Reinsurance Group of America, Incorporated: 2010 Q2 Form 10-Q Summary
Business Context and Reporting Period
RGA is a global life and health reinsurer with operations in the United States, Canada, Europe and South Africa, and Asia Pacific. The filing covers the three and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods. The interim financial statements are unaudited.
Effective January 1, 2010, RGA acquired ING subsidiary ReliaStar Life Insurance Company’s U.S. and Canadian group life, accident and health reinsurance business. The transaction created a $129 million intangible asset and was expected to contribute less than 5% of consolidated 2010 assets, liabilities and income.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $1.932 billion | $1.813 billion | $4.032 billion | $3.344 billion |
| Net premiums | $1.582 billion | $1.375 billion | $3.210 billion | $2.721 billion |
| Income before taxes | $198.1 million | $215.4 million | $391.4 million | $249.6 million |
| Net income | $127.0 million | $153.2 million | $249.5 million | $176.5 million |
| Diluted EPS | $1.70 | $2.10 | $3.34 | $2.42 |
| Operating cash flow | Not separately provided | Not separately provided | $1.035 billion | $539.2 million |
- Q2 revenue increased 6.5%, while year-to-date revenue increased 20.6%.
- Q2 net income declined 17.1%, primarily because 2009 included a $38.9 million gain on long-term debt repurchases. Year-to-date net income increased 41.4%.
- Net income margins were approximately 6.6% in Q2 2010 versus 8.5% in Q2 2009, and 6.2% for the first six months versus 5.3% in the prior-year period.
- Net investment income increased 2.5% in Q2 and 17.3% year to date, reflecting a larger invested asset base but lower portfolio yields. Investment yield excluding funds withheld declined to 5.51% from 5.79% in Q2 and to 5.67% from 5.70% year to date.
- Claims and other policy benefits were $1.307 billion in Q2 and $2.682 billion year to date. The U.S. Traditional loss ratio increased to 84.5% in Q2 from 82.9% and to 86.0% year to date from 85.6%, reflecting higher volume and severity of large claims.
- Cash and invested assets increased to $21.607 billion at June 30, 2010 from $19.736 billion at December 31, 2009. Total assets were $27.221 billion and stockholders’ equity was $4.443 billion.
- Cash and cash equivalents were $557.8 million; total liquidity, including short-term investments, was $621.7 million.
- Long-term debt was $1.216 billion, the collateral finance facility was $850.0 million, and trust preferred securities were $159.3 million. The company reported compliance with debt covenants and no cash borrowings under its revolving credit facilities.
Material Changes Versus the Prior Comparable Period
- Premium growth reflected growth in business in force, favorable foreign exchange, and the ReliaStar acquisition. Consolidated assumed insurance in force increased to $2.367 trillion from $2.219 trillion at June 30, 2009.
- Year-to-date income benefited from lower investment impairments, higher investment income, and favorable changes in embedded derivatives. Q2 results were adversely affected by unfavorable derivative valuation changes and the absence of the prior-year debt repurchase gain.
- Net investment-related gains were $23.0 million in Q2 2010 versus $78.2 million in Q2 2009, but $154.2 million for the first six months versus $5.9 million in the prior-year period.
- Other-than-temporary impairment losses fell to $4.8 million in Q2 and $11.1 million year to date, compared with $22.1 million and $63.6 million, respectively, in 2009.
- Gross unrealized losses on fixed maturity and equity securities declined to $386.7 million at June 30, 2010 from $584.9 million at December 31, 2009 and $1.064 billion at June 30, 2009.
- Stockholders’ equity increased by approximately $574.8 million from year-end 2009, substantially reflecting unrealized investment appreciation and retained earnings.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that industry trends had not materially changed from those described in the 2009 Form 10-K and that consolidation and continued use of reinsurance should provide growth opportunities, although at potentially lower historical rates.
- Management believes liquidity is sufficient for normal operations, potential early treaty recaptures, and higher-than-expected death claims. It also believes cash flows are sufficient to meet obligations for at least the next 12 months.
- Derivative and embedded-derivative valuations can materially affect reported earnings without affecting current cash flows, underlying treaty crediting rates, or spread performance. These values are sensitive to interest rates, credit spreads, equity markets, volatility, currency movements, and policyholder behavior.
- The company’s investment portfolio was approximately 94.7% investment grade by fair value. Significant exposures include corporate securities, mortgage-backed securities, asset-backed securities and funds withheld assets. Management intends to hold securities with unrealized losses until recovery, subject to changing credit, liquidity and asset-liability considerations.
- RGA had $386.7 million of gross unrealized losses, including $192.4 million on securities whose fair values had remained at least 20% below amortized cost for six months or more.
- Commitments at June 30, 2010 included $124.4 million for limited partnerships, $18.7 million for commercial mortgage loans, and $8.5 million for private placements.
- Outstanding letters of credit included approximately $18.0 million for third parties and $646.8 million supporting intercompany reinsurance. The company had $402.6 million of issued but undrawn letters of credit under a $750 million revolving facility and $200 million under a separate facility.
- RGA reported no material litigation and no material changes to previously disclosed risk factors. Principal risks include mortality and morbidity experience, reserve adequacy, investment impairments, market volatility, counterparty and collateral requirements, credit ratings, foreign exchange, regulation, catastrophes, and execution of acquired or new business.
- The active financing exception tax rules expired at year-end 2009. RGA recorded additional tax provisions of approximately $5.0 million in Q2 and $9.9 million year to date, subject to possible reversal if legislation were enacted.
- The company’s catastrophe program retained the first $20 million of covered claims, covered the next $80 million, and retained amounts above $100 million; pandemics and certain California earthquakes were excluded.
Investor Verification Checklist
- Verify the sustainability of premium growth after separating foreign exchange effects and the ReliaStar acquisition contribution.
- Assess underlying mortality and claims trends, particularly the elevated U.S. Traditional loss ratio.
- Reconcile reported earnings with derivative and embedded-derivative valuation changes, which created substantial period-to-period volatility.
- Review investment credit quality, commercial mortgage-backed and subprime/Alt-A exposure, unrealized losses, and future impairment risk.
- Confirm liquidity, collateral requirements, letters of credit, debt maturities, and access to revolving facilities.
- Monitor the effect of tax legislation on the effective tax rate and potential reversal of the 2010 tax provisions.
- Evaluate reserve adequacy, retrocessionaire credit quality, catastrophe exposure, and the company’s ability to integrate the ReliaStar business.