Reinsurance Group of America, Incorporated — Q1 2012 Form 10-Q
Business context and reporting period
RGA is a global life and health reinsurer with operations in the U.S., Canada, Europe and South Africa, and Asia Pacific. The filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The interim financial statements are unaudited. Prior-period amounts were retrospectively adjusted for the amended accounting guidance on deferred policy acquisition costs.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $2.293 billion | $2.282 billion | Up 0.5% |
| Net premiums | $1.863 billion | $1.736 billion | Up 7.3% |
| Investment income, net | $340.9 million | $371.0 million | Down 8.1% |
| Investment-related gains, net | $43.5 million | $123.6 million | Down 64.8% |
| Income before income taxes | $180.8 million | $226.8 million | Down 20.3% |
| Net income | $123.3 million | $148.9 million | Down 17.2% |
| Diluted EPS | $1.67 | $2.02 | Down 17.3% |
| Comprehensive income | $117.0 million | $137.7 million | Down 15.1% |
| Operating cash flow | $554.7 million | $375.6 million | Up 47.7% |
The effective tax rate was 31.8%, compared with 34.3% in the prior-year quarter. The company declared a quarterly dividend of $0.18 per share, compared with $0.12 in Q1 2011.
At March 31, 2012, total assets were $32.286 billion, stockholders’ equity was $5.929 billion, cash and cash equivalents were $873.9 million, and total cash and invested assets were $26.384 billion. Long-term debt was $1.415 billion and the collateral finance facility was $652.0 million. Reported liquidity, including cash and short-term investments, was approximately $949.4 million.
Material changes versus the prior comparable period
- Premium growth was broad-based, supported by growth in life reinsurance in force. Assumed life insurance in force increased to $2.771 trillion from $2.588 trillion, and first-quarter new business production increased to $118.5 billion from $88.2 billion.
- Income declined mainly because investment-related gains were substantially lower, particularly changes in the fair value of embedded derivatives and derivatives used to hedge guaranteed living-benefit liabilities.
- Net investment income fell despite a 9.5% increase in average invested assets to $18.3 billion. Investment yield declined to 5.05% from 5.35%, reflecting the low interest-rate environment.
- Operating cash flow improved significantly, but investing cash usage increased to $509.3 million from $125.8 million, primarily because of investment purchases.
- Segment income before taxes increased in Canada to $55.1 million from $29.9 million and in Asia Pacific to $32.1 million from $22.0 million, but declined in the U.S. to $92.7 million from $147.6 million and in Europe and South Africa to $6.6 million from $22.5 million.
- Canada benefited from improved mortality experience and $6.3 million of income from recapture of a previously assumed block. Europe and South Africa experienced unfavorable claims, particularly in the U.K. Asia Pacific benefited from favorable claims experience and the comparison with earthquake losses recorded in 2011.
Guidance, outlook, risks and unusual items
- Management stated that current liquidity sources and capital are sufficient for at least the next 12 months, including under scenarios involving early treaty recaptures and higher-than-expected death claims. No formal earnings guidance was provided.
- Management expects sustained low interest rates to pressure investment yields. It stated that reserves should remain sufficient and that no deferred acquisition cost write-down or capital augmentation is expected even if rates remain at current levels for five years.
- Other-than-temporary impairments on fixed maturity and equity securities totaled $15.7 million in Q1 2012, compared with $1.6 million in Q1 2011. Including other impairments and mortgage-loan provisions, total impairment-related charges were $21.5 million versus $1.0 million.
- Gross unrealized gains on fixed maturity and equity securities were $2.198 billion, compared with $214.4 million of gross unrealized losses at March 31, 2012. Approximately 95.5% of fixed maturity securities were investment grade.
- RGA had no sovereign fixed-maturity exposure to Greece, Ireland, Italy, Portugal or Spain, but had $69.1 million of non-sovereign securities and equity exposure issued from that region.
- The company’s derivative and embedded-derivative valuations remain sensitive to interest rates, credit spreads, equity markets, volatility, policyholder behavior and the company’s own credit standing. Net credit exposure on derivatives was $0.7 million at quarter-end.
- The company had $1.415 billion of debt and was in compliance with its debt covenants. Its $850 million revolving credit facility had no cash borrowings outstanding and $174.6 million of issued but undrawn letters of credit.
- Collateral finance arrangements include regulatory and approval dependencies. Approval to pay interest on a surplus note supporting the Timberlake collateral financing had been granted through June 28, 2012.
- RGA reported no material litigation. It retains catastrophe exposure, including the first $50 million of covered catastrophe claims and all covered claims above $150 million; pandemics are excluded from the catastrophe program.
- Disclosure controls were considered effective. The company upgraded accounts payable, general ledger and financial reporting systems effective January 1, 2012.
Most important facts to verify
- Whether premium growth and new business production persist after the large U.S. in-force transaction recorded in Q1.
- Mortality and claims trends, particularly the elevated U.S. loss ratio and unfavorable U.K. experience.
- The sustainability of investment yields amid prolonged low interest rates and the effect on spreads for asset-intensive business.
- Future impairment losses, especially in structured securities, commercial mortgage-backed securities and mortgage loans.
- Volatility from embedded derivatives and the effectiveness of hedges for variable-annuity guarantees.
- Regulatory approvals, collateral requirements, letters of credit and subsidiary dividend capacity supporting holding-company liquidity and debt service.
- The effect of the retrospective deferred acquisition cost accounting change on future expenses, equity and comparability.