Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed its Form 10-K for the fiscal year ended December 31, 2015. RGA is a global life and health reinsurer offering traditional products, including mortality, health, disability and critical illness reinsurance, and non-traditional products, including longevity, asset-intensive and financial reinsurance. Operations span the United States and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other.
The filing includes fourth-quarter results, but the primary reporting period is the full year 2015, with comparisons to 2014 and 2013.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net premiums | $8.571 billion | $8.670 billion | Down 1.1% |
| Total revenues | $10.418 billion | $10.904 billion | Down 4.5% |
| Income before income taxes | $744.8 million | $1.009 billion | Down 26.2% |
| Net income | $502.2 million | $684.0 million | Down 26.6% |
| Diluted EPS | $7.46 | $9.78 | Down 23.7% |
| Net income margin | Approximately 4.8% | Approximately 6.3% | Lower |
| Net cash provided by operating activities | $2.089 billion | $2.336 billion | Down 10.6% |
| Total investments | $41.978 billion | $36.696 billion | Up 14.4% |
| Total assets | $50.383 billion | $44.654 billion | Up 12.8% |
| Stockholders’ equity | $6.135 billion | $7.023 billion | Down 12.6% |
Investment income, net of related expenses, increased 1.2% to $1.734 billion. Total investment-related gains declined to a $164.8 million loss from a $186.2 million gain in 2014. Other-than-temporary impairments on fixed maturity securities increased to $57.4 million from $7.8 million.
Operating cash flow remained positive. Investing activities used $1.432 billion and financing activities used $708.3 million, including $384.5 million of treasury-stock purchases and $93.4 million of dividends. Cash and cash equivalents ended at $1.525 billion; cash and short-term investments, the company’s stated liquidity position, totaled $2.084 billion.
Long-term debt was $2.298 billion and collateral finance and securitization notes were $899.2 million at year-end. Total borrowings under debt agreements were $2.313 billion, and the company reported compliance with all debt covenants. The $850 million revolving credit facility had no cash borrowings outstanding and $313.7 million of issued but undrawn letters of credit.
Material Changes Versus the Prior Comparable Period
- Net income fell primarily because of unfavorable mortality and claims experience, lower investment-related gains, and adverse foreign-currency movements.
- Changes in embedded derivative values reduced pre-tax income by approximately $191.6 million relative to the prior year. The largest effects were from modified coinsurance or funds-withheld treaties and variable-annuity guarantees; these changes were substantially unrealized and did not affect current cash flows.
- Foreign-currency fluctuations reduced pre-tax income by approximately $55.1 million and reduced net premiums by approximately $473.5 million.
- U.S. and Latin America pre-tax income declined 32.2% to $443.7 million. The traditional segment’s loss ratio increased to 90.8% from 87.4%, reflecting larger individual-life claims and higher group disability claims.
- Canada pre-tax income increased 35.8% to $138.1 million, primarily due to favorable individual-life mortality experience.
- Asia Pacific pre-tax income increased 22.5% to $125.3 million, primarily reflecting improved claims experience in Australia. The segment had reported a $226.7 million pre-tax loss in 2013.
- Corporate and Other reported a $119.1 million pre-tax loss versus an $11.7 million loss in 2014, driven by higher investment-related losses and a $46.2 million increase in interest expense.
- Assumed life reinsurance in force rose to $2.995 trillion from $2.944 trillion, while new business production increased to $491.0 billion from $482.0 billion.
- RGA completed the acquisition of Aurora National in April 2015 for $191.5 million net of cash acquired and acquired a Netherlands-based closed-block portfolio from PGGM in October 2015. Neither acquisition had a material consolidated earnings impact.
- RGA repurchased 4.145 million shares for $375.3 million in 2015. On January 21, 2016, the board authorized a new $400 million repurchase program.
Outlook, Risks, Contingencies and Unusual Items
Management did not provide specific earnings or revenue guidance in the filing. Management stated that current capital and liquidity were adequate for expected needs and that sources of liquidity were sufficient for at least the next 12 months, including under scenarios involving early treaty recapture and higher-than-expected claims.
- Low interest rates continue to pressure investment yields and spread income. The average investment yield, excluding spread-related business, was 4.82% in 2015, unchanged from 2014.
- Regulation XXX, captive-reinsurance restrictions and increasing statutory reserve requirements may increase collateral and capital costs, constrain new business, or require alternative financing.
- At year-end, approximately $10.536 billion of securities were held in trust for third-party reinsurance collateral requirements, and $1.638 billion were held in trust for certain RGA subsidiaries.
- Approximately $338.9 billion of gross assumed in-force business was subject to treaty provisions allowing recapture upon specified financial-condition or ratings events.
- Insurance results remain sensitive to mortality, morbidity, longevity, lapse and policyholder-behavior assumptions. Reserve inadequacy or adverse claims experience could materially affect earnings and capital.
- Investment risks include credit deterioration, energy-sector exposure, widening credit spreads, interest-rate changes, mortgage-loan defaults and valuation uncertainty. Gross unrealized investment losses increased to $627.5 million from $134.9 million.
- Variable-annuity guarantees and equity-indexed annuities create earnings volatility from equity markets, interest rates and volatility. RGA uses hedging programs, but management stated that hedges may not fully offset liability changes.
- Additional risks include foreign-currency movements, counterparty and retrocessionaire defaults, regulatory changes, cyber and operational disruptions, catastrophes, competition and liquidity restrictions at insurance subsidiaries.
- The company reported no material litigation, no unresolved SEC staff comments, effective disclosure controls and an unqualified audit opinion on both the financial statements and internal control over financial reporting.
Investor Verification Priorities
- Verify whether elevated U.S. mortality and disability claims represent temporary volatility or a sustained deterioration in loss ratios.
- Reconcile reported earnings with the effect of embedded derivatives, hedging results, impairments and other non-cash investment-related items.
- Review statutory capital, risk-based capital ratios, collateral availability and the effect of changing captive-reinsurance rules.
- Assess recapture exposure, including the $338.9 billion of in-force business subject to financial-condition or ratings-related recapture provisions.
- Monitor interest-rate and credit-spread sensitivity, unrealized investment losses, energy exposure and the sustainability of investment spreads.
- Evaluate liquidity after dividends, share repurchases, debt service, collateral requirements and potential claims or recapture payments.
- Assess the integration and capital returns of the Aurora National and PGGM transactions.
- Confirm the continuation and size of the $400 million share-repurchase authorization and the board’s future dividend decisions.