Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed this unaudited Form 10-Q for the three months ended March 31, 2013. RGA is a global life and health reinsurer serving traditional life, longevity, disability income, annuity, critical illness, financial reinsurance and related markets through U.S., Canada, Europe and South Africa, Asia Pacific, and Corporate and Other segments.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $2.601 billion | $2.293 billion | 13.4% increase |
| Net premiums | $1.980 billion | $1.863 billion | 6.2% increase |
| Net investment income | $425.1 million | $340.9 million | 24.7% increase |
| Investment-related gains, net | $94.4 million | $43.5 million | 116.8% increase |
| Income before taxes | $278.8 million | $180.8 million | 54.3% increase |
| Net income | $185.5 million | $123.3 million | 50.4% increase |
| Diluted EPS | $2.49 | $1.67 | 49.1% increase |
| Operating cash flow | $494.9 million | $554.7 million | 10.8% decrease |
Net income margin was approximately 7.1% in Q1 2013 versus 5.4% in Q1 2012; pretax margin was approximately 10.7% versus 7.9%. The effective tax rate increased to 33.5% from 31.8%.
- Total assets were $40.197 billion at March 31, 2013, compared with $40.360 billion at December 31, 2012.
- Total investments were $32.982 billion, including $22.402 billion of fixed-maturity securities, $2.325 billion of mortgage loans, and $5.699 billion of funds withheld at interest.
- Cash and cash equivalents were $1.002 billion, down from $1.260 billion at year-end. Management reported liquidity of $1.183 billion, including cash, cash equivalents and short-term investments.
- Stockholders’ equity was $6.915 billion, broadly unchanged from $6.910 billion at December 31, 2012. Other comprehensive income declined by $132.2 million, primarily from lower unrealized investment gains and foreign currency translation.
- Long-term debt was $1.815 billion and the collateral finance facility was $492.0 million. The Company was in compliance with all debt covenants.
- Net cash used in investing activities was $385.4 million, reflecting $1.277 billion of fixed-maturity purchases partially offset by $795.6 million of sales. Net cash used in financing activities was $351.6 million, including $112.0 million for repurchase of collateral finance facility notes and $47.6 million for treasury stock.
Material Changes Versus the Prior Comparable Period
- Income growth was driven by higher investment income, stronger investment-related gains, and a $46.5 million pretax gain from repurchasing $160.0 million face amount of collateral finance facility notes for $112.0 million.
- Investment-related gains benefited from tightening credit spreads and favorable changes in embedded derivatives. Changes in embedded derivatives increased pretax income by approximately $30.9 million versus the prior-year period, but these gains were largely unrealized and did not affect current cash flows, policyholder crediting rates, or underlying spread performance.
- Net premiums increased with growth in life reinsurance in force, which reached $2.873 trillion at March 31, 2013 versus $2.771 trillion a year earlier. First-quarter new business production declined to $95.9 billion from $118.5 billion.
- Average invested assets excluding funds withheld and other spread-related business increased 10.1% to $17.992 billion, while investment yield declined to 4.83% from 5.05%, reflecting the low interest-rate environment.
- U.S. pretax income increased to $174.4 million from $92.7 million, while Europe and South Africa increased to $17.4 million from $6.6 million. Canada declined to $36.3 million from $55.1 million, and Asia Pacific declined to $14.5 million from $32.1 million due primarily to less favorable claims experience and investment-related results.
- Other-than-temporary impairments declined substantially: fixed-maturity impairment losses recognized in earnings were $0.2 million versus $14.8 million, while total impairments across investments and other assets were $1.8 million versus $21.5 million.
- On January 24, 2013, RGA authorized a $200.0 million share repurchase program and repurchased 815,011 shares for $47.6 million during the quarter. In April, the authorization was increased to $300.0 million in total.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that liquidity and capital are sufficient for at least the next 12 months and that reserves are expected to remain sufficient even if interest rates remain at current levels for five years, assuming other factors remain constant.
- Persistently low interest rates are expected to pressure reinvestment yields and future investment income.
- Results may be volatile because of mortality, morbidity, longevity, lapses, recaptures, catastrophe events, foreign exchange movements, equity markets, interest rates, credit spreads and changes in the fair value of embedded derivatives.
- RGA’s investment portfolio contained $122.5 million of gross unrealized losses at March 31, 2013, although gross unrealized gains of $2.692 billion substantially exceeded those losses. Approximately 93.4% of fixed-maturity securities were investment grade.
- Counterparty and collateral risks include ceding companies, retrocessionaires, derivatives counterparties and funds-withheld arrangements. Net derivative credit exposure was $9.5 million.
- Commitments included $166.8 million for limited partnerships, $22.2 million for commercial mortgage loans and $80.5 million for bank loans. A statutory reserve-support commitment could require funding of up to $560.0 million, although management considered the triggering events remote.
- There was no material litigation, and the filing reported no material change to previously disclosed risk factors. Disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- How much of the earnings increase is attributable to recurring underwriting and investment spreads versus volatile, unrealized embedded-derivative gains and the $46.5 million debt-repurchase gain.
- Whether the lower 4.83% investment yield continues to pressure earnings as assets reinvest in a low-rate environment.
- Subsequent mortality and claims experience, particularly in Canada and Asia Pacific, and the sustainability of favorable U.S. and Europe and South Africa results.
- Progress and remaining capacity under the $300.0 million share repurchase authorization, together with capital and liquidity needs.
- Exposure to funds-withheld assets, derivative collateral requirements, retrocession recoverables, investment impairments and the $560.0 million contingent reserve-support commitment.