Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: RGA is a holding company primarily engaged in life reinsurance, providing mortality risk management and capital management solutions to insurers globally. Operations are segmented into U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other. The company also maintains discontinued accident and health operations.
Key Financial Metrics
| Metric (in thousands) | Q1 2006 | Q1 2005 |
|---|---|---|
| Net Premiums | $992,442 | $901,820 |
| Total Revenues | $1,199,097 | $1,096,216 |
| Net Income | $69,070 | $66,557 |
| Income from Continuing Ops (Pre-tax) | $108,200 | $100,535 |
| Diluted EPS (Net Income) | $1.10 | $1.04 |
| Operating Cash Flow | $152,050 | $181,030 |
| Total Assets | $16,563,929 | $16,193,866 |
| Total Liabilities | $14,079,062 | $13,666,382 |
| Stockholders' Equity | $2,484,867 | $2,527,484 |
| Debt (Short-term + Long-term) | $799,683 | $799,992 |
| Cash & Cash Equivalents | $430,740 | $128,692 |
Investment Portfolio: Total invested assets were $12.3 billion. The earned yield on invested assets (excluding funds withheld) was 5.78% for Q1 2006, compared to 5.75% in Q1 2005. Approximately 96.9% of fixed maturity securities were investment grade.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.4% year-over-year, driven by a 10.0% increase in net premiums and a 19.0% increase in investment income due to a larger asset base.
- Profitability: Net income rose 3.8% to $69.1 million. Income from continuing operations before taxes increased 7.6% to $108.2 million.
- Segment Performance:
- U.S. Operations: Income before taxes increased 17.3% to $80.3 million, driven by improved mortality experience and business growth.
- Canada: Income before taxes decreased 46.2% to $8.4 million due to adverse mortality experience.
- Europe & South Africa: Income increased slightly to $14.8 million, offset by adverse foreign currency fluctuations.
- Asia Pacific: Income increased 127% to $6.6 million, driven by strong premium growth in Australia and Japan, partially offset by poor mortality in Korea.
- Cash Position: Cash and cash equivalents increased significantly from $128.7 million to $430.7 million, largely due to financing activities including securitized lending.
- Accounting Changes: Effective Jan 1, 2006, the company adopted SFAS 123(r) for share-based payments, increasing compensation expense by $1.7 million. The company also changed its capital allocation methodology from regulatory-based to economic capital-based.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary: Management believes liquidity is sufficient to cover potential increases in claims and operational needs. The company expects continued growth in the U.S. Traditional segment due to industry consolidation. The effective tax rate was 34.8% in Q1 2006 compared to 33.1% in the prior year.
Risks and Contingencies:
- Legal Proceedings: The company is involved in multiple arbitrations regarding discontinued accident and health business and life reinsurance. Claims raised by parties total $32.0 million, which is $27.6 million in excess of current reserves. Management believes outcomes will not have a material adverse effect on financial position but could impact quarterly net income.
- Mortality Risk: Claims are subject to significant fluctuation. The company retains a maximum of $6 million per life in the U.S., with 36 exceptions averaging $2.6 million over the limit.
- Market Risk: Exposure to interest rate and foreign currency fluctuations. The company does not hedge foreign currency translation exposure.
- Investment Risk: Gross unrealized losses on fixed maturity and equity securities totaled $114.7 million as of March 31, 2006. No other-than-temporary impairments were recorded for fixed maturities in Q1 2006.
Unusual Items: The Asset-Intensive sub-segment reported a decrease in income due to a reduction in the change in value of embedded derivatives (from a $22.6M gain in 2005 to a $4.6M gain in 2006) and a shift from investment gains to losses.
Investor Verification Checklist
- Discontinued Operations Reserves: Verify the adequacy of reserves for the discontinued accident and health business, where claims in dispute exceed reserves by $23.5 million.
- Capital Allocation Impact: Assess the long-term impact of the shift from regulatory to economic capital allocation on segment profitability reporting.
- Investment Portfolio Quality: Review the $114.7 million in gross unrealized losses to ensure no other-than-temporary impairments are imminent, particularly given the interest rate environment.
- Foreign Currency Exposure: Monitor the impact of weakening foreign currencies (British Pound, Euro, South African Rand, Australian Dollar, Japanese Yen) on reported premiums and income.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly given the $800 million in outstanding borrowings and the recent repayment of $100 million in Senior Notes.