Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: RGA is a leading life reinsurer primarily engaged in traditional life, asset-intensive, and financial reinsurance. Operations are segmented geographically into the U.S., Canada, and Other International (Europe & South Africa, Asia Pacific, Latin America). As of December 31, 2002, MetLife beneficially owned 59.1% of RGA's outstanding common stock.
Key Financial Metrics
| Metric | 2002 | 2001 | 2000 |
|---|---|---|---|
| Net Premiums | $1,980.7 million | $1,661.8 million | $1,404.1 million |
| Total Revenues | $2,382.0 million | $1,968.3 million | $1,725.7 million |
| Net Income | $122.8 million | $33.0 million | $77.7 million |
| Income from Continuing Ops | $128.5 million | $39.9 million | $105.8 million |
| Diluted EPS (Net Income) | $2.47 | $0.66 | $1.56 |
| Total Assets | $8,892.6 million | $7,016.1 million | $6,090.0 million |
| Total Investments | $6,650.2 million | $5,088.4 million | $4,560.2 million |
| Long-Term Debt | $327.8 million | $323.4 million | $272.3 million |
| Stockholders' Equity | $1,222.5 million | $1,005.6 million | $862.9 million |
| Operating Cash Flow | $161.9 million | $243.9 million | $192.8 million |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 272% to $122.8 million in 2002 compared to $33.0 million in 2001. Income from continuing operations rose 222% to $128.5 million.
- Premium Growth: Net premiums grew 19.2% to $1.98 billion, driven by strong growth in the U.S. traditional reinsurance segment and expansion in Europe & South Africa.
- Investment Performance: Net investment income increased 10.0% to $374.5 million. Realized investment losses narrowed significantly to $14.6 million in 2002 from $68.4 million in 2001.
- Segment Performance:
- U.S. Operations: Pre-tax income rose to $177.1 million (from $125.7 million in 2001), aided by the absence of 9/11-related claims that impacted 2001 results.
- Canada: Pre-tax income declined 25% to $38.6 million due to below-average mortality experience.
- Other International: Turned profitable with $6.2 million pre-tax income, recovering from a $77.1 million loss in 2001. The Latin America segment loss narrowed to $3.5 million from $79.1 million.
- Discontinued Operations: The accident and health division reported a net loss of $5.7 million in 2002, consistent with the run-off of terminated treaties.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects sustained growth in premiums to lessen the burden of start-up expenses. The company views its long-term debt as an integral part of its capital structure.
- Dividend Restrictions: Dividends from key subsidiaries (RCM, RGA Reinsurance, RGA Canada) are subject to regulatory limits. Allowable dividends without prior approval for 2003 are approximately $63.4 million (RGA Reinsurance), $28.9 million (RCM), and $33.4 million (RGA Canada).
- Legal Contingencies:
- RGA is involved in litigation and arbitration regarding medical reinsurance, personal accident, and aviation bodily injury. As of January 31, 2003, claims raised by ceding companies exceeded reserves by $41.7 million.
- Additional potential claims of $8.5 million are under audit.
- Management believes these outcomes will not have a material adverse effect on financial position.
- Market Risks:
- Interest Rate Risk: A hypothetical 10% unfavorable change in interest rates would result in a projected fair value loss of $78.4 million.
- Foreign Currency: Significant exposure to the Argentine peso; however, the company has liquidated most Argentine-based securities to mitigate risk.
- Accounting Changes: The company adopted SFAS No. 142 (Goodwill) in 2002, ceasing amortization of goodwill. Adoption of SFAS No. 148 (Stock-Based Compensation) in 2003 is estimated to reduce net income by approximately $1.1 million.
Investor Verification Checklist
- MetLife Ownership: Verify the impact of MetLife's 59.1% beneficial ownership on corporate governance and related-party transactions (net premiums with MetLife affiliates were $172.1 million).
- Latin America Exposure: Review the run-off status of Argentine privatized pension reinsurance and the adequacy of reserves given the economic instability in the region.
- Legal Reserves: Assess the sufficiency of reserves for the $41.7 million in disputed claims from discontinued accident and health operations.
- Investment Portfolio Quality: Examine the $55.9 million in gross unrealized losses on fixed maturity securities, specifically those downgraded or held for more than six months.
- Debt Covenants: Confirm compliance with debt covenants, noting that $28.4 million of debt is subject to immediate payment upon a downgrade of senior long-term debt ratings.