

 
$
4,292

 
$
4,957


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 September 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 September 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 September 30, 2019 or December 31, 2018 (dollars in thousands):
 
 
 
 
September 30, 2019
 
December 31, 2018
Reinsurer
 
A.M. Best Rating
 
Amount
 
% of Total
 
Amount
 
% of Total
Reinsurer A
 
A+
 
$
358,845

 
41.6
%
 
$
303,036

 
40.0
%
Reinsurer B
 
A+
 
201,011

 
23.3

 
193,324

 
25.5

Reinsurer C
 
A
 
76,807

 
8.9

 
69,885

 
9.2

Reinsurer D
 
A++
 
57,247

 
6.6

 
36,600

 
4.8

Reinsurer E
 
A+
 
40,816

 
4.7

 
40,004

 
5.3

Other reinsurers
 
 
 
128,301

 
14.9

 
114,723

 
15.2

Total
 
 
 
$
863,027

 
100.0
%
 
$
757,572

 
100.0
%

Included in the total reinsurance ceded receivables balance were $189.9 million and $242.8 million of claims recoverable, of which $15.6 million and $17.4 million were in excess of 90 days past due, as of September 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):
 
 
Nine months ended September 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
 
8,203,842

 
7,534,297

Prior years
 
108,023

 
97,336

Total incurred
 
8,311,865

 
7,631,633

Payments:
 
 
 
 
Current year
 
(2,937,099
)
 
(2,748,547
)
Prior years
 
(4,774,623
)
 
(4,222,550
)
Total payments
 
(7,711,722
)
 
(6,971,097
)
Other changes:
 
 
 
 
Interest accretion
 
19,887

 
18,550

Foreign exchange adjustments
 
(99,788
)
 
(153,247
)
Total other changes
 
(79,901
)
 
(134,697
)
 
 
 
 
 
Net balance at end the period
 
6,672,328

 
5,966,761

Plus: reinsurance recoverable
 
508,003

 
424,545

Balance at end of the period
 
$
7,180,331

 
$
6,391,306


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. The FASB has tentatively agreed to defer the original effective date by one year. Upon issuance of a final standard, 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
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 through an allowance for credit losses and adjusted each period for changes in credit risks. 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 developing its expected credit loss models and related system processes and controls for assets held at amortized costs, the most significant of which are commercial mortgages and other loans. The allowance for credit losses will increase when this guidance is adopted to include expected losses over the lifetime of commercial mortgages and other loans, including reasonable and supportable forecasts and expected changes in future economic conditions. Based on a preliminary analysis performed in the third quarter of 2019 and forecasts of macroeconomic conditions and exposures at that time, the overall impact is estimated to be an approximate $15 million to $25 million increase in the allowance for credit losses. This increase will be reflected as a decrease to opening retained earnings, net of income taxes, as of January 1, 2020. The extent of the impact of the adoption of this guidance on the Company’s consolidated financial statements will depend on various factors including the economic environment, the size and type of commercial loans and the nature and size of transactions closed in the fourth quarter of 2019.
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 $75.8 billion as of September 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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,809,641

 
$
2,562,042

 
$
8,311,240

 
$
7,739,053

Investment income, net of related expenses
 
678,805

 
572,742

 
1,842,760

 
1,617,132

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(8,539
)
 
(10,705
)
 
(17,992
)
 
(14,055
)
Other investment related gains (losses), net
 
57,323

 
(9,312
)
 
87,036

 
(17,004
)
Investment related gains (losses), net
 
48,784

 
(20,017
)
 
69,044

 
(31,059
)
Other revenues
 
90,335

 
112,764

 
291,960

 
272,020

Total revenues
 
3,627,565

 
3,227,531

 
10,515,004

 
9,597,146

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,469,981

 
2,209,920

 
7,493,516

 
6,851,614

Interest credited
 
226,262

 
143,292

 
517,293

 
333,068

Policy acquisition costs and other insurance expenses
 
321,855

 
310,639

 
894,081

 
987,817

Other operating expenses
 
209,348

 
200,262

 
634,330

 
586,495

Interest expense
 
45,927

 
33,290

 
129,383

 
107,769

Collateral finance and securitization expense
 
7,102

 
7,467

 
22,670

 
22,509

Total benefits and expenses
 
3,280,475

 
2,904,870

 
9,691,273

 
8,889,272

 Income before income taxes
 
347,090

 
322,661

 
823,731

 
707,874

Provision for income taxes
 
84,325

 
21,462

 
188,761

 
102,071

Net income
 
$
262,765

 
$
301,199

 
$
634,970

 
$
605,803

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
4.19

 
$
4.76

 
$
10.13

 
$
9.47

Diluted earnings per share
 
$
4.12

 
$
4.68

 
$
9.93

 
$
9.30

Consolidated income before income taxes increased $24.4 million, or 7.6%, and $115.9 million, or 16.4%, for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018. The increase in income for the third quarter of 2019 was primarily due to improved claims experience in the Canada and Europe, Middle East, and Africa segments, as well as favorable experience in the various Financial Solutions segments. The favorable experience was partially offset by unfavorable results in the Asia Pacific Traditional segment, primarily in Australia, and the U.S. and Latin America Traditional segment. In addition, income for the first nine months of 2019 reflects unfavorable 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 $1.8 million in the third quarter and decreased income by $15.7 million in the first nine 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 September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Modco/Funds withheld:
 
 
 
 
 
 
 
Unrealized gains (losses)
$
8,508

 
$
(2,081
)
 
$
11,678

 
$
20,335

Deferred acquisition costs/retrocession
(9,157
)
 
51

 
(17,575
)
 
(2,617
)
Net effect
(649
)
 
(2,030
)
 
(5,897
)
 
17,718

EIAs:
 
 
 
 
 
 
 
Unrealized gains (losses)
(35,883
)
 
1,602

 
(55,940
)
 
29,600

Deferred acquisition costs/retrocession
16,682

 
(1,285
)
 
27,192

 
(16,997
)
Net effect
(19,201
)
 
317

 
(28,748
)
 
12,603

Guaranteed minimum benefit riders:
 
 
 
 
 
 
 
Unrealized gains (losses)
(42,233
)
 
32,133

 
(42,116
)
 
62,242

Deferred acquisition costs/retrocession
(17,784
)
 
(17,575
)
 
(40,633
)
 
(11,379
)
Net effect
(60,017
)
 
14,558

 
(82,749
)
 
50,863

Related freestanding derivatives
57,085

 
(9,393
)
 
81,998

 
(50,697
)
Net effect after related freestanding derivatives
(2,932
)
 
5,165

 
(751
)
 
166

 
 
 
 
 
 
 
 
Total net effect of embedded derivatives
(79,867
)
 
12,845

 
(117,394
)
 
81,184

Related freestanding derivatives
57,085

 
(9,393
)
 
81,998

 
(50,697
)
Total net effect after freestanding derivatives
$
(22,782
)
 
$
3,452

 
$
(35,396
)
 
