Reinsurance Group of America, Incorporated — 2010 Q3 Form 10-Q
Business context and reporting period
RGA is a global life reinsurer with operations in the U.S., Canada, Europe and South Africa, and Asia Pacific. The filing covers the three and nine months ended September 30, 2010, compared with the respective 2009 periods. The financial statements are unaudited.
RGA completed the acquisition of ReliaStar Life Insurance Company’s U.S. and Canadian group life, accident and health reinsurance business effective January 1, 2010. The transaction resulted in a $129 million intangible asset and was expected to contribute less than 5% of consolidated 2010 assets, liabilities and income.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net premiums | $1.647 billion | $1.405 billion | $4.858 billion | $4.126 billion |
| Total revenues | $1.956 billion | $1.779 billion | $5.988 billion | $5.123 billion |
| Income before income taxes | $197.2 million | $182.6 million | $588.6 million | $432.2 million |
| Net income | $128.2 million | $118.2 million | $377.7 million | $294.7 million |
| Diluted EPS | $1.72 | $1.61 | $5.06 | $4.03 |
| Net income margin | 6.6% | 6.6% | 6.3% | 5.8% |
| Operating cash flow | Not separately presented | Not separately presented | $1.330 billion | $902.9 million |
Q3 income before taxes increased 8.0%, while nine-month income before taxes increased 36.2%. Net premiums increased 17.2% in Q3 and 17.7% year to date, driven by growth in life reinsurance in force, the ReliaStar acquisition and favorable foreign currency effects.
At September 30, 2010, total assets were $28.934 billion versus $25.250 billion at December 31, 2009. Stockholders’ equity was $4.998 billion versus $3.868 billion. Cash and cash equivalents were $634.1 million, and total liquidity, including short-term investments, was approximately $718.2 million.
Total cash and invested assets were $22.940 billion, including $14.170 billion of available-for-sale fixed maturity securities and $5.277 billion of funds withheld at interest. Approximately 95.1% of fixed maturity securities were investment grade.
Outstanding borrowings were $1.216 billion, the collateral finance facility was $850.0 million, and company-obligated trust preferred securities were $159.4 million. The company reported compliance with its debt covenants and no cash borrowings under its revolving credit facilities. The average interest rate on debt excluding trust preferred securities was 6.38%.
Dividends declared were $0.12 per share in Q3 and $0.36 per share for the first nine months, compared with $0.09 and $0.27, respectively, in 2009.
Material changes versus the prior comparable period
- Net premiums increased $242.1 million in Q3 and $731.4 million for the first nine months, reflecting business growth, the ReliaStar acquisition and currency effects.
- Assumed insurance in force increased to $2.479 trillion from $2.275 trillion at September 30, 2009. New business production increased to $246.5 billion for the first nine months from $216.9 billion.
- Operating cash flow increased $427.4 million year over year to $1.330 billion, primarily because premium and investment-income inflows exceeded higher claims and other cash outflows.
- Investment income decreased 4.0% in Q3 but increased 9.4% year to date. Average invested assets increased 18.2% in Q3 and 18.6% year to date, while investment yield declined to 5.66% and 5.67%, respectively, from 5.71% in both 2009 periods.
- Other-than-temporary impairment losses declined to $9.965 million in Q3 and $21.106 million for the first nine months, compared with $25.735 million and $89.332 million in 2009.
- Gross unrealized investment losses declined to $298.3 million from $584.9 million at December 31, 2009. Accumulated unrealized appreciation of securities increased to $832.8 million from $104.5 million.
- Investment-related gains were $16.8 million of losses in Q3, compared with $42.4 million of gains in 2009, primarily due to unfavorable changes in embedded derivatives. Year-to-date investment-related gains were $137.4 million, compared with $48.3 million in 2009.
- Corporate and Other pretax income declined to $5.9 million in Q3 and $9.1 million year to date, primarily due to higher interest expense and the absence of the $38.9 million 2009 gain on debt repurchase.
- Canada completed its first longevity reinsurance transaction, generating $55.2 million of Q3 premiums, including a $43.3 million one-time advance premium recorded with a deferred profit liability.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that current liquidity and capital were adequate for operating needs and that cash flows were expected to cover obligations for at least the next 12 months. Management also expects low U.S. interest rates to continue pressuring investment yields.
Reported earnings remain sensitive to fair-value changes in embedded derivatives associated with modified coinsurance and funds-withheld treaties, equity-indexed annuities and variable annuity guaranteed benefits. These changes generally do not affect current cash flows, credited rates or underlying treaty spread performance, but can materially affect reported earnings.
- Variable annuity living-benefit liabilities had a fair value of $174.0 million at September 30, 2010 versus $23.7 million at December 31, 2009. Hedging may not fully offset changes caused by equity markets, interest rates, volatility, policyholder behavior or basis risk.
- Key insurance risks include mortality, morbidity, longevity, lapses, claims volatility, reserve adequacy, underwriting and pricing risk, catastrophe exposure and retrocessionaire counterparty risk.
- Investment risks include credit deterioration, commercial mortgage-backed securities, structured securities, subprime and Alt-A exposure, interest rates, foreign currencies, liquidity and valuation-model assumptions. Commercial mortgage-backed securities had approximately $1.758 billion of fair value, and securities with subprime mortgage exposure had approximately $114.7 million of fair value.
- RGA had commitments to fund limited partnerships, commercial mortgage loans and private placements totaling $174.6 million. It also had $16.9 million of letters of credit in favor of third parties and $523.8 million supporting intercompany reinsurance.
- The company’s catastrophe program retains the first $25 million of covered claims, provides coverage for the next $75 million, and retains claims above $100 million. Pandemic losses are excluded.
- The company reported no material litigation and no material changes to previously disclosed risk factors. It stated that disclosure controls and procedures were effective.
- The active-financing tax rules expired December 31, 2009. The company recorded additional tax provisions of approximately $5.0 million in Q3 and $14.9 million year to date, subject to possible reversal if legislation were enacted.
Important facts for investors to verify
- Whether premium growth from the ReliaStar acquisition and new business production translates into sustainable earnings after acquisition costs and claims.
- The sensitivity of future earnings, capital and liquidity to changes in interest rates, credit spreads, equity markets, volatility and policyholder behavior.
- The adequacy of reserves, particularly following adverse mortality in Canada and the launch of longevity reinsurance.
- The quality, valuation and concentration of the fixed maturity, commercial mortgage-backed, subprime and Alt-A portfolios.
- The availability and cost of letters of credit, collateral and other financing if market conditions deteriorate or treaty recaptures increase.
- The potential impact of the unresolved tax legislation and the $181.4 million balance of unrecognized tax benefits at September 30, 2010.