Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
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) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenues | $1,354,649 | $1,199,097 |
| Net Premiums | $1,125,450 | $992,442 |
| Investment Income (Net) | $215,743 | $186,941 |
| Net Income | $76,252 | $69,070 |
| Income from Continuing Ops (Pre-Tax) | $119,230 | $108,200 |
| Effective Tax Rate | 35.5% | 34.8% |
| Diluted EPS (Net Income) | $1.19 | $1.10 |
| Total Assets | $19,825,895 | $19,036,837 (Dec 31, 2006) |
| Total Liabilities | $16,936,638 | $16,221,453 (Dec 31, 2006) |
| Stockholders' Equity | $2,889,257 | $2,815,384 (Dec 31, 2006) |
| Cash & Cash Equivalents | $315,222 | $160,428 (Dec 31, 2006) |
| Long-Term Debt | $944,147 | $676,165 (Dec 31, 2006) |
| Collateral Finance Facility | $850,402 | $850,402 (Dec 31, 2006) |
Liquidity: Net cash provided by operating activities was $287.9 million for Q1 2007, compared to $152.1 million in Q1 2006. Total invested assets increased to $15.2 billion.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13.0% year-over-year, driven by a 13.4% increase in net premiums due to growth in life reinsurance in force and a 15.4% increase in investment income.
- Profitability: Net income rose 10.4% to $76.3 million. Income from continuing operations before taxes increased 10.2%, attributed to increased premiums across all segments and improved mortality experience in the U.S., Canada, and Europe & South Africa.
- Investment Activity: Invested assets grew 23.9% compared to March 31, 2006, largely due to the investment of proceeds from a $300 million senior note issuance in March 2007 and the collateral finance facility established in 2006.
- Debt Structure: Long-term debt increased significantly following the March 6, 2007 issuance of $300 million in 5.625% Senior Notes due 2017. Proceeds were used to pay down $30 million of bank credit facility indebtedness and for general corporate purposes.
- Segment Performance:
- U.S. Operations: Income before taxes increased 16.0% to $93.2 million, driven by favorable mortality and business growth.
- Canada: Income before taxes surged 78.3% to $15.0 million due to favorable mortality and investment gains.
- Asia Pacific: Income before taxes grew 56.2% to $10.3 million, fueled by premium growth in Japan and South Korea.
- Corporate & Other: Reported a loss of $20.4 million, an increase from the prior year's $2.0 million loss, primarily due to a $10.5 million foreign currency translation loss related to the sale of Argentine operations and increased interest expense.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The Company adopted FIN 48 ("Accounting for Uncertainty in Income Taxes") on January 1, 2007. This resulted in a $22.6 million reduction to retained earnings and a $17.3 million increase in the liability for unrecognized tax benefits. The effective tax rate for Q1 2007 was 35.5%, slightly higher than the prior year due to this adoption.
- Unusual Items:
- Argentina Sale: A $10.5 million foreign currency translation loss was recognized related to the decision to sell direct insurance operations in Argentina. Management does not expect the ultimate sale to generate a material financial impact.
- Embedded Derivatives: The Asset-Intensive sub-segment recorded a $2.8 million change in the value of embedded derivatives (revenue) and $2.1 million in related deferred acquisition costs due to SFAS 133 Issue B36. These fluctuations are tied to credit spreads and do not impact cash flows.
- Risks and Contingencies:
- Legal Proceedings: The Company is involved in three arbitrations regarding discontinued accident and health business and one threatened arbitration regarding life reinsurance. Claims raised by parties total $22.9 million, which is $22.1 million in excess of the Company's current reserves. Management believes it has substantial defenses.
- Mortality Risk: Profitability depends heavily on mortality experience. While predictable over long periods, claims fluctuate significantly in the short term.
- Counterparty Risk: The Company relies on retrocessionaires to fulfill obligations. While no material defaults have occurred, the inability of a counterparty to pay could materially impact financial condition.
- Outlook: Management believes liquidity is sufficient to cover potential claims and operational needs. The Company expects continued growth in life reinsurance in force and maintains a predominantly investment-grade fixed maturity portfolio.
Investor Verification Checklist
- Debt Covenants: Verify compliance with covenants under the new $300 million Senior Notes and existing credit facilities, particularly given the increase in leverage.
- Reserve Adequacy: Review the $22.1 million gap between disputed claims/reserves in discontinued operations and the Company's current reserves to assess potential future liability.
- Investment Portfolio Quality: Confirm the status of the $66.7 million in gross unrealized losses on fixed maturity securities and the Company's assessment of "other-than-temporary" impairments.
- Argentina Transaction: Monitor the progress and final financial impact of the sale of the Argentine direct insurance operations.
- Tax Liability: Assess the ongoing impact of FIN 48 adoption on future effective tax rates and cash tax payments.