$
30,487

Consolidated net premiums increased $247.6 million, or 9.7%, and $572.2 million, or 7.4%, for the three and nine months ended September 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 $34.9 million and $173.7 million in the third quarter and the first nine months of 2019, as compared to the same periods in 2018. Consolidated assumed life insurance in force increased to $3,359.8 billion as of September 30, 2019 from $3,307.2 billion as of September 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 $98.3 billion and $95.7 billion during the third quarter of 2019 and 2018, respectively, and $248.0 billion and $292.1 billion during the first nine months of 2019 and 2018, respectively.
Consolidated investment income, net of related expenses, increased $106.1 million, or 18.5%, and $225.6 million, or 14.0%, for the three and nine months ended September 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 associated with joint venture and limited partnership investments. 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 $19.5 million in the third quarter and decreased investment income by $29.6 million in the first nine 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 nine months ended September 30, 2019 were $28.2 billion, a 5.7% increase over September 30, 2018. The average yield earned on investments, excluding spread related business, was 4.83% and 4.57% for the third quarter of 2019 and 2018, respectively, and 4.57% and 4.45% for the nine months ended September 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. Investment yields in 2019 benefited from higher distributions from joint ventures and limited partnerships. 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 $48.8 million and $(20.0) million for the third quarter of 2019 and 2018, respectively, and $69.0 million and $(31.1) million for the first nine 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

48

treaties written on a modco or funds withheld basis, reflecting the impact of changes in interest rates and credit spreads on the calculation of fair value. Changes in the fair value of these embedded derivatives increased (decreased) investment related gains by $8.5 million and $(2.1) million for the third quarter of 2019 and 2018, respectively, and $11.7 million and $20.3 million for the first nine months of 2019 and 2018, respectively. In addition, impairments on fixed maturity securities decreased by $2.2 million in the third quarter and increased by $3.9 million in the first nine 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 24.3% and 6.7% for the third quarter 2019 and 2018, respectively, and 22.9% and 14.4% for the first nine 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 and other longevity type products. 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 September 30, 2019:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
1,404,164

 
$
12,298

 
$
—

 
$
1,416,462

Investment income, net of related expenses
 
209,874

 
254,264

 
1,002

 
465,140

Investment related gains (losses), net
 
(9,587
)
 
56,840

 
—

 
47,253

Other revenues
 
5,415

 
36,422

 
21,846

 
63,683

Total revenues
 
1,609,866

 
359,824

 
22,848

 
1,992,538

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,241,332

 
49,438

 
—

 
1,290,770

Interest credited
 
19,518

 
183,295

 
—

 
202,813

Policy acquisition costs and other insurance expenses
 
201,784

 
19,642

 
672

 
222,098

Other operating expenses
 
34,690

 
7,788

 
2,961

 
45,439

Total benefits and expenses
 
1,497,324

 
260,163

 
3,633

 
1,761,120

Income before income taxes
 
$
112,542

 
$
99,661

 
$
19,215

 
$
231,418

 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2018:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
1,360,076

 
$
6,885

 
$
—

 
$
1,366,961

Investment income, net of related expenses
 
181,396

 
200,397

 
1,491

 
383,284

Investment related gains (losses), net
 
(33
)
 
581

 
—

 
548

Other revenues
 
6,351

 
53,735

 
27,759

 
87,845

Total revenues
 
1,547,790

 
261,598

 
29,250

 
1,838,638

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,191,489

 
46,995

 
—

 
1,238,484

Interest credited
 
20,321

 
110,673

 
—

 
130,994

Policy acquisition costs and other insurance expenses
 
183,433

 
30,519

 
5,324

 
219,276

Other operating expenses
 
36,219

 
7,921

 
2,343

 
46,483

Total benefits and expenses
 
1,431,462

 
196,108

 
7,667

 
1,635,237

Income before income taxes
 
$
116,328

 
$
65,490

 
$
21,583

 
$
203,401


50

For the nine months ended September 30, 2019:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
4,171,549

 
$
27,728

 
$
—

 
$
4,199,277

Investment income, net of related expenses
 
568,718

 
655,379

 
3,047

 
1,227,144

Investment related gains (losses), net
 
(20,009
)
 
75,386

 
—

 
55,377

Other revenues
 
14,950

 
109,338

 
67,711

 
191,999

Total revenues
 
4,735,208

 
867,831

 
70,758

 
5,673,797

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
3,834,249

 
146,200

 
—

 
3,980,449

Interest credited
 
58,909

 
395,791

 
—

 
454,700

Policy acquisition costs and other insurance expenses
 
557,734

 
64,532

 
5,233

 
627,499

Other operating expenses
 
104,945

 
23,995

 
8,667

 
137,607

Total benefits and expenses
 
4,555,837

 
630,518

 
13,900

 
5,200,255

Income before income taxes
 
$
179,371

 
$
237,313

 
$
56,858

 
$
473,542

 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2018:
 
 
 
Financial Solutions
 
 
(dollars in thousands)
 
 
 
Asset-Intensive
 
Financial
Reinsurance
 
Total U.S. and Latin America
 
 
Traditional
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
4,033,046

 
$
18,776

 
$
—

 
$
4,051,822

Investment income, net of related expenses
 
544,934

 
530,119

 
4,817

 
1,079,870

Investment related gains (losses), net
 
5,375

 
2,033

 
—

 
7,408

Other revenues
 
18,276

 
100,759

 
77,644

 
196,679

Total revenues
 
4,601,631

 
651,687

 
82,461

 
5,335,779

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
3,701,457

 
85,530

 
—

 
3,786,987

Interest credited
 
61,593

 
239,695

 
—

 
301,288

Policy acquisition costs and other insurance expenses
 
543,137

 
130,493

 
11,933

 
685,563

Other operating expenses
 
104,246

 
22,377

 
7,238

 
133,861

Total benefits and expenses
 
4,410,433

 
478,095

 
19,171

 
4,907,699

Income before income taxes
 
$
191,198

 
$
173,592

 
$
63,290

 
$
428,080

Income before income taxes increased by $28.0 million, or 13.8%, and $45.5 million, or 10.6%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in income before income taxes for the third quarter was primarily due to the income from asset-intensive transactions executed since the third quarter of 2018, including investment related gains recognized during portfolio repositioning. The increase in income before income taxes for the first nine months was primarily due to the impact of higher investment related gains (losses) in the Asset-Intensive segment.
Traditional Reinsurance
Income before income taxes for the U.S. and Latin America Traditional segment decreased by $3.8 million, or 3.3%, and $11.8 million, or 6.2%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decrease in the third quarter and first nine months was primarily due to unfavorable claims experience within the individual mortality business as well as changes in the value of embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis. The unfavorable individual mortality claims experience was partially offset by an increase in variable investment income and improved claims experience within the Group and Individual Health lines of business.
Net premiums increased $44.1 million, or 3.2%, and $138.5 million, or 3.4%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in net premiums in the third quarter and first nine 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 $23.9 billion and $27.6 billion for the third quarter and $77.4 billion and $80.2 billion for the first nine months of 2019 and 2018, respectively.
Net investment income increased $28.5 million, or 15.7%, and $23.8 million, or 4.4%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in the third quarter and first nine months were primarily due to an increase in variable investment income from real estate joint ventures and limited partnerships as well as a higher asset base. Investment related gains (losses), net decreased $9.6 million and $25.4 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.

