Reinsurance Group of America, Incorporated — Q1 2016 Form 10-Q Summary
Business context and reporting period
RGA is a global insurance holding company providing traditional and non-traditional life, health, disability, critical illness, longevity, asset-intensive and financial reinsurance. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015, and the balance sheet is compared with December 31, 2015.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $2.513 billion | $2.521 billion | Down 0.3% |
| Net premiums | $2.157 billion | $2.024 billion | Up 6.6% |
| Investment income, net | $417.3 million | $426.9 million | Down 2.3% |
| Investment-related gains (losses), net | $(120.9) million | $7.6 million | Down $128.5 million |
| Income before income taxes | $107.6 million | $184.1 million | Down 41.6% |
| Net income | $76.5 million | $125.1 million | Down 38.9% |
| Diluted EPS | $1.17 | $1.81 | Down 35.4% |
| Effective tax rate | 28.9% | 32.0% | Down 3.1 percentage points |
| Dividends declared per share | $0.37 | $0.33 | Up $0.04 |
Net income margin was approximately 3.0%, compared with approximately 5.0% in the prior-year quarter; pretax margin was approximately 4.3%, compared with 7.3%.
- Operating cash flow was $368.6 million, compared with $316.2 million in Q1 2015.
- Investing activities used $709.6 million, primarily reflecting purchases of fixed maturity securities and mortgage loans.
- Cash and cash equivalents were $1.502 billion at March 31, 2016. Management reported liquidity of $1.934 billion, including short-term investments.
- Total assets were $52.187 billion and stockholders’ equity was $6.719 billion, up from $6.135 billion at December 31, 2015, primarily reflecting unrealized investment gains and foreign currency translation gains.
- Debt and financing obligations included $299.7 million of short-term debt, $1.998 billion of long-term debt and $899.5 million of collateral finance and securitization notes. Borrowings under debt agreements totaled $2.312 billion, and the company was in compliance with its covenants.
- Average investment yield, excluding spread-related business, declined to 4.46% from 4.78%; average invested assets increased 6.2% to $22.4 billion.
Material changes versus the prior comparable period
- Net premiums increased $133.2 million, driven by growth in life reinsurance in force, new business and in-force transactions. Assumed life insurance in force increased to $3.068 trillion from $2.845 trillion.
- Investment-related results deteriorated substantially, including $33.8 million of fixed-maturity other-than-temporary impairments versus $2.5 million in Q1 2015. Impairments were primarily associated with high-yield energy and emerging-market corporate securities.
- Unfavorable changes in the fair value of embedded derivatives reduced pretax income by approximately $70.2 million versus the prior-year period. Management characterized these changes as unrealized and not affecting current cash flows, crediting rates or underlying spread performance.
- Foreign currency movements reduced pretax income by approximately $9.2 million year over year.
- U.S. and Latin America pretax income declined to $36.2 million from $72.3 million, although traditional reinsurance improved on favorable mortality experience.
- Canada pretax income declined to $20.7 million from $26.9 million, reflecting lower investment income, unfavorable longevity experience and currency effects.
- EMEA pretax income declined to $24.3 million from $30.1 million, primarily due to unfavorable critical illness claims experience, partly offset by growth in longevity and payout annuity business.
- Asia Pacific pretax income declined to $49.7 million from $62.8 million, primarily due to more favorable mortality experience in the prior-year period and higher operating expenses.
- RGA repurchased 1.2 million shares for $105.1 million under a new $400 million authorization and paid $24.0 million of dividends.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued growth opportunities from industry consolidation, regulatory changes and established demand for mortality and morbidity risk transfer, but noted that growth rates may be lower than historically experienced in some markets.
- Management expects a prolonged low-interest-rate environment to pressure investment yields and future earnings. It stated that reserves and capital are expected to remain sufficient even if interest rates remain at current levels for five years, assuming other factors remain constant.
- Management believes liquidity is sufficient for at least the next 12 months, including potential early treaty recapture and higher-than-expected death claims. Available alternatives include a revolving credit facility, secured borrowings, debt or equity issuance and asset sales.
- The company had an $850 million revolving credit facility, with $618.3 million of availability and $231.7 million of issued but undrawn letters of credit at March 31, 2016. It also had $848.7 million of FHLB collateralized borrowing capacity.
- Key risks include mortality, morbidity, longevity, lapse and recapture experience; investment impairments; interest rates, credit spreads, equity markets and foreign exchange; counterparty and retrocessionaire performance; collateral and statutory reserve requirements; regulatory changes affecting captive reinsurers; litigation; operational and technology failures; and catastrophic events.
- Energy-sector exposure totaled $2.432 billion at fair value, including $2.325 billion of fixed-maturity and equity securities and $110.6 million of net written credit-default-swap notional exposure. Approximately 87.5% of the fixed-maturity and equity energy exposure was investment grade.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $7.2 billion across maturities from 2023 through 2036; management considered required funding remote as of March 31, 2016.
- There were no material changes to previously disclosed risk factors, contractual obligations or market-risk disclosures. Management concluded that disclosure controls were effective and that there was no material change in internal control over financial reporting.
Most important facts for an investor to verify
- Whether the large decline in earnings is primarily market-driven and unrealized, or indicates deterioration in underlying reinsurance profitability.
- The sensitivity of embedded derivative valuations and investment impairments to credit spreads, interest rates, equity markets and policyholder behavior.
- Progress in improving investment yield amid a prolonged low-rate environment and the quality, concentration and liquidity of the investment portfolio.
- The adequacy and availability of collateral, letters of credit and other financing supporting statutory reserve credits and reinsurance obligations.
- Exposure to energy, emerging-market and below-investment-grade securities, including potential future impairments.
- Mortality, morbidity, longevity, lapse and critical-illness claims trends by geographic segment.
- Compliance with debt covenants and the potential liquidity effect of ratings downgrades, derivative collateral calls, treaty recapture or higher claims.
- Remaining authorization and future pace of share repurchases, as well as the sustainability of the $0.37 quarterly dividend.