Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Overview: RGA is a leading global life reinsurer providing traditional life, asset-intensive, critical illness, and financial reinsurance. In September 2008, MetLife, Inc. divested the majority of its interest in RGA, retaining a 4.1% stake. The Company operates through five geographic segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other.
Key Financial Metrics
| Metric (in millions) | 2008 | 2007 |
|---|---|---|
| Net Premiums | $5,349.3 | $4,909.0 |
| Total Revenues | $5,681.2 | $5,718.4 |
| Net Income | $176.8 | $293.8 |
| Diluted EPS (Continuing Ops) | $2.88 | $4.80 |
| Total Assets | $21,658.8 | $21,598.0 |
| Total Stockholders' Equity | $2,616.8 | $3,189.8 |
| Long-Term Debt | $918.2 | $896.1 |
| Cash and Cash Equivalents | $875.4 | $404.4 |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 40% to $176.8 million, driven primarily by a $468.5 million increase in investment-related losses and unfavorable mortality experience in the U.S. Traditional segment.
- Investment Losses: Investment-related losses totaled $647.2 million in 2008 (vs. $178.7 million in 2007). This included $130.5 million in other-than-temporary impairments and significant unrealized losses due to widening credit spreads affecting embedded derivatives (Issue B36) and variable annuity guarantees.
- Revenue Growth: Despite market turmoil, net premiums grew 9.0% to $5.35 billion, supported by growth in life reinsurance in force and scheduled premium increases.
- Equity Impact: Total stockholders' equity declined to $2.62 billion, largely due to a $1.08 billion other comprehensive loss driven by unrealized investment losses and foreign currency translation adjustments.
Guidance, Outlook, and Risks
- Market Environment: Management highlights extreme volatility in capital and credit markets. While the Company maintains sufficient liquidity for the next 12 months, access to capital may be constrained, and the cost of capital has increased.
- Embedded Derivatives: Significant volatility in earnings is attributed to the fair value changes of embedded derivatives in asset-intensive reinsurance (Issue B36) and variable annuity guarantees. Management notes these are non-cash items that do not affect current cash flows or spread performance.
- Regulatory Capital: The Company faces increasing statutory reserve requirements under Regulation XXX, necessitating collateral (letters of credit or assets in trust). The Company currently holds over $2.7 billion in assets in trust for various collateral requirements.
- Dividends: RGA paid $0.36 per share in dividends in 2008. Future dividends depend on earnings, capital requirements, and regulatory restrictions on subsidiary dividends.
- Risks: Key risks include further credit spread widening, counterparty default in the financial sector, adverse mortality/morbidity experience, and potential limitations on the use of Net Operating Losses (NOLs) due to ownership changes.
Investor Verification Checklist
- Investment Portfolio Quality: Verify the extent of unrealized losses ($1.42 billion gross) and the Company's intent/ability to hold securities to maturity versus potential forced sales.
- Embedded Derivative Exposure: Assess the sensitivity of earnings to further widening of credit spreads and changes in risk-free rates, particularly regarding Issue B36 and variable annuity guarantees.
- Liquidity Position: Confirm the availability of the $750 million revolving credit facility and the $395 million in undrawn letters of credit to meet potential collateral calls.
- Regulatory Capital: Monitor the impact of Regulation XXX on statutory capital and the availability of collateral to support reserve credits.
- Discontinued Operations: Review the $9.0 million increase in claim reserves for the discontinued accident and health division in Q4 2008.