51

Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 88.4% and 87.6% for the third quarter and 91.9% and 91.8%, for the nine months ended September 30, 2019 and 2018, respectively. The increase in the loss ratio for the third quarter was primarily due to unfavorable claims experience in the individual mortality line of business.
Interest credited expense decreased $0.8 million, or 4.0%, and $2.7 million, or 4.4%, for the three and nine months ended September 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 14.4% and 13.5% for the third quarter and 13.4% and 13.5% for the nine months ended September 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 decreased $1.5 million, or 4.2%, and increased by $0.7 million, or 0.7%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decrease in the third quarter was primarily due to lower salaries and fringe costs related to the timing of incentive based compensation adjustments. Other operating expenses, as a percentage of net premiums were 2.5% and 2.7% for the third quarter and 2.5% and 2.6% first nine 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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Total revenues
 
$
359,824

 
$
261,598

 
$
867,831

 
$
651,687

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
18,160

 
(2,138
)
 
31,799

 
14,819

Guaranteed minimum benefit riders and related free standing derivatives
 
(769
)
 
8,067

 
307

 
5,556

Revenues before certain derivatives
 
342,433

 
255,669

 
835,725

 
631,312

Benefits and expenses:
 
 
 
 
 
 
 
 
Total benefits and expenses
 
260,163

 
196,108

 
630,518

 
478,095

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
9,157

 
(51
)
 
17,575

 
2,617

Guaranteed minimum benefit riders and related free standing derivatives
 
2,163

 
2,902

 
1,058

 
5,390

Equity-indexed annuities
 
19,201

 
(317
)
 
28,748

 
(12,603
)
Benefits and expenses before certain derivatives
 
229,642

 
193,574

 
583,137

 
482,691

Income before income taxes:
 
 
 
 
 
 
 
 
Income before income taxes
 
99,661

 
65,490

 
237,313

 
173,592

Less:
 
 
 
 
 
 
 
 
Embedded derivatives – modco/funds withheld treaties
 
9,003

 
(2,087
)
 
14,224

 
12,202

Guaranteed minimum benefit riders and related free standing derivatives
 
(2,932
)
 
5,165

 
(751
)
 
166

Equity-indexed annuities
 
(19,201
)
 
317

 
(28,748
)
 
12,603

Income before income taxes and certain derivatives
 
$
112,791

 
$
62,095

 
$
252,588

 
$
148,621

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 nine months ended September 30, 2019 and 2018.
The change in fair value of the embedded derivatives - modco/funds withheld treaties increased (decreased) income before income taxes by $9.0 million and $(2.1) million for the third quarter and $14.2 million and $12.2 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in income for the third quarter and first nine months of 2019 was primarily the result of repositioning in the funds withheld portfolio, partially offset by widening credit spreads. The increase in income for the third quarter of 2018 was primarily the result of interest rate movements. The increase in income for the first nine months of 2018 were primarily due to tightening credit spreads, partially offset by repositioning in the funds withheld portfolio.
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 nine months ended September 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 (decreased) income before income taxes by $(2.9) million and $5.2 million for the third quarter and $(0.8) million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease in income for the three and nine months ended September 30, 2019 was due to the annual update of best estimate actuarial policyholder assumptions to account for lower policyholder lapse experience, partially offset by favorable hedging results. The increases in income for the third quarter and for the first nine months of September 30, 2018 were primarily due to favorable hedging results.
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 $(19.2) million and $0.3 million for the third quarter and $(28.7) million and $12.6 million for the nine months ended September 30, 2019 and 2018, respectively.  The decreases in income for the third quarter and first nine months of 2019 were primarily due to interest rate movements. The increases in income for the third quarter and first nine months of 2018 were 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 $50.7 million and $104.0 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in the third quarter and the first nine months were primarily due to income from asset-intensive transactions executed since the third quarter of 2018, including investment related gains recognized during portfolio repositioning and favorable longevity experience during the first nine months of 2019.
Revenue before certain derivatives increased by $86.8 million and $204.4 million for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018. The increases in the third quarter and first nine months were primarily due to income from asset-intensive transactions executed since the third quarter of 2018, including investment related gains recognized during portfolio repositioning, partially offset by lower interest credited associated with the reinsurance of EIAs. 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 $36.1 million and $100.4 million for the three and nine months ended September 30, 2019, as compared to the same period in 2018. The increases in the third quarter and first nine months were primarily due to benefits and expenses from asset-intensive transactions executed since the third quarter of 2018, including investment related gains recognized during portfolio repositioning, partially offset by lower interest credited associated with the reinsurance of EIAs. The effect on interest credited related to equity options is substantially offset by a corresponding change in investment income.
The invested asset base supporting this segment increased to $24.7 billion as of September 30, 2019 from $19.0 billion as of September 30, 2018. As of September 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 $2.4 million, or 11.0%, and $6.4 million, or 10.2%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decreases in the third quarter and first nine months were primarily due to the termination of certain agreements.
At September 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 $15.9 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 September 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Canada
 
Traditional
 
Financial Solutions
 
Total Canada
Net premiums
$
270,749

 
$
22,432

 
$
293,181

 
$
243,105

 
$
10,681

 
$
253,786

Investment income, net of related expenses
53,162

 
960

 
54,122

 
50,145

 
415

 
50,560

Investment related gains (losses), net
1,067

 
—

 
1,067

 
2,484

 
—

 
2,484

Other revenues
(127
)
 
812

 
685

 
228

 
1,072

 
1,300

Total revenues
324,851

 
24,204

 
349,055

 
295,962

 
12,168

 
308,130

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
215,950

 
20,127

 
236,077

 
210,292

 
10,003

 
220,295

Interest credited
31

 
—

 
31

 
6

 
—

 
6

Policy acquisition costs and other insurance expenses
56,528

 
453

 
56,981

 
56,224

 
190

 
56,414

Other operating expenses
8,658

 
516

 
9,174

 
8,291

 
329

 
8,620

Total benefits and expenses
281,167

 
21,096

 
302,263

 
274,813

 
10,522

 
285,335

Income before income taxes
$
43,684

 
$
3,108

 
$
46,792

 
$
21,149

 
$
1,646

 
$
22,795

(dollars in thousands)
Nine months ended September 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Canada
 
