Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Business Overview: RGA is a leading global life reinsurer engaged in traditional life, asset-intensive, critical illness, and financial reinsurance. As of December 31, 2004, General American Life Insurance Company (a wholly-owned subsidiary of MetLife, Inc.) owned approximately 51.6% of RGA's outstanding common stock. The Company operates in five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate and Other.
Key Financial Metrics
| Metric (in millions) | 2004 | 2003 |
|---|---|---|
| Net Premiums | $3,347.4 | $2,643.2 |
| Total Revenues | $4,038.9 | $3,205.0 |
| Net Income | $221.9 | $173.1 |
| Income from Continuing Operations | $245.3 | $178.3 |
| Diluted EPS (Continuing Ops) | $3.90 | $3.46 |
| Total Assets | $14,048.1 | $12,113.4 |
| Total Stockholders' Equity | $2,279.0 | $1,947.7 |
| Long-Term Debt | $349.7 | $398.1 |
| Operating Cash Flow | $714.5 | $571.6 |
Loss Ratios: Claims and other policy benefits as a percentage of net premiums were 80.0% in 2004 and 79.8% in 2003.
Material Changes vs. Prior Period
- Revenue Growth: Net premiums increased 26.6% to $3.35 billion, driven primarily by the full-year impact of the Allianz Life coinsurance agreement (effective July 1, 2003) and organic growth in international segments.
- Profitability: Net income rose 28.2% to $221.9 million. Income from continuing operations increased 37.6% to $245.3 million.
- Discontinued Operations: The discontinued accident and health division reported a net loss of $23.0 million in 2004, compared to $5.7 million in 2003. This increase was primarily due to a $24.0 million pre-tax charge for a negotiated settlement of disputed claims.
- Investment Income: Net investment income increased 24.7% to $580.5 million, reflecting a larger asset base, though average yields declined from 6.39% to 5.91% due to lower interest rates.
- Balance Sheet: Total assets grew 16.0% to $14.0 billion. Life reinsurance in force increased to $1.46 trillion.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management targets a return on stockholders' equity of 12% to 14% and annual earnings per share growth of 12% to 13% over the intermediate term. The Company aims to maintain a debt-to-capital ratio of 20% to 25%. Growth is expected to continue in core North American operations and selected international markets.
Subsequent Event
On January 31, 2005, MetLife announced an agreement to purchase Travelers Life & Annuity and Citigroup's international insurance business. To finance this, MetLife indicated it would consider selling select assets, including its holdings of RGA common stock. Consequently, Moody's placed RGA's ratings on review with direction uncertain, and S&P placed them on credit watch with negative implications.
Risks and Contingencies
- Argentine Pension Business (AFJP): RGA is involved in arbitration regarding the Argentine government's intervention in privatized pension funds, which RGA believes artificially inflates claim values. RGA increased liabilities by $10.0 million in Q4 2004 to reflect uncertainty. Management believes current reserves are adequate but notes potential for material adverse effects on net income in specific periods.
- Discontinued Operations Litigation: RGA faces arbitration and litigation regarding its discontinued accident and health business (including LMX programs). Claims raised by ceding companies exceed RGA's reserves by approximately $28.2 million ($3.7 million in active disputes and $24.5 million in anticipated claims). Management believes it has substantial defenses.
- Indian Ocean Tsunami: RGA recorded $7.5 million in policy claims and benefits related to the December 26, 2004 tsunami, including incurred but not reported estimates.
- Regulation XXX: Increasing statutory reserve requirements in the U.S. may require increased collateral (letters of credit or assets in trust) from RGA, potentially straining liquidity or regulatory capital.
Investor Verification Checklist
- MetLife Ownership: Verify the status of MetLife's potential sale of its 51.6% stake in RGA and the impact on RGA's credit ratings and cost of capital.
- AFJP Exposure: Monitor the outcome of the ICSID arbitration and any further regulatory actions in Argentina regarding the privatized pension business.
- Discontinued Operations Reserves: Track the run-off of the accident and health division and any additional charges related to LMX or workers' compensation disputes.
- Allianz Integration: Assess the long-term profitability of the Allianz Life block of business now fully integrated into U.S. operations.
- Interest Rate Sensitivity: Evaluate the impact of declining interest rates on investment yields and the spread on asset-intensive products.