RGA 2013 Form 10-K Summary
Business context and reporting period
Reinsurance Group of America, Incorporated is a global life and health reinsurer providing traditional life and health, disability, critical illness, longevity, asset-intensive and financial reinsurance. The filing covers the fiscal year ended December 31, 2013, with comparative results for 2012 and 2011. Approximately 66.7% of 2013 net premiums came from the U.S. and Canada. At year-end, RGA had approximately $2.9 trillion of life reinsurance in force, $39.7 billion of consolidated assets and 1,890 employees.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net premiums | $8.254 billion | $7.907 billion | +4.4% |
| Total revenues | $10.318 billion | $9.841 billion | +4.9% |
| Income before taxes | $635.3 million | $919.2 million | -30.9% |
| Net income | $418.8 million | $631.9 million | -33.7% |
| Diluted EPS | $5.78 | $8.52 | -32.2% |
| Net income margin | Approximately 4.1% | Approximately 6.4% | Lower |
| Operating cash flow | $1.727 billion | $1.975 billion | -12.5% |
| Total assets | $39.674 billion | $40.360 billion | -1.7% |
| Stockholders’ equity | $5.936 billion | $6.910 billion | -14.1% |
Investment income, net of related expenses, increased 18.4% to $1.700 billion, while net investment-related gains declined to $64.0 million from $254.1 million. The average investment yield, excluding funds withheld and other spread-related business, fell to 4.73% from 4.98%. Total cash and invested assets were $33.365 billion, including $21.474 billion of fixed-maturity securities; approximately 93.7% of fixed-maturity securities were investment grade.
Liquidity included $1.063 billion of cash and cash equivalents and short-term investments at year-end, $782.4 million of availability under the revolving credit facility and $599.1 million of potential collateralized borrowing capacity from the Federal Home Loan Bank. Long-term debt was $2.214 billion, up from $1.815 billion, following issuance of $400 million of 4.70% senior notes due 2023. The collateral finance facility was $484.8 million. RGA reported compliance with its debt covenants.
Common dividends declared increased to $1.08 per share from $0.84. RGA repurchased 4.15 million shares for $261.3 million during 2013. A new authorization for up to $300 million of repurchases was approved on February 20, 2014.
Material changes versus the prior comparable period
- Net premiums grew 4.4%, but earnings declined sharply because of adverse Australian claims experience and lower investment-related gains.
- The Asia Pacific segment recorded a $235.2 million pretax loss versus $45.4 million of pretax income in 2012. Australian group claims liabilities increased by $274.1 million, principally for total and permanent disability and disability income coverage; individual disability and lump-sum claims experience was also unfavorable.
- RGA suspended new quoting activity indefinitely in the Australian group total and permanent disability market, although it remains obligated to provide certain renewal quotes.
- U.S. Traditional pretax income increased modestly to $371.6 million, while U.S. Non-Traditional pretax income declined to $245.6 million from $268.3 million, primarily because 2012 benefited from unusually significant investment-related gains.
- Canada pretax income declined 12.1% to $164.3 million, reflecting more favorable mortality in 2012, lower investment-related gains and foreign-exchange effects. Europe & South Africa pretax income increased 20.5% to $89.1 million.
- Gross unrealized investment gains fell to $1.524 billion from $2.871 billion, while gross unrealized losses increased to $324.6 million from $133.6 million, largely reflecting higher interest rates. Comprehensive income was a loss of $684.5 million, primarily due to the $1.103 billion after-tax reduction in other comprehensive income.
- Other revenues included a $46.5 million pretax gain from repurchasing $160.0 million face amount of collateral finance facility notes for $112.0 million.
- The deferred tax asset valuation allowance increased to $102.2 million from $10.1 million, principally related to foreign operations and the transfer of the New Zealand branch to Australia.
Guidance, outlook, commentary and risks
Management stated that liquidity was sufficient for at least the next 12 months, including scenarios involving early treaty recapture and higher-than-expected death claims. Management also stated that capital was adequate for current operating levels and that reserves and deferred acquisition costs were expected to remain supportable if interest rates remained at then-current levels for five years, assuming other factors were unchanged. The filing does not provide formal earnings or revenue guidance.
Management expects continued demand from industry consolidation, capital management needs, demographic trends and international expansion, but acknowledged that growth rates may be lower than historical levels in some markets. Low interest rates are expected to continue pressuring investment yields and spread income.
- Insurance risk includes adverse mortality, morbidity, disability, longevity, lapse and claims-development experience. Reserve estimates depend on long-term actuarial assumptions and client-provided data.
- Regulation XXX and related statutory reserve requirements may increase capital and collateral needs. Restrictions on captive reinsurers or changes to collateral rules could reduce capital efficiency and constrain new business.
- Ratings downgrades could impair competitiveness, increase financing and collateral costs, trigger trust requirements or recapture rights, and restrict subsidiary dividends.
- Approximately $337.9 billion of gross assumed in-force business was subject to treaties allowing recapture if specified financial or ratings conditions were not maintained.
- Market risks include interest rates, equity markets, credit spreads and foreign currency. A modeled 10% unfavorable interest-rate change implied a projected $485.3 million decline in fair value in 2013; this sensitivity is not a forecast.
- Variable-annuity guarantees and equity-indexed annuities create earnings volatility because embedded derivatives depend on market conditions and policyholder behavior. Hedging may not fully offset changes in guarantee values.
- Counterparty, retrocession, collateral, investment-credit and liquidity risks remain material. Treaty guarantees had $647.9 million of net exposure after assets held in trust.
- RGA had no material litigation, and management and Deloitte reported effective internal control over financial reporting with unqualified audit opinions.
Most important facts for investors to verify
- Whether Australian disability claims liabilities and loss ratios stabilize after the 2013 reserve strengthening and market suspension.
- The sustainability of earnings excluding volatile derivative valuations, investment gains and the $46.5 million collateral-finance repurchase gain.
- Future investment yields, unrealized losses and credit performance as interest rates and credit spreads change.
- Availability and cost of collateral supporting Regulation XXX and other statutory reserve credits, including any new captive-reinsurance restrictions.
- RGA’s statutory capital, risk-based-capital ratios, dividend capacity and ratings relative to treaty recapture and collateral triggers.
- Debt-service capacity, covenant headroom and liquidity after dividends, share repurchases and potential claims or recapture-related cash needs.
- Trends in net premiums, new business production and life reinsurance in force, which declined to $370.4 billion of new business and $2.890 trillion of in-force business in 2013.