Traditional
 
Financial Solutions
 
Total Canada
Net premiums
$
790,188

 
$
66,877

 
$
857,065

 
$
756,578

 
$
32,941

 
$
789,519

Investment income, net of related expenses
152,857

 
2,466

 
155,323

 
150,264

 
860

 
151,124

Investment related gains (losses), net
11,035

 
—

 
11,035

 
2,199

 
—

 
2,199

Other revenues
1,246

 
2,364

 
3,610

 
1,439

 
3,233

 
4,672

Total revenues
955,326

 
71,707

 
1,027,033

 
910,480

 
37,034

 
947,514

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
622,078

 
60,502

 
682,580

 
647,052

 
27,033

 
674,085

Interest credited
159

 
—

 
159

 
32

 
—

 
32

Policy acquisition costs and other insurance expenses
167,485

 
1,349

 
168,834

 
171,797

 
578

 
172,375

Other operating expenses
25,382

 
1,587

 
26,969

 
24,938

 
1,042

 
25,980

Total benefits and expenses
815,104

 
63,438

 
878,542

 
843,819

 
28,653

 
872,472

Income before income taxes
$
140,222

 
$
8,269

 
$
148,491

 
$
66,661

 
$
8,381

 
$
75,042

Income before income taxes increased by $24.0 million, or 105.3%, and $73.4 million, or 97.9%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in income for the third quarter and first nine months are primarily due to favorable individual 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 $0.5 million and $4.9 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Traditional Reinsurance
Income before income taxes for the Canada Traditional segment increased by $22.5 million, or 106.6%, and $73.6 million, or 110.4%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in income before income taxes for the third quarter and first nine months were primarily due to favorable individual 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 $0.5 million and $4.6 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.

55

Net premiums increased by $27.6 million, or 11.4%, and $33.6 million, or 4.4%, for the three and nine months ended September 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 completed during the last quarter of 2018 as well as a non-recurring payment received during the quarter relating to a block of existing business. Foreign currency exchange fluctuations in the Canadian dollar resulted in a decrease in net premiums of $2.9 million and $25.1 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net investment income increased $3.0 million, or 6.0%, and $2.6 million, or 1.7%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in net investment income for the third quarter and first nine months of 2019 were primarily a result of an increase in the invested asset base due to growth in the underlying business volume, partially offset by foreign currency exchange fluctuations. Foreign currency exchange fluctuation in the Canadian dollar resulted in a decrease in net investment income of $0.6 million and $4.9 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Other revenues decreased by $0.4 million and $0.2 million for the three and nine months ended September 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 79.8% and 86.5% for the third quarter and 78.7% and 85.5% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the loss ratios for the three and nine months ended September 30, 2019, as compared to the same periods in 2018, is due to favorable individual mortality experience. Loss ratios for the traditional individual life mortality business were 85.2% and 96.7% for the third quarter and 84.0% and 95.3% for the first nine months ended September 30, 2019 and 2018, respectively. Excluding creditor business, claims as a percentage of net premiums for this segment were 65.0% and 81.2% for the third quarter and 68.5% and 79.1% for the nine months ended September 30, 2019 and 2018, respectively. Excluding creditor business, claims and other policy benefits, as a percentage of net premiums and investment income were 70.5% and 77.2% for the third quarter and 70.0% and 76.8% for the nine months ended September 30, 2019 and 2018, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 20.9% and 23.1% for the third quarter and 21.2% and 22.7% for the nine months ended September 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 $0.4 million, or 4.4%, and $0.4 million, or 1.8%, for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018. Other operating expenses as a percentage of net premiums were 3.2% and 3.4% for the third quarter and 3.2% and 3.3% for the nine month periods ended September 30, 2019 and 2018, respectively.
Financial Solutions Reinsurance
Income before income taxes increased by $1.5 million, or 88.8%, and decreased by $0.1 million, or 1.3%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in income for the third quarter was primarily due to favorable experience on longevity business and favorable investment revenues. The decrease in income for the nine months ended September 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 negligible difference and a decrease in income before income taxes of $0.2 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net premiums increased $11.8 million, or 110.0%, and $33.9 million, or 103.0%, for the three and nine months ended September 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 $0.2 million and $2.1 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net investment income increased $0.5 million, or 131.3%, and $1.6 million, or 186.7%, for the three and nine months ended September 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 $10.1 million, or 101.2%, and $33.5 million, or 123.8%, for the three and nine months ended September 30, 2019 as compared to the same periods in 2018. The increases for the third quarter and first nine 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

56

two major segments: Traditional and Financial Solutions. The Traditional segment primarily provides reinsurance through yearly renewable term and coinsurance agreements on a variety of life, health and critical illness products. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and, in some markets, group risks. The Financial Solutions segment consists of reinsurance and other transactions associated with longevity closed blocks, payout annuities, capital management solutions and financial reinsurance.
(dollars in thousands)
Three months ended September 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total EMEA
 
Traditional
 
Financial Solutions
 
Total EMEA
Net premiums
$
359,394

 
$
54,692

 
$
414,086

 
$
340,414

 
$
49,104

 
$
389,518

Investment income, net of related expenses
17,514

 
54,937

 
72,451

 
16,190

 
37,548

 
53,738

Investment related gains (losses), net
(112
)
 
2,165

 
2,053

 
—

 
(87
)
 
(87
)
Other revenues
1,314

 
5,006

 
6,320

 
455

 
5,099

 
5,554

Total revenues
378,110

 
116,800

 
494,910

 
357,059

 
91,664

 
448,723

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
297,289

 
33,333

 
330,622

 
291,442

 
24,211

 
315,653

Interest credited
—

 
11,916

 
11,916

 
—

 
2,402

 
2,402

Policy acquisition costs and other insurance expenses
26,538

 
562

 
27,100

 
21,817

 
814

 
22,631

Other operating expenses
28,941

 
9,743

 
38,684

 
25,430

 
8,032

 
33,462

Total benefits and expenses
352,768

 
55,554

 
408,322

 
338,689

 
35,459

 
374,148

Income before income taxes
$
25,342

 
$
61,246

 
$
86,588

 
$
18,370

 
$
56,205

 
$
74,575

(dollars in thousands)
Nine months ended September 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total EMEA
 
Traditional
 
Financial Solutions
 
Total EMEA
Net premiums
$
1,074,162

 
$
163,453

 
$
1,237,615

 
$
1,070,677

 
$
146,218

 
$
1,216,895

Investment income, net of related expenses
54,261

 
150,195

 
204,456

 
49,041

 
109,810

 
158,851

Investment related gains (losses), net
—

 
8,079

 
8,079

 
9

 
9,123

 
9,132

Other revenues
3,192

 
18,480

 
21,672

 
3,652

 
15,331

 
18,983

Total revenues
1,131,615

 
340,207

 
1,471,822

 
1,123,379

 
280,482

 
1,403,861

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
905,085

 
129,762

 
1,034,847

 
928,431

 
88,536

 
1,016,967

Interest credited
—

 
26,538

 
26,538

 
—

 
3,877

 
3,877

Policy acquisition costs and other insurance expenses
84,085

 
2,374

 
86,459

 
77,330

 
2,948

 
80,278

Other operating expenses
85,558

 
30,096

 
115,654

 
77,359

 
24,383

 
101,742

Total benefits and expenses
1,074,728

 
188,770

 
1,263,498

 
1,083,120

 
119,744

 
1,202,864

Income before income taxes
$
56,887

 
$
151,437

 
$
208,324

 
$
40,259

 
$
160,738

 
$
200,997

Income before income taxes increased by $12.0 million, or 16.1%, and $7.3 million, or 3.6%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in income before income taxes were primarily due to favorable performance in the individual mortality, closed block longevity and payout annuity businesses, as well as increased business volumes. Foreign currency exchange fluctuations resulted in a decrease in income before income taxes of $4.7 million and $13.1 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Traditional Reinsurance
Income before income taxes increased by $7.0 million, or 38.0%, and $16.6 million, or 41.3%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in income for the quarter was primarily due to an improvement in individual mortality experience. The increase in income for the first nine months was primarily due to an improvement in individual mortality and morbidity experience. Foreign currency exchange fluctuations resulted in a decrease in income before income taxes of $1.2 million and $3.9 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.

