Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2016. RGA provides traditional and non-traditional life, health, disability, critical illness, longevity, annuity and financial reinsurance through geographic segments covering the U.S. and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other.
Key Financial Metrics
| Metric | Three months ended June 30, 2016 | Year-over-year change | Six months ended June 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net premiums | $2.347 billion | +10.2% | $4.504 billion | +8.5% |
| Total revenues | $3.039 billion | +15.5% | $5.552 billion | +7.8% |
| Income before income taxes | $353.2 million | +65.2% | $460.8 million | +15.8% |
| Net income | $236.1 million | +81.1% | $312.6 million | +22.3% |
| Diluted EPS | $3.64 | +$1.70 | $4.81 | +$1.05 |
| Net income margin | 7.8% | Improved from 5.0% | 5.6% | Improved from 5.0% |
| Net cash from operating activities | Not separately reported | — | $594.4 million | Down from $605.7 million |
Investment income, net of related expenses, was $507.7 million in the second quarter and $924.9 million for the first six months, increases of 12.7% and 5.4%, respectively. Investment yield excluding spread-related business declined to 4.71% in the quarter and 4.59% year to date, from 4.88% and 4.83% in the comparable 2015 periods.
At June 30, 2016, total assets were $53.9 billion and stockholders’ equity was $7.6 billion, compared with $50.4 billion and $6.1 billion at December 31, 2015. Total investments were $45.8 billion. Gross unrealized investment gains were $3.285 billion, while gross unrealized losses were $198.6 million.
Liquidity, Debt and Capital
- Cash and cash equivalents were $1.034 billion; liquidity, defined by cash and cash equivalents plus short-term investments, was $1.230 billion, down from $2.084 billion at year-end 2015.
- Operating cash flow was $594.4 million, while investing activities used $2.058 billion, primarily because purchases of fixed maturity, equity and mortgage investments exceeded proceeds from sales, maturities and repayments.
- Financing activities provided $953.0 million, including approximately $800.0 million of long-term debt issuance and $304.9 million of net deposits on universal life and other investment-type contracts.
- Outstanding borrowings under debt agreements totaled $3.112 billion, compared with $2.313 billion at December 31, 2015. The company remained in compliance with its debt covenants.
- On June 1, 2016, RGA issued $400.0 million of 3.95% senior notes due 2026 and $400.0 million of 5.75% fixed-to-floating subordinated debentures due 2056. Net proceeds were approximately $791.0 million, partly intended to repay $300.0 million of senior notes maturing in March 2017.
- The company had an $850.0 million revolving credit facility, with no cash borrowings outstanding and $198.1 million of issued but undrawn letters of credit. Management stated that liquidity should be sufficient for at least the next 12 months.
- RGA repurchased 1.4 million shares for $116.1 million during the first six months under a $400.0 million authorization and paid $47.7 million in dividends. The quarterly dividend was increased to $0.41 per share in July 2016 from $0.37.
Material Changes Versus the Prior Comparable Period
- Second-quarter earnings benefited from improved mortality experience, higher investment income, favorable investment-related gains and a $15.4 million reduction in interest expense related to the settlement of uncertain tax positions.
- Six-month earnings growth was partly offset by a $28.0 million increase in impairments on fixed maturity and equity securities, primarily involving high-yield energy and emerging-market corporate securities.
- Net premiums increased because of growth in life reinsurance in force and large in-force block transactions completed late in 2015. Assumed life insurance in force reached $3.090 trillion at June 30, 2016, versus $2.925 trillion a year earlier.
- Income before taxes increased in U.S. and Latin America, Canada and Asia Pacific, but declined in EMEA due primarily to unfavorable mortality and morbidity experience, reduced fee-income business and foreign-currency effects.
- Foreign-currency fluctuations reduced income before taxes by approximately $5.7 million in the second quarter and $14.9 million for the first six months.
- Other comprehensive income increased substantially, primarily from net unrealized investment gains. Comprehensive income was $891.1 million in the quarter and $1.590 billion year to date, compared with losses in the 2015 comparable periods.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings guidance. Management stated that reserves are expected to remain sufficient and that no deferred acquisition cost write-down or capital augmentation would be expected if interest rates remain at current levels for five years, assuming other factors remain constant. Management also stated that current capital and liquidity are adequate for current operating levels.
- Low interest rates are pressuring investment yields and can adversely affect annuity liabilities, spreads and embedded derivative valuations. Management noted that the average investment yield declined 24 basis points year to date.
- Brexit created additional foreign-currency volatility and may lead to greater regulatory restrictions or complexity for U.K. reinsurance written by entities outside the U.K.
- Changes in fair values of embedded derivatives produced significant earnings volatility but generally did not affect current cash flows, credited rates or underlying treaty spread performance. The combined effect of the three principal embedded-derivative categories increased pretax income by approximately $53.9 million in the quarter and $124.1 million year to date relative to the prior-year periods.
- Variable-annuity guaranteed-benefit liabilities and related hedges remain sensitive to equity markets, interest rates, volatility and policyholder behavior. The fair value of living-benefit rider liabilities was $284 million at June 30, 2016, versus $192 million at year-end 2015.
- Key insurance risks include adverse mortality, morbidity, longevity, lapse and recapture experience. Claims may be predictable over many years but volatile from quarter to quarter.
- Other material risks include investment impairments, credit deterioration, collateral and letter-of-credit requirements, retrocessionaire or client insolvency, regulatory changes affecting Regulation XXX and captives, litigation, operational failures, cybersecurity and political or economic instability in international markets.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $7.2 billion across stated maturity years, although management considered required funding remote as of June 30, 2016.
Most Important Facts for Investors to Verify
- Whether earnings growth is sustained after removing favorable mortality experience, tax-related interest benefits and volatile embedded-derivative gains.
- The effect of continued low interest rates on investment yield, asset-liability spreads, reserves, deferred acquisition costs and capital requirements.
- Future impairments and credit exposure in energy, emerging-market, corporate and structured securities.
- Liquidity after debt issuance, share repurchases, dividend payments, collateral requirements and potential early recapture or policyholder withdrawals.
- Performance of variable-annuity guarantees and the effectiveness of related hedging programs under adverse equity, interest-rate and volatility scenarios.
- Developments following Brexit and any resulting U.K. regulatory, tax, currency or reinsurance-market consequences.
- Availability and cost of collateral, letters of credit and alternative capital supporting statutory reserves and regulatory capital.