Reinsurance Group of America, Incorporated — FY 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed March 2, 2015. The filing is an annual report, not a standalone quarterly filing, but it provides unaudited fourth-quarter results.
Business Context
RGA is a global life and health reinsurer operating across the United States and Latin America, Canada, Europe, the Middle East and Africa, and Asia Pacific. Products include traditional life, health, disability and critical illness reinsurance, as well as longevity, asset-intensive and financial reinsurance. The company reports five operating segments: U.S. and Latin America, Canada, Europe, Middle East and Africa, Asia Pacific, and Corporate and Other.
Key Financial Metrics
<>| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net premiums | $8.670 billion | $8.254 billion | +5.0% |
| Total revenues | $10.904 billion | $10.318 billion | +5.7% |
| Income before income taxes | $1.009 billion | $635.3 million | +58.8% |
| Net income | $684.0 million | $418.8 million | +63.3% |
| Diluted EPS | $9.78 | $5.78 | +69.2% |
| Net margin | 6.3% | 4.1% | Improved |
| Pre-tax margin | 9.2% | 6.2% | Improved |
| Net cash from operating activities | $2.336 billion | $1.727 billion | +35.3% |
| Total assets | $44.680 billion | $39.674 billion | +12.6% |
| Stockholders’ equity | $7.023 billion | $5.936 billion | +18.3% |
| Long-term debt | $2.314 billion | $2.214 billion | +4.5% |
Investment income, net of related expenses, was $1.714 billion, up 0.8%. Net investment-related gains were $186.2 million versus $64.0 million in 2013. The average investment yield, excluding spread-related business, increased to 4.82% from 4.73%.
Total cash and invested assets were $38.342 billion, including $25.481 billion of fixed-maturity securities, $5.923 billion of funds withheld at interest, $2.712 billion of mortgage loans and $1.646 billion of cash and cash equivalents. Approximately 94.6% of fixed-maturity securities were investment grade.
Liquidity improved: cash and cash equivalents plus short-term investments were $1.743 billion at year-end, compared with $1.063 billion in 2013. Management stated that liquidity was sufficient for the next 12 months, including under scenarios involving early recapture of treaties and higher-than-expected claims. The revolving credit facility had $850.0 million of capacity, no cash borrowings outstanding and $204.8 million of issued but undrawn letters of credit.
RGA paid $87.3 million of common dividends and repurchased $201.5 million of stock in 2014. Dividends declared were $1.26 per share. The company was in compliance with debt covenants; long-term debt had an average interest rate of 5.69%.
Material Changes Versus 2013
- Net income increased primarily because Asia Pacific moved from a $226.7 million pretax loss to $102.3 million of pretax income.
- Asia Pacific benefited from the absence of the significant Australian group disability claims deterioration recorded in 2013. The 2013 charge included a $274.1 million increase in Australian group claims liabilities.
- Europe, Middle East and Africa pretax income increased 116.8% to $161.6 million, supported by higher business volumes, payout annuity transactions, fee income and investment-related gains.
- Canada pretax income declined 38.1% to $101.7 million because of unfavorable individual life mortality and lower investment-related gains.
- U.S. and Latin America pretax income increased 5.0% to $654.6 million. Asset-intensive results improved, while traditional results declined because of unfavorable mortality. A fourth-quarter retrocession transaction reduced U.S. traditional premiums by approximately $130 million.
- New business production increased to $482.0 billion from $370.4 billion, while assumed life reinsurance in force increased to $2.944 trillion from $2.890 trillion.
- Investment-related gains improved with favorable changes in hedging and embedded-derivative valuations. These gains are market-sensitive and may not recur.
- The effective tax rate declined to 32.2% from 34.1%. Net income benefited by approximately $33.0 million from the release of uncertain-tax-position liabilities and related accrued interest following closure of certain IRS tax years, plus a $5.5 million benefit from retroactive extension of active-financing legislation.
- RGA issued a $100.0 million promissory note secured by its headquarters and, in December 2014, a subsidiary issued $300.0 million of asset-backed notes in an embedded-value securitization transaction.
Outlook, Commentary, Risks and Unusual Items
Management expected long-term demand for life reinsurance to be supported by insurer capital-management needs, demographic aging, industry consolidation, outsourcing of mortality risk and regulatory developments such as Solvency II. The company planned to continue growing North American mortality business and expanding in selected international markets and non-traditional products. The filing does not provide formal earnings or revenue guidance.
- Regulatory capital and collateral: Regulation XXX and related statutory reserve requirements require collateral, letters of credit, trusts or other financing. Restrictions on captive reinsurers could increase costs, reduce capital efficiency, limit new business or require additional capital.
- Insurance experience: Mortality, morbidity, longevity, lapse and claims experience may differ from pricing assumptions. Reserving and deferred acquisition cost balances are highly dependent on actuarial estimates.
- Market-sensitive guarantees: Equity markets, interest rates, volatility and credit spreads affect variable annuity guarantees, equity-indexed annuities, embedded derivatives and hedging results. The fair value of liabilities associated with living-benefit riders was $159 million at year-end 2014 versus $30 million in 2013.
- Interest rates and investments: Prolonged low rates could reduce investment yields and spread income. Fixed-maturity securities totaled $25.5 billion, and gross unrealized gains substantially exceeded gross unrealized losses at year-end.
- Foreign exchange and concentration: Approximately 40.1% of revenues were denominated in currencies other than the U.S. dollar. Funds withheld at interest totaled $5.9 billion, with approximately $4.2 billion associated with one client.
- Recapture and liquidity: Approximately $333.6 billion of gross assumed in-force business was subject to recapture rights triggered by treaty provisions, including financial-condition or ratings deterioration.
- Other unusual items: The company recognized $13.1 million of other-than-temporary investment impairments, held $10.2 billion of securities in trust for third-party reinsurance collateral, and reported no material litigation.
- Subsequent event: In January 2015, the board authorized a new $300 million share-repurchase program. RGA also announced the planned acquisition of Aurora National Life Assurance Company, with approximately $2.7 billion of statutory policyholder liabilities; closing was expected in the first half of 2015, subject to regulatory approvals.
Most Important Facts to Verify
- Whether 2014 earnings growth, particularly the Asia Pacific recovery and investment-related gains, is sustainable or reflects nonrecurring items.
- Current mortality and morbidity trends in the U.S., Canada and Australia, including any further development of Australian disability claims.
- Effects of low interest rates on investment yields, annuity spreads, deferred acquisition costs and guaranteed-benefit liabilities.
- Availability and cost of collateral, letters of credit and alternative financing as Regulation XXX and captive-reinsurance rules evolve.
- Potential cash-flow effects from treaty recapture rights, client concentration and funds-withheld assets.
- Progress, regulatory approval and financial impact of the Aurora acquisition.
- Debt maturities, covenant compliance, subsidiary dividend capacity and the extent to which parent liquidity depends on regulated subsidiary distributions.
- Foreign-currency movements, investment impairments and valuation assumptions for Level 3 securities and embedded derivatives.