57

Net premiums increased $19.0 million, or 5.6%, and $3.5 million, or 0.3%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in net premiums for the three and nine months was primarily due to an increase in business volumes on existing treaties partially offset by treaty terminations and unfavorable foreign exchange fluctuations. Foreign currency exchange fluctuations decreased net premiums by $17.1 million and $73.0 million for the three and nine months ended September 30, 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, 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 $48.6 million and $45.6 million for the third quarter and $136.1 million and $142.4 million for the first nine months of 2019 and 2018, respectively.
Net investment income increased $1.3 million, or 8.2%, and $5.2 million, or 10.6%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in net investment income were primarily due to an increase in the invested asset base resulting from business growth. Foreign currency exchange fluctuations resulted in a decrease in net investment income of $0.9 million and $3.9 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Loss ratios for this segment were 82.7% and 85.6% for the third quarter and 84.3% and 86.7% for the first nine months ended September 30, 2019 and 2018, respectively. The decreases in loss ratios were due to normal claims variability associated with individual mortality and morbidity business and changes in business mix.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 7.4% and 6.4% for the third quarter and 7.8% and 7.2% for the first nine months ended September 30, 2019 and 2018, respectively. The increases in the percentages are due primarily to variations in the mixture of business.
Other operating expenses increased $3.5 million, or 13.8%, and $8.2 million, or 10.6%, for the three and nine months ended September 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 $1.3 million and $5.7 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. Other operating expenses as a percentage of net premiums totaled 8.1% and 7.5% for the third quarter and 8.0% and 7.2% for the first nine months ended September 30, 2019 and 2018, respectively.
Financial Solutions Reinsurance
Income before income taxes increased by $5.0 million, or 9.0%, and decreased by $9.3 million, or 5.8%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in the third quarter was primarily due to favorable longevity performance and increased business volumes. The decrease in income before income taxes for the first nine months was 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 $3.4 million and $9.2 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net premiums increased by $5.6 million, or 11.4%, and $17.2 million, or 11.8%, for the three and nine months ended September 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 $3.1 million and $10.1 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net investment income increased $17.4 million, or 46.3%, and $40.4 million, or 36.8%, for the three and nine months ended September 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 an increased invested asset base resulting from business growth. The increase for the nine months was due to an increased invested asset yield, an increased invested asset base from business growth as well as an increase in investment income associated with unit-linked policies which fluctuate with market performance. 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 $3.2 million and $9.4 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Other revenues decreased by $0.1 million, or 1.8%, and increased by $3.1 million, or 20.5%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in other revenues for the first nine months of 2019 was primarily due to fees related to a new closed block annuity transaction. Foreign currency exchange fluctuations resulted in a decrease in other revenues of $0.2 million and $1.4 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.

58

Claims and other policy benefits increased $9.1 million, or 37.7%, and $41.2 million, or 46.6%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in the third quarter and the first nine 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 $1.9 million and $8.2 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Interest credited expense increased by $9.5 million and $22.7 million or the three and nine months ended September 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 $1.7 million, or 21.3%, and $5.7 million, or 23.4%, for the three and nine months ended September 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 $0.5 million and $1.9 million for the three and nine months ended September 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 September 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Asia Pacific
 
Traditional
 
Financial Solutions
 
Total Asia Pacific
Net premiums
$
655,911

 
$
29,995

 
$
685,906

 
$
551,695

 
$
75

 
$
551,770

Investment income, net of related expenses
26,643

 
10,482

 
37,125

 
23,169

 
10,145

 
33,314

Investment related gains (losses), net
(1
)
 
(1,062
)
 
(1,063
)
 
—

 
(438
)
 
(438
)
Other revenues
3,333

 
6,287

 
9,620

 
3,171

 
6,385

 
9,556

Total revenues
685,886

 
45,702

 
731,588

 
578,035

 
16,167

 
594,202

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
584,005

 
28,399

 
612,404

 
431,570

 
3,894

 
435,464

Interest credited
—

 
6,081

 
6,081

 
—

 
6,875

 
6,875

Policy acquisition costs and other insurance expenses
40,114

 
5,095

 
45,209

 
42,063

 
786

 
42,849

Other operating expenses
40,314

 
4,241

 
44,555

 
42,395

 
4,406

 
46,801

Total benefits and expenses
664,433

 
43,816

 
708,249

 
516,028

 
15,961

 
531,989

Income (loss) before income taxes
$
21,453

 
$
1,886

 
$
23,339

 
$
62,007

 
$
206

 
$
62,213


59

(dollars in thousands)
Nine months ended September 30,
 
2019
 
2018
Revenues:
Traditional
 
Financial Solutions
 
Total Asia Pacific
 
Traditional
 
Financial Solutions
 
Total Asia Pacific
Net premiums
$
1,909,070

 
$
108,243

 
$
2,017,313

 
$
1,680,007

 
$
783

 
$
1,680,790

Investment income, net of related expenses
76,710

 
31,134

 
107,844

 
71,845

 
30,723

 
102,568

Investment related gains (losses), net
7

 
2,191

 
2,198

 
8

 
4,933

 
4,941

Other revenues
6,688

 
18,220

 
24,908

 
11,234

 
17,566

 
28,800

Total revenues
1,992,475

 
159,788

 
2,152,263

 
1,763,094

 
54,005

 
1,817,099

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Claims and other policy benefits
1,698,453

