REINSURANCE GROUP OF AMERICA INC quarterly report, Q2 FY2013

Reinsurance Group of America, Incorporated — 2013 Q2 Form 10-Q Summary

Business Context and Reporting Period

RGA is a global life and health reinsurance company with operations in the United States, Canada, Europe and South Africa, and Asia Pacific. Its products include traditional life and health, longevity, disability, annuity, critical illness and financial reinsurance. This report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Financial statements are unaudited.

Key Financial Metrics

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Net premiums	$2.035 billion	$1.951 billion	$4.015 billion	$3.814 billion
Total revenues	$2.591 billion	$2.376 billion	$5.192 billion	$4.669 billion
Income before income taxes	$(74.8) million	$215.9 million	$204.1 million	$396.7 million
Net income	$(49.6) million	$141.1 million	$135.9 million	$264.4 million
Diluted earnings per share	$(0.69)	$1.91	$1.85	$3.57
Operating cash flow	Not separately presented for the quarter	Not separately presented for the quarter	$805.1 million	$818.3 million

• Second-quarter total revenue increased 9.0%, while six-month revenue increased 11.2%.
• Net premiums increased 4.3% in the quarter and 5.3% year to date, primarily from growth in life reinsurance.
• Investment income, net of related expenses, increased 35.3% in the quarter to $444.2 million and 29.9% year to date to $869.4 million.
• Total investment-related gains were $48.2 million in the quarter and $142.6 million year to date, compared with $23.8 million and $67.3 million in the prior-year periods.
• The effective tax rate was 33.6% for the quarter and 33.4% for the six months.
• Total assets were $38.8 billion at June 30, 2013, compared with $40.4 billion at December 31, 2012. Stockholders’ equity was $5.9 billion, down from $6.9 billion, largely reflecting a $926.8 million after-tax decline in other comprehensive income.
• Cash and cash equivalents were $973.6 million. Reported liquidity, including cash and short-term investments, was $1.012 billion, down from $1.548 billion at year-end 2012.
• Total debt included $120.0 million of short-term debt and $1.816 billion of long-term debt. The collateral finance facility was $487.6 million.
• The available-for-sale fixed-maturity portfolio had a fair value of $21.3 billion; approximately 93.2% was investment grade.

Material Changes Versus the Prior Comparable Period

• RGA reported a second-quarter loss primarily because Asia Pacific incurred a $290.4 million pretax loss, compared with $23.9 million of pretax income in the second quarter of 2012.
• The Asia Pacific result reflected a $274.1 million increase in Australian group claims liabilities for total and permanent disability and disability income benefits, together with adverse experience in Australian individual lump-sum and disability businesses. Australia reported a $300.3 million pretax loss for the quarter.
• RGA suspended quoting activity indefinitely in the Australian group total and permanent disability market.
• U.S. pretax income increased to $170.4 million from $140.6 million for the quarter and to $344.9 million from $233.3 million for the six months, supported by the asset-intensive business, favorable embedded-derivative changes and growth.
• Canada’s quarterly pretax income was broadly stable at $35.7 million, but six-month pretax income declined to $72.0 million from $90.1 million due to better prior-year mortality, lower investment gains and a prior-year recapture gain.
• Europe and South Africa quarterly pretax income declined to $15.8 million from $19.6 million because of higher U.K. mortality claims, while six-month income increased to $33.2 million from $26.2 million.
• Changes in embedded-derivative valuations increased consolidated pretax income by approximately $109.5 million in the quarter and $140.4 million year to date versus the corresponding 2012 periods. Management states these changes are generally unrealized and do not affect current cash flows, crediting rates or underlying spread performance.
• RGA repurchased $234.7 million of common stock during the first six months, including $182.9 million in the second quarter. Approximately $69.5 million remained under the authorization at June 30, excluding the additional $100.0 million authorization approved in July.
• In the first quarter, the Company repurchased $160.0 million face amount of collateral finance facility notes for $112.0 million and recorded a $46.5 million pretax gain.
• Accumulated other comprehensive income declined from $2.109 billion at year-end 2012 to $1.182 billion, primarily due to a $826.2 million after-tax reduction in net unrealized investment gains and a $102.9 million foreign-currency translation loss.

Guidance, Outlook, Commentary, Risks and Unusual Items

• Management expects industry consolidation and continued use of reinsurance to provide growth opportunities, although at lower rates than historically experienced in some markets.
• Management expects the low interest-rate environment, particularly in the United States and Canada, to continue pressuring investment yields. The average investment yield excluding funds withheld and other spread business declined to 4.77% in the quarter and 4.80% year to date, from 5.06% in each 2012 comparison.
• Management stated that reserves and liquidity are expected to be sufficient under current assumptions, including a scenario of interest rates remaining at current levels for five years. It believes liquidity is sufficient for at least the next 12 months, including potential early treaty recaptures and higher-than-expected death claims.
• RGA was in compliance with its debt covenants at June 30, 2013. The Company had no cash borrowings under its $850 million revolving credit facility and had $94.2 million of issued but undrawn letters of credit.
• Material risks include adverse mortality, morbidity, longevity, lapsation or claims experience; Australian disability claims deterioration; investment impairments and unrealized losses; interest-rate, equity-market and foreign-currency volatility; counterparty and retrocessionaire defaults; collateral requirements; regulatory changes; rating downgrades; liquidity needs; catastrophe events; and treaty recapture.
• Gross unrealized losses on fixed-maturity and equity securities increased to $310.7 million from $133.6 million at year-end 2012, largely reflecting rising interest rates. The Company stated that it generally had the ability and intent to hold affected securities until recovery.
• RGA had no material litigation and disclosed no material changes to previously reported risk factors. Management reported that disclosure controls and procedures were effective.

Most Important Facts for Investors to Verify

1. Whether the Australian group disability claims reserve increase fully captures claim incidence, reporting-lag and future-development risks, and whether further deterioration occurs.
2. The sustainability of earnings excluding volatile embedded-derivative and other investment-related valuation changes.
3. Investment portfolio sensitivity to higher interest rates, credit-spread widening, impairments and unrealized losses.
4. Liquidity and collateral requirements under derivatives, reinsurance arrangements, letters of credit, FHLB advances and treaty guarantees.
5. The effect of share repurchases, dividends and debt levels on capital available to support growth and insurance subsidiaries.
6. Future mortality, morbidity, lapse and recapture experience across major geographic segments, particularly Australia and the U.K.