Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2006
Business Overview: RGA is a holding company primarily engaged in life reinsurance, providing mortality risk management and capital management solutions to insurance companies globally. Operations are segmented into U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other.
Key Financial Metrics
| Metric (in thousands) | Q3 2006 | Q3 2005 | 9 Months 2006 | 9 Months 2005 |
|---|---|---|---|---|
| Net Premiums | $1,076,191 | $973,532 | $3,145,236 | $2,806,706 |
| Total Revenues | $1,282,483 | $1,158,417 | $3,724,116 | $3,345,965 |
| Net Income | $74,035 | $67,629 | $206,736 | $156,003 |
| Diluted EPS (Net Income) | $1.17 | $1.06 | $3.29 | $2.45 |
| Investment Income (Net) | $183,357 | $166,456 | $538,903 | $469,793 |
| Total Assets | $18,478,247 | $16,193,866 (Dec 31, 2005) | -- | -- |
| Total Liabilities | $15,703,204 | $13,666,382 (Dec 31, 2005) | -- | -- |
| Stockholders' Equity | $2,775,043 | $2,527,484 (Dec 31, 2005) | -- | -- |
| Cash & Cash Equivalents | $244,584 | $128,692 (Dec 31, 2005) | -- | -- |
| Operating Cash Flow (9 Mo) | -- | -- | $490,500 | $271,177 |
Debt & Liquidity: As of September 30, 2006, outstanding borrowings totaled $702.8 million. The company maintains a $600 million syndicated credit facility with $50 million outstanding. A new $850 million Collateral Finance Facility was established in June 2006 to fund statutory reserve requirements.
Material Changes vs. Prior Period
- Revenue Growth: Net premiums increased 10.5% in Q3 and 12.1% for the nine months ended September 30, 2006, compared to the prior year, driven by growth in life reinsurance in force.
- Profitability: Net income rose 9.5% in Q3 and 32.5% for the nine-month period. Income from continuing operations before taxes increased 3.5% in Q3 and 31.0% for the nine months.
- Segment Performance:
- Asia Pacific: Significant improvement in Q3 income ($20.4M vs $1.4M prior year) due to increased premiums and improved mortality experience.
- U.S. Operations: Nine-month income increased 30.1% ($236.1M vs $181.5M) driven by improved mortality experience and business growth.
- Canada: Nine-month income decreased 13.6% due to unfavorable mortality experience, partially offset by a stronger Canadian dollar.
- Europe & South Africa: Nine-month income increased 74.7% ($40.9M vs $23.4M) primarily due to adverse mortality experience in the UK during the prior year period.
- Investment Portfolio: Total invested assets grew 21.5% to $14.1 billion, largely due to the investment of proceeds from the new collateral finance facility. The average yield on investments (excluding funds withheld) decreased slightly from 5.89% to 5.79%.
- Accounting Changes: Effective January 1, 2006, the company adopted SFAS 123(r) for share-based compensation, increasing compensation expense. Segment capital allocation methodology also changed from regulatory-based to economic capital-based.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management believes liquidity sources are sufficient to cover potential claims and operational needs. The company expects continued growth in life reinsurance in force.
- Unusual Items:
- Collateral Finance Facility: A $850 million facility was issued in June 2006. While consolidated, the notes are non-recourse to RGA. Expenses related to this facility are reflected in the income statement.
- Discontinued Operations: The accident and health division reported a loss of $1.5 million in Q3 2006. Amounts in dispute or subject to audit exceed reserves by approximately $23.7 million.
- Embedded Derivatives: Fluctuations in the fair value of embedded derivatives (Issue B36) impacted Asset-Intensive segment results, though management notes these have no impact on cash flows.
- Risks:
- Mortality/Morbidity: Claims are less predictable over short periods; adverse experience can materially impact results.
- Litigation: The company is party to arbitrations regarding discontinued operations and life reinsurance. Claims raised exceed reserves by $23.8 million, though management believes defenses are substantial.
- Market Risk: Exposure to interest rate fluctuations and foreign currency exchange rates (particularly in Asia Pacific and Europe).
- Counterparty Risk: Reliance on ceding companies for data accuracy and retrocessionaires for claim recoveries.
Investor Verification Checklist
- Reserve Adequacy: Verify the sufficiency of reserves for the discontinued accident and health business, where claims in dispute exceed reserves by $23.8 million.
- Mortality Experience: Monitor mortality trends in the Canada segment, which showed adverse experience in the first nine months of 2006.
- Investment Yield: Track the impact of the reinvestment of the $850 million collateral finance facility proceeds on the overall portfolio yield.
- Foreign Currency Impact: Assess the volatility of results in the Asia Pacific and Europe segments due to currency fluctuations (e.g., weakening Australian dollar and Japanese Yen).
- Capital Allocation: Review the impact of the new economic capital allocation model on segment profitability reporting compared to prior regulatory-based methods.