 
97,225

 
1,795,678

 
1,362,356

 
10,767

 
1,373,123

Interest credited
—

 
19,513

 
19,513

 
—

 
19,929

 
19,929

Policy acquisition costs and other insurance expenses
78,853

 
20,004

 
98,857

 
138,429

 
2,711

 
141,140

Other operating expenses
122,317

 
13,159

 
135,476

 
118,553

 
12,233

 
130,786

Total benefits and expenses
1,899,623

 
149,901

 
2,049,524

 
1,619,338

 
45,640

 
1,664,978

Income before income taxes
$
92,852

 
$
9,887

 
$
102,739

 
$
143,756

 
$
8,365

 
$
152,121

Income before income taxes decreased by $38.9 million, or 62.5%, and $49.4 million, or 32.5%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decreases in income before income taxes are the result of an increase in the loss incurred in Australia and unfavorable claims experience and assumption updates in Asia as compared to the prior periods. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $3.5 million and $2.2 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Traditional Reinsurance
Income before income taxes decreased by $40.6 million, or 65.4%, and $50.9 million, or 35.4%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decreases in income before income taxes are the result of an increase in the loss incurred in Australia and unfavorable claims experience and assumption updates in Asia as compared to the prior periods. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $3.1 million and $1.5 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net premiums increased by $104.2 million, or 18.9%, and $229.1 million, or 13.6%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases were driven by new business written in Asia as well as in force growth across the segment. Foreign currency exchange fluctuations resulted in a decrease in net premiums of $11.9 million and $62.3 million for the three and nine 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 $294.4 million and $191.1 million for the third quarter and $789.3 million and $607.7 million for the first nine months ended September 30, 2019 and 2018, respectively.
Net investment income increased by $3.5 million, or 15.0%, and $4.9 million, or 6.8%, for the three and nine months ended September 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 $0.8 million and $3.7 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Other revenues increased by $0.2 million, or 5.1%, and decreased by $4.5 million, or 40.5%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decrease in the first nine months of 2019 was primarily related to variances in foreign currency gains and losses recognized in each period. Foreign currency exchange fluctuations resulted in a decrease in other revenues of $0.3 million and $0.7 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Loss ratios for this segment were 89.0% and 78.2% for the third quarter and 89.0% and 81.1% for the first nine months ended September 30, 2019 and 2018, respectively. The increases in the loss ratios were primarily due to unfavorable claims experience in several markets, as well as the impact of experience adjustments in Asia.

60

Policy acquisition costs and other insurance expenses as a percentage of net premiums were 6.1% and 7.6% for the third quarter and 4.1% and 8.2% for the nine months ended September 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 during the nine months ended September 30, 2019. Favorability in policy acquisition costs and other insurance expenses was offset by an increase to claims and other policy benefits.
Other operating expenses decreased $2.1 million, or 4.9%, and increased by $3.8 million, or 3.2%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in the first nine months was mainly due to growth in operations in Asia. Other operating expenses as a percentage of net premiums totaled 6.1% and 7.7% for the third quarter and 6.4% and 7.1% for the first nine months ended September 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.
Financial Solutions Reinsurance
Income before income taxes increased by $1.7 million and $1.5 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in income before income taxes for the three and nine months ended September 30, 2019 was primarily due to new business growth in the segment. Foreign currency exchange fluctuations resulted in an increase in income before income taxes of $0.4 million and $0.8 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net premiums increased $29.9 million and $107.5 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase for the third quarter and first nine months was due to new asset-intensive transactions in Asia. Foreign currency exchange fluctuations had a negligible effect on net premiums for the three months ended September 30, 2019, as compared to the same period in 2018. Foreign currency exchange fluctuations increased net premiums by $0.8 million and decreased net premiums by $0.4 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Net investment income increased $0.3 million, or 3.3%, and $0.4 million, or 1.3%, for the three and nine months ended September 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 $0.2 million and $1.0 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
Other revenues decreased by $0.1 million, or 1.5%, and increased by $0.7 million, or 3.7%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. At September 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 $3.3 billion and $2.9 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 $24.5 million and $86.5 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases in the third quarter and first nine months were attributable to new asset-intensive transactions in Asia.
Other operating expenses increased by $0.2 million, or 3.7%, and $0.9 million, or 7.6%, for the three and nine months ended September 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 accelerate the development of new solutions and services to increase consumer engagement within the life insurance industry.

61

(dollars in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Net premiums
 
$
6

 
$
7

 
$
(30
)
 
$
27

Investment income, net of related expenses
 
49,967

 
51,846

 
147,993

 
124,719

Investment related gains (losses), net
 
(526
)
 
(22,524
)
 
(7,645
)
 
(54,739
)
Other revenues
 
10,027

 
8,509

 
49,771

 
22,886

Total revenues
 
59,474

 
37,838

 
190,089

 
92,893

Benefits and expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
108

 
24

 
(38
)
 
452

Interest credited
 
5,421

 
3,015

 
16,383

 
7,942

Policy acquisition costs and other insurance income
 
(29,533
)
 
(30,531
)
 
(87,568
)
 
(91,539
)
Other operating expenses
 
71,496

 
64,896

 
218,624

 
194,126

Interest expense
 
45,927

 
33,290

 
129,383

 
107,769

Collateral finance and securitization expense
 
7,102

 
7,467

 
22,670

 
22,509

Total benefits and expenses
 
100,521

 
78,161

 
299,454

 
241,259

Income (loss) before income taxes
 
$
(41,047
)
 
$
(40,323
)
 
$
(109,365
)
 
$
(148,366
)
Loss before income taxes increased by $0.7 million and decreased by $39.0 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in loss before income taxes for the third quarter was primarily due to increased interest expense and other operating expenses, offset by lower investment losses. The decrease in loss before income taxes for the first nine months was primarily due to decreased net investment related losses and higher investment income partially offset by increased other operating expenses and interest expense.
Net investment income decreased by $1.9 million, or 3.6%, and increased by $23.3 million, or 18.7%, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decrease in the third quarter was largely attributable to lower yield on unallocated invested assets. The increase in the first nine months was largely attributable to increases in unallocated invested assets and a higher average investment yield.
Net investment related losses decreased by $22.0 million and $47.1 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The decrease in the third quarter losses was primarily due to an increase in net gains on the sale of fixed maturity securities of $20.2 million and an increase in the fair value of equity securities of $0.4 million, as well as a decrease of $4.9 million in investment impairments. The increase in the first nine months of 2019 was primarily due to an increase in net gains on the sale of fixed maturity securities of $47.4 million and an increase in the fair value of equity securities of $17.1 million, which were offset by a $1.5 million increase in other-than-temporary impairments on fixed maturity securities and other investments.
Other revenues increased by $1.5 million and $26.9 million for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The increase in the third quarter was mainly related to the Company’s RGAx operations, which contributed $5.1 million to the variance in other revenues, and was partially offset by losses primarily in foreign currency exchange of $2.3 million. The increase in the first nine 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 $38.0 million to other revenues in the first nine months of 2019 compared to $22.0 million in the same period in 2018.
Policy acquisition costs and other insurance income decreased by $1.0 million, or 3.3%, and $4.0 million, or 4.3%, for the three and nine months ended September 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 $6.6 million, or 10.2%, and $24.5 million, or 12.6%, for the three and nine months ended September 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 $12.6 million, or 38.0%, and $21.6 million, or 20.1%, for the three and nine months ended September 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.

