Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: RGA is an insurance holding company primarily engaged in life reinsurance, reinsuring policies often in force for the remaining lifetime of insured individuals. The company operates through five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other. The reporting period reflects the impact of severe global financial market turmoil, including increased investment impairments and volatility in embedded derivative valuations.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Premiums | $1,346,047 | $1,298,065 |
| Total Revenues | $1,530,840 | $1,360,267 |
| Net Income | $23,290 | $31,505 |
| Income from Continuing Operations | $23,290 | $36,589 |
| Investment Income (Net) | $223,196 | $199,526 |
| Investment Related Losses (Net) | $(72,262) | $(155,260) |
| Other-Than-Temporary Impairments | $(39,825) | $(5,150) |
| Total Assets | $21,634,314 | $21,658,818 |
| Total Liabilities | $19,161,120 | $19,042,010 |
| Stockholders' Equity | $2,473,194 | $2,616,808 |
| Cash and Cash Equivalents | $586,542 | $875,403 |
| Long-Term Debt | $917,913 | $918,246 |
| Collateral Finance Facility | $850,019 | $850,035 |
Operating Cash Flow: Net cash provided by operating activities was $352.5 million for Q1 2009, compared to $188.5 million in Q1 2008.
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased by 26.1% ($8.2 million) compared to Q1 2008. Income from continuing operations before taxes dropped 39.7% ($22.5 million).
- Investment Impairments: Other-than-temporary impairments increased significantly to $39.8 million in Q1 2009 from $5.2 million in Q1 2008, driven by financial market turmoil, bankruptcies, and government interventions.
- Investment Losses: Net investment-related losses decreased by $83.0 million (53.5%) year-over-year. This improvement was primarily due to reduced losses on embedded derivatives related to modified coinsurance treaties and guaranteed minimum living benefits, partially offset by higher impairment charges.
- Revenue Growth: Net premiums increased 3.7% ($48.0 million) due to growth in U.S. life reinsurance in force, despite unfavorable foreign currency fluctuations of approximately $144.7 million.
- Equity Reduction: Stockholders' equity decreased by $143.6 million, largely driven by an increase in unrealized depreciation of securities (net of tax) from $553.4 million to $695.1 million.
Guidance, Outlook, and Risks
Management Commentary:
- Market Environment: Management notes that capital and credit markets experienced extreme volatility and disruption from late 2008 through Q1 2009. The company has incurred significant investment-related losses due to impairments and unfavorable changes in embedded derivative values.
- Liquidity: RGA maintains sufficient liquidity to cover potential claims and operational needs. It does not rely on short-term funding or commercial paper. The company has a syndicated revolving credit facility with $750 million capacity, of which $349.7 million was undrawn as of March 31, 2009.
- Investment Strategy: The company intends to hold investment securities until recovery, provided it remains comfortable with the credit of the issuer. It has selectively reduced exposure to distressed issuers.
Risks and Contingencies:
- Investment Risk: Significant exposure to fixed maturity securities with gross unrealized losses of $1.55 billion. 17.9% of fixed maturity securities are classified as Level 3 (unobservable inputs), including private placements and asset-backed securities with subprime exposure.
- Embedded Derivatives: Valuation of embedded derivatives in annuity products is sensitive to credit spreads, interest rates, and equity volatility. Fluctuations in these inputs caused significant volatility in reported earnings.
- Counterparty Risk: Exposure to reinsurance counterparties and derivative counterparties, though mitigated by collateral arrangements and retrocession pools.
- Subsequent Event: On April 29, 2009, the company repurchased $80.2 million face amount of junior subordinated debentures for $39.2 million, expecting a pretax gain of $40.2 million in Q2 2009.
Investor Verification Checklist
- Impairment Methodology: Verify the criteria used to determine "other-than-temporary" impairments, particularly for the $39.8 million write-downs in Q1 2009.
- Level 3 Assets: Review the valuation assumptions for the $1.58 billion in Level 3 fixed maturity securities, which rely on unobservable inputs and management judgment.
- Embedded Derivative Sensitivity: Assess the impact of widening credit spreads and changing risk-free rates on the valuation of embedded derivatives in variable and equity-indexed annuities.
- Liquidity Position: Confirm the availability of the $750 million credit facility and the status of collateral requirements for derivative positions.
- Subsequent Debt Repurchase: Monitor the realization of the $40.2 million pretax gain from the April 2009 debt repurchase in the Q2 2009 filing.