Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: RGA is an insurance holding company primarily engaged in life reinsurance, reinsuring policies for the remaining lifetime of insured individuals. The company operates through five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other. The company measures performance based on income from continuing operations before income taxes.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2009) | Amount ($ in thousands) |
|---|---|
| Total Revenues | $5,122,987 |
| Net Premiums | $4,126,407 |
| Investment Income (Net) | $807,303 |
| Net Income | $294,677 |
| Income from Continuing Operations | $294,677 |
| Diluted EPS (Continuing Ops) | $4.03 |
| Total Assets | $24,162,113 |
| Total Liabilities | $20,389,437 |
| Stockholders' Equity | $3,772,676 |
| Cash and Cash Equivalents | $546,882 |
| Long-term Debt | $816,648 |
| Collateral Finance Facility | $850,025 |
Material Changes vs. Prior Period
- Profitability Surge: Net income for the nine months ended September 30, 2009, increased to $294.7 million from $167.4 million in the same period of 2008. Income from continuing operations before taxes rose 66.1% to $432.2 million.
- Investment Performance: Total investment-related gains improved significantly by $451.9 million compared to the prior year, driven by a decrease in investment impairments and favorable changes in the value of embedded derivatives due to tightening credit spreads.
- Revenue Growth: Net premiums increased 4.2% to $4.13 billion, and total investment income rose 19.7% to $807.3 million, reflecting a larger average invested asset base.
- One-Time Gain: Results included a pre-tax gain of $38.9 million from the repurchase of long-term debt in the second quarter of 2009.
- Foreign Currency Impact: Unfavorable foreign currency fluctuations reduced income from continuing operations before taxes by approximately $28.3 million for the nine-month period.
- Balance Sheet: Total assets increased by approximately $2.5 billion to $24.2 billion, primarily due to growth in fixed maturity securities and funds withheld at interest.
Guidance, Outlook, and Risks
- Outlook: Management believes industry consolidation and reduced capital levels in the life insurance industry will continue to provide growth opportunities, albeit at rates lower than historically experienced. The company expects the ReliaStar acquisition (announced October 2009) to generate returns of 15-19% beginning in 2010.
- Market Risk: The company remains exposed to interest rate risk, credit spreads, and foreign currency fluctuations. While market conditions improved in the second and third quarters of 2009, volatility remains a concern.
- Investment Impairments: The company recorded $81.6 million in other-than-temporary impairments (OTTI) on fixed maturity and equity securities for the nine months ended September 30, 2009, compared to $115.0 million in the prior year. Gross unrealized losses decreased to $687.2 million from $1.42 billion at year-end 2008.
- Embedded Derivatives: Significant volatility in earnings is driven by changes in the fair value of embedded derivatives associated with variable annuities and modified coinsurance treaties. These fluctuations do not affect current cash flows.
- Liquidity: The company maintains sufficient liquidity to cover potential claims and obligations, with no reliance on short-term funding or commercial paper. It holds $636.3 million in liquid assets (cash and short-term investments).
Investor Verification Checklist
- Embedded Derivative Volatility: Verify the sensitivity of earnings to changes in credit spreads and interest rates, as these drive significant unrealized gains/losses on embedded derivatives.
- Investment Portfolio Quality: Review the composition of the $18.8 billion investment portfolio, specifically the exposure to subprime/Alt-A securities and commercial mortgage-backed securities (CMBS), and the adequacy of OTTI provisions.
- Foreign Currency Exposure: Assess the impact of currency fluctuations on the Canada, Europe, and Asia Pacific segments, which contributed to a $28.3 million reduction in pre-tax income.
- Debt Repurchase Gain: Note that the $38.9 million gain on debt repurchase is a non-recurring item that boosted 2009 results.
- ReliaStar Acquisition: Monitor the regulatory approval and integration of the ReliaStar Life Insurance Company business, expected to close in 2010.