62

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 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. However, the Company’s average investment yield, excluding spread business, for the nine months ended September 30, 2019 was 4.57%, 12 basis points above the same period in 2018 due to higher income from limited partnerships. 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 $4,723.1 million at September 30, 2019. Similarly, gross unrealized losses decreased from $748.5 million at December 31, 2018 to $102.2 million at September 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 $4,723.1 million remain well in excess of gross unrealized losses of $102.2 million as of September 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 September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Interest expense
 
$
54,036

 
$
40,924

 
$
154,034

 
$
133,618

Capital contributions to subsidiaries
 
12,000

 
17,850

 
50,768

 
40,850

Dividends to shareholders
 
43,886

 
38,071

 
119,233

 
102,441

Interest and dividend income
 
35,758

 
132,035

 
101,676

 
396,055

Issuance of unaffiliated debt
 
—

 
—

 
598,524

 
—

 
 
September 30, 2019
 
December 31, 2018
Cash and invested assets
 
$
814,504

 
$
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.

63

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 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):
 
Nine months ended September 30,
 
2019
 
2018
Dividends to shareholders
$
119,233

 
$
102,441

Repurchases of treasury stock
79,804

 
258,524

Total amount paid to shareholders
$
199,037

 
$
360,965

 
 
 
 
Number of shares repurchased
546,614

 
1,750,295

Average price per share
$
146.00

 
$
147.70

In October 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 September 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 September 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.

64

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 September 30, 2019, the Company had no cash borrowings outstanding and $19.5 million in issued, but undrawn, letters of credit under this facility.
Based on the historic cash flows and the current financial results of the Company, management believes RGA’s cash flows will be sufficient to enable RGA to meet its obligations for at least the next 12 months.
Credit and Committed Facilities
At September 30, 2019, the Company maintained an $850.0 million syndicated revolving credit facility and certain committed letter of credit facilities aggregating to $1,070.6 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 September 30, 2019, there were approximately $84.8 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 September 30, 2019, $1.1 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 $830.5 million as of September 30, 2019. The Company also has $901.1 million of funds available through collateralized borrowings from the FHLB as of September 30, 2019. As of September 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 nine months ended September 30,
 
 
2019
 
2018
 
 
(Dollars in thousands)
Sources:
 
 
 
 
Net cash provided by operating activities
$
1,763,250

 
$
1,100,163

 
Net cash provided by investing activities
—

 
31,012

 
Proceeds from long-term debt issuance
598,524

 
—

 
Exercise of stock options, net
4,259

 
2,336

 
Change in cash collateral for derivative positions and other arrangements
—

 
—

 
Effect of exchange rate changes on cash
—

 
—

 
Total sources
2,366,033

 
1,133,511

 
 
 
 
 
Uses:
 
 
 
 
Net cash used in investing activities
980,206

 
—

 
Dividends to stockholders
119,233

 
102,441

 
Repayment of collateral finance and securitization notes
76,516

 
75,146

 
Debt issuance costs
4,750

 
—

 
Principal payments of long-term debt
2,091

 
2,007

 
Purchases of treasury stock
98,231

 
273,873

 
Change in cash collateral for derivatives and other arrangements
67,069

 
21,288

 
Cash used for changes in universal life and other
 
 
 
 
investment type policies and contracts
254,486

 
199,778

 
Effect of exchange rate changes on cash
17,588

 
32,013

 
Total uses
1,620,170

 
706,546

Net change in cash and cash equivalents
$
745,863

 
$
426,965

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 $725.1 million since December 31, 2018 primarily related to the May 2019 issuance of senior notes as previously discussed. The Company’s obligation for interest sensitive contracts increased by $7.5 billion since December 31, 2018 as a result of several large asset-intensive transactions closed during 2019. 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 $2,743.1 million and $2,032.3 million at September 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 $82.4 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 September 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 $67.1 billion and $56.1 billion at September 30, 2019 and December 31, 2018, respectively, as illustrated below (dollars in thousands):
 
 
September 30, 2019
 
% of Total
 
December 31, 2018
 
% of Total
Fixed maturity securities, available-for-sale
 
$
49,481,267

 
73.7
%
 
$
39,992,346

 
71.3
%
Equity securities
 
134,453

 
0.2

 
82,197

 
0.1

Mortgage loans on real estate
 
5,647,265

 
8.4

 
4,966,298

 
8.8

Policy loans
 
1,289,868

 
1.9

 
1,344,980

 
2.4

Funds withheld at interest
 
5,614,363

 
8.4

 
5,761,471

 
10.3

Short-term investments
 
107,503

 
0.2

 
142,598

 
0.3

Other invested assets
 
2,215,275

 
3.3

 
1,915,297

 
3.4

Cash and cash equivalents
 
2,635,596

 
3.9

 
1,889,733

 
3.4

Total cash and invested assets
 
$
67,125,590

 
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 September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
  Increase/  
  (Decrease)  
 
2019
 
2018
 
  Increase/  
  (Decrease)  
Average invested assets at amortized cost
$
29,043,254

 
$
27,029,073

 
7.5
%
 
$
28,221,792

 
$
26,689,086

 
5.7
%
Net investment income
344,363

 
303,860

 
13.3
%
 
961,397

 
886,165

 
8.5
%
Investment yield (ratio of net investment income to average invested assets)
4.83
%
 
4.57
%
 
 26 bps

 
4.57
%
 
4.45
%
 
12 bps

Investment yield increased for the three months ended September 30, 2019 in comparison to the same period in the prior year primarily due to increased income from joint ventures and limited partnerships. Investment yield increased for the nine months ended September 30, 2019 in comparison to the same period in the prior year primarily due to increased income from limited partnerships. Joint ventures and limited partnerships, are 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 September 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 both September 30, 2019 and December 31, 2018, approximately 95.6% 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 5.9% and 6.2% of the total fixed maturity securities at September 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 fluctuations in interest payments. The Company holds floating rate 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.

68

The largest asset class in which fixed maturity securities were invested was corporate securities, which represented approximately 61.3% and 59.9% of total fixed maturity securities as of September 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 September 30, 2019 and December 31, 2018.
As of September 30, 2019, the Company’s investments in Canadian government securities represented 9.4% 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 September 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 September 30, 2019 and December 31, 2018 was as follows (dollars in thousands):
 
 
 
 
 
September 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
 
$
28,621,572

 
$
32,128,170

 
64.9
%
 
$
24,904,526

 
$
26,180,440

 
65.5
%
2
 
BBB
 
14,129,529

 
15,213,511

 
30.7

 
12,141,601

 
12,023,426

 
30.1

3
 
BB
 
1,585,829

 
1,610,553

 
3.3

 
1,409,235

 
1,371,328

 
3.4

4
 
B
 
443,401

 
444,260

 
0.9

 
395,694

 
385,670

 
1.0

5
 
CCC and lower
 
29,558

 
29,186

 
0.1

 
13,183

 
12,860

 
—

6
 
In or near default
 
50,552

 
55,587

 
0.1

 
17,929

 
18,622

 
—

 
 
Total
 
$
44,860,441

 
$
49,481,267

 
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 September 30, 2019 and December 31, 2018 (dollars in thousands): 
 
 
September 30, 2019
 
December 31, 2018
 
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
RMBS:
 

 
 
 

 
 
Agency
 
$
786,882

 
$
834,399

 
$
811,044

 
$
814,568

Non-agency
 
1,573,809

 
1,605,443

 
1,061,192

 
1,054,653

Total RMBS
 
2,360,691

 
2,439,842

 
1,872,236

 
1,869,221

CMBS
 
1,698,334

 
1,782,218

 
1,428,115

 
1,419,034

ABS
 
2,809,008

 
2,822,635

 
2,171,254

 
2,149,204

Total
 
$
6,868,033

 
$
7,044,695

 
$
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.

