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, 2014. RGA is a global life and health reinsurance holding company with operations in the U.S. and Latin America, Canada, Europe, the Middle East and Africa, and Asia Pacific. The company also conducts asset-intensive, financial reinsurance, annuity, longevity, disability, critical illness and synthetic guaranteed investment contract business.
Effective January 1, 2014, RGA moved Mexico and Latin America operations into the U.S. and Latin America segment and moved India into Asia Pacific; prior periods were recast to conform.
Financial Performance and Position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenues | $2.833 billion | $2.591 billion | $5.490 billion | $5.192 billion |
| Net premiums | $2.183 billion | $2.035 billion | $4.284 billion | $4.015 billion |
| Income before taxes | $300.5 million | $(74.8) million | $500.0 million | $204.1 million |
| Net income | $198.3 million | $(49.6) million | $335.0 million | $135.9 million |
| Diluted EPS | $2.84 | $(0.69) | $4.75 | $1.85 |
| Dividends declared per share | $0.30 | $0.24 | $0.60 | $0.48 |
- Net income margin was approximately 7.0% for the quarter and 6.1% year to date, compared with a negative margin in the 2013 second quarter and approximately 2.6% for the 2013 first half.
- Net cash provided by operating activities increased to $907.8 million from $805.1 million in the first half of 2013. Investing activities used $95.4 million, while financing activities used $376.5 million. Cash and cash equivalents increased $454.5 million to $1.378 billion.
- Total assets were $43.171 billion at June 30, 2014, compared with $39.674 billion at December 31, 2013. Total investments were $35.401 billion, including $24.480 billion of available-for-sale fixed maturity securities.
- Stockholders’ equity increased to $6.689 billion from $5.936 billion, primarily reflecting net income and a $623.1 million increase in accumulated other comprehensive income.
- Gross unrealized gains on fixed maturity and equity securities were $2.225 billion, while gross unrealized losses were $112.3 million. Approximately 94.9% of fixed maturity securities were investment grade.
- Investment income, net of related expenses, declined 7.6% in the quarter and 6.3% year to date, reflecting lower funds-withheld investment income and lower effective portfolio yields. The investment yield excluding spread-related business was 4.79% in the quarter and 4.76% year to date.
- Borrowings consisted of $110.0 million of short-term debt and $2.215 billion of long-term debt at June 30, 2014. The collateral finance facility was $482.1 million. The company was in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Consolidated income before taxes increased $375.3 million in the second quarter and $295.9 million in the first half. The principal driver was the absence of the significant Asia Pacific claims loss recorded in 2013.
- Asia Pacific income before taxes improved to $34.9 million from a $287.3 million loss in the quarter and to $61.2 million from a $269.1 million loss year to date. The 2013 results included a $274.1 million increase in Australian group disability claims liabilities and adverse individual disability and lump-sum claims experience.
- Europe, Middle East and Africa income before taxes increased to $61.3 million from $11.9 million in the quarter and to $76.5 million from $22.9 million year to date, driven by higher business volumes, favorable claims experience, fee income and investment gains.
- U.S. and Latin America income before taxes increased 10.7% in the quarter but declined 7.1% year to date. The year-to-date decline primarily reflected unfavorable mortality experience in the Traditional business; its six-month loss ratio increased to 89.2% from 87.5%.
- Canada income before taxes declined 1.8% in the quarter and 23.5% year to date, primarily due to unfavorable mortality experience, lower investment gains and adverse Canadian-dollar translation.
- Other revenues included a $39.3 million recapture fee in Asia Pacific. The 2013 first half had included a $46.5 million gain on the repurchase of collateral finance facility securities, which did not recur.
- Investment-related gains increased to $118.5 million in the quarter and $203.1 million year to date, compared with $48.2 million and $142.6 million, respectively. Results benefited from derivative and embedded-derivative fair-value changes and asset repositioning.
- RGA repurchased 818,515 shares for $64.1 million in the second quarter and 2.268 million shares for $176.7 million during the first half. Approximately $123.3 million remained under the authorized $300 million repurchase program at June 30, 2014.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects industry consolidation and continued demand for mortality-risk reinsurance to provide growth opportunities, although growth may be slower than historical levels in some markets.
- Management stated that current liquidity and capital are adequate for current operating levels and that reserves are expected to remain sufficient even if interest rates remain at current levels for five years, assuming other factors remain constant.
- Management expects sufficient liquidity for at least the next 12 months, including under scenarios involving early treaty recapture and higher-than-expected death claims. Revolving credit availability was $619.4 million, and additional collateralized borrowing capacity from the Federal Home Loan Bank was $484.3 million.
- Low interest rates continue to pressure investment yields. Market movements also cause volatility in fair values of embedded derivatives related to funds-withheld treaties, equity-indexed annuities and variable annuity guarantees. Management characterizes these changes as largely unrealized and not affecting current cash flows or underlying treaty spread performance.
- Variable annuity guarantee liabilities were sensitive to equity markets, interest rates, volatility and policyholder behavior. The fair value of living-benefit rider liabilities increased to $59 million from $30 million at December 31, 2013; hedging may not fully offset changes in guarantee values.
- Other significant risks include mortality, morbidity, longevity, lapsation, treaty recapture, retrocessionaire credit, investment impairments, collateral requirements, foreign currency movements, regulatory changes affecting captive reinsurers and Regulation XXX financing, counterparty defaults, litigation, catastrophes and operational or information-technology failures.
- Undrawn letters of credit totaled approximately $212.5 million for third parties and $1.138 billion primarily supporting intercompany reinsurance. Treaty guarantees totaled $966.9 million, or $776.7 million net of assets in trust.
- The company had no material litigation and reported no material changes to the risk factors in its 2013 Form 10-K. Disclosure controls and procedures were deemed effective.
- Management identified no required funding under statutory reserve support commitments because triggering events were considered remote; however, maximum potential obligations under those commitments totaled $5.6 billion through 2036.
Important Facts for Investors to Verify
- Assess the sustainability of the sharp earnings improvement after excluding the 2013 Asia Pacific claims charge, recapture fee, asset repositioning gains and derivative fair-value effects.
- Monitor U.S. and Latin America and Canada mortality experience, including the elevated year-to-date loss ratios.
- Review sensitivity of earnings, capital and liquidity to interest rates, credit spreads, equity markets, volatility and policyholder behavior.
- Evaluate concentration in funds withheld at interest, including approximately $4.2 billion associated with one client, and Canadian provincial securities that exceeded 10% of stockholders’ equity individually.
- Verify debt maturities, covenant compliance, available credit facilities, collateral requirements and the effect of any ratings downgrade on derivative agreements.
- Assess the potential impact of regulatory changes affecting captive reinsurers, statutory reserve collateral and Regulation XXX or A-XXX financing.
- Confirm the level and quality of retrocession recoverables, including $614.2 million outstanding at June 30, 2014, and the concentration with the four largest retrocessionaires.