Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed an unaudited Form 10-Q for the three months ended March 31, 2014. RGA primarily provides life, health, longevity, disability, annuity, critical illness, and financial reinsurance globally. Effective January 1, 2014, it realigned Mexico and Latin America into the U.S. and Latin America segment and India into Asia Pacific; prior-period segment data was recast.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenues | $2.657 billion | $2.601 billion | +2.2% |
| Net premiums | $2.101 billion | $1.980 billion | +6.1% |
| Income before income taxes | $199.4 million | $278.8 million | -28.5% |
| Net income | $136.7 million | $185.5 million | -26.3% |
| Diluted EPS | $1.92 | $2.49 | -22.9% |
| Operating cash flow | $541.2 million | $494.9 million | +9.4% |
- Net income margin was approximately 5.1%, compared with 7.1% in the prior-year quarter. Pre-tax margin was approximately 7.5%, compared with 10.7%.
- Net investment income declined 4.9% to $404.4 million. Average invested assets excluding spread-related business increased 9.6% to $19.7 billion, while investment yield declined to 4.74% from 4.83%.
- Total investments were $33.1 billion and total assets were $40.5 billion at March 31, 2014. Stockholders’ equity was $6.25 billion, up from $5.94 billion at December 31, 2013, primarily reflecting net income and higher unrealized investment gains.
- Cash and cash equivalents were $1.13 billion. Including short-term investments, liquidity was approximately $1.25 billion.
- Long-term debt was $2.21 billion, collateral finance facility obligations were $484.7 million, and short-term debt was $50.0 million, representing new Federal Home Loan Bank advances. The company reported compliance with debt covenants.
- Fixed maturity securities had a fair value of $22.2 billion; approximately 94.9% were investment grade. Gross unrealized gains were $1.845 billion versus gross unrealized losses of $179.3 million.
Material Changes Versus the Prior Comparable Period
- Profit declined despite higher premiums, primarily because of unfavorable mortality experience in the U.S. and Latin America Traditional segment and Canada, lower investment income, foreign currency effects, and the absence of a $46.5 million collateral finance facility repurchase gain recognized in Q1 2013.
- U.S. and Latin America pre-tax income decreased 24.3% to $134.1 million. The Traditional segment’s loss ratio increased to 90.5% from 88.7%, driven partly by volatile large facultative mortality claims.
- Canada pre-tax income decreased 44.7% to $20.1 million; its loss ratio rose to 84.4% from 78.0%, primarily due to unfavorable individual life mortality experience.
- Europe, Middle East and Africa pre-tax income increased 38.7% to $15.2 million, supported by higher business volumes and fee-income treaties, despite unfavorable claims experience.
- Asia Pacific pre-tax income increased 44.2% to $26.3 million, helped by lower policy acquisition costs in Australia after suspending new-business quoting in the Australian group total and permanent disability market.
- Corporate and Other pre-tax income fell to $3.8 million from $36.2 million, largely because Q1 2013 included the collateral finance facility repurchase gain.
- Comprehensive income increased to $410.6 million from $53.4 million, primarily because net unrealized investment gains contributed $315.4 million to other comprehensive income, partly offset by unfavorable foreign currency translation.
- The board authorized a new $300 million share repurchase program. RGA repurchased 1.45 million shares for $112.6 million during the quarter, leaving $187.4 million authorized at March 31, 2014. The quarterly dividend increased to $0.30 per share from $0.24.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that current liquidity and capital were adequate and expected cash flows to meet obligations for at least the next 12 months, including scenarios involving early treaty recapture and higher-than-expected claims.
- Management expected continued low interest rates to pressure investment yields but indicated that the company could maintain current reserve and capital positions if rates remained at then-current levels for five years, assuming other factors were unchanged.
- Embedded derivative fair-value changes reduced pre-tax income by approximately $50 million versus the prior-year period. These changes are generally unrealized and do not affect current cash flows, policy crediting rates, or underlying spread performance.
- Variable annuity and equity-indexed annuity exposures remain sensitive to equity markets, interest rates, volatility, lapses, withdrawals, mortality, and policyholder behavior. Hedging may not fully offset liability changes.
- Key insurance risks include mortality, morbidity, longevity, lapses, recapture of treaties, catastrophe events, and inaccurate pricing or reserving assumptions. The company maintained catastrophe coverage for qualifying events involving 10 or more insured deaths, covering $100 million above a $50 million deductible.
- Liquidity and capital risks include collateral calls, counterparty defaults, retrocessionaire nonperformance, credit-rating downgrades, regulatory reserve requirements, and potential changes affecting captive reinsurers and Regulation XXX financing.
- Investment commitments at March 31, 2014 included $302.5 million for limited partnerships, $23.5 million for commercial mortgage loans, $39.8 million for private placements, and $46.9 million for bank loans.
- RGA reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Assess whether elevated mortality and loss ratios in U.S. and Latin America Traditional and Canada are temporary volatility or evidence of deteriorating underlying experience.
- Separate recurring underwriting and spread earnings from volatile embedded-derivative and other investment-related fair-value gains and losses.
- Monitor reinvestment yields, interest-rate sensitivity, unrealized investment losses, and the credit quality of the fixed maturity portfolio.
- Review liquidity available under the $850 million revolving facility, Federal Home Loan Bank capacity, letters of credit, collateral requirements, and potential rating-triggered derivative settlements.
- Evaluate concentration risks, including $4.1 billion of funds withheld at interest associated with one client and significant exposure to Canadian provincial securities and other major counterparties.
- Track regulatory developments involving captive reinsurers, statutory reserve collateral, Regulation XXX, and potential effects on capital efficiency and new-business capacity.
- Confirm the pace and valuation of share repurchases, dividend sustainability, debt maturities, and the company’s ability to fund future capital needs.