69

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.
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 nine months ended September 30, 2019 and 2018 (dollars in thousands).
 
Three months ended September 30,
 
Nine months ended September 30,
2019
 
2018
 
2019
 
2018
 


 


 


 


Impairment losses on fixed maturity securities
$
8,539

 
$
10,705

 
$
17,992

 
$
14,055

Other impairment losses
3,942

 
5,910

 
11,013

 
7,249

Change in mortgage loan provision
88

 
656

 
485

 
986

Total
$
12,569

 
$
17,271

 
$
29,490

 
$
22,290

The fixed maturity impairments for the three months ended September 30, 2019 and 2018, primarily related to high-yield securities. The fixed maturity impairments for the nine months ended September 30, 2019 were primarily related to a U.S. utility company and high-yield securities. The fixed maturity impairments for the nine months ended September 30, 2018 were primarily related to high-yield securities. In addition, other impairment losses for the three months ended September 30, 2019 were primarily due to impairments on limited partnerships. Other impairment losses for the three months ended September 30, 2018 were primarily due to impairments on real estate joint ventures and limited partnerships. Other impairment losses for the nine months ended September 30, 2019 and 2018 were primarily due to impairments on real estate joint ventures and limited partnerships.
At September 30, 2019 and December 31, 2018, the Company had $102.2 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.
 
 
September 30, 2019
 
December 31, 2018
Sector:
 
 
 
 
Corporate
 
76.3
%
 
74.2
%
Canadian government
 
0.2

 
0.3

RMBS
 
2.2

 
3.4

ABS
 
13.7

 
4.4

CMBS
 
0.5

 
2.4

U.S. government
 
0.2

 
7.7

State and political subdivisions
 
1.6

 
1.2

Other foreign government
 
5.3

 
6.4

Total
 
100.0
%
 
100.0
%
Industry:
 
 
 
 
Finance
 
18.0
%
 
27.5
%
Asset-backed
 
13.7

 
4.4

Industrial
 
51.0

 
38.2

Mortgage-backed
 
2.7

 
5.8

Government
 
7.3

 
15.6

Utility
 
7.3

 
8.5

Total
 
100.0
%
 
100.0
%

70

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 September 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%.
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 September 30, 2019 and December 31, 2018.
As of September 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 8.4% and 8.8% of the Company’s cash and invested assets as of September 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 September 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):
 
 
September 30, 2019
 
December 31, 2018
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
U.S. Region:
 
 
 
 
 
 
 
 
Pacific
 
$
1,498,874

 
26.5
%
 
$
1,396,346

 
28.0
%
South Atlantic
 
1,017,068

 
17.9

 
964,174

 
19.3

Mountain
 
820,734

 
14.5

 
693,281

 
13.9

East North Central
 
727,264

 
12.8

 
605,608

 
12.2

West North Central
 
278,086

 
4.9

 
288,949

 
5.8

West South Central
 
757,446

 
13.4

 
567,541

 
11.4

Middle Atlantic
 
249,709

 
4.4

 
202,235

 
4.1

East South Central
 
126,203

 
2.2

 
117,588

 
2.4

New England
 
—

 
—

 
5,609

 
0.1

Subtotal - U.S.
 
5,475,384

 
96.6

 
4,841,331

 
97.2

Canada
 
166,298

 
2.9

 
135,394

 
2.7

United Kingdom
 
25,672

 
0.5

 
6,629

 
0.1

Total
 
$
5,667,354

 
100.0
%
 
$
4,983,354

 
100.0
%

71

Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The valuation allowances are established after management considers, among other things, the value of underlying collateral and payment capabilities of debtors. Any subsequent adjustments to the valuation allowances will be treated as investment gains or losses. See “Mortgage Loans on Real Estate” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for information regarding valuation allowances and impairments.
Policy Loans
Policy loans comprised approximately 1.9% and 2.4% of the Company’s cash and invested assets as of September 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 8.4% and 10.3% of the Company’s cash and invested assets as of September 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 September 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), lifetime mortgages, derivative contracts, FVO contractholder-directed unit-linked investments and FHLB common stock. Other invested assets represented approximately 3.3% and 3.4% of the Company’s cash and invested assets as of September 30, 2019 and December 31, 2018, respectively. See “Other Invested Assets” in Note 4 – “Investments” in the Notes to Condensed Consolidated Financial Statements for a table that presents the carrying value of the Company’s other invested assets by type as of September 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.
The Company holds beneficial interests in lifetime mortgages in the United Kingdom. Lifetime mortgages represent loans provided to individuals 55 years of age and older secured by the borrower’s residence. Lifetime 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. Lifetime mortgages may be fully funded at origination, or the borrower can request periodic funding similar to a line of credit. Lifetime mortgages are subject to risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks.
Other invested assets include $670.0 million and $475.9 million of lifetime mortgages as of September 30, 2019 and December 31, 2018, respectively. Lifetime mortgage investment income was $8.8 million and $5.4 million for the three months ended September 30, 2019 and 2018, respectively, and $24.5 million and $12.6 million for the nine months ended September 30, 2019 and 2018, respectively.
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 September 30, 2019 and December 31, 2018.

72

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 September 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.

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 September 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 September 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 September 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
July 1, 2019 -
July 31, 2019
 
1,154

 
$
158.86

 
—

 
$
350,000,071

August 1, 2019 -
August 31, 2019
 
202,721

 
$
147.27

 
202,377

 
$
320,195,966

September 1, 2019 -
September 30, 2019
 
2,788

 
$
160.71

 
—

 
$
320,195,966

 
(1)
RGA had no repurchases of common stock under its share repurchase program for July and September 2019 and repurchased 202,377 of common stock under its share repurchase program for $29.8 million during August 2019. The Company net settled - issuing 3,187, 1,154 and 7,220 shares from treasury and repurchased from recipients 1,154, 344 and 2,788 shares in July, August and September 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
 
Letter Agreement, dated as of July 25, 2019, by and between the Company and Anna Manning.*
 
 
 
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
 
 
 
104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101).

* Represents a management contract or compensatory plan or arrangement

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: November 1, 2019
 
By: 
/s/ Anna Manning
 
 
 
Anna Manning
 
 
 
President & Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date: November 1, 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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