Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: RGA is a holding company primarily engaged in life reinsurance, providing mortality and morbidity risk management, capital management, and financial reinsurance solutions globally. Operations are segmented into U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Premiums | $1,298,065 | $1,125,450 |
| Total Revenues | $1,360,267 | $1,354,649 |
| Net Income | $31,505 | $76,252 |
| Income from Continuing Ops (Pre-tax) | $56,688 | $119,230 |
| Diluted EPS (Net Income) | $0.49 | $1.19 |
| Total Assets | $21,812,508 | $21,598,009 |
| Total Liabilities | $18,753,635 | $18,408,177 |
| Stockholders' Equity | $3,058,873 | $3,189,832 |
| Cash & Cash Equivalents | $304,083 | $404,351 |
| Long-term Debt | $925,893 | $896,065 |
| Operating Cash Flow | $188,515 | $285,098 |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 58.7% to $31.5 million, and income from continuing operations before taxes dropped 52.5% to $56.7 million. This was primarily driven by unfavorable mortality experience in the U.S. and Europe & South Africa segments and significant unrealized losses on embedded derivatives.
- Embedded Derivative Impact: A $148.5 million unrealized loss was recorded in investment-related losses due to widening credit spreads affecting embedded derivatives (Issue B36) and changes in risk-free rates for equity-indexed annuities. This contributed approximately $47.5 million to the decline in pre-tax income.
- Premium Growth: Net premiums increased 15.3% to $1.3 billion, driven by growth in life reinsurance in force (up to $2.2 trillion) and favorable foreign currency fluctuations.
- Segment Performance:
- U.S. Operations: Pre-tax income fell 83.6% to $15.3 million due to adverse mortality ($50 million impact) and derivative valuation changes.
- Canada: Pre-tax income rose 57.4% to $23.7 million due to favorable mortality and a stronger Canadian dollar.
- Europe & South Africa: Pre-tax income dropped 71.4% to $6.0 million due to adverse claims experience in the UK and South Africa.
- Asia Pacific: Pre-tax income increased 79.7% to $18.6 million, driven by premium growth in Australia, Japan, and Korea.
- Investment Portfolio: Total invested assets increased 7.3% to $16.3 billion. The average yield on investments (excluding funds withheld) rose to 6.06% from 5.93%.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The Company adopted SFAS No. 157 (Fair Value Measurements) effective January 1, 2008, resulting in a $3.9 million pre-tax gain related to embedded derivatives. The Company is evaluating the impact of new standards SFAS 161, FSP 140-3, SFAS 141(r), and SFAS 160.
- Unusual Items:
- Discontinued Operations: Reported a loss of $5.1 million (net of tax) due to a $5.8 million settlement of a disputed claim in excess of reserves.
- Subprime Exposure: The Company holds $255.4 million in amortized cost of securities with subprime mortgage exposure. Management expects no material losses due to high credit quality (weighted average AA+ rating) and originations primarily from 2005 and prior.
- Liquidity: The Company maintains a $750 million syndicated revolving credit facility with $358 million in undrawn letters of credit. Management believes liquidity is sufficient to cover claims and obligations.
- Risks: Key risks include adverse mortality/morbidity experience, credit rating downgrades (including MetLife, the majority shareholder), counterparty default on retrocession, and market volatility affecting investment values and embedded derivatives.
Investor Verification Checklist
- Derivative Valuation Sensitivity: Verify the magnitude of unrealized losses tied to credit spreads and risk-free rates in the U.S. Asset-Intensive segment and their impact on reported earnings versus cash flow.
- Mortality Experience: Review the specific drivers of the $50 million adverse mortality variance in the U.S. Traditional segment to assess if this is a one-time volatility event or a trend.
- Subprime Exposure Quality: Confirm the credit ratings and origination dates of the $255.4 million subprime exposure to validate management's assertion of low loss probability.
- Discontinued Operations Run-off: Monitor the remaining liability and potential future settlements related to the discontinued accident and health operations.
- Counterparty Risk: Assess the financial stability of major retrocessionaires and ceding companies, particularly given the reliance on external reinsurance for risk mitigation.