Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. RGA provides traditional life, health, disability and critical illness reinsurance, as well as financial solutions including asset-intensive, longevity and financial reinsurance, across the U.S. and Latin America, Canada, Europe/Middle East/Africa, and Asia Pacific.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $3.129 billion | $3.039 billion | $6.138 billion | $5.552 billion |
| Net premiums | $2.480 billion | $2.347 billion | $4.846 billion | $4.504 billion |
| Net investment income | $518.5 million | $507.7 million | $1.033 billion | $924.9 million |
| Income before taxes | $339.3 million | $353.2 million | $547.2 million | $460.8 million |
| Net income | $232.2 million | $236.1 million | $377.7 million | $312.6 million |
| Diluted EPS | $3.54 | $3.64 | $5.76 | $4.81 |
| Dividends declared per share | $0.41 | $0.37 | $0.82 | $0.74 |
- Q2 revenue increased 3.0% year over year, while six-month revenue increased 10.6%.
- Q2 net income declined 1.7%; six-month net income increased 20.8%.
- Implied net margins were approximately 7.4% in Q2 2017 versus 7.8% in Q2 2016, and 6.2% for the first six months versus 5.6% in the prior-year period.
- Operating cash flow for the first six months was $656.0 million, compared with $594.4 million in 2016. Investing activities used $889.7 million, producing a net decrease in cash and cash equivalents of $77.4 million.
- Cash and cash equivalents were $1.123 billion at June 30, 2017. Cash and short-term investments totaled approximately $1.247 billion.
- Total assets were $58.138 billion and stockholders’ equity was $7.971 billion at June 30, 2017, compared with $53.098 billion and $7.093 billion, respectively, at December 31, 2016.
- Long-term debt was $2.788 billion, down from $3.089 billion at year-end 2016. Collateral finance and securitization notes were $823.1 million.
- RGA reported a 31.6% Q2 effective tax rate and a 31.0% six-month effective tax rate, below the 35.0% U.S. statutory rate.
Material Changes Versus the Prior Comparable Period
- Q2 pretax income decreased $13.9 million, or 3.9%, primarily because investment-related gains were lower and interest expense increased. Higher investment income partially offset these effects.
- Six-month pretax income increased $86.4 million, or 18.7%, due primarily to improved investment-related results and higher investment income, partly offset by higher interest expense.
- Net premiums rose 5.7% in Q2 and 7.6% year to date, primarily reflecting growth in life reinsurance in force. Assumed life insurance in force increased to $3.233 trillion from $3.090 trillion at June 30, 2016.
- Investment yield excluding spread-related business declined to 4.60% in Q2 and 4.50% for the first six months, versus 4.71% and 4.59%, respectively, in 2016.
- Investment-related gains were $56.3 million in Q2 and $116.8 million for the first six months, compared with $118.3 million and a $2.6 million loss, respectively, in the prior-year periods. Results were materially affected by fair-value changes in embedded derivatives.
- U.S. and Latin America pretax income declined 10.3% in Q2 but increased 29.1% year to date. Canada declined 18.0% in Q2 and 9.0% year to date, while EMEA increased 17.4% and 47.0%, and Asia Pacific increased 70.6% and 26.3%, respectively.
- The company executed a large annuity reinsurance transaction during Q2, increasing future policy benefits by approximately $1.0 billion and interest-sensitive contract liabilities by approximately $3.2 billion from December 31, 2016.
- RGA did not repurchase shares under its $400 million authorization during the first six months. It paid $52.8 million in dividends and made $10.6 million of treasury-stock purchases related to equity-award tax withholding.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- No quantified earnings or revenue guidance is provided in the filing. Management states that results for the six months are not necessarily indicative of full-year results.
- Management expects liquidity sources to be sufficient for at least the next 12 months, including operating cash flows, a revolving facility, secured borrowing capacity and potential asset sales. The $850 million revolving facility had no cash borrowings and $94.0 million of issued but undrawn letters of credit at June 30, 2017; reported availability was $756.0 million.
- Management reported compliance with debt covenants. The debt agreements require minimum consolidated net worth of $3.5 billion and limit consolidated indebtedness to 35% of indebtedness plus adjusted equity.
- Low interest rates continue to pressure investment yields. Management also identifies sensitivity to mortality, morbidity, lapse and claims experience; credit spreads; equity markets; foreign exchange; liquidity and collateral requirements; counterparty and retrocessionaire performance; regulatory changes; catastrophes; and operational or cybersecurity events.
- Fair-value changes in embedded derivatives increased pretax income by approximately $37.3 million in Q2 and $227.1 million for the first six months compared with the corresponding 2016 periods. These changes are unrealized and do not affect current cash flows, crediting rates or underlying spread performance.
- Gross unrealized gains on available-for-sale securities were $2.781 billion and gross unrealized losses were $179.1 million at June 30, 2017. Fixed maturity securities were 95.6% investment grade.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $12.854 billion across maturities from 2023 through 2037; management considered required funding under these commitments remote at quarter-end.
- The company reported no material litigation and no material changes to previously disclosed risk factors. It had $964.98 million of treaty guarantees, $207.14 million of securities-borrowing and repurchase guarantees, and $106.68 million of financing guarantees at June 30, 2017.
- RGA adopted new stock-compensation accounting guidance on January 1, 2017, increasing retained earnings by approximately $17.7 million and producing tax benefits of $2.6 million in Q2 and $4.5 million year to date.
Important Facts for Investors to Verify
- Assess the sustainability of earnings excluding fair-value movements in embedded derivatives, investment gains and other unusual items.
- Monitor mortality and claims deterioration in U.S. Traditional and Canada operations, including the reported increases in loss ratios.
- Evaluate the effect of the large Q2 annuity transaction on asset growth, interest-sensitive liabilities, capital requirements, liquidity and future spread earnings.
- Track investment yield compression, credit spreads, unrealized losses and impairment trends in the fixed maturity portfolio.
- Review debt covenants, rating-sensitive derivative provisions, letters of credit, collateral requirements and the company’s ability to access secured and unsecured funding.
- Examine concentration risk, including approximately $4.0 billion of funds withheld associated with one client and significant exposure to corporate securities, Canadian provincial securities and long-duration assets.
- Confirm subsequent dividend, share-repurchase and capital-deployment decisions; the board declared a quarterly dividend of $0.50 per share in July 2017.