RGA

Business Context and Reporting Period

Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: RGA is a leading global life reinsurer primarily engaged in traditional life, asset-intensive, critical illness, and financial reinsurance. As of December 31, 2005, General American Life Insurance Company (a wholly-owned subsidiary of MetLife, Inc.) owned approximately 52.8% of RGA's outstanding common stock. The Company operates in five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate and Other.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 13.5% to $4.58 billion, driven by a 15.5% increase in net premiums to $3.87 billion. Investment income rose 10.1% due to a growing asset base, despite declining yields.
• Profitability Decline: Income from continuing operations decreased 4.0% to $235.6 million. This was primarily due to unfavorable mortality experience in the U.S. Traditional sub-segment during the first two quarters of 2005.
• Segment Performance:
  • U.S. Operations: Income before taxes decreased 7.1% to $269.2 million, largely attributed to poor mortality experience in traditional reinsurance.
  • Asia Pacific: Income before taxes surged 220.2% to $40.4 million, driven by strong growth in Australia and favorable mortality experience.
  • Canada: Income before taxes increased 19.7% to $88.0 million, aided by favorable mortality and a stronger Canadian dollar.
• Debt Issuance: In December 2005, RGA issued $400 million in Junior Subordinated Debentures. Approximately $75.9 million of the proceeds were used for an accelerated share repurchase program.
• Discontinued Operations: Loss from discontinued accident and health operations decreased to $11.4 million in 2005 from $23.0 million in 2004, following a negotiated settlement of disputed claims.

Guidance, Outlook, and Risks

• Financial Objectives: Management targets a return on stockholders' equity of 12% to 14% and annual earnings per share growth of 11% to 13% over the next three to five years. Debt-to-capital ratio is targeted below 25%.
• Rating Outlook: On August 2, 2005, A.M. Best changed the outlook for RGA's ratings from "stable" to "negative" due to weakened operating performance in Q2 2005 and uncertainty regarding MetLife's future ownership. Moody's and S&P maintained stable outlooks or credit watches with negative implications earlier in the year.
• Key Risks:
  • Mortality/Morbidity: Adverse experience remains a primary risk, as seen in the 2005 U.S. results.
  • Regulatory Capital: Increasing statutory reserve requirements (Regulation XXX) may require additional collateral or capital, potentially limiting new business volume.
  • MetLife Ownership: MetLife's majority ownership creates potential conflicts of interest and uncertainty regarding future capital structure or asset sales.
  • Legal Contingencies: Pending arbitrations related to discontinued accident and health operations and Argentine pension business (AFJP) pose potential liability risks, though management believes reserves are adequate.

Investor Verification Checklist

• Mortality Experience: Verify the severity and duration of the unfavorable mortality experience in the U.S. Traditional segment and its impact on future pricing and reserves.
• Regulatory Capital: Assess the sufficiency of collateral (letters of credit, assets in trust) to meet increasing statutory reserve requirements under Regulation XXX.
• MetLife Strategy: Monitor MetLife's intentions regarding its 52.8% stake in RGA, as potential divestiture could impact stock price and capital availability.
• Discontinued Operations: Review the status of the $23.5 million excess claims in discontinued accident and health arbitrations to ensure reserves remain adequate.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly given the recent issuance of $400 million in subordinated debentures and the associated interest deferral provisions.