Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: RGA is a holding company primarily engaged in life reinsurance, providing mortality risk management and capital management solutions to insurers globally. Operations are segmented into U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other. The company also maintains discontinued accident and health operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
| Metric | 2007 (9 Months) | 2006 (9 Months) | Change |
|---|---|---|---|
| Total Revenues | $4,221.8 million | $3,724.1 million | +13.4% |
| Net Premiums | $3,561.0 million | $3,145.2 million | +13.2% |
| Investment Income (Net) | $681.1 million | $538.9 million | +26.4% |
| Net Investment Related Losses | $(24.7) million | $(4.8) million | Worsened |
| Income from Continuing Ops (Pre-Tax) | $364.7 million | $323.2 million | +12.8% |
| Net Income | $230.2 million | $206.7 million | +11.4% |
| Diluted EPS (Net Income) | $3.59 | $3.29 | +9.1% |
| Total Assets | $21,099.3 million | $19,036.8 million | +10.8% |
| Total Liabilities | $18,059.4 million | $16,221.5 million | +11.3% |
| Stockholders' Equity | $3,039.9 million | $2,815.4 million | +8.0% |
| Cash & Cash Equivalents | $451.0 million | $160.4 million | +181.2% |
| Long-Term Debt | $896.0 million | $676.2 million | +32.5% |
| Operating Cash Flow | $601.1 million | $490.5 million | +22.6% |
Material Changes vs. Prior Period
- Revenue Growth: Net premiums increased $415.8 million (13.2%) driven by growth in life reinsurance in force and favorable foreign currency fluctuations ($67.7 million impact).
- Investment Performance: Investment income rose significantly due to a larger asset base and higher effective yields (6.00% vs 5.79% in Q3). However, net investment-related losses increased to $24.7 million, including $4.7 million in other-than-temporary write-downs and a $10.5 million foreign currency translation loss related to the sale of Argentine operations.
- Accounting Impact (Issue B36): The U.S. Asset-Intensive segment reported a loss of $4.9 million year-to-date, largely due to a $14.7 million negative impact from changes in the value of embedded derivatives (SFAS 133 Issue B36) caused by widening credit spreads. This is a non-cash accounting adjustment.
- Segment Performance:
- U.S. Traditional: Income increased 13.1% year-over-year despite slightly less favorable mortality.
- Canada: Income surged 88.2% due to favorable mortality and higher premiums.
- Europe & South Africa: Income increased 9.2%, offset by adverse mortality experience.
- Asia Pacific: Income increased 24.4% driven by premium growth in Australia, Japan, and Korea.
- Debt Structure: Issued $300 million in 5.625% Senior Notes in March 2007. Entered a new $750 million revolving credit facility in September 2007.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management believes liquidity is sufficient to cover potential claims and operational needs. The company expects continued growth in life reinsurance in force.
- Unusual Items:
- Discontinued Operations: Reported a loss of $6.5 million (net of tax) for the nine months, including a $3.0 million loss from commuting $24.9 million of obligations.
- Argentina Sale: A $10.5 million currency translation loss was recognized related to the decision to sell direct insurance operations in Argentina.
- Tax Accounting (FIN 48): Adoption of FIN 48 resulted in a $22.6 million reduction to retained earnings at Jan 1, 2007, and a $9.4 million decrease in interest expense in Q3 due to resolved tax positions.
- Risks & Contingencies:
- Legal Proceedings: Involved in three arbitrations regarding discontinued accident and health business. Claims raised by parties total $24.3 million, which is $23.5 million in excess of RGA's reserves. Management believes it has substantial defenses.
- Investment Risk: Holds $270.4 million in securities with subprime mortgage exposure (weighted average rating "AA"). Management does not expect material losses but monitors the asset class closely.
- Counterparty Risk: Reliance on ceding companies for accurate data and retrocessionaires for claims recovery.
Investor Verification Checklist
- Embedded Derivatives Volatility: Verify the sensitivity of the U.S. Asset-Intensive segment to credit spread widening (Issue B36) and its impact on reported earnings vs. cash flow.
- Subprime Exposure: Review the specific composition and credit ratings of the $270.4 million subprime mortgage exposure to assess potential future write-downs.
- Discontinued Operations Reserves: Monitor the status of the $23.5 million reserve shortfall in discontinued accident and health arbitrations.
- Foreign Currency Impact: Assess the sustainability of the favorable currency translation effects ($6.8 million pre-tax benefit YTD) given global currency fluctuations.
- Debt Covenants: Confirm continued compliance with the new $750 million credit facility and senior note covenants.