RGA 2011 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Reinsurance Group of America, Incorporated and subsidiaries filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. RGA is primarily a global life reinsurer, with operations in the U.S., Canada, Europe and South Africa, and Asia Pacific, plus corporate activities. Results are presented under U.S. GAAP and are not necessarily indicative of full-year results.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenues | $2.204 billion | $1.932 billion | $4.486 billion | $4.032 billion |
| Net premiums | $1.789 billion | $1.582 billion | $3.525 billion | $3.210 billion |
| Income before income taxes | $200.4 million | $198.1 million | $442.3 million | $391.4 million |
| Net income | $132.9 million | $127.0 million | $293.7 million | $249.5 million |
| Diluted EPS | $1.78 | $1.70 | $3.96 | $3.34 |
| Net income margin | 6.0% | 6.6% | 6.5% | 6.2% |
- Second-quarter income before tax increased 1.2%; six-month income before tax increased 13.0%. Net income increased 4.6% in the quarter and 17.7% year to date.
- Net premiums increased 13.1% in the quarter and 9.8% year to date, driven by life reinsurance growth and favorable foreign-exchange effects. Assumed insurance in force reached $2.659 trillion at June 30, 2011, compared with $2.367 trillion a year earlier.
- Net investment income increased 15.7% in the quarter and 18.9% year to date, primarily from a larger invested-asset base. Average invested assets at amortized cost increased 12.2% year to date to $17.0 billion, while investment yield excluding funds withheld declined to 5.35% from 5.67%.
- Operating cash flow was $537.8 million for the first six months, down from $1.035 billion in the prior-year period. Cash and cash equivalents increased to $711.0 million from $463.7 million at December 31, 2010; cash and short-term investments totaled $836.6 million.
- Total cash and invested assets were $24.6 billion, up from $23.1 billion at year-end 2010. Stockholders’ equity was $5.325 billion, compared with $5.041 billion at year-end.
- Outstanding borrowings totaled $1.614 billion at June 30, 2011, versus $1.216 billion at December 31, 2010. The company reported compliance with debt covenants and no cash borrowings under its $750 million revolving credit facility.
- The investment portfolio was predominantly investment grade: approximately 94.9% of fixed-maturity securities were investment grade. Gross unrealized losses on fixed-maturity and equity securities declined to $233.8 million from $319.1 million at year-end.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue growth was broad-based, with six-month revenue increases in the U.S. of 5.4%, Canada of 11.5%, Europe and South Africa of 29.0%, and Asia Pacific of 15.8%.
- Canada produced notable improvement: second-quarter pretax income increased 30.4%, aided by improved mortality, investment gains, foreign exchange, and a $4.5 million benefit from recapture of a previously assumed block.
- Europe and South Africa pretax income declined 27.3% in the quarter because of unfavorable claims experience in the U.K., although six-month pretax income increased 29.0%.
- Asia Pacific pretax income declined 66.7% in the quarter and 33.8% year to date, primarily due to unfavorable Australian individual-life claims and approximately $6.5 million of estimated net losses from the Japan and New Zealand earthquakes.
- U.S. operations pretax income declined 3.8% in the quarter but increased 5.8% year to date. U.S. traditional loss ratios increased to 86.2% for the quarter and 87.0% year to date, reflecting mortality volatility and higher group disability claims.
- Reported earnings benefited from changes in embedded-derivative valuations. The combined after-adjustment pretax effect of Modco/funds-withheld, equity-indexed annuity, and guaranteed-minimum-benefit derivatives increased pretax income by approximately $2.9 million in the quarter and $17.5 million year to date versus 2010. These changes generally did not affect current cash flows or underlying treaty crediting rates.
- Other-than-temporary impairments recognized in earnings totaled $9.0 million in the quarter and $10.5 million year to date, primarily involving mortgage-related structured securities and European financial-institution equity securities.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that liquidity and capital were sufficient for at least the next 12 months, including scenarios involving early treaty recaptures and higher-than-expected death claims. No specific earnings or revenue guidance was provided.
- Management expects industry consolidation and continued demand for mortality-risk reinsurance to support growth, although growth rates may be below historical levels in some markets.
- RGA issued $400 million of 5.00% senior notes due June 1, 2021, receiving approximately $394.4 million of net proceeds. Proceeds were intended partly to fund repayment of $200 million of senior notes maturing in December 2011.
- The company repurchased approximately $340.2 million of treasury stock during the first six months, including shares intended to offset approximately 5.5 million shares issued upon warrant exercise. In July 2011, the quarterly dividend was increased to $0.18 per share from $0.12.
- RGA recorded a $5.0 million pretax gain from repurchasing collateral finance facility notes and a $4.4 million pretax loss related to the redemption and remarketing of trust preferred securities.
- Principal risks include mortality and morbidity volatility, catastrophe exposure, reserve adequacy, investment and credit losses, interest-rate and foreign-currency movements, embedded-derivative valuation volatility, collateral requirements, counterparty and retrocessionaire performance, regulatory changes, litigation, and access to capital.
- The catastrophe program retains the first $25 million of covered claims, covers the next $75 million, and leaves the company responsible for claims above $100 million; pandemics are excluded. The filing reports no material litigation.
- Guarantees supporting subsidiaries covered $710.6 million of liabilities before offsets, with net treaty-guarantee exposure of $466.5 million at June 30, 2011. Undrawn letters of credit included approximately $16.4 million supporting third parties and $465.0 million supporting intercompany reinsurance.
Most Important Facts for an Investor to Verify
- Whether premium growth and new business production continue after adjusting for favorable foreign-exchange effects.
- Whether claims experience improves in Asia Pacific, the U.K., and U.S. traditional business, including the effect of catastrophe and mortality claims.
- The sensitivity of earnings, capital, and liquidity to credit spreads, interest rates, equity markets, foreign exchange, and embedded-derivative assumptions.
- The recoverability and valuation of structured securities, including $119.7 million of fair value exposure to securities with subprime mortgage exposure and $233.8 million of gross unrealized investment losses.
- Progress toward repayment or refinancing of the $200 million senior notes maturing in December 2011 and the effect of the higher debt balance on interest expense.
- Availability of collateral and letters of credit, counterparty strength, retrocession recoverables, and the potential impact of regulatory capital requirements.
- The sustainability of operating cash flow, which declined materially year over year despite higher premiums and investment income.