Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: RGA is an insurance holding company primarily engaged in life reinsurance, providing mortality, morbidity, and longevity risk management globally. The company operates through five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Premiums | $1,628,464 | $1,346,047 |
| Total Revenues | $2,100,185 | $1,530,840 |
| Net Income | $122,439 | $23,290 |
| Income Before Taxes | $193,315 | $34,206 |
| Diluted EPS | $1.64 | $0.32 |
| Operating Cash Flow | $948,032 | $352,485 |
| Total Assets | $26,722,458 | $25,249,501 |
| Total Liabilities | $22,557,024 | $21,381,574 |
| Stockholders' Equity | $4,165,434 | $3,867,927 |
| Long-term Debt | $1,216,140 | $1,216,052 |
| Cash and Cash Equivalents | $525,360 | $512,027 |
Investment Portfolio: Total cash and invested assets were $21.1 billion at March 31, 2010. The average investment yield (excluding funds withheld) was 5.84% for Q1 2010, up from 5.57% in Q1 2009.
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 425.7% to $122.4 million, driven primarily by a $159.1 million increase in income before taxes. This was largely due to a significant decrease in investment impairments and favorable changes in the fair value of embedded derivatives.
- Revenue Growth: Total revenues rose 37.2% to $2.1 billion. Net premiums increased 21.0% due to growth in life reinsurance in force and favorable foreign currency fluctuations.
- Investment Gains: Total investment-related gains improved by $203.4 million compared to Q1 2009. This included a $135.0 million favorable change in embedded derivatives and a $29.3 million decrease in investment impairments.
- Cash Flow: Net cash provided by operating activities increased 169% to $948.0 million, reflecting higher cash inflows from premiums and investment income.
- Acquisition: Effective January 1, 2010, RGA acquired ReliaStar Life Insurance Company's U.S. and Canadian group life, accident, and health reinsurance business, resulting in a $129 million intangible asset.
Guidance, Outlook, and Risks
Management Commentary:
- Market Environment: Management notes that U.S. and global financial markets have improved significantly since Q1 2009. Credit spreads have tightened, leading to favorable valuation changes for embedded derivatives.
- Embedded Derivatives: A significant portion of the income improvement ($76.5 million pre-tax) is attributed to unrealized gains on embedded derivatives related to modified coinsurance treaties, equity-indexed annuities, and variable annuities. Management emphasizes these fluctuations do not affect current cash flows.
- Investment Strategy: The company maintains a predominantly investment-grade fixed maturity portfolio. Gross unrealized losses on securities decreased from $1.55 billion in Q1 2009 to $470.7 million in Q1 2010.
Risks and Contingencies:
- Market Risk: Exposure to interest rate, credit spread, and foreign currency fluctuations. Changes in these factors significantly impact the fair value of embedded derivatives and investment portfolios.
- Investment Impairments: While impairments decreased, the company continues to monitor securities for other-than-temporary impairments (OTTI). Q1 2010 OTTI losses were $6.3 million compared to $41.5 million in Q1 2009.
- Counterparty Risk: Risk of non-performance by retrocessionaires or ceding companies, particularly regarding funds withheld at interest.
- Regulatory and Tax: The effective tax rate for Q1 2010 (36.7%) was impacted by a $5.0 million accrual for tax extender provisions not yet passed by Congress, which is expected to be reversed later in 2010.
Investor Verification Checklist
- Embedded Derivative Volatility: Verify the sustainability of earnings given that a large portion of the Q1 2010 profit ($76.5 million pre-tax) stems from unrealized gains on embedded derivatives, which are sensitive to credit spreads and interest rates.
- Investment Portfolio Quality: Review the composition of the $470.7 million in gross unrealized losses, specifically the concentration in commercial mortgage-backed securities (30% of losses) and asset-backed securities (15% of losses).
- Foreign Currency Impact: Assess the extent to which revenue and income growth is driven by favorable currency fluctuations (approx. $10.8 million impact on income) versus organic business growth.
- Tax Provision: Monitor the resolution of the $5.0 million tax accrual related to U.S. Congress extender provisions to confirm the reversal of this expense in future quarters.
- Liquidity Position: Confirm the adequacy of the $604.5 million liquidity position (cash, cash equivalents, and short-term investments) against potential early treaty recaptures or higher-than-expected claims.